Employee according to Section 2 (7) IVV: Update 2025

The needs-based and at the same time legally permissible application of the employee concept is of material practical relevance: If an individual is to be classified as an employee within the meaning of Section 2 (7) IVV in relation to their professional activity for the institution, the remuneration that they receive for this professional activity from the institution or from a third party is generally subject to the regulatory requirements of the IVV and the German Banking Act (Kreditwesengesetz, KWG, Section 2 (1) IVV). This applies in particular to any variable remuneration received in relation to the professional activity for the institution, which, among other things, (1) in relation to the fixed remuneration, is subject to the upper limit of a maximum of 100% (/200% if the shareholders of the institution so decide) (Section 25a (5) KWG), (2) be compatible with the institution's business and risk strategy in terms of content (Section 4 IVV), and (3) take into account any negative performance contributions in their final determination (Section 5 (2) IVV). If the specific person qualified as an employee within the meaning of Section 2 (7) of the IVV is identified as a Material Risk Taker (Section 25a (5b) KWG) in a significant institution (Section 1 (3c) KWG) or in a qualified, non-significant institution (Section 1 (3) sentence 2 IVV), the variable remuneration is also subject to the special requirements of Sections 18 et seq. IVV.

1. The wording of Section 2 (7) IVV: A comprehensive regulatory concept of employees... and the key questions in practice

The definition of the term ‘employee’ in the current version of Section 2 (7) IVV (IVV 4.0) is essentially the same as the definition in the previous versions of Section 2 (7) dated 25 July 2017 (IVV 3.0) and dated 16 December 2013 (IVV 2.0) and of Section 2 (6) in the first version of the IVV dated 6 October 2010:

Employees within the meaning of the IVV are all employees of the institution in accordance with Section 5 (1) of the German Labour Court Act (Arbeitsgerichtsgesetz, ArbGG) and all natural persons

1. who the institution uses to carry out banking transactions that require regulatory approval or to provide financial services, in particular on the basis of an employment, agency or service relationship, or
   
2.  who are directly involved in providing services for the institution as part of an outsourcing agreement with an outsourcing company belonging to the group in order to carry out banking transactions or provide financial services.
   

Pursuant to Section 2 (7) sentence 2 IVV, managing directors within the meaning of Section 1 (2) KWG are also deemed to be employees; i.e. the natural persons who, in accordance with the law and the articles of association of the institution, are appointed to manage the business and represent an institution or a company or a commercial partnership.

The wording of Section 2 (7) sentence 1 IVV makes it clear that the capacity as an employee of the institution is not limited to the basis of an employment relationship. Any form of work performed by the individual on the basis of third-party personnel deployment can also establish the capacity as employee pursuant to Section 2 (7) IVV. In this regard, the following forms of collaboration can be considered: (i) work performed by the individual as a freelancer on the basis of a service/work contract with the institute, (ii) work performed by the individual as part of a temporary employment relationship on the basis of a temporary employment contract between the institute and the lender, and (iii) on the basis of a service/work contract between the contractual employer of the person and the institute, for example on the basis of a group-related outsourcing of the specific activity.

In practice, the following two key questions remain for the specific application of Section 2 (7) IVV:

• What requirements must be met with regard to the link between the activities of the individual and the operation of the specific banking business / the provision of the specific financial services?
  
•  Is the requirement of the necessary ‘service’ of the individual employee by the institution for the operation of banking business or the provision of financial services as a prerequisite for the regulatory qualification as an employee within the meaning of Section 2 (7) IVV to persons in an employment relationship with the institution, or are those persons to be categorised as employees of the institution within the meaning of Section 2 (7) IVV solely on the basis of the existing employment relationship?

2. The starting point under remuneration law in the CRD (VI): the risk-related, design-neutral perspective – only risk takers as employees

The EU legislator does not directly answer the two questions in the initial EU remuneration law regulation of Art. 92 (2) of Directive 2013/36/EU (in the versions of Directives 2019/878/EU (CRD V) and 2024/1619/EU (CRD VI)). In Article 92 (2) CRD V, it takes a risk-related perspective, according to which the EU remuneration framework is to apply (solely) to various categories of employees whose professional activities have a material impact on the institution's risk profile (MRT). Accordingly, the term ‘employee’ within the meaning of the EU remuneration rules only refers to risk takers. The EU remuneration rules define MRT as employees in a neutral way – what is important is the actual influence of the professional activity on the risk profile of the institution, regardless of the form of the legal relationship underlying the activity. The EU legislator does not provide any clarifications regarding the possible forms of the legal relationship. In its statements in the recitals of the CRD V (in particular recital 10), it indicates that, in addition to an employment relationship with the institution, an activity on the basis of an employment relationship with a contractual partner of the institution can also be considered as a legal basis for the activity. The EBA has not provided any further explanation of the term ‘employee’ in its Guidelines on sound remuneration policies (EBA/2021/04).

3. (No) statement by the BaFin in the interpretation guide and in the FAQ IVV

In the FAQs on the IVV, published on 13 June 2024, the BaFin did not provide any separate explanations regarding the content of Section 2 (7) IVV, whereas in its interpretation guide for the IVV 3.0 (dated 15 March 2018, BaFin interpretation guide) it had still provided individual clarifying principles for the possible practical application of the employee concept: (i) The professional activity of the person for the institution must, in the case of outsourcing, relate to participation in the specific service for the purpose of conducting banking business or providing financial services. (ii) It may also be carried out on the basis of a temporary employment relationship.

Since the BaFin interpretative guide continues to be relevant in practice at least for matters not explicitly addressed in the FAQs, see our Client Alert.

However, the BaFin interpretation guide does not contain any further statements on the two core questions.

4. Required link between the activity of the person for the institution and the operation of the relevant banking business / provision of financial services

The question of the intensity of this connection arises in particular for persons who do the specific professional work for the institution not in an employment relationship but by way of third-party deployment. (Supervisory) practice is initially in agreement on this point, in view of the focus in Section 2 (7) sentence 1 no. 1 IVV, which focuses on the deployment of the individual for the operation of the relevant banking business or the provision of the relevant financial services, not every activity related to the institution can fall under the employee concept of Section 2 (7) IVV and therefore, for example, exclusively facility-related activities (e.g. cleaning services, building management, fleet services and canteen services) without direct reference to the operational business of the institution do not fall under Section 2 (7) IVV.

The specific assessment of the application of Section 2 (7) IVV to the individual person in relation to the professional activity performed for the institution must be based on the regulatory purpose of Section 2 (7) IVV: From a teleological point of view, the supervisory law definition of employee in Section 2 (7) IVV is intended to ensure that the monetary risk incentivisation intended by the IVV (= (bonus-eligible) incentive for the individual employee to act in accordance with the institution's sustainable business and risk strategy and thus to ensure that the institution's business operations – which require a licence – are carried out in a manner that complies with the supervisory authority's requirements) covers all persons who perform such professional activities for the institution that the institution uses when conducting the respective – licence-requiring – banking transactions or providing the respective financial services. Section 2 (7) IVV is intended to prevent institutions from circumventing the application of the IVV to such persons by agreeing the contractual legal basis for the activities of these persons not with the institution but with/through a third party. Rather, these persons are covered by Section 2 (7) IVV, regardless of the content of this legal basis – in a design-neutral manner – if the specific activity focuses on the respective banking business/relevant financial service.

The application of Section 2 (7) IVV to the specific professional activity is therefore subject to two conditions:

1. The person in question performs an activity typical of the institution for the purpose of conducting the banking business/financial services requiring a licence; from a practical point of view, this assessment can be carried out on the basis of a causality consideration, according to which the specific activity cannot be imagined without the operation of the relevant banking business/financial services. According to this criterion, the application of Section 2 (7) IVV to the aforementioned facility activities, for example, can be denied.
   
2. The person is integrated into the operational organisational structure of the institution in such a way that their activity directly affects the operational business of the institution. This criterion distinguishes, for example, consultancy services provided by external third parties from the scope of application of Section 2 (7) IVV, which, although they are geared towards the institute's operational business requiring a licence, have no operational impact on it if and to the extent that the specific consultancy services only include proposals for structures that the institute itself operationalises.

5. Employees in an employment relationship with the institution – at the same time always supervisory employees pursuant to Section 2 (7) IVV?

The question of whether all employees in an employment relationship with the institution can already be qualified as employees of the institution within the meaning of Section 2 (7) IVV in view of the contractual legal basis of their work arises in practice for individual groups of persons who perform operational activities for the institution in business areas that are not subject to the supervisory law requirement for a licence. In recent practice, the professional activities of employees for the institution who exclusively broker real estate or exclusively arrange insurance policies are still under discussion in this regard.

According to the assessment of the financial supervisory authority (which has not yet explicitly stated this in the FAQ IVV or in the BaFin interpretation aid), all employees in an employment relationship with the institution (already in view of the employment-contractual legal basis of their activity) are to be qualified as employees of the institution in accordance with Section 2 (7) IVV and therefore the two employee groups mentioned above should also fall under the regulatory definition of employee.

However, this regulatory classification is not compelling in view of the aforementioned regulatory purpose of Section 2 (7) IVV in its personal scope: from a teleological point of view, Section 2 (7) IVV focuses (only) on persons whose activities are relevant for the respective banking transactions and for the respective financial services. From a regulatory perspective, there are therefore important reasons not to classify employees of the institution in an employment relationship as employees within the meaning of Section 2 (7) IVV in individual cases whose activities do not have the required connection to the respective banking business or the relevant financial service. This understanding can be derived from the wording of Section 2 (7) IVV on the basis that the introductory sentence of Section 2 (7) IVV (‘Employees within the meaning of this Ordinance are all employees of the institution in accordance with Section 5 (1) ArbGG and all natural persons,’) refers to both of the case groups of Section 2 (7) nos. 1 and 2 of the IVV and therefore also requires the fulfilment of the conditions of Section 2 (7) no. 1 of the IVV (‘whose services the institution uses in conducting banking business or providing financial services’) for the employees listed in the introductory sentence.

6. Measures required and suitable under supervisory law for the institution to work towards compliance with the IVV in the remuneration of employees in the context of the deployment of third-party personnel

If the individual professional activity and thus the relevant employee is covered by Section 2 (7) IVV, the institutions must work towards ensuring that the remuneration systems for the relevant employees are designed in a manner that is compliant with supervisory law.

For employees with whom the institution directly enters into the contractual legal basis for the relevant activity (= employment relationship, freelance work under a service or work contract), the institution must directly implement the supervisory requirements in the agreed remuneration. For employees who perform their professional activity for the institution on the basis of an agreement with a third party, who in turn concludes an agreement with the institution for the work (= temporary employment, deployment via service/work contracts with external third parties, particularly in the case of outsourcing), the institution must work towards ensuring that the third party includes an obligation in the contractual agreement that the third party is obliged to structure the employee's remuneration in a manner that complies with supervisory law in relation to the professional activities performed for the institution. For the deployment of third-party personnel by way of temporary employment, the institution may regularly take into account the fact that the employment relationship between the lender and the individual temporary employee is generally subject to a collective agreement in order to be able to take advantage of the labour law privileges of a collective agreement-based temporary employment relationship with regard to the principle of equal treatment in accordance with Section 8 of the German Temporary Employment Act (Arbeitnehmerüberlassungsgesetz, AÜG) when implementing the temporary employment relationship. Such exclusive collective-agreement remuneration of the temporary agency worker in his employment relationship with the lender requires that the remuneration granted to him by the lender for his professional activity for the institution is not subject to the IVV from the outset in accordance with Section 1 (4) IVV.

7. Summary

When implementing remuneration systems, institutions must identify all groups of persons who, in view of their specific professional activities for the institution, are to be categorised as employees within the meaning of Section 2 (7) IVV. They must also work to ensure that the remuneration of the identified employees is structured in a manner that complies with supervisory law. A standard process must be established for identifying individuals who, in particular as a result of third-party personnel deployment, are to be categorised as employees of the institution in accordance with Section 2 (7) IVV. This process must allow for and at the same time require an examination in each individual case based on the aforementioned criteria.

The two main criteria listed above apply when determining which employees are to be classified as supervisory staff: (1) typical activities for the institution related to the relevant original banking/financial services; (2) sufficient integration into the operational organisational structure of the institution.

The mere professional activity of the relevant individual for the institution by way of the deployment of third-party personnel does not automatically lead to the qualification as an employee within the meaning of Section 2 (7) IVV from a supervisory perspective, provided that the activity does not concern the institution's core operational processes. The internal review process could include the following review steps by way of example:

1. Does the institution use the external person who performs the relevant activity to conduct banking business or provide financial services? If the answer to this question is ‘no’, the person is not an employee within the meaning of Section 2 (7) IVV.
   
2. If the answer to the first question is ‘yes’, it must then be determined whether the person is working as a temporary agency employee under a staff leasing agreement. If the answer is ‘yes’, the person is an employee of the institution within the meaning of Section 2 (7) IVV.
   
3. If the answer to the second question is ‘no’, the last step is to check whether the person carries out management-related decisions in relation to the specific activity, i.e. makes decisions that directly affect the operational activity of the institution and whether the person is integrated into the operational organisation of the institution when carrying out their activity. If the answer is ‘no’, the person only provides advisory services. Otherwise, the person is an employee of the institution within the meaning of Section 2 (7) IVV.

Published: February 2025