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Labor and employment law challenges in business transformations

Germany

Workforce restructuring

The key practical issues in workforce restructuring include:

  • Legal justification
  • Works council and employee representatives’ process
  • Labor administration process
  • Costs and timing
  • Litigation risk

Applicable legislation

Collective dismissal in Germany is governed by the Works Constitution Act (Betriebsverfassungsgesetz or BetrVG) and the German Protection against Dismissal Act (Kündigungsschutzgesetz or KSchG). Collective dismissal obligations are triggered if the employer decides to dismiss:

  • more than 5 employees in an establishment with 21-59 employees
  • more than 25 employees or 10% of all employees in an establishment with 60-499 employees
  • more than 30 employees in an establishment with 500 or more employees

Required legal justification

The employer must provide social justification (Sec. 1 para 1 of Kündigungsschutzgesetz) for a collective dismissal based on economic, business or operational reasons.

Works council/unions or other employee consultation requirements

Consultation requirements with works council/unions

Works council: In case of collective dismissal the employer shall inform and consult the works council prior to the implementation of the contemplated collective dismissal. The employer must provide the following information to the works council:

  • Reasons for the dismissal
  • Number of employees to be dismissed
  • Selection criteria
  • Period over which the dismissals are to take place

The works council must be informed in good time. Generally, the employer must provide the required information to the works council four to six months prior to the planned implementation of the collective dismissal. For evidence purpose written form is suggested.

Subsequently, the employer must consult with the works council to mitigate the consequences of collective dismissal and to draw a reconciliation of interests. Usually, such consultations will be done together with the social plan negotiations.

Furthermore, as collective dismissals are individual dismissals as well, if a works council exists, it must be heard before every single dismissal.

Consultation requirements with other employee representatives

If an economic committee exists at the employer’s company, it must be informed upfront regarding the change of business.

Consultation requirements with employees

No statutory legal consultation requirements with employees.

Approval/notification of the labor authorities or other government authorities

Notification of dismissal as well as for relocation to the affected employees is possible only after consultation with the works council, information to local agency for employment regarding the planned collective dismissals, hearing of the works council regarding every single dismissal, consultation with the statutory authorities regarding the dismissals of protected employee-groups (e.g., pregnant or disabled employees) and response of the works council.

If there are employees with special protection against dismissals existing, the employer must notify the authority responsible for the protection of the employees (e.g., for pregnant employees) or the competent authority for the integration of severely disabled persons (Integrationsamt) at least 30 calendar days prior to implementation of the contemplated collective dismissal. A dismissal without prior approval of the competent authority is invalid.

The employer must submit the relevant form provided by the aforementioned authorities explaining the reasons for the dismissals, brief information on negotiations with the works council and the response of the works council along with the notice.

Employee selection criteria

In Germany, employers cannot freely choose which of their employees will be dismissed. For instance, if the collective dismissal is based on valid economic reasons, the employer must comply with the social selection process. For a valid social selection, the employer must first dismiss the employees who least require a social protection from the group of all comparable employees.

The social selection must be carried out in three steps:

  1. Determination of the employees to be included in the social selection.
  2. Determination of whether the retention of one or more employees is conditioned by legitimate operational requirements.
  3. Selection based on social criteria like seniority, age, number of dependents, disability – the above-mentioned social criteria shall carry equal weight for the employer’s decision.

Certain employees are afforded special protection against dismissal, in particular pregnant women or employees on parental leave, the employee representatives or disabled employees.

Actions required to limit the negative impact and social plan

The employer must undertake the following internal and external measures to limit the negative impact of collective dismissals:

Internal alternative employment/redeployment
Before dismissing any employee, the employer is obligated to search for available job positions which could be offered to the affected employees. The obligation is limited to the company with which the employment contract of the affected employee is concluded. There are, however, exceptions: if a joint operation exists, the selection has to be a company-wide one taking into account the complete joint operation.

Other measures
The employer must negotiate and consult with the works council in order to agree on a reconciliation of interests and a social plan. The reconciliation of interest is an agreement, which determines whether, when and how a measure takes place. The social plan must include compensation measures in order to avoid or reduce the economic impact of the collective dismissal, as well as to mitigate the implications for the employees affected.

For example:

  • Severance payments (no statutory fixed amount, could vary between 0.5 and 1.5 gross salary for each year of employment - but parties can also agree on lower or higher payments)
  • Measures aimed at readapting or re-train the affected employees, measures designed to facilitate reinstatement in a new job or relocation to a new work place
  • Other measures like outplacement, early retirement, etc.

Estimated timeline

Preparation of any specific documentation required for the collective dismissal process may take about two months depending on the complexity of the project.

There is no specific legal timeline; however, the estimated timeline for a collective dismissal is approximately six to eight months.

Estimated costs

Mandatory costs

The key components of mandatory HR legal costs are as follows:

  • Remuneration payment during notice periods (minimum four weeks)
  • Severance payments as agreed to each dismissed employee
  • Costs for implementing any agreed social plan

Customary additional costs

The customary additional HR legal costs are as follows:

  • Costs for hiring any third-party experts (for both employer and works council)
  • Costs for court proceedings and possible arbitration committee
  • Costs for outplacement
  • Service fee for qualification company - before being dismissed, employees can be transferred temporarily to a qualification company in order to be supported to find a new employment.

Hiring restrictions post-redundancy

During the notice periods of the affected employees, the employer must not hire new employees at comparable positions of the employees to be dismissed, as the affected employees are entitled to claim for re-employment before the end of such notice period.

Litigation risk

Interested parties

The following interested parties can bring lawsuits related to the dismissal process:

  • Works council: can challenge the employer’s measures on collective dismissal if the employer failed to consult with them.
  • Impacted employees: If the employer’s decision for dismissal is not based on any socially justified reasons, the impacted employees could claim for reinstatement. The impacted employee must file his suit to the Labor Court within three weeks after receiving the written termination notice to find that the employment relationship has not been dissolved due to the termination. If the three weeks period is lapsed, the dismissal is deemed valid and the affected employee cannot claim for reinstatement anymore.

Litigation can stop or slow down the collective dismissal process. German labor courts can stop and declare the dismissal process legally invalid if the employer fails to consult the works council. Further, it may grant preliminary injunctions ordering the employer to refrain from implementing any measures before full compliance with the legal requirements.

Damages and other remedies

Challenges could lead to following remedies:

Damages for unfair dismissal

No punitive damages in Germany. However, if the employer deviates from the reconciliation of interests and dismisses an employee in violation thereof, the employee may sue the employer for compensation payment.

Reinstatement

Employees are entitled to reinstatement within the establishment if the court holds that the dismissal is not socially justified by a reason provided in law and the employment relationship is presumed to continue. The affected employees are also entitled to their outstanding salaries from the end of the notice period date if the proceedings lasted longer than the notice period.

Criminal sanctions

No criminal sanctions in Germany.

Country-specific issues

If an economic committee exists at the employer’s company, it must be informed upfront regarding the change of business.

If the employer is bound by collective bargaining agreements and/or existing works council agreements, the applicable provisions regarding dismissal conditions (e.g., severance payment, notice period, exclusion of notice) must be taken into account.

Contact

Primary Contact for Germany Labor and Employment Law

Karsten Umnuß
Ernst & Young Law GmbH Rechtsanwaltsgesellschaft Steuerberatungsgesellschaft
+49 89 14331 22220

Global Labor and Employment Law Guide
Workforce restructuring
2016-07-01
Germany
DE

Contacts