Insolvency Entitlements to Company Pension Benefits - Liability of the Acquiring Party

Employees with entitlements to company pension benefits are covered by the Pension Protection Association ("PSV") in the event of their employer's insolvency, but not completely, particularly with regard to the dynamization of pension benefits. Is an acquirer of a business in insolvency liable for this unsecured part of the entitlements? The European Court of Justice and the German Federal Labor Court have provided clarification in this matter.

Facts

The two plaintiffs were promised company pension benefits. According to the pension plan, their company pension is calculated on the basis of the number of years of service and the salary earned on a certain date before they leave the company. Insolvency proceedings were opened against the assets of their employer on March 1, 2009. In April 2009, the business was transferred to the defendant pursuant to Sec. 613a (1) of the German Civil Code (BGB).

Since August 2015, one of the plaintiffs has been receiving a company pension of approximately 145 Euros from the defendant and a retirement pension of approximately 817 Euros from the PSV. Although the defendant based its calculation on the pension scheme, including the higher salary received on the relevant date before the insured event, it did not take into account the share of the company pension earned before the insolvency. The PSV, on the other hand, used the plaintiff's lower salary at the time the insolvency proceedings were opened, as provided for in the German Occupational Pensions Act. The plaintiff considers the defendant to be obliged to grant him a higher company pension. According to the provisions of the pension scheme, this would have to be calculated on the basis of the higher salary, merely deducting the amount he receives from the PSV. The other plaintiff did not yet have a legally vested pension entitlement when the insolvency proceedings were opened. Therefore, he is not entitled to a claim against the PSV upon the occurrence of a pension case under the German Occupational Pensions Act. He considers the defendant to be obligated to grant him a company pension in the full amount in the future. The lower courts dismissed the claims.

Reasons for decision

The plaintiffs' appeals were unsuccessful before the Third Senate of the Federal Labor Court.

In established case law, the German labor courts had always interpreted Sec. 613a (1) BGB restrictively due to the special features of insolvency law. The Third Senate of the Federal Labor Court requested a preliminary ruling from the Court of Justice of the European Union (CJEU) in these two proceedings and sought an answer to the question of whether such a restrictive application of Sec. 613a para. 1 BGB in the case of a transfer of business in insolvency proceedings is in line with EU law provisions, specifically Art. 3 para. 4, Art. 5 para. 2 letter a of Directive 2001/23/EC and whether, if applicable, Art. 8 of Directive 2008/94/EC is directly applicable in this case and the employee can therefore also invoke it against the PSV.

As the Court of Justice of the European Union has ruled on this reference (ECJ September 9, 2020 - C-674/18 and C-675/18 - [TMD Friction]), this established case law of the German labor courts is compatible with Union law. It is justified according to the general rule of Art. 3(4) Directive 2001/23/EC, which also remains applicable in addition to the provisions in Art. 5 thereof, only applying in insolvency. The prerequisite is that a minimum protection corresponding to Art. 8 Directive 2008/94/EC is granted. This minimum protection required by Union law is guaranteed in the Federal Republic of Germany by means of a claim directly derived from Union law and directed against the PSV.

It therefore continues to apply that, with regard to the special distribution principles of insolvency law, Sec. 613a (1) BGB must be interpreted restrictively. Pursuant to Section 613a (1) BGB, the acquirer of a business (part of a business) in insolvency is only liable for claims of the transferred employees to company pension benefits on a pro rata basis for the period of service completed after the opening of the insolvency proceedings. The employer is not liable for benefits based on periods up to the opening of the insolvency proceedings even if the Pension Protection Association (PSV) - the legally designated insolvency insurance provider - does not fully cover this part of the company pension in accordance with the German Company Pensions Act.

Note for practice

The decisions of the Federal Labor Court as a result of the response of the European Court of Justice have significant implications. The previous case law of the German labor courts has been confirmed, and it is thus clear that in the event of the insolvency of their employer and subsequent transfer of the business from insolvency, employees will - as before - share in the insolvency risk of their employer for qualifying periods up to the opening of insolvency proceedings, insofar as the obligation of the Pension Insurance Association to pay does not apply. Apart from this privileged treatment through mandatory insurance, employees are treated in the same way as other insolvency creditors, as before. Business acquirers from insolvency therefore do not have to bear the insolvency risk of the transferring employees from the pre-employment period with the insolvent previous employer. As a result, business transfers out of insolvency are not further impeded.