Salary cut when working from home: A US model for companies in Germany?

Germany

According to press reports, employees in some US technology groups have access to an IT-based calculation program that allows them to calculate their salary depending on where they work. For example, an employee who works for a company in New York City and also lives in New York City does not have to fear any loss of salary when switching to working from home. The situation is different, however, if the employee resides in Stamford in Connecticut, barely an hour away: The employee continues to receive his/her full salary if he/she commutes to New York every working day. However, given the lower cost of living in Connecticut and the savings he/she makes on travel costs, he/she must accept a 15 % reduction in salary if he/she decides to work exclusively from home on a permanent basis. Depending on the individual case, an employee's salary could be reduced by up to 25 %.

This approach is still uncommon in German companies, but it is creative and could provide an opportunity for recruiting and retaining employees, since the demand for the option of working from home is growing constantly, both among applicants and employees. For them, working from home could be lucrative despite lower remuneration than when working in the office if the amount of remuneration is still higher than the usual salary level in their place of residence and/or other advantages of them working from home outweigh the disadvantages.

Remuneration dependent on location of work in Germany possible in principle

Pursuant to section 611a (2) German Civil Code (BGB), the employer is required to pay the remuneration agreed (in the employment contract or collective bargaining agreement). The amount is usually not calculated based on the employees' location of work, but based on the content of their work, their qualifications and their professional experience.

However, there are also concepts in place in Germany for remuneration dependent on the location of work, such as when employees are seconded abroad and receive temporary allowances to compensate for loss of purchasing power. So-called residential allowances are also granted within Germany to compensate for increased living costs in particularly expensive locations. Furthermore, there are still some collective bargaining agreements with different salary scales for Eastern and Western Germany in force today, which are also due to the different cost of living. Taking the cost of living into account when setting remuneration is thus not completely unknown to the German labour market.

Such remuneration models are also not legally objectionable. The cost of living and travel expenses saved are appropriate means for justifying different treatment of employees. For civil servants, the German Federal Constitutional Court even ruled in 2007 that, when assessing remuneration for the same office, classifications may be made which are linked to their place of residence or place of employment, provided that such regional distinctions can be justified in terms of the reason for and extent of the differentiation. The difference in the remuneration of employees in Eastern and Western Germany under collective bargaining agreements was also recognised by the German Federal Labour Court and the German Federal Constitutional Court on various occasions at the turn of the millennium due to the different economic conditions.

Specific remuneration for working from home permissible

Reduced remuneration for working from home on a permanent basis in a more affordable place of residence is also permissible under German labour law. It does not constitute discrimination within the meaning of the German General Act on Equal Treatment (Allgemeines GleichbehandlungsgesetzAGG), as it is not linked to any of the criteria mentioned in section 1 German General Act on Equal Treatment, but rather to the lower cost of living and the savings on travel costs. The same applies if the company wants to provide incentives for working from home less frequently by offering higher remuneration for working at the company.

Of course, the reduction in remuneration for men and women should not be different if the cost of living or savings on travel when working from home are comparable. There is a risk of impermissible indirect discrimination based on gender if more women working from home tend to be affected more frequently by the lower remuneration than men.

Beyond that, however, there is no apparent violation of the principle of equal treatment under labour law. The amount of remuneration is generally subject to contractual freedom between the employer and employee. A general principle of "equal pay for equal work" is not enshrined in law, even though many efforts are being made to achieve this (e.g. German Transparency in Wage Structures Act (EntgTranspG)). However, the limits of contractual freedom could be exceeded if employees working from home who are in a comparable situation – i.e. employees with comparable work, qualifications, experience and cost of living – had to accept different salary reductions. This situation should therefore be avoided by choosing comprehensible and transparent parameters.

Possible implementation of a salary reduction to be examined on a case-by-case basis

As long as there is no legal entitlement to work from home in Germany, companies are free to decide whether to have employees perform their jobs at home. If they decide to do so, at least in the case of companies not bound by collective bargaining agreements, there is in principle nothing to prevent them from offering these jobs to the labour market at a reduced rate of pay and thus expanding the scope of potential applicants. The situation is different if a remuneration system under a collective bargaining agreement precludes such a reduction, which would have to be examined in each individual case.

In the case of existing employment relationships, an agreement with the employee is required which provides for his/her permanent work from home and, if living costs are more affordable in his/her place of residence, a lower remuneration. In accordance with this, the employer can make working from home dependent on a reduction in salary. If the employee does not agree to the reduction, the agreement on working from home does not come into effect. This applies in any case as long as there is no legal entitlement to work from home in Germany.

If an employee has already entered into an agreement on working from home without any salary reduction, he/she will probably not agree to a subsequent salary reduction. Since a unilateral reduction of the salary by the employer (e.g. through a notice of termination pending a change in contract) is not possible, it seems sensible to introduce work from home as part of an overall concept and not on the basis of individual cases.

It would also be conceivable to only make a proportional salary reduction according to the extent of the work performed from home (e.g. if an employee works three days in the office and two days from home).

In accordance with the recently introduced co-determination criterion under section 87 (1) no. 14 German Works Constitution Act (Betriebsverfassungsgesetz – BetrVG), if the company has a works council, its participation rights must be observed when a concept for working from home is introduced. In the case of reduced remuneration in more affordable places of residence according to defined criteria, remuneration principles in accordance with section 87 (1) no. 10 German Works Constitution Act are also likely to be affected and thus also trigger a co-determination right.

Work from home in exchange for lower salary may be a win-win prospect for companies and employees in Germany

In summary, the American idea also opens up interesting possibilities for companies in Germany in dealing with jobs where employees work from home. As some employees have already realised that employers are now more likely to allow work from home if they see a certain amount of employee "buy-in", they are taking the initiative and offering to take a pay cut in exchange for consent. Employers could take advantage of this and create a win-win situation for both parties by introducing a work-from-home concept with a predefined and transparent salary reduction.

In addition to diligence in determining the economic parameters for salary reduction, employers must keep the legal framework in mind.