Lawsuit waiver clause in a pre-formulated termination agreement
> June 2016
Termination agreements are frequently used to create legal certainty for the eventuality that an employment contract is terminated. In practice, such agreement commonly include clauses in which employees waive their right to initiate court proceedings to protect themselves against dismissal in accordance with Section 4 of the German Protection Against Dismissal Act (KSchG) within the statutory three week period after signing the termination agreement.
Employers use such clauses to provide legal certainty in the event that the employment contract is terminated. However, such clauses are very rarely successful. Generally speaking, contracts between employers and employees related to the employer-employee relationship are considered consumer contracts in the meaning of Section 310(3) of the German Civil Code (BGB). The same is true for agreements between employers and employees governing the terms of an employee's termination. These agreements are therefore subject to the "standard business terms test" described in Section 307 et seq. of the German Civil Code.
According to Section 307(1) of the German Civil Code, provisions in standard business terms are ineffective if, contrary to the requirement of good faith, they place the counterparty (in this case the employee) at an unreasonable disadvantage to the principal.
According to the Federal Labour Court of Germany (BAG), whether individual terms (clauses or provisions) in a termination agreement are unreasonably disadvantageous always depends on whether the compensation provided is adequate. When deciding whether terms are unreasonably disadvantageous, the BAG looks at whether the termination agreement stipulates that the employer should provide a consideration (which is usually not mandatory) to employees in return for the latter waiving their rights to initiate court proceedings to protect themselves against dismissal.
Settlement payments are as common in this context as they are unpopular. If they are substantial enough, they can be considered an appropriate quid pro quo for the legal certainty which the employer is trying to achieve. However, making a settlement payment is precisely the outcome which employers fear the most, particularly if legal proceedings are pending. Employers use waiver clauses to pre-empt this possibility, particularly in situations where the grounds for dismissal are not particularly substantive.
Simply providing a final reference which is more positive than merited is not enough, according to the latest decision of the BAG. When deciding whether terms are unreasonably disadvantageous, a final reference which is more positive than merited not considered sufficient compensation.
If the compensation offered in return for the waiver clause is inadequate, the waiver clause is unenforceable in accordance with Section 307(1) of the German Civil Code. The employee is entitled to initiate proceedings with a labour court within the three week period and is not required to comply with the waiver clause.
In conclusion:
Employers who apply waiver clauses without providing adequate compensation have no assurance that the waiver clause will stand up in court.
