It is just a few weeks since the minimum wage was introduced in Germany, but it is already becoming quite clear that its implementation in practice cannot be taken for granted. Scarcely a day goes by without the media reporting new minimum wage breaches. Online, meanwhile, law firms openly offer counselling on how to sidestep the statute. And, every day, on the hotline set up by the German Trade Union Federation (DGB) and the Federal Ministry of Labour and Social Affairs (BMAS), hundreds of employees tell of the sometimes highly devious attempts being made to do them out of the minimum wage.
Back in the autumn of last year, in a study commissioned by the Labour Ministry of North Rhine-Westphalia, the Hans Böckler Foundation’s Institute of Economic and Social Research (WSI) was already asking questions about the preconditions for successful implementation. It examined examples from other European countries (France, the UK and the Netherlands), as well as German experiences with regional and sectoral minimum wages, which have existed for quite some time. Basically, it identified five factors for success:
1. A precise and manageable definition of the minimum wage;
2. Clear, checkable provisions on the relationship between the minimum wage and working time;
3. The existence of efficient monitoring institutions and processes;
4. Effective instruments for wage-earners to get their minimum wage entitlements applied;
5. The broadest possible social acceptance, including by large sections of business.
Definition of the term “minimum wage”
One of the greatest weaknesses of the German Minimum Wage Act (MiLoG) is that it does not include any precise definition. This fact had already drawn criticism during the legislative process – for example, from the Bundesrat (upper house of parliament), which explicitly called upon the Federal Government to clarify “which components of wages are to be counted as part of hourly remuneration”, as “the lack of concretization creates the risk that the minimum wage could be undermined”. The Federal Government, on the other hand, took the view that the term “minimum wage” had already been sufficiently clarified by the case law of the European Court of Justice (ECJ) and the Federal Labour Court (BAG), so that no further clarification was needed. However, a look at the current legal debate makes it clear that the meaning of “minimum wage” has by no means been conclusively settled in every respect by the jurisprudence.
The basic principle confirmed by both BAG and ECJ case law is that the only payments that may be included in the calculation of the minimum wage are those that recompense the contractually agreed standard performance. So any bonuses for additional performance by the employee must be paid as extras. Among these are, for instance, bonuses for unsocial hours (e.g. overtime, Sundays and public holidays, night work or shift work) or for particular working conditions (e.g. dirty-work bonuses or danger money). Nor can account be taken of reimbursements, capital-building benefits or company pension contributions, as these are not intended to recompense standard performance. Finally, tips should not be included either, as they are voluntary payments by third parties and are not, therefore, part of remuneration.
On the other hand, all payments that serve to recompense standard performance should be taken into account in the minimum wage. Alongside the basic, this may include bonuses that are not tied to any special tasks or conditions. Also covered are collectively bargained one-off payments in lieu of increases in negotiated basic rates. Finally, there are a number of remuneration components on which no generally agreed legal view has been reached. This applies in particular to the payment of Christmas and holiday bonuses. The Federal Government’s position is that these should be included if they were irrevocably paid out to the employee, while the Bundesrat insists that they should not generally be taken into account. Meanwhile, the labour court in Berlin has decided at first instance that these bonuses cannot be used to calculate the minimum wage, but there is still the possibility that a higher labour court instance might reverse this judgement.
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Relationship between the minimum wage and working time
Experience in other European countries indicates that incorrect recording of working time is one of the most widespread ways of sidestepping the minimum wage. This has been confirmed by the customs service’s own monitoring of sectoral minimum wages in Germany. Overall, three main avoidance techniques may be identified here:
1. Many firms oblige employees to perform unpaid additional work, and this can mean that pay per hour actually worked is below the minimum wage.
2. Many sectors have no set working times. Here, payment is based rather on a predetermined work output and therefore follows the piecework principle.
3. A third possible way of avoiding the minimum wage is to incorrectly remunerate special working time, such as standby, on-call, travelling and waiting times.
In the Minimum Wage Act (Section 1, paragraph 1), the minimum is first of all defined as pay per hour. The explanatory memorandum attached to the law further clarifies that, in the case of piecework agreements, it will be a requirement in future “that the minimum wage should be reached for the hours worked”. To prevent abuses when arranging and calculating work times, the Act (in Section 17) requires firms to record the start, end and length of employees’ daily working time and retain these records for at least two years.
However, the duty to record working time is not a general one. It applies only to certain sectors and employee groups. These include marginally employed people, who are assumed to be at greater risk of not enjoying the minimum wage, as even today the proportion of low-paid workers is higher among “mini-job” holders than in any other group of employees. The duty to record also applies to those sectors that, according to the Illicit Employment Prevention Act, are particularly susceptible to illegal employment practices.
Monitoring the minimum wage
If the Minimum Wage Act is to be implemented effectively, proper monitoring is essential. Germany has long had a well-developed system for ensuring the application of legal and collectively bargained employment conditions. The most important monitoring authority in this regard is the Illicit Employment Financial Inspectorate (FKS), which is part of the customs service. Under the Illicit Employment Prevention Act, the FKS is tasked with prosecuting cases of illegal employment. To that end, it has been provided with extensive investigatory powers, enabling comprehensive checks on firms.
In addition, pension funds regularly carry out workplace checks, and these also look at compliance with the minimum wage. However, pension funds only examine the employers’ own documentation and, if suspicions arise, pass this information on to the FKS. Furthermore, in the case of public procurement, either the offices issuing the tenders or the federal states’ own monitoring authorities carry out checks.
While the powers of the FKS to carry out effective minimum wage checks are generally seen as very far-reaching, discussion has tended to focus on the staffing levels needed if the FKS is to live up to its new, expanded mission. In the meantime, the Federal Government has stated that the FKS will get 1,600 additional permanent staff. However, this staff build-up will be gradual, over a period of five years. So comprehensive monitoring of the minimum wage will not become possible until a few years down the line.
Getting minimum wage entitlements applied
For the statutory minimum wage to be successfully implemented as a whole, another crucial factor – alongside the creation of an efficient monitoring system – is that the employees concerned get their minimum wage entitlements respected. Certainly, every employee concerned has the right to take the employer to court over minimum wage breaches. However, experience up to now plainly shows that employees are relatively reluctant to do so, because of fear of losing their job and other sanctions. In order to make minimum wage claims applicable in law, the possibilities for bringing collective cases to court must be strengthened. In a number of European countries, labour law now also recognizes organizations’ right to bring class action lawsuits. In France, for example, the trade unions can take employers to court over minimum wage breaches, acting on the employees’ behalf. In Germany too, the unions have long demanded an associative right to sue. Given the high barriers faced by individual employees when bringing a suit, the introduction of an associative right to sue could be an important contribution to the implementation of minimum wage entitlements.
Getting the minimum wage accepted
Together with setting transparent rules and building up an efficient monitoring structure, the most important precondition for the successful implementation of the minimum wage is, in the final analysis, social acceptance. The UK, which did not introduce a minimum wage until the end of the 1990s, swiftly succeeded in making it a generally accepted institution within the British social model. In Germany, some sections of business are still very sceptical about the minimum wage. That is why the British experience is of such interest to Germany – in the UK too, it was initially brought in against the wishes of the majority of business. A major factor in gaining acceptance was the establishment of the Low Pay Commission, which conducts a broad social dialogue and has, particularly, involved those sectors that claimed to have especially large problems with the statutory minimum.
In Germany too, in order to increase business acceptance, it is vitally important to engage in a dialogue precisely with those business representatives who fear particularly negative consequences for their sectors. For instance, within sectoral employer-union dialogues, the specific sectoral problems in implementing the minimum wage could be discussed and solutions developed. A model for this could be provided by the existing sectoral alliances among employers, unions and the customs service to combat illicit employment.
The way forward
Many of the preconditions for a successful implementation of the minimum wage in Germany have, up to now, been insufficiently met. When reviewing the Minimum Wage Act, the Federal Government should set out a clear definition of the minimum wage, as regards the remuneration components and working times to be taken into account. Moreover, FKS staffing increases should be accelerated and cooperation with other monitoring authorities intensified. For the minimum wage to become a successful project, joint initiatives by politicians, business and unions are ultimately required, so that companies’ acceptance of the minimum wage can increase.
This blogpost was first published by the Global Labour Column
Thorsten Schulten is head of the collective agreements archive of the Institute of Economic and Social Research (WSI) at the Hans Böckler Stiftung. He is also an honorary professor at the University of Tübingen.