Fixed-term employment contracts under German law

Legal framework, advantages and golden rules

Fixed-term employment contracts are popular in Germany. Employers use them for flexible personnel planning, as extended probationary periods and, frequently, – especially in an international context – to comply with internal headcount policies as well. But there are various restrictions to observe and some golden rules employers have to bear in mind.

Legal framework

The traditional understanding of the German lawmaker is that a permanent employment contract forms the standard basis of an employment relationship. Because such employment relationships are, in most cases, protected by the German Dismissal Protection Act (Kündigungsschutzgesetz, KSchG) following a "waiting period" of six months of employment, employees have a high level of protection and future security Protected employment relationships can only be unilaterally terminated by the employer if this is "socially justified" by the KSchG. Without such justification, employees are entitled to permanent employment, which means the employer needs the employee’s consent to end the employment contract. It goes without saying that employees will only give their consent to mutually terminate the employment relationship if the employer offers significant severance compensation.

If employers wish to use alternative concepts that deviate from the rather inflexible permanent employment model, they are usually heavily restricted. These restrictions not only apply, for instance, to the use of agency workers but also, and in particular, to the use of fixed-term employment contracts.

The legal framework for fixed-term employment contracts is set by the German Part-time and Fixed-term Employment Act (Teilzeit- und Befristungsgesetz; ”TzBfG”). As its title indicates, this act has two subjects: part-time work and fixed-term work. Regarding fixed-term work, the act differentiates between fixed-term employment contracts with a “valid reason” (mit Sachgrund) and contracts without such a “valid reason” (ohne Sachgrund).

A fixed-term employment contract without "valid reasons" is subject to some restrictions. In short, the employer may only extend such a fixed-term contract a maximum of three times and may not exceed the duration of two years in total. These restrictions and other important rules will be discussed in detail as the golden rules in the following article.

Fixed-term employment contracts with “valid reasons” are – for example – contracts that are entered into to hire employees as temporary replacements for others on parental leave or to cover increased workloads during a special temporary project. In practice, however, most fixed-term employment contracts are not based on “valid reasons” in the meaning of the TzBfG (sachgrundlose Befristung).

Advantages

Fixed-term employment contracts are certainly less attractive for employees and thus making it more difficult for HR department to recruit, but they have huge advantages for employers:

• Fixed-term employment contracts expire automatically and therefore do not require any severance compensation to terminate them.

• Fixed-term employment contracts allow employers to test employees for longer than the short six months' waiting period, for example employers can offer employment contracts with fixed terms of nine to twelve months to test employees before they are offered protected permanent employment contracts.

• Fixed-term employment contracts often do not have to be considered for head count purposes under company policies and therefore provide much more flexibility for personnel planning (which is why these contracts are often seen in international companies).

Golden rules

This article focuses on fixed-term employment contracts without valid reasons in the meaning of the TzBfG (sachgrundlose Befristung) and outlines the following golden rules

• No. 1 – Fixed-term employment contracts must be executed in writing
  According to Section 14 paragraph 4 of the TzBfG, fixed-term employment contracts must be executed in writing in the meaning of Section 126 of the German Civil Code (Bürgerliches Gesetzbuch). This requires signatures in ink by both parties. Emails, PDF copies, scanned signatures, electronic signatures and the like are not sufficient. If the employer violates the written-form requirement, the employment contract itself will remain effective, however the provisions concerning the automatic expiration after the fixed term has lapsed will be null and void. This means the fixed-term employment contract changes into a permanent employment contract.

• No. 2 – Fixed-term employment contracts must be executed before the employee commences work
  In accordance with case law of the highest instance, fixed-term contracts must, in general, be executed - that is signed in writing by both parties (see above) - before the employee commences work. For instance, the agreement on the fixed-term would be null and void, if the employee commenced work on the first of a month and the parties agreed on the contract one week later.

• No. 3 – There may be no previous employment
  According to Section 14 paragraph 2 sentence 2 of the TzBfG, the fixed term of employment contracts will also be null and void if the employee has been previously employed by the employer (“prohibition of previous employment”).This literally means that the employer may not agree on effective fixed terms if the employee has been employed at any time in the past no matter how long ago, for example in a student job 15 years ago. This rule has been criticized over the years and, as a consequence, specified by case law. Two decisions handed down by the Federal German Labour Court (Bundesarbeitsgericht, BAG) are essential in this regard:

  First, a 2005 decision determined that the prohibition of previous employment does not apply to trainees (Auszubildende) in the meaning of the German Vocational Training Act (Berufsbildungsgesetz), that is, it is permissible to enter into effective fixed-term employment contracts if the employee has been previously employed as a trainee. The same applies to apprentices (Praktikanten), provided they have not, however, been employed within the context of “normal” employment relationships, for example as “cheap” office clerks or helpers.

  Second, a 2011 decision determined that the prohibition on previous employment only applies to previous employment within the last three years before the fixed-term contract commences. In other words, an employer can agree on fixed terms if the employee has not been employed with the company during the last three years before the new fixed-term employment contract commences. But: It is not clear whether the 2011 decision will remain in effect because not all appeal courts follow that decision, and, meanwhile, a local employment court has asked the German Constitutional Court (Bundesverfassungsgericht, BVerfG) whether BAG`s 2011 decision is in line with the German constitution. In light of this, cautious employers should not execute any fixed-term employment contracts with any former employees, even if their employment dates back more than three years, until the BVerfG has rendered its decision.

• No. 4 – The fixed term does not exceed a total of two years
  According to Section 14 paragraph 2 sentence 1 of the TzBfG, fixed-term employment contracts may not be entered into for a term in excess of two years. Longer terms will not be valid.

• No. 5 – No more than three contract extensions are allowed within the two year term
  Section 14 paragraph 2 sentence 1 of the TzBfG stipulates that fixed-term employment contracts may only be extended three times within the overall two year term. For instance, it is possible to agree on an initial six-month term and to extend it three times for additional six months (that is, two years total). It is not, however, enforceable to agree on an additional fourth extension, even if the two-year maximum period has not been reached. Here is one example to illustrate this: If a contract has been drawn up for an initial term of three months and extended three times by three months (for a total of one year ), it is not possible to agree on a fourth extension.

• No. 6 – Any extension must be concluded before the previous term expires
  According to case law of the highest instance, any extension must generally be concluded before the previous term expires. For example if the agreed term expires on June 30, the subsequent contract must be agreed on June 30 or before that date. It is not possible to extend an already-expired contract.

• No. 7 – No additional agreements may be made as part of a contract extension
  In accordance to case law changes to other terms and conditions are not permitted as part of a contract extension. If other terms and conditions were changed – for example different salary, different working hours and so on, this is no longer considered a valid extension. This means employers are well advised to agree on any contract amendments either before or after the extension of the contract`s term.

For the sake of completeness: Fixed-term employment contracts with a valid reason in the meaning of the TzBfG (Befristung mit Sachgrund), for example contracts for temporary parental leave replacements or temporary project work, are also subject to rule No. 1 above. There are also other restrictions regarding valid reason fixed-term employment contracts that we may cover in a later article.

Consequences of breaking the golden rules

As mentioned above, violation of the golden rules will usually invoke the establishment of a permanent and protected (!) employment relationship that can often only be terminated with severance compensation. For this reason, compliance with the golden rules is of utmost importance.

Violating any of the golden rules will, however only become relevant if the employee – after failing to settle with the employer out of court - takes legal action and files a claim of permanent employment at the competent labour court (Entfristungsklage). The employee must do so within three weeks after the agreed end date of the contract or, if the parties continue the employment relationship beyond the agreed end date, within three weeks of the employer’s written declaration, on the basis of which the employer informs the employee that the employment relationship has ended because of the agreed fixed term.

If the employee ceases work after the agreed end date and does not bring legal action within the three-week period, the TzBfG protects the employer and assumes there has been an effective agreement on the fixed term, even if one of the above mentioned golden rules has been violated. For that reason, risks are often not realized in practice, but employees do sue for rights to permanent employment every day, and they see high rates of success.

Summary

The TzBfG leaves certain room for flexible personnel planning. But, as shown, the entire area of fixed-term employment contracts is strictly regulated under German law. HR departments are well advised to strictly observe the golden rules to avoid unpleasant and costly surprises.

If you have any questions regarding this topic, please feel free to contact
Henrik Lüthge (Lawyer, Licensed Specialist for Labour Law).