Germany: Company Practices—Their Unintentional Creation and how to Eliminate Them

Last Updated: 26 April 2005
Article by Georg Mikes

A "company practice"—defined as consecutive actions by an employer leading an employee to conclude eventually that this practice will continue for the duration of the employment relationship—may subsequently turn into a legal claim by the employee since the practice has, by implication, become part of the individual’s employment agreement. The simplest example of the above is a Christmas bonus. Generally, even if not called for in the written employment agreement, if an employer in Germany pays a Christmas bonus for three consecutive years without expressly notifying the employee that the payment is not to become a "company practice", the employee will have a legal claim to a Christmas bonus after the third consecutive payment.

Company practices are the subject of many disputes. This is, in part, because they are not covered by statute, but instead only by case law. Further, they may apply to any employer, regardless of the size or structure of the company. Also, unlike almost any other basis for a claim in the field of employment law, company practices are not set forth in writing. Finally, different also from verbal commitments, an employer typically does not expressly announce the creation of a company practice and it is quite possible that the employer never intended to a create a company practice. Thus, employers need to be aware as to how company practices may be created and how they may be eliminated.

Recent case law has brought some clarity to company practices. In a January 20, 2004, decision, the Federal Labor Court held that company practices may apply to any aspect of an employment relationship that could be included in an employment agreement. In that decision the court held that the employer was required to pay a particular insurance premium on behalf of a civil servant upon the retirement of that employee because the employer had made these payments in the past. The Federal Labor Court also confirmed that a simple clause in an employment agreement setting forth that any amendments to the employment agreement must be in writing will not negate the possibility of the creation of a company practice. This is because the clause requiring amendments to be in writing is itself subject to an oral amendment. Thus, a company practice—which actually constitutes an amendment to an employment agreement— may enter into effect through a two-step process: first, an oral agreement is made to the clause requiring all amendments to be in writing, and second, an oral agreement ( i.e., the introduction of the company practice) is made to the employment agreement.

Another 2004 Federal Labor Court decision held that an employer may create a company practice not only by granting a particular benefit three successive times (such as with the above-mentioned Christmas bonus). Instead, according to the Federal Labor Court, the "three times" rule applies only to benefits that an employer has granted to all employees annually. For other types of benefits granted by the employer—in this particular case, anniversary bonus payments—whether a payment will become a company practice depends on the type, duration and the amount of the payment. The court does not set forth what minimum duration is necessary to create a company practice as this will depend on the frequency of the payments and the percentage of employees who are entitled to the payments. For "less significant benefits" the court requires a higher percentage of employees to be entitled to the benefits than for "more significant benefits".

This approach causes some concern as it leads to the result that a company practice for "more significant benefits" will be created more easily than for less significant benefits, i.e., those benefits which may be more costly to the employer are created more easily. This behooves employers to review their actions vis-à-vis employees to ensure that they are not unintentionally creating any binding company practices.

On a slightly different note, an employer cannot create a company practice merely by performing its already existing obligations that have been created by contract, by a collective bargaining agreement or by an agreement with a works council. German courts have also held in the past that an employer cannot unintentionally create a company practice if the employer erroneously assumed that it was required to perform the obligation. However, employers should proceed with caution when relying on this argument as generally only the employee’s objective viewpoint will be determinative as to whether a company practice was created.

What should an employer do if it has unintentionally created a company practice and it wishes to eliminate this company practice? Even an understanding works council will generally not be of much help since works agreements ( i.e., agreements with works councils) that eliminate or reduce employees’ rights cannot impact a company practice. Since, as already mentioned above, company practices become an integral part of the individual employment agreement, an employee may rely on the terms of the employment agreement (whether express or implied) if the rights set forth in that employment agreement are greater than set forth in a more generally applicable agreement e.g., a works agreement.

As a result, an employer can only eliminate a company practice by directly impacting the employment agreement. One possibility—at least theoretically—is to dismiss the employee and immediately thereafter offer employment to that same employee, only this time without the benefit of the company practice. However, the termination of employees can be quite complicated in Germany and to go through the procedure of terminating employees just for the sake of eliminating a company practice will generally not be justified.

A more practical solution would be to introduce a procedure for the elimination of the company practice, e.g., by continuing to provide the benefit that created the company practice, but with the added proviso that the company practice is now subject to the employer’s revocation. This method, which has generally been accepted by the Federal Labor Court, will allow the employer to eliminate the company practice over time. Unfortunately, there is not yet a clear indication as to how an employer can best introduce such a procedure and employers should not merely assume that employees will accept the elimination of a company practice without a fight.

It is clear that preventing the creation of a company practice is easier than eliminating an existing company practice. As a result, employers are well-advised to provide extraordinary benefits with the proviso that they are subject to the employer’s revocation.

Further, an employer should include a clause in employment agreements that company practices will not be created. As already mentioned above, a simple clause setting forth that any amendments to the employment agreement must be in writing will not suffice. Instead, the employer should also include a clause that any amendments to the employment agreement must be in writing, including any amendments to the clause setting forth that amendments must be in writing. This "duplicative" writing requirement is relatively common in Germany and will go a long way in preventing the unintentional creation of a company practice. In fact, in 2003 the Federal Labor Court held that a company practice cannot be created unintentionally so long as the individual employment agreement includes the above "duplicative" writing requirement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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