Under-the-Table Payments No Basis for a “Net Pay Agreement”

30.07.2010

[] In the last issue of our Newsletter, we mentioned the fact that section 14 of Social Code IV presumes the de facto existence of a "net pay agreement" in the case of "illegal" employment within the meaning of social-security law, which will regularly result in claims for unpaid social-security contributions. In a recent judgment, the Federal Labor Court made it clear that the presumption of the existence of a net pay agreement applies only in the context of legislation governing the social security system and has no implications at the level of rights and obligations under employment agreements.

In a concrete case, an employee filed an action to recover compensation for lost wages and paid leave on the basis of a de facto net pay agreement within the meaning of section 14 of Social Code IV. She had been employed under a marginal employment program and received € 400.00 per month, which was exempt from the payment of social-security contributions. In actual fact, however, she was working full time and received a significant share of her remuneration, i.e., € 900.00, "under the table" in addition to the € 400.00. The Federal Labor Court dismissed the employee's action for payment in the final instance. The court reasoned that the only reason for presuming the existence of a net pay agreement is to discourage payment "under the table" through social-security legislation and thereby protect the community of insureds, adding that another purpose of the legislation was to make it easier to determine the amount of the social-security contributions in arrears. The court pointed out that the legislation was not on the other hand intended to enable employees who receive wages "under the table" to benefit from the legal fiction. As a result, net payment agreements are presumed to exist only for the purposes of enforcement of social-security legislation and not to support claims of employees under employment law (Federal Labor Court, judgment of 17 March 2010, 5 AZR 301/09).

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