Not even employment law is immune from globalization. An ever-increasing number of employees are working on a cross-border basis, causing their jobs potentially to be subject to the laws of several countries simultaneously.
Just like for any other types of agreements, the basis for determining which country’s laws apply to a particular employment relationship is whether the parties, i.e., the employer and the employee, have expressly agreed in the employment agreement which country’s laws will govern. It is essentially between the parties to decide whether to agree in the employment agreement which country’s laws shall apply or whether a selected jurisdiction has a particular nexus to their employment relationship.
It is generally to an employer’s detriment to insist upon the laws of a country other than the laws which would govern if the employment agreement failed to include a governing law clause. This is because — at least under Germany’s conflicts of law rules — the employer cannot contract out of certain mandatory legal provisions. Unfortunately, the German legislature has not specifically stated which provisions must apply to an employment relationship; the only thing that is clear is that "mandatory" provisions are those provisions that would apply regardless of the terms of any governing law clause. The legislature has given some direction as to the last point: As long as the totality of the circumstances do not clearly lead to the application of the laws of a particular country, or the employment relationship does not have a nexus to a particular country, then the laws of the country where the employee generally performs his work obligations — even if the employee has only been transferred to another country temporarily — or that country where the employer hired the employee will apply to the employment relationship.
Applying this general rule, however, may not be as simple as it sounds. For example, what happens if the employee’s general place of performance and the hiring entity are not in the same country, or if the employment relationship actually has a closer nexus to a different country? These types of situations are becoming increasingly common.
In December of last year, Germany’s Federal Labor Court stated that the employee’s place of performance, the employer’s place of business and the employee’s domicile are the primary factors in determining which country’s laws shall apply to an employment relationship. A court may also consider other secondary factors such as the language of the employment agreement and the currency paid to the employee.
In the case that was presented to the Federal Labor Court, the issue as to which law would apply was quite significant from a financial point of view. The court finally concluded that German law applied to the employment relationship, and thus the defendant, a Belgian employer, was not required to pay termination compensation to the plaintiff, a German employee who had been hired in Belgium. If Belgian law had applied, the employer would have been required to pay compensation to the terminated employee. The Federal Labor Court held that the employment relationship had a closer nexus to Germany than to Belgium, and that the employee’s general place of performance — Germany as well as other countries — carried more weight than the fact that the employee had been hired in Belgium. Somewhat surprisingly, the court gave practically no weight to the fact that the parties had agreed in the employment agreement that German law would govern. One would initially think that this would have been the strongest argument against applying Belgian law, and thus would have been the employer’s strongest argument against paying the compensation that would otherwise have become due under Belgian law.
The Federal Labor Court’s decision buttressed the already general view that it rarely makes sense for an employer to try to contract out of German law if German employment law would apply to the employment relationship based on the above considerations. The employer should always be careful to avoid the situation where an employee enjoys the protection of the employment laws as chosen by the parties plus — in this case, Germany’s — mandatory employment laws.
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