“After a long night of talks we've achieved a result employees at Volkswagen can be very happy with,” chief negotiator for union IG Metall Thorsten Groeger said in a statement.
VW's 120,000 employees in Germany will see a 4.3-percent pay boost from May this year and tripled contributions to their company pension fund.
But the car-making giant did not match other employers' offer of the option to temporarily switch to a 28-hour week.
Instead, some groups of employees, such as those with young children or caring for relatives, can choose to take up to six additional paid days off per year instead of an annual bonus.
“This decision is effectively in line with the contract renegotiation across the metalworking industry. That was an important goal for us to secure Volkswagen's competitiveness” in the labour market, VW human resources chief Karlheinz Blessing said in a separate statement.
During the wider pay talks between IG Metall and other employers' groups earlier this year, thousands of workers downed tools in 24-hour “warning strikes” across Germany.
Fearing labour shortages in an already tight job market, business leaders held out long and fiercely against the demand for a working week of 28 hours.
The employee representatives — negotiating on behalf of some 3.9 million metalworkers nationwide — eventually secured most of their demands including higher pay and the temporary shorter week.