Getting employment contracts right
Over time, every startup has to address the issue of employment contracts. It’s important to create an agreement that both reflects the nature of the employer’s business and contains every material point. This is the best way to avoid expensive lawsuits that can result from invalid or missing contractual provisions.
A contract of employment has to be concluded in writing and signed by the parties. Even though an employment relationship can be concluded validly by oral agreement, the employer does have to give the employee a written and signed document containing the essential con-tents of the employment relationship. Also, having no written contract can be disadvantageous for the employer in the case of disputes/litigation.
The provisions of an employment contract are subject to the German rules governing the “terms and conditions control” (AGB-Kontrolle). The employer must then at all costs avoid using surprising or ambiguous clauses in the contract. Otherwise the clause is not enforceable, and the matter is regulated by statutory provisions, which can be negative for the employer. The courts are continuously ruling on the requirements for general terms and conditions, meaning that contracts have to be revised frequently and new clauses adopted.
The contract should stipulate the beginning and duration of the employment relationship. As a general rule, employee and employer agree on a probationary period in which both the employer and the employee can terminate the agreement within two weeks. It’s not necessary to give any reason for termination in this case. The employment relationship can be concluded for an indefinite period or as a fixed-term contract. But if there is no specific reason for limitation under the Part-Time Work and Fixed-Term Employment Contracts Act (Teilzeit- und Befristungsgesetz – TzBfG), a fixed-term employment contract can be concluded for a maximum of two years only.
In an employment contract, the employer has to fix the employee’s weekly working hours. On average, a 48-hour week is the maximum allowed. The provisions set out in the German Working Hours Act (Arbeitszeitgesetz – ArbZG) apply to breaks and rest periods. The daily working hours and the need for overtime are determined by the needs of the company and should be regulated individually. A company that needs employees over and above the regular working hours should consult an employment lawyer for advice on the permitted number of (extra) working hours and applicable pay.
The contract should define the employee’s field of work. Here it’s advisable to reserve the right to redeploy the employee to comparable business operations in the same company. The startup should also reserve the right to relocate the employee. This lets the employer respond flexibly to changes in the company without being forced to change the contract, seeking the employee’s approval.
Of prime importance are the pay arrangements. On top of the employee’s fixed monthly salary, the employer can offer a variable sum or employee participation programs etc. You can find an overview of the different payment systems in another future blogpost.
The statutory length of vacation in Germany is 20 days for a five-day working week. An em-ployee’s vacation is governed by the German Federal Vacation Act (Bundesurlaubsgesetz – BUrlG). The employer can grant additional vacation days contractually. Any additional days granted by the employer can depart from the regulations laid down in the Federal Vacation Act. The Federal Vacation Act provides that (statutory) vacation in principle be taken during the calendar year. In exceptional cases, the unused days can be carried into the next year. In this case, vacation entitlement expires on March 31 of the following year. If employees are unable to take their vacation by the end of March 31of the following year due to sickness, their entitlement remains. Here, this (as yet unused) right to statutory vacation must be exer-cised by the end of the 15th month after the expiry of the calendar year for which the vacation was granted; otherwise it will be lost.
The contract needs to contain provisions on any inability to work. In particular, it should in-clude information on the time an employee has to report sick on the affected working day. If employees are ill for more than three days in a row, they have to hand in a sickness certificate, which contains information on their inability to work and the expected length of their absence.
Confidentiality and inventions
In a startup, it’s really important that the employee keep company and business secrets confidential. This needs to be included in the contract as well. Here the employer should make sure, in particular, that confidentiality applies not only during the employment relationship but also after termination or expiry of the contract.
The rights to employee inventions are subject to the German Employee Protection Act (Ar-beitnehmererfindungsgesetz – ArbNErfG). It allows employers to own and exploit employees’ inventions, while employees are entitled to receive sufficient payment for their technical achievements. That means the employer has to pay a reasonable fee for this service. It is not possible to waive these regulations to the disadvantage of the employee.
Limitation – a useful clause
Employee and employer can agree that any claims must be made within three months. The advantage of an exclusion clause is that the employer achieves legal stability much earlier than under the ordinary limitation period (three years). When one of the parties asserts a claim during the three-month period which is rejected by the opposite side, it can be agreed that the claim must be filed in court within another three months (double-exclusion clause). This clause applies to both employee and employer. The time limit can’t be shortened any further. The clause must be drafted carefully as the requirements of general terms and conditions change frequently.