Germany’s Federal Constitutional Court Revises Case Law on Fixed-Term Contracts

Germany’s Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) has overturned the controversial case law of the Federal Labour Court (Bundesarbeitsgericht – BAG) on fixed-term contracts. The controversial judgment handed down by the BAG in 2011 with regard to what is known as the “prohibition of subsequent contracts” exceeds the limits of what is permitted under the German constitution in terms of judge-made law.

Back in 2011 the BAG had decided that a previous employment with the same employer did not preclude a fixed-term contract without objective justification as per section 14(2) of the German Act on Part-Time Work and Fixed-Term Employment (Teilzeit- und Befristungsgesetz – TzBfG), provided that such previous employment dates back more than three years. The Federal Constitutional Court has now quashed this case-law. This is expected to have substantial repercussions in practice.

Fixed-Term Contracts Without Objective Justification

Pursuant to section 14 TzBfG, employment relationships may be entered into for a fixed term with or without objective justification. Limiting the term of an employment relationship without objective justification is only permitted up to a maximum term of two years. According to the wording of section 14(2) sentence 2 TzBfG, such limitation is not permitted if “there has previously been an open-ended or a fixed-term employment relationship with the same employer”. The range of this exclusion of fixed-term contracts without objective justification is assessed in different ways.

Previous Case Law

In 2011 the 7th Division of the BAG held that it is possible to limit the term of an employment contract without objective justification if, although the employee had previously been employed by the same employer, such employment dated back more than three years. According to the judges the wording of section 14(2) sentence 2 TzBfG “previously” is not crystal clear and not limited to one interpretation only. Rather, the wording “previously” could be interpreted in various ways, such as “never before”, “at some point in the past” or “immediately prior to”.

The BAG argued, given that the restriction of fixed-term contracts without objective justification was aimed at preventing a misuse of repeat fixed-term employments, there was no need for a lifelong prohibition of previous employments in the sense of “never before”. By extending the legal provision in question, the BAG therefore decided that a fixed-term contract without objective justification is permissible if any prior employment relationship was terminated more than three years previously.

The BAG Case Law Has Been Controversial for Some Time

The 2011 BAG decision and subsequent case law had met with substantial criticism. Several regional and local labor courts had refused to follow the decision of the BAG and had applied section 14(2) sentence 2 TzBfG in accordance with its literal wording.

The Federal Constitutional Court Quashes the BAG Case Law

The BVerfG has now put a stop to this BAG case law in its decision of 6 June 2018 (1 BvL 7/14, 1 BvL 7/14, 1 BvR 1375/14). The court held that the assumption made by the BAG was incompatible with constitutional requirements and exceeded the limits of judge-made law. Referring to the explanatory notes to section 14(2) sentence 2 TzBfG the court argues that the legislator had opted against imposing a time limit for the prohibition of a renewed fixed term without objective justification back when the provision was implemented. The BVerfG found that the BAG had failed to sufficiently respect this fundamental decision taken by the legislator.

In addition, the court has clarified that although the provision of section 14(2) sentence 2 TzBfG restricts the occupational freedom of employees and employers, this was, however, reasonable for reasons of employee protection in order to prevent the misuse of repeat fixed-term contracts as the standard form of employment. The employer’s interest in maintaining flexibility is taken into account given that the parties to the employment contract have the alternative option of limiting the contract for objective reasons pursuant to section 14(1) TzBfG.

The BVerfG does, however, confirm the original thoughts of the BAG according to which the wording of section 14(2) sentence 2 TzBfG “previously” was too wide. The BVerfG stated that, as a consequence, case law would have to take certain corrective measures if a renewed fixed-term contract without objective justification did not have an impact on the purpose of preventing the misuse of repeat fixed-term contracts in any way, referring to cases where the previous employment was a very long time ago (e.g., student job), of a completely different nature or lasted for a very short time.

Practical Consequences

Employers who to date have looked to the 2011 case law of the BAG for direction and, based on this, have entered into fresh fixed-term employment contracts without an objective justification can expect to be faced with legal actions going forward. Given the widespread criticism of the BAG case law it is questionable whether companies may argue to have relied on this case law.

The decision will have significant consequences regarding the existing practice of entering into fixed-term contracts. After this judgment, a fixed-term contract without an objective justification can only be entered into with any degree of legal certainty upon conclusion of the very first employment contract. If, at any point in the past there has been an employment relationship between the parties to the employment contract, any fixed term without an objective justification imposed regardless may be invalid.

It will take some time until the case law has established reliable criteria as to how to limit the wording “previously” in order to prevent the misuse of repeat fixed-term contracts, however, without taking away much needed flexibility of companies under German employment law. It is to be hoped that the legislator will clarify this position soon. According to the coalition agreement entered into between Germany’s governing parties, the new law on fixed-term employment contracts is on the agenda soon.