Germany: labour law in restructurings (part 1)

The notion of restructuring

Restructuring or reorganisation - these terms refer to fundamental economic and legal changes in a company. The reasons for restructurings are diverse and range from process optimisation and efficiency enhancement to the management of a crisis or of impending insolvency.

The notion restructuring incorporates a large spectrum of various procedures, which can range from small changes in work flows and the structure of the company to broad financial restructurings. This integrates alterations such as outsourcing, process optimisation or focusing on successful business areas as well as the carve-out of a subarea and the following disposal, the suspension of entire establishments or the acquisition of another company respectively the merge with another company.

The legal questions and problems connected to restructurings are correspondingly diverse. Aside from corporate law, this concerns  in particular also labour law. In general linguistic usage, the term of restructuring stands as a synonym for a wave of dismissals as well as mass redundancies.

The entrepreneurial decision

At the beginning of every restructuring stands the entrepreneurial decision. The background of this decision is often an internal or external analysis of  the company's figures and structures with the aim of uncovering inefficiencies or requirements of improvement.

The decision can be based on internal reasons, such as cost-cutting measures, restructuring of production, realignment of the product range, or on external reasons, such as a decline in business volume, increased competition or lack of orders.

The entrepreneurial decision is often accompanied by the reduction of workplaces and other labour law measures such as transfers or regroupings. For the preparation of these measures, a diligent documentation of the entrepreneurial decision is of particular importance. In case of a dispute, the entrepreneur as the employer is obliged to present and prove that such a decision was taken, with what content and by which persons. The Labour Court does not examine whether the decision was economically reasonable. It does, however, examine whether the decision was validly taken and whether it is arbitrary. It is therefore advisable to document the entrepreneurial decision in writing.

The differentiation between internal and external reasons for a dismissal becomes relevant in the context of dismissals for operational reasons. In the case of an operational dismissal the employer is obliged to justify why the employment need for the individual employed has ceased to exist. In the case of external reasons, the employer must demonstrate in what way these aspects have a concrete impact on the individual workplace and terminate the need of employment. In the case of internal reasons, the employer is obliged to state in what way the entrepreneurial decision has an impact on the individual workplaces.

The operational co-determination

Once the employer has come to an entrepreneurial decision and started planning the implementation, the next step is to check whether the works council - if a works council exists - has a right of information or even a right of co-determination concerning the restructuring.

Co-determination according to section 111 of the Works Constitution Act

Section 111 of the Works Constitution Act (Betriebsverfassungsgesetz, BetrVG) regulates the works council's most relevant right of co-determination concerning restructurings. This right of co-determination applies in companies with generally more than 20 employees entitled to vote, whereby temporary workers are to be added. According to section 111 of the Works Constitution Act, the works council has a right of co-determination in the case of alterations that may entail considerable disadvantages for the staff or significant sections of thereof.

However, not every restructuring measure qualifies as an alteration. Section 111, sentence 3 of the Works Council Constitution Act contains a list of restructuring measures which constitute alterations and which the legislator assumes to be associated with considerable disadvantages for the staff or significant sections of thereof. Considerable disadvantages include, for instance, the loss of a workplace, decreased earnings, higher travel costs and longer commutes due to a transfer to a different place of work or a notable increase in workload.

The following shall be considered as alterations according to section 11, sentence 2 of the Works Constitution Act:

• reduction of operations in or closure of the whole or important departments of the establishment,
• transfer of the whole or important departments of the establishment,
• the amalgamation with other establishments or split-up of establishments,
• important changes in the organization, purpose or plant of the establishment and
• the introduction of entirely new work methods and production processes.

Section 111 of the Works Council Constitution Act requires that not only individual employees but the entire staff or significant sections of thereof are affected by the alterations. The law does not specify exact figures in this respect. The jurisdiction therefore falls back on the threshold values of section 17 paragraph 1 of the Dismissals Protection Act  (Kündigungsschutzgesetz) for the necessity to issue a mass dismissal notice, whereby the 30-day period contained therein has no relevance for the assessment of whether section 111 of the Works Constitution Act is relevant.

A transfer of business according to section 613 a in the German Civil Code (Bürgerliches Gesetzbuch) does not per se constitute an alteration in the meaning of section 111 of the Works Constitution Act. In the case of a transfer of business, the undertaking usually remains as a unit and only its legal entity changes. The situation is different if further measures are taken in connection with the transfer of the business. These may in themselves constitute an alteration in the meaning of section 111 of the Works Constitution Act.

If the examination shows that the scope of application of section 111 of the Works Council Constitution Act is open, the employer must inform the works council in a timely and comprehensive manner and discuss the planned measures with it. The works council must be informed in good time so that it still has the opportunity to influence the planned measures. If the employer fails to inform the works council completely or does so belated, the employer may be fined up to EUR 10,000 according to section 121 of the Works Council Constitution Act. If the employer has already started to implement the measure, the employees are entitled to compensation for disadvantages under section 113 paragraph 3 of the Works Council Constitution Act. For employees who are dismissed due to the change of operation without the employer having fulfilled its obligations towards the works council under section 111 of the Works Council Constitution Act, the claim for compensation for disadvantages gives rise to a claim for severance pay in the amount determined by section 10 of the Dismissal Protection Act.

The information is comprehensive if the works council can form a picture of the planned measure and the resulting consequences for the staff. The documents to be submitted include, for example, reports by management consultants or auditors, information on the positions and employees affected, etc. If an economic committee has been formed under section 106 of the Works Council Constitution Act, it must also be informed accordingly.

Section 111 of the Works Council Constitution Act also obliges the employer to consult with the works council with the aim of attempting a reconciliation of interests and concluding a social plan to compensate for the economic disadvantages of the employees. This will be discussed in more detail in the second part of this article.

Further rights on co-determination

Depending on the procedures planned by the employer, the works council's right of co-determination in individual personnel measures in the meaning of section 99 of the Works Council Constitution Act and the right of co-determination in the meaning of section 102 of the Works Council Constitution Act may apply in the case of dismissals.

Section 99 of the Works Council Constitution Act regulates the co-determination of the works council in the recruitment, grouping, regrouping and transfer of employees. Section 102 of the Works Council Constitution Act regulates the consultation of the works council in the case of a dismissal of an employee.

If such individual measures or dismissals are planned in the context of a restructuring, the works council should be involved at an early stage. A proper documentation will help in providing evidence in case of a dispute.

Continued in parts 2 and 3 of the series

In the second part of this article series, we will examine the topics of reconciliation of interests and social compensation plans, mass redundancies and dismissals for operational reasons in more detail. Here, too, complex legal questions and problems arise that employers should keep in mind when restructuring.

The third part of our Insight series focuses on the labour law issues that employers regularly face in connection with a planned staff reduction.