Executive Summary: Short-time work can have a negative impact on company pension schemes by means of deferred compensation. Affected employees must react. Employers should inform their employees promptly.
In light of the current Coronavirus pandemic, many employers are introducing short-time work. Instead of the full salary from his employer, the employee will then receive short-time work allowance and possible supplemental payments by his employer. Short-time work allowance does not equate normal salary payments with regard to renumeration law and holds a special position. As a tax-free compensation payment for salary, it is not classified as income. That is why it is not taken into account when calculating parental benefits, for example. A period of short-time work during the calculation period for parental benefits may lead to severe cuts in the receipt of parental benefits.
Does short-time work and the receipt of short-time work allowance have a similarly negative impact on an employee’s entitlements to company pension schemes financed by means of deferred compensation? Sec. 1a Para. 1 of the German Act on the Improvement of Company Pension Schemes (Gesetz zur Verbesserung der betrieblichen Altersversorgung – BetrAVG) grants an employee the right to demand that an employer converts parts of his future renumeration into his company pension scheme. Therefore, deferred compensation offers an alternative to the traditional financing of company pension schemes by the employer. There are also hybrid schemes which are partly paid for by the employer and partly by the employee by means of deferred compensation. Deferred compensation plans often involve external pension funds (life insurers or pension trusts), to which payments or contributions from the converted salary are paid.
I. General impact of short-time work on company pension schemes
The introduction of short-time work “by itself” does not have a negative impact on pension entitlements. A company’s difficult financial situation does not grant an employer the right to change company pension schemes, especially not pension entitlements financed by deferred compensation. All agreements on company pension schemes – including those with external pension funds – initially remain in effect.
Any impact on deferred compensation is based solely on the employee’s reduced salary when working on short-time. The amount of the remaining salary and the impact on deferred compensation hinges primarily on the scope of short-time work.
If the employee remains working on a reduced scale during the period of short-time work, he will receive a reduced amount of his gross monthly salary. That salary can usually still be used for deferred compensation. In that case, it depends on the amount of the remaining salary whether and to what amount the employee can continue paying into his deferred compensation plans. Should an employee require liquidity, the specific existing agreement on deferred compensation must be changed together with the employer. He does principally not have a legal right to such a change, but a reasonable employer will hardly deny such a demand.
Pursuant to Sec. 1a BetrAVG, agreements on deferred compensation are generally binding for the employer and employee for one year, but the parties to the labour contract may agree on deviating special regulations in light of the special circumstances caused by the Coronavirus pandemic. For example, they could reduce or pause the deferred compensation and defer payments to external pension funds or agree on a release from contribution payments. The requirements and effects of that option depend on the particular conditions of each external pension fund, while non-payment will naturally lead to reduced benefits. Deferred payment or a release from contribution payments may also have a negative impact on benefits or benefit requirements (e.g. a renewed health examination) and should be considered with the external pension fund beforehand.
In cases of deferred compensation co-financed by the employer (especially Matching Contribution Systems), a reduced deferred compensation usually also results in a reduced employer contribution. Employees should obtain information thereon from their employer before considering a change to their agreements on deferred compensation.
II. Special case: Subsidized temporary layoffs
The impact is much more severe in cases of subsidized temporary layoffs, that is when the working hours are temporarily suspended to zero. In that case, the employee does not receive any regular salary from his employer. Any renumeration to which an employee may be entitled can principally be converted, whether they are ongoing or one-time payments. Even salaries within the statutory minimum wage can be converted to pension entitlements. Yet if an employee does not receive a gross salary from his employer, deferred compensation is no longer possible. The short-time work allowance paid by the Federal Employment Agency is defined as a wage compensation payment and thus does not constitute renumeration for performed work. Therefore, short-time work allowance cannot be converted into payments for company pension schemes.
Sec. 1a Para. 4 BetrAVG offers a lifeline for those cases of periods of employment without renumeration. The regulation grants an employee the right to continue his own contributions to an insurance or pension plan, as well as to continue and stimulate the pension entitlement based on deferred compensation with his own resources. That way, the employee can continue the company pension scheme without a break. Any entitlement gained that way is also covered by the extensive protection obligation of the employer (warranty obligation, insolvency insurance and obligation to make adjustments). However, this right to continuation does not apply to defined benefits pension plans and pensions plans provided by pension trusts, but only to pension plans provided by an insurer. The continuation right also applies to pension plans provided by life insurers.
III. What should employees and employers do?
It is important for employees to immediately check their agreements on deferred compensation in order to evaluate any impact on them. That evaluation depends highly on the personal financial situation.
Whether employers have an active obligation to inform employees using deferred compensation cannot be answered clearly pursuant to the Federal Labour Court’s rulings. However, due to the often-existing discrepancy of information on company pension schemes, employers should actively and promptly (and in writing!) reach out to their employees which are currently working on short time or will do so soon, provided that there is an agreement on deferred compensation with them. Thereby, accidental disadvantages regarding pension plans can be avoided.
There are several courses of action, depending on the scope of short-time work.
- General possible reactions to short-time work
- The amount and other modalities of deferred compensation during the period of short-time work can amicably be regulated in a new agreement on deferred compensation. The binding period to prior agreements of one year pursuant to Sec. 1 BetrAVG does not prevent that.
- Considering the burden of proof pursuant to Sec. 2 Para. 1 Sen. 2 No. 6 German Act on the Proof of Material Conditions Applicable to an Employment Relationship, any diverging agreements between employer and employee should always be made in writing.
- Changes should be coordinated with external pension funds beforehand.
- Special case subsidized temporary layoffs
- The possibility to personally continue pension plans pursuant to Sec. 1a Para. 4 BetrAVG should be reviewed. Existing agreements on deferred compensation should be amended where necessary.
- Additionally, temporary measures to bridge the period of short-time work can be agreed upon, depending on the respective insurance conditions. Here, the temporary deferral of or release from contribution payments should be considered.
- Changes should be coordinated with external pension funds beforehand.
- Matching Contributions
- Should the employer co-finance the deferred compensation, the above-mentioned changes to deferred compensation must also be reviewed to that extend and recorded in writing.
- Corporate co-determination
- If not only case-by-case decisions are affected or the implementation of a company’s deferred compensation plan, the co-determination rights of the works council in company pension schemes must be considered. Works agreements on short-time work can subsequently implement such co-determinations rights.