Employer liability in the context of occupational pension schemes
Employers and their associations are not yet sufficiently aware that they are on the front line of responsibility and liability. Some insurers play this down in order not to jeopardise the brokerage of their products. Many companies complain about existential legacy issues. Now for an example of the details:
I. General duties of the employer to provide information
The law, the commentary literature and the still isolated rulings result in numerous obligations of the employer to provide information and clarification to the employee in the area of occupational pensions. And even where there are no obligations, the employer is nevertheless liable for any voluntarily given false information and consultation errors as well as for inadequate monitoring of the consultation by commissioned third parties – e.g. insurance brokers.For example, in § 4a of the German Occupational Pensions Act (BetrAVG), the legislator has standardised a claim to information in many cases, in particular about the amount of vested pension rights acquired._ The employer is liable for incorrect or incomplete information not only on termination of the employment relationship (judgment of the Frankfurt Regional Labour Court of 22 August 2001, AZ 107 Ca 450/95) but also under § 1a of the German Occupational Pensions Act (BetrAVG) in conjunction with § 242 of the German Civil Code (BGB) on commencement of the employment relationship. § 242 BGB at the beginning of the establishment of an occupational pension scheme: Already at the time of the introduction of an occupational pension scheme, the employer is subject to very high obligations of precaution, clarification and information for the benefit of his employees, as shown, for example, by the BAG, judgement of 17. 10. 2000-3 AZU 605/99._
1 If insurers claim that “§ 1a Betr- AVG does not impose an obligation on the employer to provide information” or “The law does not contain any regulations or information on the scope of the employer’s obligation to provide information”, it can be stated – even if it is not directly stated in the law: Exactly the opposite is true, e.g. if a company pension scheme already exists._ The potential liability sums of the employer – as can be calculated actuarially by experts – are enormous; many tax advisors overlook this as a balance sheet item.e.g. if a company pension scheme already exists._ The potential liability sums of the employer are – as can be calculated actuarially by experts – enormous; many tax consultants overlook this as a balance sheet item under the HGB and/or the Insolvency Code._ The Federal Labour Court (Bundesarbeitsgericht, BAG) also sees a concrete duty of the employer to inform the employee about possible disadvantages for the company pension scheme when concluding a termination agreement initiated by the employer if the employer has given the impression that the employee will be saved from imprudent disadvantages under pension law or if there is a threat of very high pension losses as in the case of public pension schemes (BAG judgement of 17. 10. 2000, file no. 3 AZR 605/99)._ A close reading of the ruling shows that the employer is obligated to provide complete and comprehensive advice to the employees and must also compensate the employees for all pension losses._
2 There is a significant duty of care and information particularly in relation to deferred compensation. The judgement of the Hessian LAG (judgement from 22. 08. 2001, Az. 8 Sa 146/00) shows that the employer is liable for the detailed and complete information of the staff. The employer was ordered to pay damages to an employee who was shown to be considering taking out a private pension. The cause of the damage was, in particular, incorrect information about the expected company pension._ It should therefore be noted that clear statutory regulations, prevailing opinions in the specialist literature as well as landmark judgments see a duty to advise on the part of the employer in many cases and that the possible “absence of a general” duty to advise should not simply be inferred as the “general absence” of a duty to advise._ If a product provider claims otherwise, this must be evaluated critically. In case of doubt, it is only a non-binding expression of opinion from which he will disclaim any liability. Such statements are also often very carefully formulated: A general duty to advise is already logically lacking if duties to advise are nevertheless given only in almost all regularly occurring individual cases._ Here, the insurance broker, the employer and the agent quickly find themselves liable if they trust in the correctness of the information or fail to recognise the restrictions._ Again and again it is claimed – with justifications that have long since been refuted – that in the case of insurance-type solutions there is automatically always a deferred compensation of equal value. Whether the insurer itself considers this to be more than a non-binding expression of opinion and whether, in case of doubt, the intermediary or the employer is liable after all, can be easily determined: by requesting the insurer to issue a corresponding guarantee and indemnity declaration.
II. selection of the supply carrier:
The Occupational Pensions Act (BetrAVG) is ultimately an employee protection law – even if some insurers see it more as a market and profit opportunity._
1. employer-funded pension
The employer is free to determine the pension provider, and even more – because the employer “determines the implementation method and tariff”. If the insurer now claims “Since the employee is not entitled to a specific occupational pension, the employer cannot commit a breach of duty when selecting the pension provider” – this is obviously too short-sighted, or simply a half-truth. The only reason why he does not have this claim is that the employer himself is liable and it is basically up to him how he procures the means to fulfil his commitments._ It is rather correct that the employer has to pay attention to the fulfilment of his commitments: He must therefore compare products and check whether he can present the implementation path without commission and with low costs. So the employer must compare the insurers’ rates, select a favourable offer – commissions (which could, after all, be avoided) could expose the employer to criminal suspicion of breach of trust._ The choice of (wrong) advisers can already set the path to liability – advisers who seem to cost nothing at first may later turn out to be the most expensive. It is therefore advisable for employers to seek independent advice. It is better to trust an independent fee-based adviser and legal counsel than the intermediary – who, as a businessman, has to live off his commission – and to establish transparency, e.g. about the cost and risk components contained in the premiums, by means of actuarial experts._ Whether special obligations arise from a collective agreement or a works agreement is another matter altogether: Such obligations are additional for the employer._
2. employee-financed pension scheme
According to § 1a para. 1 of the German Occupational Pensions Act (BetrAVG), the employer is obliged to enable his employees to convert their remuneration into a pension entitlement of equal value. The principle of freedom of contract does not apply to the employer here, because a conversion of remuneration that is not equal in value leads to the invalidity of both the remuneration agreement and the contract with the insurer, pension fund, U-Kasse, etc. The German Occupational Pensions Act (BetrAVG) obliges the employer not to violate the principle of equal value – statutory requirements and prohibitions cannot be circumvented by the employee’s “consent”. Although it is not fundamentally wrong in purely logical terms for the product provider to claim that the employer is “free to choose the external pension provider and the terms it offers”, this does not mean that it does not have to observe the statutory requirement of equal value and the duty of care as an employer irrespective of fault when making this choice._ Unfortunately, such half-truths disseminated by insurers are particularly suitable for being misunderstood by sales staff – this may be beneficial for sales, but who is liable for this will then be clarified later – it is not always the sales staff who are themselves misled. If the insurer goes on to claim that “the employee cannot generally expect the absolute best pension solution, but only a solution of average type and quality”, this does not mean that he may choose a weaker and expensive solution instead of a particularly powerful and still inexpensive one. However, he may choose the less powerful one if this is reflected in the price and the performance is still of medium quality. The chief of all labor judges in matters of pensions, has clearly shown the way in a publication: The employer has a considerable duty of care and – he is liable even without fault!_
III. Obligation of the employer to provide correct information
If the employer provides the employee with information on the occupational pension scheme, either requested or unsolicited, this information must also be correct. According to established case law, false information obliges the employer to pay damages. It is true that in the case of deferred compensation, the employer is in principle not obliged to inform the employee that he has a legal entitlement to deferred compensation. But if a company pension scheme already exists, then all employees must be informed about the advantages and disadvantages. Clarification is not only necessary at the beginning, but also when the legal regulations change several times a year, if necessary. After all, the employee does not have to continue to convert his or her remuneration according to the employer’s determination. _ Employer’s Liability Trap for Agent’s Advice: If the insurer asserts “If the insurer’s agent advises employees, the agent is acting as an agent of the insurer,” the prevailing case law would be turned on its head. For it depends in whose sphere of duties the “consultant” is active. The employer is obliged to provide advice, not the insurer – and thus the employer is also guaranteed liability for any advice given to the employee by the intermediary._ Acting “in an acquisitive capacity” can also only take place vis-à-vis the employer, because the employer determines the “implementation method and tariff” – it is therefore “the customer of the insurer”, not the employee. Canvassing the employee is a liability trap for the intermediary, who cannot provide liability-free advice to employees without guidance from the employer._
IV. Obligations of the employer when the employee leaves and/or when concluding a termination agreement
In principle, the employer is also obliged to provide transparent information about the occupational pension scheme and its severance payment upon termination of the employment relationship. The usual saying in a dismissal protection lawsuit that a settlement is paid “for all claims” leaves it up to the employee to sue again at any time. It is precisely when the value of the claim against the insurance (surrender value or non-contributory benefit) falls short – as is very often the case – of the far higher claims of the employees under the employment contract, that the employer is liable for the difference.
V. Employer’s duty to provide information in the case of zillmerised tariffs
According to a ruling of the Stuttgart Labor Court (dated January 17, 2005, AZ. 19 Ca 315/04), it is not the duty of care, which is independent of fault, but rather the far lower duty of the employer to inform the employee of financial disadvantages that dictates this. In addition, there is liability for disadvantages due to “cancellation deductions” and excessive administrative costs of the insurance company or another implementation channel. However, anyone who concludes from this judgement that the law is satisfied with the information alone is not reaching far enough, because in the judgement there was no need to examine more – the lack of information was already sufficient for the claim for damages._
Conclusion: The employer’s duties to advise and inform are almost unlimited. In order to avoid liability risks, the employer is always very well advised to engage truly independent advisors on a transparent fee basis and to be aware that there can be no such thing as “free” advisory services – at most intransparently hidden and possibly several times higher costs, which in turn represent a liability risk.
By Johannes Fiala, lawyer (Munich), MBA Financial Services (Univ. Wales), MM (Univ.), certified financial and investment advisor (A.F.A.), banker (www.fiala.de) and Dipl.-Math. Peter A. Schramm, actuary DAV (Diethardt), actuarial expert (www.pkv-gutachter.de).
(Wage and Salary Oct. 2007)
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Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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