Overtime compensated with pay

A provision under which overtime is compensated on a flat-rate basis through the employee’s salary is employment law. Although such clauses are commonly found in employment contracts, they are often invalid because they are not formulated in a clear and understandable manner for employees and unreasonably disadvantage them. The Federal Labor Court ruled as early as 2010 that blanket overtime clauses without clear limits are generally impermissible.

However, if such clauses specify a fixed number of overtime hours that are compensated monthly as part of the salary, they may be permissible. In such cases, however, it depends on the individual circumstances whether the number of overtime hours and the amount of monthly compensation are in a reasonable proportion to one another.

In this article, we explain when an employer is generally permitted to require overtime, which overtime compensation clauses may be invalid, and when employees generally do not receive additional overtime pay despite this.

1. What is the difference between overtime and extra work?

The terms “overtime” and “extra work” are often used interchangeably. However, they do not mean the same thing, even though there is no precise legal definition. The basis for determining overtime is the regular working hours agreed upon in the employment contract. For example, if a weekly work schedule of 38 hours has been agreed upon and 40 hours are worked in a week, then 2 hours of overtime have been accrued.

The basis for the concept of additional work, however, is not the agreed-upon working hours but the limits set by the Working Hours Act (ArbZG). According to Section 3 of the Working Hours Act (ArbZG), the maximum working hours are 8 hours per day or 48 hours per week for a 6-day workweek; however, in exceptional cases, the daily working hours may be extended to 10 hours, which corresponds to a weekly working time of 60 hours. If work is performed beyond these limits, it is referred to as “additional work.”

1.1 Overtime for Part-Time Employees

As a result, a full-time employee can reach the overtime threshold much sooner than a part-time employee. For example, if you are employed part-time for only 20 hours per week, you can work at least 20 hours of overtime without it being considered overtime.

2. How must overtime be regulated?

For an employer to require overtime, there must be a legal basis for doing so. Especially in smaller companies or those not bound by collective bargaining agreements, the employment contract may contain provisions regarding the assignment or performance of overtime.

If the employment contract contains no provision regarding overtime, the employer cannot force the employee to work overtime. Even if the employer can assign certain tasks to the employee based on their right to issue instructions or direct the employee’s work, this does not entitle the employer to order overtime without a corresponding legal basis.

2.1 Collective Bargaining Agreement or Company Agreement

Even if the employment contract does not require the employee to work overtime, there may be other legal grounds for doing so. In larger companies that are bound by a collective bargaining agreement — that is, where a collective bargaining agreement applies—that agreement may contain provisions regarding overtime.

If there is a works council, it may conclude a company agreement with the employer regarding overtime and its scheduling. Furthermore, in companies with a works council, the scheduling of overtime is subject to co-determination pursuant to Section 87(1)(3) of the Works Constitution Act (BetrVG).

2.2 Individual Agreement or Emergency

If no provision regarding the assignment of overtime is set forth in the employment contract, a collective bargaining agreement, or a works agreement, the employer may neither require nor assign overtime.

However, a different rule may apply if an individual agreement has been reached between the employer and the employee regarding the employee’s willingness to work or be assigned overtime, e.g., to address staffing shortages or peaks in orders. Such an agreement may also be made verbally and for a limited period of time.

In unforeseeable situations and emergencies, the employer may require employees to work overtime even without a specific agreement. For example, if a server goes down or the company is facing an emergency.

Such emergency situations include, for example, fires or natural disasters, and the overtime is necessary, for instance, to avert danger. Conversely, anything that is foreseeable or plannable—such as accepting large orders or rush orders—cannot be used as a basis for ordering overtime, since neither an emergency nor an emergency situation exists.

2.3 Employer’s Duty to Inform

Since the tightening of the German Working Hours Documentation Act (Nachweisgesetz) effective August 1, 2022, the employer must inform the employee of the conditions under which overtime may be ordered—and whether it may be ordered at all. This duty to inform arises from Section 2(1)(10) of the German Working Hours Documentation Act (NachwG).

3. What does it mean when overtime is compensated?

Employment contracts typically include provisions regarding the compensation for overtime. In this context, “compensation ” refers to how accrued overtime is to be paid or offset with time off.

In some cases, provisions may state, for example: “Accrued overtime is compensated through the salary” or “Required overtime is not compensated separately but is compensated through the salary.” This would mean that an employee could be required to work overtime that is not compensated in addition to their monthly salary, even though they worked more hours. With such wording, this would apply to all overtime worked.

However, the Federal Labor Court (ruling from 2010, case number 5 AZR 517/09) has ruled that such clauses in employment contracts are invalid, as such wording is too vague or indefinite and thus lacks transparency. Clauses in an employment contract are subject to review under the General Terms and Conditions Act (AGB), and such clauses also unreasonably disadvantage employees in this form. It must be clearly apparent to the employee, however, to what extent overtime or additional work is expected of them, which is not possible with such clauses.

4. How much unpaid overtime is permitted?

However, a flat-rate compensation for overtime is not entirely prohibited. If such provisions for compensating overtime are included in the employment contract for a predetermined monthly number of overtime hours, this may be permissible. This could be, for example, 3 hours per week or 10 hours per month. In general, compensation for overtime amounting to up to 10 to 15% of monthly working hours through the regular salary is still permissible.

The law does not specify how many hours may be compensated with the monthly salary, so it depends on the individual case. However, if too many hours of overtime must be worked in a particular case, this can lead to excessive or disproportionate disadvantage to the employee. In that case, such a provision would again be impermissible.

4.1 A Low Salary Is Not an Indicator of the Number of Overtime Hours Compensated on a Lump-Sum Basis

Furthermore, a low salary is not an indication that only a small number of overtime hours can be compensated on a lump-sum basis through the monthly salary. The Mecklenburg-Western Pomerania Regional Labor Court (2021 ruling, case number 2 Sa 26/21), for example, ruled that even with a low salary, a flat-rate compensation of 10 hours of overtime per month may be permissible.

4.2 Executives and Higher-Level Positions

Overtime is generally expected of executives and high-earning employees. Since, pursuant to Section 18(1)(1) of the Working Hours Act (ArbZG), the Working Hours Act does not apply to employees in executive positions, the employer may also expect or require them to work overtime (beyond the limits set by the Working Hours Act).

Whether this overtime is compensated depends primarily on the amount of the monthly salary. Above a certain level of monthly compensation, it must be assumed that any overtime incurred is already compensated by this compensation. If the salary exceeds the contribution assessment ceiling for the statutory pension insurance, it can be assumed that all overtime is already compensated by the salary.

In 2024, the contribution assessment ceiling is set at a monthly income of 7,550 euros in the West and 7,450 euros in the East, or an annual income of 90,600 euros in the West and 89,400 euros in the East. However, if the salary is below the contribution assessment ceiling, the employee can expect to be compensated for overtime.

The same applies to higher-level professions that require academic training or a particularly high level of specialized knowledge or skills. These include, for example, architects, lawyers, physicians, and certified public accountants. It is also common for these professional groups to agree on a flat-rate compensation for overtime.

5. Who is not required to work overtime?

For certain groups of employees, overtime is generally prohibited. These include, for example:

• Minors (ages 15 to 17,§ 8(1) JArbSchG )
• pregnant or breastfeeding employees (§ 4(1) MuSchG )

Employees with severe disabilities may, in principle, work overtime. However, at their request, they must be exempted from overtime ( § 207 SGB IX).

6. Conclusion

• Inadmissibility of blanket overtime compensation clauses in employment contracts: Clauses stipulating that all overtime is compensated on a lump-sum basis as part of the salary are generally invalid, as they lack transparency and are unfavorable to employees.
• Permissibility with a fixed number of overtime hours: Clauses that specify a fixed number of overtime hours compensated monthly as part of the salary may be permissible, depending on the ratio of the number of overtime hours to the monthly salary.
• Compensation for Overtime: For executives, in the case of higher-level positions, and for those with high monthly salaries, all overtime may, under certain circumstances, already be compensated through the salary.
• Difference between overtime and extra work: Overtime refers to working hours performed in excess of the regular working hours agreed upon in the employment contract, whereas extra work exceeds the limits set forth in the Working Hours Act.
• Assignment of Overtime: Assigning overtime requires a corresponding legal basis in the employment contract or in other legal documents, such as a collective bargaining agreement or a company agreement.
• Individual Agreement or Emergency: If there is no provision in the employment contract, collective bargaining agreement, or company agreement, the employer may not require overtime unless there is an individual agreement or an emergency. Emergencies and urgent situations are unforeseen circumstances that could not have been planned for.
• Employer’s Duty to Inform: Since the tightening of the German Working Time Documentation Act (Nachweisgesetz) in August 2022, the employer must inform the employee, in accordance with Section 2(1)(10) of the Working Time Documentation Act, of the conditions under which overtime may be mandated. This information should be included in the employment contract.

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