The use of "hardship clauses" in the east German metalworking industry

In 1993, employers' associations and the IG Metall trade union signed a collective agreement for the east German metalworking industry, which for the first time included a general "hardship clause". Under certain conditions, this allows companies with immense economic problems to pay their employees below the minimum wage set by the collective agreement for a limited period of time. More than 180 companies have since requested recognition of a "case of hardship" and in about 100 cases the social partners have agreed to use the hardship clause. The publication of a recent study on the practical results of hardship clauses to date has opened a debate on whether or not such hardship clauses should be introduced into west German collective agreements.

Since the beginning of the 1990s, the German system of centralised sectoral collective bargaining (Flächentarifvertrag), which guarantees all employees in a certain sector more or less the same basic income and working conditions, has been under increasing pressure. With growing internationalisation of capital and markets and an increasing pressure of international competition, more and more employers and economic experts have been demanding a more decentralised and company-related collective bargaining system. German unification in 1990 brought a further dynamism to the debate. Originally, all the relevant social partners agreed to transfer the western collective bargaining system to eastern Germany, but because of the continuing immense economic problems. more and more eastern employers became dissatisfied with that decision. For instance, in the eastern metal industry the proportion of employers who are members of an employers' association decreased from 60% in 1991 to 36% in 1994 - though still covering between 55% and 65% of the employees ("Ostdeutsche Tariflandschaften", Ingrid Artus and Rudi Schmidt, in Die Mitbestimmung No. 11, p. 34-36 (1996)).

Furthermore a significant number of employers which are still members of an employers' association often cooperate informally with their works councils to undermine the rules of the existing collective agreement. Estimations of companies which in fact break the collective agreement vary between 20% (IG Metall) and 60% (eastern German metalworking employers' association). As one reaction to this development, in 1993 the social partners in the eastern German metal industry, for the first time, agreed to include a hardship clause (Härtefallklausel) in collective agreements. As a result, companies with immense economic problems are allowed, under certain conditions, to pay their employees below the rate set by the collective agreement. A recent study published by the University of Bremen ("Tarifliche Lohnpolitik unter Nutzung der Härtefallregelung. Ergebnisse einer Untersuchung zur Praxis in der ostdeutschen Metall- und Elektroindustrie", Rudolf Hickel and Wilfried Kurtzke, in WSI-Mitteilungen No.2, p. 98-111 (1997)) which was funded by IG Metall's Otto Brenner Foundation, presents a first evaluation of the practical results of the use of hardship clauses.

Bargaining and hardship clauses in eastern Germany

Collective bargaining policy in eastern Germany after unification had to address two different and partially contradictory aims. On the one hand, the social partners had to consider the particular economic situation of a transformation economy with enormous economic problems, in particular in the industrial sector. On the other hand, they had to deal with the ambitious expectations of east German people for a rapid alignment of working and pay conditions to west German levels. The latter was encouraged by a rapid increase in living costs in eastern Germany.

As a reaction to these particular political circumstances, in 1991 the social partners in the eastern German metalworking industry signed a collective agreement which included a phasing-in plan for a step-by-step increase of east German wages. Originally it was agreed to reach the western German level in 1994, but because of the still very complicated economic situation of many eastern companies the phasing-in plan was renegotiated in 1993. After several rounds of negotiations and a first strike in the eastern metalworking industry the social partners finally agreed a plan to reach a 100% of west German payment levels on 1 July 1996. However, effective income for eastern metalworkers is still about 88.6% of that of their western colleagues because of the continuing differences in working time (38 hours per week in the east compared with 35 hours in the west) and in payment of annual bonuses (holiday and Christmas bonus).

Nevertheless, the main problem for bargaining policy in eastern Germany is the fact that there remains a significant number of companies which have a rather poor economic performance and are still in danger of bankruptcy. Considering the high rate of unemployment in the east, IG Metall agreed in 1993 to introduce a hardship clause in the collective agreement. Since then, east German companies have the opportunity to apply for a "case of hardship", in order to:

  • avoid threatened insolvency;
  • safeguard jobs, in particular in the case of imminent dismissals; and
  • improve the chances of reorganising the company on the basis of a detailed reorganisation plan

The decision concerning a case of hardship has to be taken jointly by the social partners, such as the regional metalworking employers' association and the regional office of IG Metall. In the event that the social partners could not come to an agreement, it was originally planned to delegate the final decision to a conciliation committee. The social partners subsequently decided to renounce the conciliation committee because the whole procedure became too bureaucratic and too expensive, and took too much time. If a case of hardship is accepted by both social partners, they negotiate together with the company a special hardship agreement which includes reduced pay rates below the level of the general collective agreement for a limited period of time.

Hardship clauses in practice

Since the introduction of a hardship clause in the collective agreement in 1993, more than 180 companies have made an application for a case of hardship. About half of them were accepted by the social partners. The other half either failed (without a formal refusal of the social partners) or were refused by the social partners, usually by IG Metall. However, the number of applications which have been accepted by the social partners has grown from year to year. This has mainly to do with the fact that in the beginning many companies were not able or willing to give sophisticated information about their economic situation and their plans to reorganise the company, a situation which has improved over the years because of the institutional help of the employers' associations. The attitude of IG Metall towards the use of hardship clauses was much more sceptical in the beginning, though now even the union seems to accept them as a useful instrument.

Companies which applied for a case of hardship came from many different sectors inside the metal industry. They covered small and medium-size companies as well as large companies, all of which were in an economically difficult situation with labour costs making up an extremely high proportion of total costs. On average the personnel costs of these companies stood at 53% of total costs, compared with an average of 28% in all eastern metal companies and of 20% in western Germany. This high proportion is the result less of high wages than of the extremely low turnover and sales of these companies. The table below sets out the levels of hardship applications from 1993 to 1996.

Table: Number of applications for a case of hardship in the east German metal industry
Cases of hardship 1993 1994 1995 1996 Total
1. Failed cases of hardship 27 10 20 0 57
2. Refused cases of hardship 19 3 4 0 26
3. Agreed cases of hardship 24 12 44 18 98
Total 70 25 68 18 181

Note: From 1993 - 1995 all cases are covered; for 1996 only a limited number of cases are covered.

Source: Hickel and Kurtzke 1997

In the companies where a case of hardship was agreed by the social partners, the average duration of that agreement was one year, but many companies made further applications. The agreements on a case of hardship included:

  • a reduction of wages and salaries below the level of the collective agreement mainly, through a shifting of wage increases. On average the reduction was about 10%;
  • in return, the companies declared they would make no redundancies during the term of the hardship agreement.

Some agreements also include a flexibility clause stating that if the economic situation improves during the term of the agreement, the companies have to give additional payments. If the company goes bankrupt, the hardship agreement will usually be cancelled.

The consequent economic development of the companies with hardship agreements was rather ambiguous: about half of the companies were able to improve their sales but only a few of them could ameliorate their financial situation. The employment situation of these companies was quite stable, while an important number of companies still see themselves in danger of becoming bankrupt. In summary, the evaluation made by the University of Bremen came to the conclusion that the reduction of labour costs through the use of hardship clauses alone does not improve the economic situation of the companies. Hardship clauses can only be one element in a period of restructuring and make sense only in the wider context of a comprehensive plan for a reorganisation of the company. Therefore, the central aim for the east German metalworking industry must be to increase its productivity and to improve market conditions.

Should hardship hardship clauses be introduced in western Germany?

Despite its limited economic effects, the use of hardship clauses has an important meaning in the current debate on the future of centralised sectoral collective bargaining in Germany: one conclusion of the University of Bremen study was that the use of hardship clauses for companies with a very difficult economic situation could help to mitigate the process of erosion of centralised collective bargaining in eastern Germany. Nevertheless, it seems to be absolutely necessary that the final decision about a case of hardship lies with the social partners and not with the company itself.

For these reasons, Walter Riester, the vice-president of IG Metall, recently proposed the introduction of hardship clauses in west German collective agreements. Currently, collective agreements in the western metalworking industry contain only a general arrangement that in the event of possible insolvency or other exceptional circumstances, the social partners could decide to diverge from the collective agreement. Mr Riester argues that even in western Germany there is a growing number of companies which informally make arrangements below the level of the collective agreement. A hardship clause could offer a strictly-defined procedure for companies with major economic problems to diverge from the collective agreement, which would still be under the control of the social partners. As a result, it could help to stabilise the German system of collective bargaining.

The idea of introducing hardship clauses in western Germany has opened a broad debate among the German public. The peak employers' association in the German metalworking industry, Gesamtmetall, has already refused the proposal because it sees hardship clauses as too bureaucratic and too expensive. It may also be bad for the image of a company when it has to open its books to the public in order to apply for a case of hardship. Finally, Gesamtmetall criticises the idea that hardship clauses should be limited to companies which are near to insolvency. Instead of this, the employers demand a general "opening clause", whereby the decision to diverge from the collective agreement is taken jointly by the company and the works council.

Criticism of Mr Riester's proposal has also come from inside IG Metall. Even if it is widely accepted that there must be a possibility for special arrangements for companies which are in danger of bankruptcy, critics within IG Metall - such as the leader of the regional organisation in northern Germany, Frank Teichmüller- are afraid that a general hardship clause could set in motion a dynamic whereby more and more companies demand a case of hardship and finally accelerate the process of erosion of centralised collective bargaining. In Mr Teichmüller's view, hardship clauses make sense only under the particular economic circumstances in eastern German, and there is no need to introduce them to the west.

Commentary

The debate on hardship clauses seems to have become a major issue in the discussions on the future of centralised collective bargaining in Germany. Economically, the evaluation of the practice in eastern Germany has shown that the use of hardship clauses makes sense only when they are integrated in a comprehensive reorganisation strategy of the company. Therefore it may be problematic to overestimate the economic effects of hardship clauses, because they focus very much on wages which, according to the University of Bremen study, are not the main factor in economic problems in the east German metalworking industry.

Politically, it is still heavily disputed whether the use of hardship clauses could help to stabilise the centralised collective bargaining system. In any case, it seems to be necessary that the final decision for a company to diverge from the collective agreement must lie with the social partners. Otherwise there is a clear danger of a further erosion of centralised collective bargaining in Germany. (Thorsten Schulten, WSI)

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