International Employment Law Issues, Wage and Hour Claims and the Differentiation of Employees and Independent Contractors

Transcription

1 International Employment Law Issues, Wage and Hour Claims and the Differentiation of Employees and Independent Contractors Germany Anke Kuhn CMS Hasche Sigle Krankhaus 1, Im Zollhafen Köln Tel: Fax:

2 Outline A. Jurisdiction in international employment disputes... 3 I. The principle of free choice of law Limitations to the principle of free choice of law... 3 a) Indispensable Regulations... 3 b) Ordre Public... 3 c) Conflicting European agreements... 4 d) Conflicting international agreements Exclusion of a renvoi... 4 II. Determination of the applicable law (in the absence of a chosen law) Applicable law Litigation in disputes occurring in several jurisdictions... 5 III. Place of jurisdiction in international disputes Exclusive jurisdiction clauses... 6 a) Limitations... 7 b) Non-Member States Refusal of recognition... 7 B. Wage and hour claims... 8 I. Wage and hour class actions in Germany... 8 II. Collective claims by works councils... 8 C. Independent contractor vs. employee I. Determination of employees and independent contractors Self-determination Incorporation of an employee Individual rights Intermediate categories... 12

3 A. Jurisdiction in International Employment Disputes I. The Principle of Freedom of Choice of Law In Germany, as in all Member States of the European Union except Denmark, the general principle of freedom of choice prevails, according to Articles 3 and 8 of Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations ("the Rome I Regulation"). The freedom of choice of law has the upmost priority when determining the applicable law and hence, if such a choice of law has been made, it must be considered to take precedence. 1. Limitations to the Principle of Freedom of Choice of Law The principle of freedom of choice does not exist without limitations. Even if the parties have explicitly chosen a specific law, there are numerous regulations that limit the applicability of the chosen law to protect the employee, as the weaker contractual party. a) Indispensable Regulations According to Article 8(1) of the Rome I Regulation, the choice of law may not have the result of depriving the employee of the protection afforded to him by provisions that cannot be derogated from by agreement under the law that, in the absence of choice, would have been applicable pursuant to paragraphs 2, 3 and 4 of Article 8 of the Rome I Regulation. The applicable law pursuant to Article 8(2), (3) and (4) of the Rome I Regulation is the law of the country from which the employee habitually carries out his work (paragraph 2), the law of the country where the place of business through which the employee was engaged is situated (paragraph 3) or, where it appears from the circumstances as a whole that the contract is more closely connected with a country other than that indicated in paragraphs 2 or 3, the law of that other country (paragraph 4). It must be considered that Article 8(2) of the Rome I Regulation is has priority over paragraph 3 and that paragraph 4 is always applicable and serves as a corrective. b) Ordre Public Another exception is provided for in Article 21 of the Rome I Regulation and relates to public policy (ordre public). The application of the law of any country specified by this Regulation

4 may be refused only if it is clearly incompatible with the ordre public of the forum. Ordre public is defined by the European Court of Justice as "all national provisions whose adherence is crucial for the protection of the political, social or economical organization of the concerned Member State to such an extent that the observance is stipulated for all individuals who are situated in the national territory of this State and for every legal relationship localized in this State" (ECJ C-369/96 Arblade and Leloup [1999] ECR I-8430, 8453 No. 30 = EuZW 2000, 88). c) Conflicting European Agreements If there are conflicting European agreements that regulate the same legal aspects as the Rome I Regulation, these agreements take precedence. The only exception to this is Article 7 of the Rome I Regulation, which contains specific provisions for insurance contracts. d) Conflicting International Conventions Disputes may not be regulated by the Rome I Regulation if there is an international convention (concluded before the Rome I Regulation was accepted on June 17, 2008) that deals with competing conflict-of-laws rules. In this case, the rules of the international convention have priority. Article 25 of the Rome I Regulation states that all international conventions continue to exist and have priority with only one exception: if the convention is concluded exclusively between two or more Member States and deals with issues that are regulated by the provisions of the Rome I Regulation. In such case, the Rome I Regulation takes precedence. 2. Exclusion of Renvoi If according to the provisions of the Rome I Regulation the law of a European Union or non-european Union country is applicable, renvoi is excluded under Article 20 of the Rome I Regulation. The law of that country is the applicable law. Hence, if a Member State declares, for example, California law applicable, there will be no further consideration of the rules of private international law in California.

5 Within and among the Member States, these provisions have no practical relevance, because the Member States all follow the same regulations when determining applicable law. Accordingly, renvoi is excluded from the outset. II. Determination of Applicable Law (in the Absence of a Choice of Law) Article 8 of the Rome I Regulation states exactly how to determine applicable law where the contracting parties neglected to make a choice of law. Articles 18 to 21 deal with "individual contracts of employment" and are highly protective of employees. Where both parties are domiciled (or deemed to be domiciled under Article 18) within the European Union, the effect of this regime is clear. The employee may be sued only in his home courts, but may file a claim at the court where his employer is located or where the employee has actually worked. If the employee has worked in several Member States, he may file a claim at the court where the establishment is or was located when the employee was employed. These entitlements cannot be taken away by agreement in advance. The situation is more complex, however, where non-member States are involved. 1. Applicable Law Generally, the choice of law is the primary principle determining applicable law. The parties are also able to agree on an exclusive jurisdiction clause. But these possibilities do not rule out the possibility of the countries to allow litigation to occur in their country. As stated previously, the choice of law is limited by various provisions. Moreover, the exclusive jurisdiction clause may not be valid, or the court could have jurisdiction if the defendant neglects to object to its jurisdiction. Therefore, there are various constellations in which litigation can occur in a country other than the one the parties initially agreed upon (see above). 2. Litigation in Disputes Occurring in Several Jurisdictions In cases where the factual or legal questions underlying the dispute occur in several jurisdictions, the residency of the defendant generally determines the place of jurisdiction.

6 If the employer is the defendant, the employee may also sue the employer in the Member State (other than the Member State where he resides) where the employee carries out or has carried out his work or, if the employee has worked in several Member States, the place where the establishment is or was located when the employee was employed. Therefore, in this scenario, the jurisdiction would be determined by the establishment where the employee was employed no matter where the employer resides or the employee actually worked. III. Place of Jurisdiction in International Disputes In Germany like in Europe Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the "Judgments Regulation") is the applicable law regulating the allocation of jurisdiction between the courts of different Member States of the European Union. Where the question concerns the allocation of jurisdiction between a Member State and Iceland, Norway or Switzerland, the Lugano Convention which is similar to the Judgments Regulation applies. In general, the Judgments Regulation stipulates that litigation should take place at the courts of the Member State in which the defendant resides. For individual employment relationships, Articles 19 and 20 of the Judgments Regulation contain specific provisions that come to the same conclusion. Both employee and employer may be sued in the Member State in which they reside the employer also in the Member State (other than the Member State where he is domiciled) where the employee carries out or has carried out his work or, if the employee has worked in several Member States, the place where the establishment where the employee was employed is or was located. But there are various exceptions, such as exclusive jurisdiction agreements described in Article 23 of the Judgments Regulation. 1. Exclusive Jurisdiction Clauses The European lawmakers have established the requirements for a valid exclusive jurisdiction clause determining that the courts of a Member State have jurisdiction in Article 23 of the Judgments Regulation. These requirements are: (1) the domicile of at least one of the parties

7 must be located in a Member State, (2) the clause must be sufficiently precise in regard to the legal relationship and the court, (3) the exclusive jurisdiction clause must meet the specific formal requirements and (4) the exclusive jurisdiction clause may not aim to render inoperative exclusive jurisdiction by virtue of Article 22 of the Judgment Regulation. In international employment disputes, the exclusive jurisdiction clause may also not interfere with Article 21 of the Judgment Regulation. a) Limitations Article 21 of the Judgment Regulation limits the possibility of exclusive jurisdiction clauses in international employment disputes to those concluded after the dispute has arisen or to those allowing the employee to bring proceedings in courts other than those having jurisdiction by law. Hence, if all requirements are met and Article 21 of the Judgment Regulation has been complied with, Germany (and all of the other European Member States) recognizes exclusive jurisdiction clauses. According to Article 23(5) of the Judgments Regulation, a valid exclusive jurisdiction clause establishes the exclusive jurisdiction of the chosen court as long as the parties have not agreed otherwise. b) Non-Member States The Judgment Regulation does not expressly provide for an exclusive jurisdiction clause in favor of the courts of a non-member State, but the European Court of Justice has ruled that Article 23 "does not apply to clauses designating a court in a third country. A court situated in a Contracting State must, if it is seised notwithstanding such a jurisdiction clause, assess the validity of the clause according to the applicable law, including conflict of laws rules, where it sits" (Case C-397/98 Coreck Maritime GmbH v Handelsveem BV [2000] ECR I (a case on Article 17 of the Brussels Convention). 2. Refusal of Recognition The German labor courts may refuse to recognize the jurisdiction chosen by means of an exclusive jurisdiction clause if the requirements mentioned above have not been met or Article 21 or Article 23(5) of the Judgment Regulation were not complied with or if the defendant has participated in the proceedings of a litigation at a court not having jurisdiction (Article 24 of the Judgment Regulation), unless the defendant has only done so to contest the

8 jurisdiction of that court or where another court has exclusive jurisdiction by virtue of Article 22. B. Wage and Hour Claims I. Wage and Hour Class Actions in Germany Class actions are primarily known in the United States and are not allowed under German law. Hence, wage and hour class actions are not possible in Germany. In Germany, collective claims are possible only by way of joinder of parties, which is not comparable to class actions. A joinder of parties makes it possible for various cases to be litigated collectively and also for evidence to be heard collectively, but each individual is the holder of his or her rights even after commencement of proceedings. An admissible joinder of parties essentially requires a homogeneous factual and legal matter. However, some German laws have been enacted, for example, the "Act on Model Case Proceedings in Disputes under Capital Markets Law" (Kapitalanleger- Musterverfahrensgesetz KapMuG), allowing sample proceedings to be brought before the courts in litigation arising from mass capital markets transactions. However, this law does not make class actions as known in the United States possible and is not applicable to other civil law proceedings. Specific organizations in Germany may also sue on behalf of the public where environmental and nature protection laws have been violated and to protect consumers. This is also not comparable to class actions as known in the United States, however. II. Collective Claims by Works Councils In Germany, lawsuits dealing with wage and hour disputes must primarily be brought forward by individual employees. There are no possibilities for combining actions in these matters with other cases as done in class actions in the United States.

9 Wage and hour disputes in companies having works councils may lead to the right of codetermination, however. In Germany, works councils have co-determination rights under Section 87 of the Works Constitution Act (Betriebsverfassungsgesetz BetrVG) when employers make decisions relating to working time and collective arrangements concerning wages and bonuses. However, there is no right of co-determination with regard to individual wage issues, because these are usually regulated by individual work contracts. Works councils can file for injunctive relief in co-determination matters against employers and assert this claim by means of an injunction without being limited to the establishmentlevel arbitration committee. The German Federal Labor Court decided that works councils have a general right to file for injunctive relief against employers when co-determination matters are concerned, because works councils must act to protect the employees. The works councils must be able to provide employees with the necessary protection to prevent employers from implementing unilateral regulations by way of their managerial authority and imposing agreements on employees when they are not able to assert their rights and interests as they should be. In such cases, works councils are allowed to file for injunctive relief. But a petition for injunctive relief will be successful only if the result of the weighing of interests is not in favor of the employer. If the employer's interests prevail, the petition for injunctive relief will not be successful. The right of a works council to injunctive relief was confirmed, and its petition was successful in a case where the employer temporarily increased the usual working hours in the company (by making Saturday a working day) without involving the works council. On the other hand, injunctive relief was denied in a case where the employer ordered employees to work overtime at short notice because the employer's interests prevailed. Other cases in which works councils might be able to file successfully for injunctive relief are: equal pay for temporary workers, exceeding maximum working hours and excessive overtime. However, the weighing of interests is always an issue to be considered, and in every single case the employer's interests might prevail.

10 C. Independent Contractor vs. Employee I. Distinction Between Employees and Independent Contractors In Germany, there is no exact definition of the term employee, but there are different criteria established by the Federal Labor Court that help determine whether an individual is to be seen as an employee or an independent contractor. According to the Federal Labor Court, an employee (as opposed to an independent contractor) is an individual who serves someone else due to a private law agreement and who is obligated to perform work in personal dependence who must follow instructions given by the employer and is heteronomous (Federal Labor Court, ruling of 22 March 1995 AP ArbGG No. 21; 16 February 2000 AP ArbGG No. 70). This rule is consistent within all courts and throughout all jurisdictions in Germany. But the courts determine the status for every case individually. The personal dependence and the heteronomous performance of work, in particular, are aspects that help distinguish employees from independent contractors. If the revenue agency has determined the status of an individual, this has no binding effect on a later court decision, but labor courts may take the decision of the revenue agency into account when deciding on the status. 1. Self-Determination Generally speaking, individuals are not able to determine by contract whether someone is to be seen as an independent contractor or an employee. German labor law is based on the principle that the weaker contractual party in this case the employee must be protected. Hence, the parties to a contract have no power to determine the status of an individual. Otherwise, employers in Germany would hire individuals only as independent contractors to avoid having to pay social security contributions and to circumvent employment protection laws. Therefore, only the true and actual circumstances may indicate whether an individual is an employee or an independent contractor, and it is the courts' responsibility to interpret the

11 circumstances correctly and to compare them with the criteria that determine the status of the individual. 2. Incorporation of an Employee Questions may arise when an individual decides to incorporate. For freelancers, this has no effect on their legal status and is part of their free decision as independent contractors, but there are restrictions for employees. Employees may incorporate only if their employers have given their consent. Employees must work exclusively for their employers unless their employers have allowed them to work for other clients. If an employee decides to become an independent contractor without his employer's consent, the employer may terminate the employment contract. If the employer has agreed to the incorporation, the employee can lose his or her employee status and become an independent work contractor. The actual circumstances decide whether an individual is an employee or an independent work contractor. The employee could thus lose all of his or her social benefits and may not rely on employment protection laws. In general, however, incorporating does not change the status of an employee per se. If an employee has decided to work for his employer as a limited liability company (Gesellschaft mit beschränkter Haftung GmbH), for example, he may do so. But if the actual circumstances remain the same, the individual could be deemed to have a disguised employment status. In this case, the individual is still an employee for social security authorities, and the employer risks having to pay the social security contributions for past years. 3. Individual Rights Independent contractors are not able to claim protection under specific employment protection regulations such as the Act on Protection Against Unfair Dismissal these are applicable only if the individual has the status of an employee. The individual is an employee if the criteria mentioned above are fulfilled. If the individual fulfills the criteria and is to be considered an employee, all employment protection laws are applicable, and notice of termination may be given only if permissible under these laws. Otherwise, the individual may file a wrongful

12 dismissal claim. The court will then bindingly determine that the individual is an employee and that the dismissal was wrongful. In such case, the employee must be employed unless the employer is able to dismiss the employee under employment protection law regulations or both parties agree on a settlement or conclude a termination agreement. 4. Intermediate Categories German law does not differentiate only between employees and independent contractors. There are also individuals similar to employees (employee-like individuals). They are not employees because they are not personally dependent, but they are economically dependent and socially in need of protection to an extent comparable to employees. Examples of these are individuals working at home (such as telework or work in production). Freelancers and commercial agents who work for only one company and do not earn more than 1000 per month may be individuals similar to employees as well. In all of these cases, the labor courts have jurisdiction, and the individuals are treated as employees with regard to various employment issues if the specific regulations expressly include employee-like individuals. Some regulations may also be applicable mutatis mutandis, depending on the circumstances and the requirements of the specific regulation.