Company restructuring often involves reducing employee numbers, too. In times of crisis, companies can reduce their personnel costs. However, even during an economic boom, personnel adjustments may still be necessary due to technological developments. For example, in Germany, the transition to electric vehicles will almost certainly lead to a loss of some jobs in the car industry.
Talent shortages give employees new power
However, the situation for employees affected by downsizing has changed. Whereas employees in the past often had trouble finding a new employer, this has changed significantly as a result of the talent shortage. In a so-called ‘employee’s market’, many employees will be able to start a new employment relationship immediately after their notice period expires. The open labour market also favours older workers, who often couldn’t find employment because of their age, but who can now return to work with confidence.
Training or Severance Pay?
In times of technological change, it is more important than ever to keep learning new skills.
Employee training is vital for a company to stay competitive. The level of training an employee has also determines how easily they find new work when their current job comes to an end.
For this reason, plans for staff reductions increasingly include provisions for further training or even retraining of employees. The resulting costs for the company can be considerable and can lead to a reduction or total elimination of severance pay. This is often supported by trade unions, who correctly consider finding employment with another company to be more important than the payment of a severance package.
The open labour market may also affect the amount of severance pay an employee receives. Employees who find work soon after termination will be inclined to accept customary severance payments, which are in the range of 0.5-1.0 times their gross monthly salary per year of employment, in order to avoid a lengthy litigation process with an uncertain outcome.
What the law says about staff layoffs
Unlike in English or French law, an unlawful termination doesn’t lead to an employee filing a claim for damages: it can lead to the termination being labelled invalid.
The consequence is that the employment contract continues, and the employer is deemed in arrears after the notice period expires. This represents a considerable ‘default of acceptance’ risk for the employer due to the ‘fixed debt’ nature of the employee’s work performance, which the employer can’t dispute. This is why companies are often inclined to offer attractive severance payments to mitigate this risk.
From the employer’s point of view, for every dismissal – and particularly for mass layoffs – they need to meet the requirements for termination for urgent operational reasons within the meaning of Section 1 of the German Dismissal Protection Act (Kündigungsschutzgesetz), which apply if:
• The company dissolves
• There are no other opportunities to employ them in another vacant job
• The dismissal meets ‘Social Selection’ (Sozialaushwahl) criteria
In the case of mass dismissals, social selection, according to length of service, age, maintenance obligations and severe disability can be a difficult and error-prone process. While the employer’s determinations around these four criteria appear to be simple enough, the difficulty arises when considering which employees are comparable with one another.
In many cases, this question can’t be answered with legal certainty, not even with computer programs for personnel reduction. According to case law from the ‘Federal Labor Court’, only those employees who are employed at the same hierarchical level, who are transferred to the workplace of another employee by way of the right to issue instructions, and who can familiarise themselves there within a short period (maximum three months) are comparable.
Since so-called ‘transfer clauses’ are agreed upon in many employment contracts in Germany, the group of employees that can be considered for social selection is often sizeable. As a result, it isn’t always possible to determine with legal certainty which employees are subject to social selection rules, which can lead to a termination being deemed legally invalid. It’s an easy case for an employee to win in court.
Against this backdrop, voluntary programs offered in the case of mass layoffs are vital, as they give employees additional financial incentives for concluding a termination agreement without resorting to legal action.
Finally, in the event of a mass dismissal, a so-called mass dismissal notice must be submitted to the Employment Agency in accordance with Section 17 (1) of the Dismissal Protection Act before notices of termination can be issued and termination agreements concluded.
Staff reductions and collective labour law
If a company that has a works council wishes to terminate a large number of employees, it must respect the information and co-decision rights of the co-determination bodies.
The works council and the economic committee (if any) must be informed early and fully of any measure, and if there are several branches in a company, they must also clarify whether the works council of the respective branch or the company’s central works council is responsible.
If the planned staff reduction reaches the scale of a ‘mass layoff’ as defined by Section 17 of the Dismissals Protection Act (e.g. 10% of the employees in companies with between 50 and 500 regular employees), the following co-determination provisions must be taken into account:
• Negotiation of a reconciliation of interests under § 111 of the Works Constitution Act (Betriebsverfassungsgesetz)
• Conclusion of a social plan under § 111 of the Works Constitution Act
• Participation of the works council under § 17 Par. 3 Dismissal Protection Act
In practice, the involvement of the works council under Section 17 (3) of the Dismissal Protection Act also entails negotiations on a reconciliation of interests and the conclusion of a social plan. Redundancies can only be implemented by the company once the negotiations on a reconciliation of interests have concluded or demonstrably failed. Failure is regularly assumed after the first meeting of the conciliatory body, which is why it is advisable not to wait too long before gathering the conciliatory body in the case of time-critical personnel reduction measures.
To increase the willingness of employees to terminate their employment without taking legal action, it is advised to offer further financial incentives, such as increased severance pay, special payments or even personnel placement measures in a voluntary company agreement. If the employee doesn’t accept these offers in a set period defined by the company, they forfeit the right to these incentives and must accept the lower offers in the social plan.
Finally, it is worth mentioning the possibility of training and qualifying employees in transfer companies, which are financially supported by the employment agency. Given the shortage of skilled workers and the open labour market, however, transfer companies have become less important and are often only of interest to low-skilled employees.
