Employers dissatisfied with regulations on social plans

The legal regulations governing the "social plan", a special form of redundancy programme, have become a controversial topic in Germany in recent years but, up until now, empirical data on the issue have been scarce. However, a recent study indicates that two-thirds of the enterprises that have concluded a social plan consider the regulations to be inadequate. One-quarter go so far as demanding the abolition of the obligation to reach an agreement on a social plan. This article introduces the legal background, summarises the key points of the study and comments on the findings.

Legal background of social plans

Under the terms of the Works Constitution Act (Betriebsverfassungsgesetz, §§ 111f), a procedure known as "reconcilement of interests" (Interessenausgleich) aims at reconciling the positions of the employer and the workforce in case of a proposed substantial alteration of the establishment, or of bankruptcy. This involves weighing the respective interests against one another, as well as reaching an agreement on the procedure of change and the necessary human resource planning. Detailed arrangements for the subsequent implementation of the changes are then subject to the co-determination rights of the works council. In cases where the employer makes no attempt to arrive at an agreed reconcilement of interests, or without compelling reasons fails to abide by one, employees who are dismissed or suffer economic disadvantage as a result may claim compensation for the loss of their job. A social plan (Sozialplan) is a programme drawn up in the form of a special works agreement (Betriebsvereinbarung) between the employer and the works council, and resembles a special form of redundancy programme. It contains the compensation packages and the human resource policies available to the employees affected by the changes. There is no obligation to draw up a social plan, provided that: the proposed alteration to the establishment consists solely of dismissals; certain maximum limits in terms of a percentage of the total workforce are not exceeded; or the case involves a newly formed enterprise.

The impact of social plans

From the perspective of the enterprise, the obligation to establish a social plan conflicts with the human resource objectives of quantitative flexibility and adaptability to changing environments, as well as the general objectives of profitability and liquidity. The social criteria for redundancy (Sozialauswahl) might even lead to the dismissal of employees other than those originally intended. This reduces the discretion and the possibilities of personnel management to find the optimal size and structure of the workforce. By contrast, trade unions and works councils regard the increased redundancy costs associated with social plans as a means of limiting the excessive use of "hire-and-fire" policies. In other words, the high costs of reducing the workforce forces management to search for alternatives other than dismissing employees.

The IW survey

Since there are no official data on the incidence and the volume of social plans, the Institut der deutschen Wirtschaft (IW) has conducted a survey covering 641 enterprises that applied measures of workforce adjustment between 1990 and 1994 ( "Sozialpläne und Personalanpassungsmaßnahmen" Edmund Hemmer, IW, Cologne (1997))

An important finding of the survey is that only 59.5% of enterprises that had to reduce their workforce were making employees redundant. Compared with a previous survey conducted in 1985 ("Sozialplanpraxis in der Bundesrepublik - eine empirische Untersuchung", Edmund Hemmer, IW, Cologne (1988)), when personnel policies were focusing primarily on compensation for job loss, many enterprises have developed new strategies of workforce adjustment in the 1990s. Those strategies included internal or external training, the use of internal labour markets, close cooperation with the employment offices and the offer of grants where employees want to become self-employed. Some of the main findings of the new study are set out in the table below.

Personnel policies of workforce adjustment
Measures associated with a reduction in the number of employees Percentage of firms applying measure
Voluntary turnover 73.3
Recruitment freeze 58.1
Voluntary dissolution of employment contracts 53.5
Early retirement schemes 42.8
Redundancy .
- without a social plan 34.1
- including a social plan 25.4
Finding jobs for the employees in another enterprise 9.1
Sabbatical leave 5.3
Measures not associated with a reduction in the number of employees .
Transfers .
- within the company 41.0
- within the group of companies 8.9
Replacement of some full-timers with part-timers 18.7
Training and qualification 14.0

Source: Hemmer (1997)

One out of four enterprises in the survey had experiences with social plans. The three most important reasons for concluding social plans were - in order of importance - reduction of the workforce, downsizing or closure of the plant, and changes in company organisation. On average, each company had to make available funds of DEM 10.2 million for the implementation of the social plan. The amount of redundancy pay equalled DEM 4.8 million per company or DEM 20,000 per worker, which was equivalent to 4.8 months' salary.

If a social plan was set up, 40% of the enterprise's workforce benefited on average. In small companies with fewer than 100 employees, however, it was in most cases the entire workforce that was eligible to benefit from the social plan. In the average company, half of the workforce was dismissed, one-quarter was subject to transfers and one-fifth retired. Contrary to the original intentions of the supporters of social plans, some employees are benefiting even though they are not financially dependent on the redundancy payments: for example, some employees receive redundancy payments although they have already found a new job. Two-fifths of the employees entitled to benefits were younger than 45, and one-third had been employed in the respective company for less than 10 years.

For many enterprises, social plans are a financial burden which is weakening their ability to invest, according to the study. For one out of two companies, the funds associated with the social plan reached 50% of the net investment spending. To finance their social plan, one out of three companies had to draw on credit or their parent company. On average, it took 57.2 days to negotiate a social plan. In addition to that, the companies complained most about - in order of importance: problems regarding the social criteria for redundancy and the respective case law; high amounts of redundancy pay for older employees; eligibility of people not dependent on redundancy pay; reduced liquidity in a situation of change; the lack of an upper limit regarding redundancy pay; and too-extensive co-determination rights of the works council.

Two-thirds of the enterprises that have concluded a social plan between 1990 and 1994 consider the regulations inadequate. One-quarter go so far as to demand the abolition of the obligation to reach an agreement on a social plan. In 1985, the respective figures were only 59% and 10%.

Commentary

The extensive "juridification" of labour relations is one of the core characteristics of the "German Model". The detailed legal regulation of substantial alterations of the establishment, especially regarding the procedures of workforce adjustment (for example social plans), prevents management from making people redundant too early in the event of of product-market pressure, and certainly increases the employment security of the employees. However, many supporters fail to see its disadvantages. First, the legal obligation to conclude social plans negatively affects the flexibility and the adaptability of the enterprise to changing environments. Second, social plans affect the costs of employment. Some employers will rethink their dismissal policies while others might refrain from hiring new labour. As a barrier to exit (and entry), the obligation to conclude a social plan impedes job creation.(Stefan Zagelmeyer, IW)

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