Freezing Salaries: What Employers May Do

Nil pay rise, collective agreements and established practice – the legal limits for employers

According to media reports, a large corporation plans to freeze its employees’ salaries for several years. Many mid-sized companies, too, are asking themselves, in view of rising costs, whether they may suspend pay rises. The answer depends on the source of the salary entitlement.

No statutory entitlement to a pay rise

There is no general statutory entitlement to an annual pay rise. An agreed salary may in principle remain at its current level. The lower limit is the statutory minimum wage (gesetzlicher Mindestlohn): it has been EUR 13.90 since 1 January 2026 and will rise to EUR 14.60 gross per hour on 1 January 2027. An entitlement to an increase can, however, arise from the employment contract, a collective agreement (Tarifvertrag), a works agreement (Betriebsvereinbarung) or established practice (betriebliche Übung).

Collective bargaining: a nil pay rise only through the collective agreement

If the company is bound by a collective agreement, for example as a member of an employers’ association, the collectively agreed standards apply directly and mandatorily to employees who are trade union members (§ 4 (1) TVG). Collectively agreed increases must then be passed on to them; a nil pay rise is possible only if the collective agreement permits it (§ 4 (3) TVG). For other employees, the collective agreement often applies through incorporation clauses (Bezugnahmeklauseln) in the employment contract. Leaving the employers’ association does not take effect immediately: the binding effect of the collective agreement continues until it ends (§ 3 (3) TVG). Thereafter its provisions continue to apply (Nachwirkung) until they are replaced by another arrangement, for example a new collective agreement or a contract amendment (§ 4 (5) TVG).

Established practice: repetition can bind

An established practice arises where the employer repeats a certain conduct regularly and the employees may infer from it a permanent benefit. For employers not bound by a collective agreement, the Federal Labour Court (Bundesarbeitsgericht) has clarified: an employer who has previously passed on collectively agreed increases is not thereby bound for the future without more; clear indications of an intention to be bound permanently are required (BAG, judgment of 19 October 2011 – 5 AZR 359/10). The position may be different where an employer who pays in accordance with a collective agreement has also increased above-tariff components in the same way for years without reservation (BAG, judgment of 19 September 2018 – 5 AZR 439/17). A clear statement with every increase that it does not give rise to an entitlement to future increases guards against an established practice.

Works council and equal treatment

Whether and to what overall extent salaries are increased is in principle decided by the employer alone. Where a works council exists, however, it has a right of co-determination in the distribution, that is, in the principles of remuneration (§ 87 (1) no. 10 BetrVG). If an employer excludes individual groups from a salary adjustment, this may be a change in the principles of remuneration subject to co-determination (BAG, order of 21 February 2017 – 1 ABR 12/15). In addition, the principle of equal treatment in employment law prohibits treating individual employees less favourably without an objective reason.

Salary reductions: high hurdles

Anyone who wants not merely to freeze but to reduce salaries needs an agreement or a notice of change (Änderungskündigung), that is, a dismissal combined with the offer to continue working on changed conditions (§ 2 KSchG). A notice of change solely to reduce pay is justified only in exceptional cases: where otherwise unavoidable losses threaten that would foreseeably lead to staff reductions or the closure of the business. As a rule, a comprehensive restructuring plan is required (BAG, judgment of 20 June 2013 – 2 AZR 396/12).

Practical checklist

• Review the bases of remuneration: employment contract, collective bargaining coverage, incorporation clauses, works agreements

• Check earlier increases for reservations and a possible established practice

• Check set-off reservations (Anrechnungsvorbehalte) for above-tariff allowances

• Provide future voluntary increases with a clear statement

• Involve the works council where distribution differs

• Plan for the minimum wage increase on 1 January 2027

Conclusion

Without collective bargaining coverage and a contractual commitment, employers may in principle freeze salaries. What matters is a careful review of the existing bases of remuneration. Please feel free to contact us if you have any questions.

Status: 23 October 2026

NIETZER Rechtsanwälte · Attorneys at Law (USA) · Heilbronn · www.unternehmensrecht.com

This article is for general information only and does not replace legal advice in an individual case.