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So tell me, what do you think about the minimum wage?

The Insolvency Law Senate of the Federal Labour Court (Bundesarbeitsgericht, BAG) was again asked to provide a clear answer to this pivotal question on 25 May 2022 (Case No. 6 AZR 497/21). The case concerned an action for annulment taken by the insolvency administrator against a payment received by an employee from their insolvent employer. The insolvency administrator was tasked with administering and disposing of the assets of the insolvent employer. These tasks include examining the lawfulness of payments made prior to insolvency and, where there are anomalies, enforcing the repayment to the insolvency assets. The insolvency administrator may, for example, “contest” payments made prior to insolvency, i.e., claim the repayment or refund of the payments. This also applies to payments made to employees. However, salary payments may only be contested in certain cases. If the employer pays the salary at the latest three months after the work was performed, the payment will generally constitute an uncontestable cash transaction (§142 (2) second sentence of the Insolvency Code, Insolvenzordnung, InsO). It becomes dangerous for employees when wages are in arrears for more than three months or where the payment is received via another source than that foreseen in the employment contract (e.g., through foreclosure or the threat of an application for insolvency). The latter is referred to as “incongruent cover.” Especially in such cases, employees may be required to repay wages.

Does this apply to the whole salary? That is exactly the question. The case law and literature have long discussed a ban on contesting salary payments for amounts below the minimum subsistence level protected under constitutional law. In many cases, the Sixth Senate of the BAG has rejected such a ban for incongruent cover. Until now, the question of whether this also applies to congruent cover has been left open.

What was the BAG asked to decide?

The employee, who was the defendant in the case, received her salary on 24 August and 26 September 2016 for the respective months. At this time, the employer was unable to pay and transferred the wage payments from his mother’s bank account, which he had endowed with funds for this purpose. On 12 October, he filed for insolvency. After the opening of the insolvency proceedings on 1 December 2016, the insolvency administrator challenged these wage payments and demanded their repayment.

The Regional Labour Court agreed with the insolvency administrator but only granted the claim for repayment for the amount that exceeded the statutory minimum wage. The Court held that the employee should be allowed to keep the minimum wage.

What did the BAG decide?

The Sixth Senate of the BAG set aside the judgment of the Regional Labour Court and awarded the insolvency administrator a claim for the repayment of the entire payments received by the employee on 25 August and 26 September 2016, including the amount of the minimum wage. Even though the employee did not receive the payment from the debtor but from his mother, it constituted a payment made in fraud of creditors. The debtor provided his mother with the funds needed to make the payments (a so-called indirect contribution). As the defendant’s claim was against the debtor as her employer, the payment made via the employer’s mother’s bank account was an incongruent payment and thus incongruent coverage under § 131 (1) of the InsO.

The constitutional law protection of the minimum wage did not provide any restriction on the right to challenge the payment as the provisions on the protection against attachment in the Code of Civil Procedure and social legislation already guaranteed sufficiently protection. Legislators did not provide any limit on the right to contest the payment nor any special protection against enforcement. The claim for repayment under insolvency law must thus also relate to the statutory minimum wage. The legal consequences of the minimum wage end with payment by the employer.

...and what's new about that?

The judgment should not be a surprise. The fact that there is no constitutional law ban on challenging the incongruent payment of salaries based on the minimum subsistence level is in line with the case law of the highest Court. What’s special about the decision is that it provides, for the first time, indications as to how the Court would decide in a parallel case of congruent coverage. It’s no coincidence that the BAG has only had to decide on a challenge to the incongruent payment of wages until now. The prerequisites for the challenge to congruent payment are much stricter and therefore occur much less frequently. In such cases, the employee must have been aware of their employer’s inability to pay or suspension of payments (§§ 17, 130, 133 (3) of the InsO). This is entirely possible where the employee works in the accounting department or is a commercial executive for the company.

Those who have followed the case law since 2014 on the relevance of the minimum wage when contesting wage payments must ask why incongruence should make the constitutional protection of the minimum subsistence level secondary. In our view, the recent judgment contains a clear indication that the BAG does not see any real distinction between congruent and incongruent payments.
The Senate was first to bring up the idea of a ban on challenging payments below the minimum subsistence level in its judgment of 29 January 2014, which is well worth reading (Case No. Az. 6 AZR 345/12). After some lower courts (including both lower courts in the current case) applied the concept in their rulings, the same Senate advised that the idea was only meant to “fuel debate” and, after considering the arguments, this idea could not be upheld. If judges of the Labour Courts or Regional Labour Courts feel that they have been misled, they will keep it to themselves. The result of this unsuccessful development of the law is at least clear:
The Court determined that social law, rather than restrictions on challenges to payments would guarantee the protection of the employees’ subsistence. This protection comes in the form of the attachment provisions of the Civil Procedure Code and social law, which is why a general restriction against challenging payments in insolvency proceedings was not advisable under constitutional law. To the extent that contested insolvency payments fall through due to the two-month deadline in § 324 (3) of the Third Volume of the Social Code, this two-month deadline would be restricted and not the deadline for contesting payments under insolvency law. Any other approach would be contrary to both the concept of the equal treatment of creditors in the Insolvency Code and the protective mechanisms in social law. It is not the community of creditors but the greater community of solidarity that is responsible for ensuring the livelihood of creditors. Everything else is reserved for the legislators. This argumentation applies equally to contesting congruent and incongruent payments.

Even the guiding principle developed by the Court no longer refers to the individual facts or circumstances of the case as it did in the previous judgments. Instead, the Court simply states: “Contesting the payment of wages also includes the amount up to the statutory minimum wage”. This should be a sufficient indication.

Outlook

Whether or not one agrees that “the advisable minimum subsistence level under constitutional law is secured… regardless of the challenge to the payment”: the recent decision clarifies that the BAG does not consider it appropriate to position the minimum wage issue in the law on contesting payments in insolvency procedures (any longer). On the other hand, since the decision in this case concerns a contest to an incongruent payment, it will be difficult to avoid the above principle soon being made “official” and confirmed in a case concerning challenges to payments with congruent coverage. However, in its judgment of 25 May 2022, the BAG already indicated how it will decide in that case. The community of creditors in an insolvency procedure is not there to cushion social hardships arising from the challenge to payments as part of insolvency proceedings or to enforce other claims against the insolvency assets, but is instead a group of creditors who have suffered a loss.

Frank Primozic
Maike Pflästerer

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Frank R. Primozic T   +49 69 756095-424 E   Frank.Primozic@advant-beiten.com
Maike Pflästerer T   +49 69 756095-107 E   Maike.Pflaesterer@advant-beiten.com