Working time credits predominantly unprotected

– Why employer time value accounts regularly do not offer insolvency protection –

The “Flexi II Act” came into force on 01.09.2009. This was intended to provide employees with better protection against loss in the event of the employer’s insolvency. Today, this proves to be incorrect in at least 98% of the companies.

Working time accounts mostly without applicability of Flexi II Act

In practice, these are mainly flexitime, overtime and seasonal flexitime accounts, which are usually settled within a year. The Flexi II Act does not apply to such working time accounts, but also in cases where there is no written agreement, as well as in the case of value credits below the reference amount pursuant to Section 18 of the German Social Code (Sozialgesetzbuch – SGB) IV of EUR 2,695 in the West (as of 2013) or EUR 2,275 in the East, for genuine value credits from lifetime working time accounts. This means that there is not even a rudimentary legal obligation to provide insolvency protection, § 7e SGB IV. Claims are therefore simply to be directed against the insolvency estate with the hope of a small quota.

Lack of insolvency protection under the Flexi II Act leads to pass-through liability

Employees whose credit balances from lifetime work accounts are not protected against insolvency, contrary to § 7e SGB IV, can terminate the corresponding agreement with their employer and have the credit balance paid out immediately. If the employer becomes insolvent, the employees would initially only have the option of registering their claims with the insolvency administrator. This rarely results in more than a few percent refund. In fact, the employees are predominantly making legally and economically unsecured advance payments in the case of working time accounts.

If genuine lifetime working time credits within the meaning of the Flexi II Act are involved, the lack of insolvency protection leads to the managing directors’ personal assets being subject to reach-through liability, Section 7e VII SGB IV. The Federal Labour Court (BAG, judgements of 23.02.2010, ref. 9 AZR 44/09 and 9 AZR 71/09) has not yet had to clarify whether this is also the case with the more specific partial retirement accounts pursuant to § 8a of the Partial Retirement Act (AltTZG or ATG).

Personal liability of the managing director as a pass-through liability

It is ensured that managing directors are personally liable if employees were promised insolvency security which did not exist at all. Liability then arises due to inaccurate assurances and breach of collateral duty due to false information. Rarely, fraud, embezzlement or withholding of wages will also be touched upon.

As in the case of advice on company pension schemes, the management is liable for insurance agents and bank advisors engaged to advise employees as its own agents in the performance of the company’s personnel work, § 278 of the German Civil Code (BGB).

Since the Flexi II Act came into force on 01.01.2009, the lack of insolvency protection for credit balances will foreseeably lead to the personal liability of the management of corporations for associated losses, as suggested by the decisions of the BAG of 23.10.2010.

On the other hand, there is a risk for the management that incomplete or ineffective off-the-shelf insolvency insurance does not protect the money from the access of the insolvency administrator, and even then there is personal liability. In the event of insolvency, it regularly emerges that the employer’s social security contribution has not been effectively protected – and this, at the latest, brings the entire hoped-for security to collapse.

Federal Labour Court (BAG): Limited insolvency protection via trusteeship

In its ruling of 18 July 2013 (Case No. 6 AZR 47/12), the BAG recognised the insolvency-proof outsourcing of reinsurance for working time credits in an individual case in particular only because it was a case in which there had been a statutory obligation to provide insolvency protection.

This is not the case for working time accounts, but also for company pension schemes, which means that a fiduciary model is invalid in cases of doubt according to the BAG ruling.

If the security, such as a pledge or assignment, holds up, the employee is only entitled to a right to separate satisfaction, so that the insolvency administrator first dissolves the assets of the reinsurance and collects them for the insolvency estate, § 166 II Insolvency Code (InsO). From this amount, 9% of the costs of determination and realisation are deducted, §§ 170 f. InsO.

If the reinsurance is movable property, e.g. physically existing securities, the insolvency administrator will realise them by private contract, section 166 I InsO.

If there are securities in the securities account, the trustee would be entitled to realise them – but only if the trust agreement is effective – § 173 I InsO (BAG, judgment of 18.07.2013).

Employer contributions generally never secured in insolvency via trust models

Although in the special case of partial retirement or lifetime working accounts the employer is also obliged to secure the employer’s social security contributions, the secured employee will not be able to have a claim to segregation and realisation or payment for his or her benefit or for the benefit of others. This is because only the pro rata wage including wage tax and the employee’s share of the overall social insurance can be claimed by the employee, as the BAG ruling states.

The remainder of the assets – minus any assessment and realisation costs – will fall into the insolvency estate and the social insurance agency will be allowed to register the employer’s contribution with the insolvency administrator as a claim. So even if the credit balances with the trustee originally also contained the employer’s social security contributions as supposedly protected against insolvency, in reality they are not protected at all in the event of insolvency. It is not only until insolvency that the pension insurance can thus declare the working time account agreement to be invalid from the outset, simply because in fact the total social security contribution is not also fully protected against insolvency, § 7 e VI SGB IV.

No effective insolvency protection at all without protection of the total social security contributions

According to § 8a AltTZG and § 7d SGB IV, the employer’s insolvency insurance must also cover the total social security contribution. Otherwise, the pension insurance institution in accordance with § 7e VI SGB IV will make this amount due by means of a notice in accordance with § 28p I 5 SGB IV. If this is done vis-à-vis the insolvency administrator, the latter will not provide any additional security, if only because of the principle of equal satisfaction of creditors. According to the BAG, employees as well as trustees do not have any separate claims against the insolvency estate with regard to the employer’s contributions anyway, so that they cannot bring about any insolvency protection for them either.

This means that after two months the value credit agreement is automatically deemed to be invalid from the outset. The consequence is that the claims of the employee and the security via trust are withdrawn altogether. A right to separate satisfaction against the insolvency administrator then naturally no longer exists in any way – the credit balances all fall into the insolvency estate and the employee’s claims may be registered with the hope of a small quota.

Liability of directors due to lack of insolvency protection

In the case of a GmbH as an employer, the social insurance will then issue a liability notice against the managing directors, § 7e VII SGB IV.

As a rule, there is no effective additional insolvency protection with regard to the employer’s contribution for the benefit of the social insurance collection agency, even if the value of the credit is initially included in the credit balances administered by the trustee. The security trust only for the employee is by no means sufficient for this purpose. This is not a case of ‘statutory full insolvency protection’. Thus, a central prerequisite for effective insolvency protection in accordance with the BAG decision of 18 July 2013 is precisely not present. This opens the way for the social insurance agency to declare the value credit agreement invalid and thus for the insolvency administrator to draw the entire value credit to the estate and for the pension insurance agency to impose liability on former managers personally.

Transfer to Deutsche Rentenversicherung Bund (DRV) when changing employer

If the value of a genuine Flexi II credit with insolvency protection obligation on the partial retirement account exceeds three times the reference amount pursuant to § 18 SGB IV, the employee may also alternatively request the transfer to the DRV as trustee from the previous – if not yet insolvent – employer instead of the transfer to the new employer. This is said to be at a cost of only around 2 euros per month.

In cases where there is a genuine statutory obligation to provide insolvency protection for old-age credits, an insolvency administrator will only be able to challenge and thus reverse corresponding security arrangements with retroactive effect for up to three months. This means that the interest-bearing credit balance with the DRV Bund is at any rate protected against insolvency, unlike in the case of transfer to a new employer.

Assets in working time accounts of managing partners are part of the insolvency estate

Employers and managing partners with 50% or more of business shares are in a special liability situation. Loans from the shareholder to his GmbH, including transactions similar to loans such as leaving wage claims unpaid, are often still backed by loan collateral such as a trust or pledge. However, the insolvency administrator can then retroactively demand any repayment from the managing partner to the insolvency estate for up to 10 years, § 135 InsO. The Federal Court of Justice (BGH, judgement of 18.07.2013, ref. IX ZR 219/11) only requires that the shareholder also has sole power of representation as managing director.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

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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