No money for old men - Lim­i­ta­tion of so­cial com­pen­sa­tion plans and law­suit waiver pre­mi­ums

March 2022 · Estimated read time: mins

Das Urteil des BAG zu Höchstbetragsklauseln in Sozialplänen

In a recent ruling, the German Federal Labor Court (BAG) updated its case law on the admissibility of maximum amount clauses in social plans and with regard to lawsuit waiver premiums. The following article deals with the most important aspects of the ruling.



If a works council exists in a company and a change in operations occurs (e.g. closure of a business), the parties must negotiate a social plan which compensates or at least mitigates the disadvantages of the employees resulting from the change in operations. The benefits provided for in a social plan (e.g. severance payments) are not compensation for work performed in the past, but have a future-oriented compensatory and bridging function. 


When negotiating the social plan, the aim of employer and works council is therefore to achieve fair compensation for the employees and at the same time to comply with the employer's existing social plan budget. In principle, the parties are free to decide whether and to what extent the disadvantages caused by the change in operations are to be compensated for or at least mitigated by social plan benefits. The parties have a wide margin of discretion in this respect.


The social plan compensation is usually calculated according to the formula: 


Length of service x gross monthly income x factor.


In addition, surcharges are often agreed in social compensation plans if there is a severe disability/equal treatment or if there are alimony obligations.


Maximum Amount Clause

Since the employer's budget available for social plan compensation limits severance payments, so-called maximum amount clauses are frequently found in social plans. These limit the severance payment to the agreed maximum amount if the severance payment calculated according to the formula plus any surcharges exceeds the maximum amount. 


In the case decided by the BAG, an employee had sued for a higher severance payment because he considered the maximum amount clause to be unlawful due to discrimination against older employees.


The BAG ruled that the maximum amount clause did not directly discriminate against older employees. The clause is not linked to the age of the employee, but limits the severance payment for all employees equally to a maximum amount regardless of age.


However, the BAG recognized that there was a disadvantage, as the longer the length of service, the higher the severance payment under the social compensation plan. Longer service with the company, in turn, is regularly accompanied by a relatively high age - simply because of the length of working life required for this. This means that older employees in particular typically receive a significantly higher severance payment under the social compensation plan than younger employees and are thus more likely to be affected by the cap on severance payments.


In the course of this, the BAG expressly abandoned its previous case law, according to which it had considered a limitation of a severance payment under a social compensation plan to a maximum amount to be permissible, on the grounds that a maximum amount clause cannot disadvantage older employees if only because they are not treated differently but in the same way as younger employees.


In the end, however, this did not bring the employee the desired judicial success, as the BAG nevertheless denied indirect discrimination on the grounds of age and thus considered the maximum amount clause to be permissible. It considered the unequal treatment to be justified. 


The objective of the maximum amount clause is to ensure fair distribution against the background of limited social plan funds. As far as possible, all employees affected by the loss of their jobs should be granted bridging assistance coupled with a fair distribution among the affected employees. This is a legitimate objective. In addition, the maximum amount clause is also suitable, necessary and appropriate, since it ensures that social plan volume is still available for the other employees affected by the operational change. In substance, the maximum amount clause therefore merely restricts the preferential treatment of older employees brought about by the method of calculating the severance payment. This was not objectionable. However, it must be ensured that the payment of the maximum severance payment results in a substantial mitigation of the disadvantages caused by the operational change. In the case decided, however, the BAG saw no evidence that this was not the case. The maximum severance payment had been set at €75,000. 


Waiver of Action Premium

In addition to the admissibility of maximum amount clauses, the BAG also commented in the current case on the admissibility of lawsuit waiver premiums. 


In addition to the social compensation plan, the parties had concluded a company agreement on a "waiver of action premium" in which it was agreed that the factor from the social compensation plan to be used for the social compensation plan settlement would be increased by 0.25 percentage points if the employee was dismissed and did not bring an action for protection against dismissal.


The employee now claimed payment of the waiver premium, whereas the employer argued that this was already included in the maximum severance payment under the maximum amount clause and that the employee was not entitled to any payment in excess of this.


The BAG awarded the employee the waiver of action premium for the following reasons:


In principle, social plan benefits which serve to compensate for or mitigate the disadvantages associated with the operational change may not be made dependent on the waiver of the filing of an action against unfair dismissal. In addition, the parties are free to conclude a (voluntary) works agreement in addition to a social compensation plan which takes into account the employer's interest in planning security and provides for a financial payment in the event that the employee dismissed as a result of a change in operations does not bring an action for protection against dismissal.


However, the BAG did not consider the waiver premium to be included in the maximum severance payment. In this respect, it clarified that the intended incentive to waive a lawsuit is only provided if it also has a financial effect. Employees who would not benefit financially despite waiving their right to file a lawsuit would not be deterred from filing a lawsuit.


In addition, it considered the principle of equal treatment under works constitution law to be violated if the waiver of action premium were included in the maximum severance payment amount. The reason for this is that employees whose social plan compensation already exceeds the maximum amount without or at any rate with the addition of the lawsuit waiver premium would receive no or only a lower financial benefit for waiving the lawsuit than employees whose social plan compensation is lower. This unequal treatment was not justified, particularly in view of the purpose of the waiver premium.


Fortunately, however, the BAG found that the company agreement did not violate the prohibition on making social plan benefits dependent on a waiver of the right to bring an action for protection against dismissal and therefore considered it generally permissible. In this respect, it also expressly abandoned its previous case law, insofar as it had previously assumed that a possible circumvention of this prohibition could exist if funds were withdrawn from the financial volume "per se" available for the social compensation plan to the detriment of the employees and were used in a way that was contrary to its function. The BAG has now clarified that there is no financial volume available "per se" for the social compensation plan which can be used "contrary to its function".


The previously existing legal uncertainty as to whether lawsuit waiver premiums can be permissibly agreed in an additional voluntary works agreement has been resolved with the ruling of the BAG. There is now legal clarity that such agreements are permissible, but that the waiver premium may not be offset against the severance payment of the social compensation plan, in particular against the maximum amount clause, the permissibility of which was also confirmed. 


We will be happy to assist you with all questions concerning social plans and support you in all steps of a restructuring process, so that you are in the best possible position.

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