Germany: Salary Increases Offered in Return for Signing New Employment Contract do not Justify Unequal Treatment of Non-signing Employees in Further Salary Increase Rounds

If salary increases are used to incentivize employees to sign new employment contracts, the employer may exclude employees who have not signed from the increase. However, if the employer subsequently increases salaries again, excluding employees who haven’t signed the new contract is not in line with the principle of equal treatment under German labour law.

In Germany, salary increases are commonly used as a means of motivating employees to sign new, amended employment contracts. While employees who agree to the new contracts benefit from the salary increase, those who decide against the offer may be excluded from the wage adjustment. The Federal Labour Court now had to decide what applies if salaries are to be increased again in the future.

 

Background

The plaintiff has been working in production for the employer since January 2015. In February 2022, the employer offered its entire workforce, which had previously been employed on the basis of different employment contract templates, new, uniform employment contracts. These provided, among other things, for a 4% increase in basic salary. The plaintiff rejected the offer, while the majority of the more than 100 employees accepted it. The plaintiff then continued to receive her previous base salary.

From January 2023, the employer increased the basic salary of those employees who had agreed to sign the new employment contracts by a further 5%. The plaintiff was unable to work due to illness from January 2023 and received her basic salary – which had not been increased – as continued remuneration. She believed, from the point of view of the principle of equal treatment, she was entitled to a 5% increase in her basic salary and a corresponding higher continued remuneration in the event of illness from January 2023. In her opinion, the non-granting of this constituted an impermissible differentiation not in line with the equal treatment principle.

 

Key Issues

The court found that, according to the principle of equal treatment under German labour law, the 5% percent wage increase from January 2023 must be taken into account when calculating the plaintiff’s entitlement to continued payment of remuneration. Since the employer wrongfully excluded her from this wage increase, the plaintiff was entitled to the difference claimed.

Different treatment of comparable employees is justified under the principle of equal treatment under German labour law if it serves a legitimate purpose and is necessary and appropriate to achieve that purpose. The decisive factor here is the purpose for which the benefit (wage increase) is granted. The court found that in the case at hand, the different treatment of the plaintiff was not based on an objective reason. The employer had argued that the wage increase was intended to promote the standardization of contractual working conditions in the company by providing a further incentive to sign the new contract forms. However, this overlooked the fact that employees who had already signed the new contracts and whose basic wages had already been increased for that reason in 2022 could no longer contribute to the standardization of contract terms in 2023.

The purpose of the wage increase, which is decisive for the question of objective justification of the different treatment of different employee groups, hence cannot consist in providing an incentive to the beneficiary group. At most, this group is “rewarded” because it has already contributed to the standardization of employment contracts sought by the employer. However, such a purpose did not justify excluding the plaintiff from a permanent increase in her base salary. Her base salary is paid exclusively in return for the work performed.

Practical Points

• Employers in Germany can still use salary increases to incentivize the signing of new employment contracts and exclude those employees who do not agree to them from the specific increase offered in the new contract.
• However, if the employer subsequently increases salaries again, the argument of incentivizing contract standardization cannot be reused, as such effect cannot be achieved regarding the employees who have already signed the new contract. Hence, unless there is another objective justification for a differentiation between certain employee groups in the concrete case, all employees must be taken into account, as otherwise this would constitute a violation of the principle of equal treatment under German labour law.