Germany: No inflation adjustments during parental leave – Federal Labour Court (BAG) confirms differentiation under collective agreements

While collective agreements for the public sector provide for inflation adjustments, implementing them has raised numerous questions, especially in relation to the entitlements of employees on parental leave.  The Tenth Senate of the Federal Labour Court (BAG) has now clarified that excluding employees on parental leave from such inflation adjustment payments neither constitutes gender discrimination nor contravenes the general principle of equality. At the same time, the Court recognised that the benefit has a remunerative character that goes beyond a mere adjustment for inflation – with far-reaching consequences for practice.

Facts of the case

The claimant, a full-time employee of a local authority in North Rhine-Westphalia since 2019, took parental leave from August 2022 to April 2024. A reference in her employment contract meant the Collective Agreement for the Public Service (TVöD - VKA) applied to the employment relationship. The Collective Agreement on Inflation Adjustment, concluded in April 2023, provided for a one-off special payment of 1,240 euros (2023 inflation adjustment), as well as monthly special payments of 220 euros each for the period from July 2023 to February 2024. Payment was conditional on the employee being entitled to remuneration on at least one day during the relevant period. From December 2023, the claimant agreed to work part-time – 24 hours per week - during her parental leave. The defendant paid a monthly inflation adjustment at a pro-rata rate of 135.38 euros for January and February 2024 only. The claimant claimed that she was entitled to the full inflation adjustment and alleged indirect gender discrimination, as the scheme predominantly affected women on parental leave. She also sought compensation under the General Equal Treatment Act (AGG) of at least 8,000 euros.

The decision

The BAG dismissed the appeals of both parties and awarded the claimant the full amount of the monthly special payment for December 2023 only, totalling 220 euro.

First, the Court ruled out both direct and indirect gender discrimination. It held that the distinguishing criterion was not gender, but a lack of entitlement to pay during the reference period, which could have various causes. In order to establish indirect discrimination, the analysis must take into account the entire group of persons to whom the relevant provisions apply, and not just the employees on parental leave. This includes employees on care leave, special leave, or long-term sick leave. It was neither demonstrated nor apparent that significantly more women were disadvantaged within this overall group.

The BAG also found no breach of the general principle of equality (Article 3(1) of the Basic Law). Referring to the most recent case law of the Federal Constitutional Court (decision of 11 December 2024 – 1 BvR 1109/21 et al.) and contrary to its previous position, the BAG held that the parties to collective agreements are directly bound by Article 3(1) of the Basic Law. However, in the case of provisions relating to core areas of working and economic conditions, the standard of review is a test for arbitrariness. There is no arbitrary unequal treatment in this case, as the purpose of the benefit justifies the differentiation.

Emphasis should be placed on the purpose of the benefit. The BAG recognised that the special payment is not only intended to mitigate the effects of rising consumer prices, but also has the character of remuneration. The Court considered that (1) the link to a remuneration entitlement during the reference period and (2) the pro-rata payment of the special payment to part-time employees indicate that the benefit also serves to safeguard the standard of living acquired through gainful employment.

The BAG awarded the claimant the full monthly inflation adjustment for December 2023. The amount is determined by the ‘relevant circumstances’ on the first day of the reference month – meaning the contractually agreed working time arrangements. As parental leave does not terminate full-time employment under the employment contract, but merely suspends the main obligations of the contract by operation of law, full-time employment was still agreed on 1 December 2023.

Implications for practice

The ruling has significant practical implications for the public sector, but also guides the structuring of comparable special payments in the private sector.

The Court confirms that parties to collective agreements may validly link special payments to an entitlement to remuneration arising out of an active employment relationship. Employees in suspended employment relationships – whether due to parental leave, carer’s leave or special leave – may be excluded from the benefit under these conditions without the exclusion constituting prohibited discrimination.

Furthermore, classifying the inflation adjustment as a benefit of remunerative nature has implications for the treatment of part-time employees. Pro rata payment is therefore permissible in accordance with the pro rata temporis principle and does not contravene Section 4(1) of the Part-Time and Fixed-Term Employment Act (TzBfG).

Practical tip

Employers in the public sector can rely on this ruling when implementing the Collective Agreement on Inflation Adjustment, and not pay the inflation adjustment to any employees who were not entitled to remuneration during the reference period. When structuring comparable special payments – including in the private sector – it is advisable to clearly define the purpose of the payment and link it to active employment. Particular attention must be paid to the cut-off date rule. As the ruling shows, the amount of the entitlement depends on the contractually agreed working hours on the cut-off date, not on the hours actually worked.

Employers should also note that the Court has amended its position regarding the obligation on parties to a collective agreement to observe the principle of equality. Any differentiation under collective agreements is now directly subject to scrutiny against the standard set out in Article 3(1) of the Basic Law. This must be considered when drafting future collective agreement provisions.