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LAG Hamburg: Effectiveness of Hypotax Agreements between Employer and Employee

An individual contractual agreement according to which a fictitiously calculated wage tax may be withheld by the employer if the employee has been posted abroad under the collective agreement may violate section 4 subsection 3 TVG and thus be invalid if the agreement deviates from the (remuneration) collective agreement to the disadvantage of the employee and the collective agreement does not contain an opening clause permitting the deviation.

The German employer cannot rely on an agreement with the posted employee on the basis of which he withholds a fictitiously calculated wage tax in Germany because the employee is liable to pay tax in the host country and the employer bears the employee’s lower tax liability there. This violates section 4 (3) of the TVG and cannot be justified by comparing favourable treatment.

If the performance of work by a posted employee abroad is to be regarded as temporary, his or her employment contract continues to be subject to German law even during the period of posting abroad and the normative validity of a collective agreement that was also previously applicable remains in force for this period. An individual agreement to deduct a tax amount hypothetically determined in the employee’s home country Germany from the employee’s monthly gross remuneration deviates from normatively applicable collective agreement provisions on the amount of gross remuneration to which the employee is entitled – at least if other payments which the employee receives as allowances are not to be included in the comparison of favourability pursuant to section 4 subsection 3 TVG, as the necessary connection between the groups of objects is not given.

Decision of the Hamburg Higher Labour Court and relevance to Hypotax practice

The legal dispute to be decided concerned the question of whether the employer was allowed to withhold a part of the gross salary of the posted employee in the amount in which the employee would have paid taxes in Germany if his income had been subject to income tax in Germany during the relevant period of the posting. The decision thus has implications for the practice of the so-called hypotax (= hypothetically determined tax) if the employee is posted abroad and is liable to pay tax there. especially if the regulation on the withholding of the hypothetically determined wage tax is based on an individual contractual agreement.

Three key statements can be derived from the LAG’s ruling. Firstly, the court clarified that in the case of a temporary posting of the employee, German law continues to apply and thus also the collective agreements (applicable to the respective parties bound by collective agreements). Furthermore, an agreement between employer and employee in the context of a “tax equalisation” violates mandatory law under section 4 (3) TVG and is thus invalid if the agreement deviates from the (remuneration) collective agreement to the disadvantage of the employee and the collective agreement does not contain an opening clause allowing for the deviation. Finally, the comparison of favourability under section 4 (3) TVG does not include payments to the employee which are only intended to compensate for higher expenses incurred by the employee in the context of the posting, but which are not paid in return for work performed.

Application of German law, in particular the TVG

If the TVG were inapplicable due to the validity of a foreign legal regime, there would be no conflict with section 4, paragraph 3 TVG. Art. 3 para. 1, Art. 8 para. 1, 2 Rome I Regulation in principle open the possibility for the contracting parties to freely choose the legal regime applicable to a posting contract. However, according to Art. 8 para. 1 sentence 2 Rome I Regulation, the choice of law must not result in the worker being deprived of the protection of the law that would be applicable in the absence of a choice of law. This is the law of the state in which or from which the employee habitually performs his work in fulfilment of the employment contract.

In the case to be decided, the contracting parties had expressly agreed that German law would apply to the posting contract. However, even without the choice of law, German law would have been applicable because the employee’s usual place of work was in Germany and the merely temporary posting did not lead to a different assessment.

This is particularly the case if – as in the case at hand – the parties expect the employee to resume work in his country of origin after his assignment abroad. This is not precluded – as the Hamburg Regional Labour Court found – even if the employee only receives instructions from the company in the host country where he is deployed during the posting.

The focus of the work is still in Germany, especially if the posting is for a limited period of time. Thus, in the case at hand, the standards of German law and thus also the provisions of the collective agreement had to be applied.

Impermissible deviation from collective agreements

Section 4 (3) TVG only permits a permissible individual contractual deviation from the collective agreement provisions if the collective agreement permits it by way of an opening clause or if the agreement contains an amendment of the (collective agreement) provisions in favour of the employee.

If – as in the case decided – the collective agreement stipulates the payment of a gross salary in a certain amount, there is a deviation from the provisions of the collective agreement if not actually payable taxes but fictitious taxes are deducted. The relevant collective agreement exclusively regulates a gross salary, but not a net salary. This constitutes a deviation within the meaning of section 4 (3) TVG – even if the employee is paid exactly the net amount of the salary owed under the collective agreement that he would have earned if he had continued to work in Germany.

A justification of the deviation by means of an opening clause in the collective agreement could not be considered in the case to be decided by the Hamburg Higher Labour Court.

Thus, in principle, the possibility remains that the deviation is permissible because it contains a change in the collective agreement provisions on the amount of the monthly gross remuneration in favour of the employee. The favourability required for this is to be determined on the basis of an objective approach. A merely objectively neutral regulation is not sufficient to qualify a deviation as such “in favour” of the employee.

The provision agreed between the parties to the employment contract on the deduction of a hypothetical tax does not stand up to the favourability comparison in particular if the employee – as in the case to be decided – has to pay lower taxes in the host country than in Germany.

According to the Hamburg Higher Labour Court (LAG Hamburg), special payments due to the posting (such as purchasing power compensation payments, lump-sum payments for moving in, moving out and moving in, reimbursement of real estate agent costs, home travel costs, etc.) do not lead to the deviation from the collective wage agreement being considered permissible. These benefits merely compensate for additional financial expenses associated with the posting. However, they are not income paid in return for the work performed. Therefore, these special payments are not to be included in the consideration.

The favourability comparison thus leads to the result that the individually agreed regulation on the deduction of a hypothetical tax does not contain a change of the (collectively agreed) regulations in favour of the employee.

The provision is not compatible with section 4 subsection 3 TVG. There is an impermissible undercutting of the gross salary if the employer withholds the hypothetical wage tax.

Possibility of implementing or further practising Hypotax

Against the background of the decision of the Hamburg Higher Labour Court, employers should therefore examine whether the deduction of hypotax for employees covered by collective agreements can or should still be made in similar cases.

Typically, the deduction of hypotax is made in the implementation of the tax equalisation method. In this method, the employee is charged with the tax level of the home country (in the form of the deduction of hypotax) and the employer in return bears actual taxes in the host country (and – if applicable – in the home country).

The LAG left open whether a deduction of hypotax would stand up to a favourability comparison if the actual taxes exceed the amount of hypotax (in the case of postings to high-tax countries). If this were to be affirmed, a different treatment of postings to high-tax countries and countries with lower tax levels would be conceivable. However, this would significantly increase the implementation effort, as the expected tax burden in the posting country can often only be determined through an individual calculation. In addition, the general implementation effort increases if different methods of tax equalisation are to be applied in the company for different employee groups or country combinations.

A change to a different tax equalisation method – e.g. tax protection – would have to be examined. In this method, the employee remains responsible for taxes in the home country and in the country of assignment. Insofar as this results in a tax disadvantage (higher tax burden than in the home country), the additional tax is compensated by the employer. In contrast to tax equalisation, tax protection is usually associated with higher costs for the employer, as he only ever has to compensate for tax disadvantages without being able to skim off tax advantages. In addition, this method does not prevent postings to low-tax countries from tending to be more attractive for employees than postings to high-tax countries due to the tax advantage.

Comment by IAC GmbH: The decision of the LAG must be further observed. The hypotax calculation is common practice in many companies, including the application to tariff employees. It must certainly be examined here how the implementation is to be viewed if the original German employment relationship is suspended for the duration of the posting abroad and the instructions will also be influenced by the host country.  There are also considerations to raise the pay scale employee to the non-pay scale level for the duration of the secondment. “We are intensively dealing with the consideration by the LAG Hamburg and will gladly be at your disposal with our consulting services if you have any questions”, says managing director Kai Mütze.

Reference LAG Hamburg ruling, published 23.11.2022

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