In light of COVID-19, by now more than half a million businesses in Germany have implemented short-time work (Kurzarbeit). The temporary reduction of the regular working time allows companies to reduce their personnel costs while at the same time maintaining their workforce and avoiding layoffs. The gap in remuneration that the employees suffer is partially compensated by the Federal Employment Agency (Bundesagentur für Arbeit), which pays 60% (or 67% for employees with children) of the net loss in remuneration (up to certain salary levels) that results from the reduction of working hours.
Now that short-time work has been implemented, employers are faced with a number of practical questions relating to the day-to-day management of short-time work and the financial impact certain circumstances might have. The following is meant to provide a brief overview of practicable issues employers have to handle during periods of short-time work.
1. Additional/Alternative Occupation – Are employees allowed to engage in alternative employment during short-time work? If so, will this have any impact on the amount of short-time work allowance?
While many businesses were forced to introduce short-time work to their sites, there are shortages in other areas of so-called "system-relevant" professions and sectors. System-relevant professions and sectors cover services that are indispensable for the public life, security and the care of people. In particular, these include areas such as health care, energy and water supply, transport and passenger traffic, but also agriculture, food industry and the supply of food to people. In order to manage the aforementioned imbalance in the employment market, employees on short-time work are vested with the opportunity to support such system-relevant professions. From a German social security law perspective, employees are allowed to supplement their short-time work allowance by voluntarily taking up a second job in such system-relevant professions and sectors. The concrete incentive is that for a limited period, i.e. between 1 April 2020 and 31 October 2020, their income deriving from such a second job will not be credited against the short-time work allowance. This applies to the extent that the sum of the employee’s total income during the grant of short-time work allowance (i.e. the amount of the short-time work allowance, reduced salary due to short-time work (if any), and the amount of the salary of the second job) is not exceeding the amount of the initial salary from the employee’s main job (for which the short-time work was introduced).
This commercial privilege will only apply under the prerequisite that the second job belongs to a system-relevant profession. Earnings from other side jobs that an employee takes up during short-time work have to be credited against the short-time work allowance in full.
System-relevant professions are determined by the Ordinance for the Determination of Critical Infrastructures in accordance with the Law on the Federal Office for Information Security (Verordnung zur Bestimmung kritischer Infrastrukturen nach dem Gesetz über das Bundesamt für Sicherheit in der Informationstechnik). To the extent the employee’s total earnings exceed the remuneration that the employee would normally earn in his or her main job as a consequence of the second income, such earnings above the limit have to be credited against the short-time work allowance. Employers should request full and timely information from their employees about side jobs that they engage in during short-time work and the remuneration received in order to avoid mistakes in the calculation of short-time work allowance.
Apart from the aforementioned commercial privilege due to the new regulation, the employment law aspects should also be taken into account. The permissibility of the commencement of a second job during an ongoing employment relationship is often subject to limitations, which are typically set out in the respective employment contract. The (minimum) requirement in most employment contracts will include the employee’s obligation to notify the employer about the second job in advance. In some cases, the commencement of a second job may be subject to the prior approval of the employer. Such approval could be given, e.g., if no business interests are affected.
2. Vacation – Do employees continue to accrue vacation entitlements during short-time work? Can employees take vacation during short-time work, and is it possible to take vacation only on “work days”? Who will pay the compensation and what is the amount?
Before the implementation of short-time work is considered unavoidable and short-time work allowance can be claimed, employers have to ensure any legacy vacation (e.g., 2019 vacation) is fully granted and taken. Vacation entitlements of the current calendar year are considered protected and do not have to be primarily used.
Apart from that, unless otherwise agreed, the accrual of vacation entitlements continues during periods of short-time work. If the working time is reduced to zero hours (so-called short-time work zero - Kurzarbeit Null), according to two landmark decisions of the ECJ, it would generally be permissible to suspend the accrual of additional vacation entitlements for as long as short-time work continues (see ECJ decisions dated 8 November 2012, case no. C-229/11 and C-230/11). However, before using this option, it needs to be carefully assessed what the legal basis for existing vacation entitlements is and how this can be amended in an enforceable manner.
Employees can continue to take vacation also during periods of short-time work. According to the functional guidelines (fachliche Weisungen) of the Federal Employment Agency vacation can even be taken on single days without jeopardizing the ability to draw short-time work allowance (e.g., to bridge time between the end of a stretch of short-time work and a weekend) provided this is in line with the wishes of the employee. On the other hand, the Federal Vacation Act (Bundesurlaubsgesetz – BUrlG) and various collective bargaining agreements require employers to grant a certain minimum period of uninterrupted vacation (e.g. 12 business days in accordance with Sec. 7 BUrlG). Otherwise, the vacation entitlement is not properly fulfilled. Therefore, during periods of short-time work, employers should encourage employees to take longer stretches of vacation and avoid granting vacation on a single-day basis right before or after short-time work days.
Compensation for vacation days has to be calculated based on standard compensation (i.e. as if, during the 13-week reference period prior to the vacation day, the employee’s remuneration was not reduced due to short-time work); see Sec. 11 para. 1 BUrlG.
3. Public Holidays – Who pays compensation on public holidays and what is the amount?
Working hours which are simultaneously lost as a result of short-time work on a public holiday and for which short-time work allowance is paid on days other than public holidays shall be deemed to be lost as a result of a public holiday (see sec. 2 para. 2 German Continuation of Pay Act – Entgeltfortzahlungsgesetz – EFZG). As a consequence, remuneration for public holidays has to be paid and borne by the employer. The Federal Employment Agency does not pay short-time work allowance for public holidays.
The amount of holiday pay then depends on whether, without the public holiday, the respective employee would have worked full-time or rather reduced hours as per the short-time work schedule. If the employee would normally have worked full-time on the public holiday, he or she will also receive public holiday remuneration in the amount of the standard remuneration. If, on the other hand, the employee had been assigned to reduced hours on this day on the basis of the short-time work schedule, he or she would only receive public holiday remuneration in the amount of the short-time work allowance (potentially increased by top-up payments that the employer makes in addition to the short-time work allowance). In practice, there is often no difference between the two scenarios as collective bargaining agreements, works agreements or individual agreements on the implementation of short-time work quite regularly determine that holiday pay has to be made in the amount of the standard remuneration.
4. Sickness – Are employees entitled to continuation of remuneration in the event of sickness during periods of short-time work? Does it make a difference whether the sickness started before or after the beginning of the short-time work?
If an employee becomes incapable for work due to sickness during periods of short-time work, the employee is entitled to short-time work allowance for the hours lost as a result of the short-time work (except on public holidays). If the incapacity for work due to sickness begins prior to the period of short-time work, the employee is not entitled to short-time work allowance for the hours lost due to short-time work but rather receives sickness benefits from the health insurance; in this case, the amount of the sickness benefits equals the short-time work allowance. The decisive point in time is the collective start date of short-time work for the respective business operation or department but not the first day of short-time work for the individual.
The employer owes continued remuneration for any remaining working hours that the employee should have worked according to the short-time work schedule. The continued remuneration is calculated in accordance with the general principles. Upon termination of short-time work, the regular working hours shall again be decisive for the calculation.
In any event, the entitlement to short-time work allowance (or sickness benefits in the amount of short-time work allowance) during incapacity to work due to illness ends when the statutory six-week reference period for continued remuneration is exhausted. Compensation (incl. short-time work allowance) is then replaced by sickness benefits payable by the health insurance.
5. Occupational Pension – What implications does short-time work have on occupational pension?
Company pension commitments are principally not suspended during a period of short-time work. The employer is therefore continuously obliged to pay the benefits or contributions that accumulate under an employer-funded company pension scheme. However, as many pension schemes use working hours- or salary-based elements in their formulas to define the payable pension or contribution amount, employers implementing short-time work may benefit from an indirect cost-saving effect.
With regard to employee-funded company pension schemes on the basis of a deferred compensation arrangement (Entgeltumwandlung) pursuant to section 1a of the German Company Pension Act (Betriebsrentengesetz - BetrAVG), the legal situation depends on the degree of short-time work: In case the employee continues to work at reduced hours, he or she also continues to receive a (reduced) salary eligible for a conversion into a company pension entitlement. The deferred compensation arrangement continues to apply unless the parties amend or suspend it by individual agreement. If, on the other hand, an employee’s working hours are reduced to zero during the short-time work period, the employee’s salary is also cut to zero with the consequence that a deferral of compensation is no longer possible. In particular, the short-time work allowance paid by the Federal Employment Agency is considered a mere salary replacement payment and is therefore not eligible for a conversion into a company pension entitlement. However, pursuant to sec. 1a para 4 BetrAVG, the employee has the right to maintain the company pension arrangement with own contributions during such a period of continued employment without salary.
Notwithstanding the above principles, the legal consequences of short-time work on the employer’s company pension obligations vis-a-vis the employees and/or involved pension providers depend on the circumstances in each individual case, including provisions of collective bargaining agreements or works agreements, where applicable. Given the complexity of the underlying legal framework and available case law, employers are well advised to seek professional support by competent legal and actuarial specialists to avoid liability risks.
6. Top-Up Payments (Aufstockungsleistungen) – Are employers required to increase the short-time work allowance by additional payments? What are the tax and social security law consequences if top-up payments are made? Do special rules apply to employees above certain income limits?
Employers may have an obligation to top up the short-time work allowance to a certain level. Such obligation may arise from a collective bargaining agreement, a works agreement, or an individual agreement. While making top-up payments seems counter-productive in light of the savings companies want to generate by reducing the number of regular working hours and compensation, in some cases offering top-up payments is necessary to actually get consent from works councils or individuals to implement a short-time work scheme. In other cases, employers want to ease the financial pain for the employees and offer top-up payments voluntarily. Top-up payments typically close the gap between the state short-time work allowance (which is 60% or 67%) and anything between 75% and 100% of the remuneration difference the employee is suffering due to the short-time work. While there are companies at both ends of the spectrum, a very common level is 80% of the income difference.
Top-up payments are taxable compensation. Unless otherwise agreed, the tax has to be borne by the employee and will be withheld from the employee’s monthly compensation by the employer and paid to the tax office. However, especially provisions requiring the employer to top up the short-time work allowance to a certain percentage of the “net” pay difference can potentially be misinterpreted by works councils and employees. It is therefore recommended to clarify in the respective provision of the works agreement or individual short-time work agreement that any tax incurred by payment of the top-up amount is to be borne by the employees. Top-up payments are exempt from social security contributions if together with the short-time work allowance they do not exceed 80% of the gross remuneration difference (up to a certain remuneration level).
Short-time work allowance is generally provided only with respect to remuneration lost up to a certain remuneration level – the so-called social security contribution assessment ceiling (Beitragsbemessungsgrenze – BBG) in the German state pension and unemployment insurance. The BBG equals a monthly gross compensation of EUR 6,900 for West Germany and EUR 6,450 for East Germany. Any remuneration lost above the BBG does not qualify for short-time work allowance. That also means that employers may be required to offer even higher top-up payments to employees with higher salaries in order to get their consent to work short-time.
7. Working Time Accounts – To what extent are they protected? Can they still be used during short-time work?
As a general rule, the implementation of short-time work is considered avoidable (and short-time allowance cannot be claimed) if and to the extent working time credits can be used by the employer to bridge downtime. Pursuant to the new rules on short-time work that were put in place by the German legislator in March 2020 in responding to the COVID-19 crisis, there is no longer a need to build up negative working time balances. However, in principle, any positive working time balances that are at the employer’s disposal, need to be reduced first before short-time work allowance can be claimed. There are a number of exceptions to this rule. Protected from the requirement to be used with priority are:
- Working time credits already earmarked for a certain purpose (e.g. bridge days) based on binding agreements that are unrelated to the short-time work.
- Flextime accounts up to the maximum limit that employees may accrue based on the underlying flextime agreement.
- Absent any flextime framework, working time credits equaling one working day that result from, for instance, shift handover activities of ½ to 1 hour per day.
- Certain working time credits for employees in the construction sector.
- Time credits in long-term flextime accounts (Wertguthaben in Zeitwertkonten).
- Time credits in excess of 10% of the annual working time.
- Time credits that have existed unchanged for more than one year (e.g. the lowest number of accumulated hours in a working time account of the last 12 months).
- Working time frameworks existing specifically to react to volatile workloads or production fluctuation.
During periods of short-time work, flextime accounts can still be used to balance daily deviations in working time provided the above limitations are taken into account.
8. Time Recording – Are there certain time recording requirements that employers have to meet in order to be able to claim reimbursement of short-time work allowance from the Federal Employment Agency?
During periods of short-time work, employers are required to ensure proper time recording. This also applies to business operations with otherwise very flexible working time models or even trust-based working time. As part of the request for payment of the short-time work allowance and short-time related social security contributions, employers have to clearly and comprehensively demonstrate to the Federal Employment Agency for each employee affected by short-time work the following:
- Regular working days per week
- Hours worked per day
- Hours per day not worked due to short-time work
- Hours per day not worked due to sickness (broken up into hours with continuation of regular remuneration and continuation of short-time work allowance)
- Hours not worked due to vacation or other approved absence (e.g., social hours)
- Hours of unapproved absence or unpaid leave
The Federal Employment Agency offers sample time sheets for downloading online.