Concept and Legal Significance of ‘Brutto für netto’
‘Brutto für netto’ is a term from German employment law and refers to an impermissible contractual arrangement in which an employee is to be paid the originally agreed gross salary as net salary. This means that the employer pays the taxes and social security contributions on top of the agreed salary, so that the employee receives the agreed net salary. The ‘Brutto für netto’ arrangement is generally invalid, but leads to significant legal consequences for both parties to the contract, especially for the employer.
Legal Framework
In Germany, remuneration is generally agreed as a gross salary. This means that taxes and social security contributions, as well as any other statutory or collectively agreed deductions, must first be withheld from the agreed remuneration. The employee receives the so-called net salary, which results after deduction of these obligations. The amount of the deductions is determined by statutory provisions such as the Income Tax Act (EStG) and the Social Code.
Principle of Gross Salary Agreements
According to the basic principle, employment contracts are interpreted in such a way that the agreed remuneration is gross unless otherwise expressly stipulated. An agreement stating that the employee receives a specific net amount and the employer assumes all applicable taxes and social security contributions in addition (‘Brutto für netto’) is considered impermissible under both employment and tax law.
Invalidity and Legal Consequences of Brutto für netto Agreements
Assessment under Employment Law
Violation of Mandatory Provisions
A ‘Brutto für netto’ agreement violates mandatory law because the employer is improperly assuming taxes and social security contributions for the employee, thus placing the employee in a more favorable position than legally intended. Such agreements are void under Section 134 of the German Civil Code (BGB) if they are designed to circumvent statutory requirements. The legislator intends a balanced distribution of the burden of contributions between employer and employee.
Evasion of Tax and Social Security Law
An agreement to guarantee the employee a fixed net remuneration with all contributions covered by the employer contravenes social security and tax law. In particular, it obscures the actual amount of remuneration owed and the true level of contributions to be paid.
Tax Implications
Tax Definition of Wages
According to Section 38 of the Income Tax Act (EStG), the employer is obliged to withhold wage tax and remit it to the tax office. The wage on which the tax is calculated is based on the gross amount. A net employment contract in which the future net salary is the basis for calculation is incompatible with the rules of proper taxation and may be considered attempted tax evasion (Section 370 of the Tax Code).
Employer’s Liability
If the employer fails in the duty to properly register and pay wage tax, the tax authorities may hold the employer liable. This applies in particular if, as a result of a ‘Brutto für netto’ arrangement, wage tax is not paid in the correct amount.
Social Security Law Dimension
Contribution-Based Remuneration
For the calculation of social security contributions, the contribution-assessable gross remuneration is decisive (Section 14 SGB IV). Here, too, a ‘Brutto für netto’ agreement does not affect the obligation to pay contributions. If contributions are paid at an insufficient level, the employer may be liable for outstanding contributions plus late payment surcharges.
Obligation to Insure and Report
A ‘Brutto für netto’ regulation can lead to incorrect reporting and calculation of contribution-based remuneration. This can result in investigations by social security institutions and back payments of contributions. In cases of intentional withholding of contributions, there are also criminal and fine-related consequences under Section 266a of the Criminal Code (StGB) and Section 111 SGB IV.
Exceptional Cases and Court Decisions
Case Law
The case law in labor courts does not consider net salary agreements per se to be generally invalid, as long as they do not represent an attempt to circumvent statutory obligations. However, if it becomes clear that with a net salary agreement taxes and contributions are being reduced or evaded, the agreement is declared void.
Exclusion of Invalidity in Good Faith Arrangements
A ‘net agreement’ can, in exceptional cases, be valid if it is concluded on a good-faith basis, for example in the case of foreign assignments where the employer assumes responsibility for certain taxes under double taxation treaties. In this case, however, correct declaration and remittance of taxes and contributions must be ensured.
Legal Consequences of Invalid Brutto für netto Agreements
If the Brutto für netto clause is void, the originally agreed gross salary usually forms the basis for taxation and contributions. The employee cannot rely on the invalidity to avoid additional tax payments. The employer remains liable if taxes and contributions were not correctly paid.
Risk Profile and Practical Relevance
Tax and Social Security Risks
Implementing or adopting a ‘Brutto für netto’ arrangement entails considerable risk for the employer. Besides demands for additional taxes and contributions, employers face fines, late payment surcharges, and criminal consequences.
Significance for Contract Drafting
When drafting employment contracts, it is essential to ensure that remuneration is specified as a gross amount. Any deviations from this require careful examination of their tax and contribution consequences.
Conclusion
The ‘Brutto für netto’ agreement is fundamentally impermissible under German law and entails considerable legal and financial risks for the employer. It contradicts the principle of gross salary agreements and results in the circumvention of mandatory tax and social security obligations. Employers are well-advised to only agree on gross salaries and to ensure all taxes and contributions are properly paid. Net agreements are only legally permissible in narrowly defined exceptional cases, such as foreign assignments and only with strict adherence to tax and social security provisions. In cases of doubt, a thorough review of the respective agreement’s legal compliance is recommended.
Frequently Asked Questions
Is a ‘Brutto für netto’ agreement legally permissible?
A ‘Brutto für netto’ agreement, whereby the employer guarantees the employee a certain net amount and undertakes to assume all taxes and social security contributions in addition, is generally not permitted. Under German employment and tax law, remuneration must always be agreed as a gross amount, as employers are legally required to withhold and pay wage tax and social security contributions (Section 38 EStG, Section 28e SGB IV). Furthermore, such an agreement may violate Section 134 BGB (violation of a statutory prohibition) as well as the requirement to collect wage tax. Exceptions are permitted only within very narrow limits, for example, in connection with net salary agreements for so-called employee assignments abroad, provided international tax treaties are observed.
What legal risks arise for the employer from a ‘Brutto für netto’ agreement?
If employer and employee enter into a ‘Brutto für netto’ agreement, the employer bears the risk that tax authorities and social security agencies may demand back payments. The agreement may be regarded as an attempt to circumvent tax and contribution obligations. In serious cases, the employer owes not only the withheld but unpaid wage tax, but also, where applicable, the employee’s share of social security contributions retroactively. Additional potential liabilities include late payment surcharges, back-payment interest, fines, and in cases of intent even criminal penalties (Section 266a StGB – Withholding and Misappropriation of Wages). Subsequent corrections are often difficult, as authorities are guided by the actual situation and not the private contractual arrangement.
Can an employee claim back payments based on a ‘Brutto für netto’ agreement?
An employee is generally not entitled to payment of a pure net salary. If a net salary has been agreed, it will be grossed up so that all tax and social security obligations are duly fulfilled. This means the employer is obliged to make the necessary deductions and remit them to the authorities. Any differences after payment of these contributions are generally the employer’s liability. However, the contractual commitment to a specific net salary protects the employee from a reduction in their payment due to subsequent tax or social security demands.
What are the consequences of a ‘Brutto für netto’ agreement in a company audit?
If a ‘Brutto für netto’ agreement is discovered during a wage tax or social security audit, the authorities will generally issue back payment demands against the employer. The authorities gross up the net wage paid into a gross salary and calculate the wage tax and social security contributions payable accordingly. In practice, this often leads to significant retroactive financial demands, which may be imposed for up to four years, or up to ten years in cases of intent or gross negligence. The employer also faces possible fines and even criminal prosecution.
Are there exceptional cases in which net salary agreements are allowed?
Net salary agreements are only permissible in certain exceptional cases, such as assignments of employees abroad (expatriates). In such cases, due to international double taxation agreements, it may be sensible and permissible to guarantee the employee a net salary, especially if the employer assumes the foreign tax burden (so-called tax equalization or tax protection agreements). Such agreements must be transparently structured and coordinated with the requirements of national and international tax authorities as well as legal regulations.
What is the difference between statutory wage tax liability and a ‘Brutto für netto’ arrangement?
The statutory wage tax liability arises from tax law and obliges the employer to withhold wage tax from the employee’s gross salary and pay it to the tax authorities. The actual amount paid out (‘net’) is the result of these statutory deductions. By contrast, a ‘Brutto für netto’ arrangement attempts to guarantee payment of a net amount by shifting all mandatory deductions to the employer. However, this contradicts the statutory system and is therefore legally problematic or even void outside of narrow exceptional cases.
How can remuneration be agreed in a legally secure way?
Remuneration should always and without exception be set out as a gross amount in the employment contract. This ensures that all statutory obligations regarding wage tax and social security contributions are complied with. If anything is unclear, reference can be made to the tax and social security-relevant components of the remuneration. Net agreements are strongly discouraged unless one of the rare exceptional circumstances applies (e.g., foreign assignments with special tax considerations). To avoid legal risks, both employer and employee should ensure that the terms of remuneration are precise and legally compliant.
