Payment of salary to employee by insolvent third party not protected against German recovery claims

context

Under German insolvency law, employees are generally protected against recovery claims. The payment of wages is considered a “cash transaction” if the employer pays the wages within three months of performing the work. A “cash transaction” can only be disputed in limited circumstances. When a third party pays the salary, the cash transaction privilege remains if it is not clear to the employee that a third party made the payment (s.142(2) and s.3 InsO).

A recent ruling by the German Federal Court of Justice shows that this protection has limits.

Decision

A gift cannot be considered part of a cash transaction. If the payment of wages by a third party is a gift within the meaning of Art. 134 InsO, the payment is not covered by the cash transaction privilege and can be recovered if the third party becomes insolvent.

The court also argued that it cannot be assumed that the legislature intended ss. 142(2) and 3 InsO to apply to an insolvent third party.

Although this decision limits the protection of employees against recovery claims, the court noted that employees are only required to return payments that have enriched them (s. 143 (2) and s. 1 InsO). It is possible for employees to argue that they did not enrich themselves if they used the compensation for general living expenses and that they could not have met the expenses by other means.

Joseph K. Bennett