Germany: labour law in restructurings (part 3)

In part 1 of our Insight series "Employment law in restructuring" we have already provided information on the concepts of restructuring and operational change within the meaning of section 111 of the Works Council Constitution Act (BetrVG). In the following part 2, we presented the most important basics with regards to reconciliations of interests and social compensation plans and discussed the possible legal consequences of not observing co-determination rights. The focus of this third part of our Insight series is on the employment law issues that employers regularly face in connection with a planned staff reduction.

Staff reductions in the course of restructuring

The aim of a restructuring is regularly to achieve an increase in efficiency of the company concerned, often combined with a reduction in costs. Many restructurings are therefore accompanied by staff reductions. This naturally applies in particular, but not exclusively, to (partial) closures. In addition to dismissals for operational reasons, staff reductions can also take place through the conclusion of termination agreements, for example within the framework of voluntary programmes.

Terminations for operational reasons

In the context of restructuring, dismissals for operational reasons often become necessary. If the Dismissal Protection Act (KSchG) applies to the employment relationship concerned, a dismissal for operational reasons is only permissible under the following strict conditions:

• The dismissal must be based on "urgent operational reasons" due to which the need of employment for the employee concerned ceases to exist (permanently).
• No possibility of further employment of the employee in another vacant job may be given. Precondition is that the vacant job is comparable to the employee's previous job and that he/she has the necessary qualifications; however, a reasonable training period must be accepted.
• The employer's interest in terminating the employment relationship must outweigh the employee's interest in continuing it (balancing of interests). This is the case if, due to an entrepreneurial decision, the need for employment has actually ceased permanently and continued employment in another job is not possible.
• The result of the necessary social selection must be to the disadvantage of the employee to be dismissed. Within the social selection, the criteria length of service, age, maintenance obligations and severe disability of the employee must be compared with employees comparable to him/her (section 1 sub. 3 KSchG). The weighting of the individual social criteria is not prescribed by law, but must not be arbitrary and must take each criterion into account appropriately. To mitigate risks, it is advisable to refer to one of the schemes for social selection already considered lawful by the Federal Labour Court.

If a works council has been established, it must be consulted before any notice of dismissal is given (section 102 BetrVG).

The requirements for the effectiveness of a dismissal for operational reasons may be less stringent, if the employee to be dismissed is named in a list of employees to be dismissed which is linked to a reconciliation of interests. More detailed information can be found in the second part of our Insight series, which can be found here.

Termination Agreements

Instead of giving notice of termination for operational reasons, the parties to the employment contract may agree to terminate the employment relationship by mutual consent at any time. For employers, termination agreements offer a clear advantage over terminations, as the strict requirements of the KSchG do not apply to the mutual termination of an employment relationship. In particular, there does not have to be a reason for dismissal. It is also not necessary to carry out a social selection. Termination agreements are subject to judicial review only to a very limited extent (eg in the case of fraudulent misrepresentation or unlawful threat). Therefore, termination agreements offer both contracting parties considerably greater legal certainty with regard to the actual termination of the employment relationship.

Notification of mass dismissal

From a company size of at least 21 employees, employers are generally obliged to notify the Federal Employment Agency about so-called mass dismissals (section 17 (1) KSchG). If the employer fails to notify the Federal Employment Agency of a mass dismissal or if the notification is incorrect, the dismissals are invalid.

Pursuant to section 17 (1) KSchG, the employer is obliged to notify the Federal Employment Agency of a mass dismissal prior to terminating:

1. more than five employees, in a business unit with usually more than 20 and less than 60 employees,
2. ten percent of the employees regularly employed in the business unit or more than 25 employees in business units with usually at least 60 and less than 500 employees; or
3. at least 30 employees in a business unit with usually more than 500 employees,

within 30 calendar days. Other reasons for terminations of employment initiated by the employer (eg termination agreements to avoid dismissals for operational reasons) are equivalent to dismissals.

Pursuant to section 18 (1) KSchG, notifiable dismissals only become effective before the expiry of one month after receipt of the notification by the Employment Agency with its consent. The consent can also be granted retroactively up to the day of application.

Consultation of the works council

If the employer wants to carry out a notifiable mass dismissal, the works council must also be informed in writing and in good time about the planned dismissals (section 17 (2) KSchG). The consultation of the works council must take place at latest two weeks before the dismissals announcement and is a mandatory requirement for its effectiveness.

The employer must provide the works council with the essential information on the planned dismissals. This includes in particular:

1. the reasons behind the planned dismissal;
2. the number and occupational groups of the employees to be dismissed;
3. the number and occupational groups of employees normally employed;
4. the period in which the redundancies are to be made;
5. the criteria designated for the selection of the employees to be dismissed; and
6. the criteria designated for the calculation of potential redundancy pays.

In terms of content, the employers duty of consultation under section 17 (2) of the Dismissal Protection Act (KschG) is essentially resembling to the duty of negotiation on a reconciliation of interests in the context of operational changes within the meaning of section 111 (1) of the Works Constitution Act (BetrVG). Therefore, the consultation procedure is often carried out simultaneously with the negotiations on a reconciliation of interests and documented in the latter. However, the consultation procedure is an isolated obligation of the employer, the disregard of which results in the invalidity of the pronounced dismissals.

Volunteer Programme

Volunteer programmes are often used, especially in large companies, to reduce personnel in a socially compatible way by concluding termination agreements and thus avoiding the need for operational redundancies. In order to offer employees an incentive to voluntarily terminate their employment contracts, fixed conditions and modalities are offered to the volunteers within the context of volunteer programmes, for example concerning redundancy pay and other employer benefits such as outplacement counselling and remunerated advanced training.

By designing volunteer programmes, companies can determine the group of beneficiaries themselves and thus avoid the social selection that is regularly required in the case of dismissal for operational reasons. This allows the company to manage staff reductions in such a way that particularly know-how carriers remain with the company.

Concerning the content, many options are possible when designing volunteer programmes. However, in order to be able to optimally adapt the volunteer programme to the needs of the company, early planning is recommended.

Turbo clause

Volunteer Programmes together with social compensation plans and termination agreements include often a so-called turbo clause or sprinter clause. Corresponding clauses serve the acceleration of personnel reduction.

In the case of volunteer programmes, a turbo clause can create a further incentive for employees to decide in favour of a separation from the company in a relatively short period of time and thereby receive, for example, a supplement to the awarded redundancy pay.

If a turbo clause in included into a social compensation plan or into an individual termination agreement, the employee is usually allowed to terminate the employment contract before the determined termination date. In return, the employee usually receives a percentage of the remuneration saved by the employer due to the early termination of the employment relationship as an additional redundancy pay (so-called turbo or sprinter bonus). In practice, such a turbo clause is often used by employees who have already found a follow-up job during the notice period or the expiry period, so that both employer and employee can benefit from an early termination of the employment relationship.