Thematic feature - redundancies and redundancy costs

This article examines the procedures and costs involved in collective redundancies in Germany, as well as current trends and debate in this area, as at November 2003.

In November 2003, the EIRO national centres in each EU Member State (plus Norway), were asked, in response to a questionnaire, to give a brief overview of: the procedures and costs involved in collective redundancies - ie the dismissal of a number of employees for economic/organisational reasons (rather than reasons related to the individuals concerned); the levels of, and reasons for, redundancies over recent years; and current debate on the issue. The German responses are set out below (along with the questions asked).

Redundancy procedures

Please outline briefly the statutory procedures involved in making 'collective redundancies' (please indicate how these are defined) in your country, in terms of: information and consultation of employee representatives/trade unions; notification of (or obtaining permission from) public authorities; notice periods to be given to the redundant employees; rules on the order of priority for redundancy or giving special protection to particular groups of employees; and obligations to mitigate the planned redundancies or provide assistance in the form of redeployment, training, outplacement etc (including provisions on 'social plans'). Where collective agreements add to or improve on these statutory provisions, please provide a brief overview of such additional procedures (with examples).

(The legal debate in this feature is mainly based on 'Collective redundancy for economic reasons in Germany', Michael Schley, European Industrial Relations Review 356, September 2003.)

Key characteristics of the German approach to dealing with redundancy procedures are determined by the relevant statutory requirements - the Works Constitution Act of 1952 (Betriebsverfassungsgesetz) and the Protection against Dismissal Act (Kündigungsschutzgesetz) of 1969 (both as amended). If a company wants to make several employees redundant, whether or not this constitutes a collective redundancy as defined in law depends on the number of employees in the firm and the timeframe of the redundancies. In a business unit (Betrieb) that usually employs between 21 and 59 workers (inclusive), if five or more employees are made redundant within a 30-day period, this will constitute a collective redundancy. In a business unit in general employing 60-499 workers (inclusive), if at least 10% or more than 25 employees are made redundant within a 30-day period, their redundancies will, legally speaking, be a collective redundancy. In a business unit with at least 500 employees, if at least 30 employees are made redundant within a 30-day period, the redundancies are defined as collective. If these conditions are satisfied, employers must inform the works council in writing and 'in good time' of their intentions. A copy of this document must also be forwarded to the local labour office.

The information that needs to be provided to the works council includes, most notably: the reasons for the redundancies, the number and occupational group of the employees affected; the number and occupational group of the employees generally employed by the business unit; the period in which the redundancies are to take effect; the criteria used in the choice of the employees to be made redundant; and the method used to calculate any redundancy payments. Social factors must be taken into account in the selection of redundant workers and key staff may be excluded. The company then has to provide the local labour office with this same information, as well as some additional data. A statement from the works council must also be submitted to the labour authorities within 15 days.

Until one month has passed since the local labour office was notified, the redundancies cannot legally take effect; this applies unless the labour office has agreed to the redundancies taking effect at an earlier date. The local labour office can also extend the redundancy period to two months. These periods are not connected to the periods for individual notice.

These redundancy requirements and procedures only involve informing the works council and the local labour office, and their approval is not required. The redundancies are automatically invalid, however, if the employer does not comply with these procedures.

The rules relating to collective redundancies can also be applicable if the employer and the employee conclude legitimate 'termination agreements' (Aufhebungsvertrag) instead of stating that the employee is being made redundant. These legitimate termination agreements between employer and employee mean that an employer does not need to make an employee redundant. However, if the total number of employment contracts terminated in this way exceeds the thresholds mentioned above, the legal requirements for collective redundancies can also be applicable.

In the event of redundancies, additional obligations apply to companies with more than 20 employees that are entitled to elect a works council, if the redundancies result from a reorganisation of the business unit. A reorganisation is defined in law as the reduction or cessation of the business unit’s activity or of the activity of substantial parts of the business unit. Other such reorganisations - in addition to shutdowns and partial closures - that are defined in law include relocations, mergers and split-ups, as well as organisational reasons or changed working methods.

As stated above, legislation stipulates that information must be provided at an early stage. German statutes also specify that the scope of the information must be comprehensive. It is usual, when collective redundancies are pending, for the company’s first announcement to be followed by an information phase in which employees’ representatives receive answers and data concerning all questions connected to the economic reasons for the company’s intended measure. The works council has the right to ask questions in this context and to request further details. In the next phase, the employer attempts to reach an agreement with the works council on the reorganisation which tries to reconcile differing interests (Interessenausgleich) - for example, on when the proposed measures should take place. If the parties are unable to reach an agreement, several interventions are possible. A conciliation board (Einigungsstelle) may, for example, be used. This body is composed of an equal number of assessors appointed by the employer, the works council and an impartial chair. An agreement that purportedly reconciles the interests of the two parties cannot be imposed on the employer by the conciliation board; that is to say, the works council cannot prevent the implementation of the reorganisation as proposed by the employee. However, the implementation of the reorganisation can be delayed until an agreement on the reconciliation of interests has been reached. Alternatively, the the board of conciliation can formally recognise the failure of the negotiations. If there is no serious attempt by the employer to conclude an agreement that reconciles the different interests, the employer is obliged to make a payment (Nachteilsausgleich) to the employees concerned if they are made redundant or if they suffer other adverse financial consequences as a result of the reorganisation. The level of this payment is equal to the payment that has to be made when an employment contract is terminated by a labour tribunal (see below).

Redundancy payments

Please outline the statutory rules on compensation for employees affected by collective redundancies, in the form of minimum notice periods, redundancy pay, severance pay etc - ie what is the level of payment, how does it vary with age, service etc. Where collective agreements add to or improve on these statutory provisions, please provide a brief overview of such additional payments (with examples). Overall, please provide any figures or estimates which may be available on the 'average' or 'typical' level of redundancy pay per employee. Where company practice and/or collective agreements provide for accompanying measures (ie set up an recruitment agency, retraining schemes with employer’s contribution, etc) please give an overview of such schemes.

If a reorganisation has taken place and if there has been a failure to reach an agreement, the payments from an employer to an affected employee are as follows: the maximum payment stipulated in law is equal to 12 months’ pay, rising to 15 months’ pay for employees aged at least 50 with at least 15 years’ continuous service, and 18 months’ pay for employees aged at least 55 and with at least 20 years’ continuous service.

The employer must conclude a social plan (Sozialplan) with the works council that aims at reducing the financial and social effects of the reorganisation for the employees concerned, either after concluding an agreement on the balance of interests (see above) or at the same time. Such a social plan has the same legal status as a works agreement (Betriebsvereinbarung). If the employer and the works council disagree, the conciliation board can impose a social plan on the employer. There are no specific rules governing the level of any payments to employees that form part of the social plan. This depends on the precise circumstances and the negotiations with the works council. The law merely contains some abstract indications that would apply if the conciliation board imposed its own social plan.

These guidelines include, for example, the principle that the total amount of redundancy payments in an imposed social plan must not endanger the existence of the company or the remaining posts in the company after the reorganisation has taken place. When a termination agreement is planned (see above), a payment will normally be made to the employee; the amount of this payment is negotiated between the parties. However, the works council is not allowed to ask the conciliation board to impose a social plan if it cannot reach agreements with the employer when a reorganisation takes place in the first four years of existence of the company or the reorganisation is simply a staff reduction for an economic reason if the number of employees to be made redundant is lower than certain thresholds. For example, in business units that generally employ at least 60 but fewer than 250 employees, this applies if the number of employees to be made redundant is lower than 20%, or 37 employees. If the proposed reorganisation falls into one of these categories, the employer has to try 'seriously' to conclude an agreement on the balance of interests with the works council. This is important, as failure to do so will result in the employees who will be made redundant being able to demand a payment. Nonetheless, a conciliation board can impose no social plan in such a case.

Observation by the employer of the procedure for participation of the works council in the event of a reorganisation, or of the formal tasks applicable to collective redundancies, does not hamper the works council from opposing certain or all of the redundancies, nor does it prevent the employees concerned from contesting their redundancy at a labour tribunal.

An innovative approach to designing alternatives to redundancy (typically through agreements with trade unions) can sometimes be taken. The most well-known example of a measure being introduced at company level is the Volkswagen scheme, where major reductions in working time were offered as a means of avoiding redundancies in the mid-1990s. In October 2003, two major employers, car-maker Opel and Deutsche Telekom, announced the introduction of short shifts to avoid redundancy amid a sustained business downturn. These measures led to a debate on prolonging working time and making it more flexible.

Redundancy levels

Where this is possible, please give statistics on the number of collective redundancies effected in your country each year from 1990 to 2003 (or the latest year for which data are available). If available, please break down by sector, and the jobs, age and gender of the workers affected. Also, please provide any information on the grounds for collective redundancies - eg company restructuring, closure or transfer/relocation. In response to this question, please give an assessment of trends and developments, even where full statistical information is not available.

General statistics on the number of collective redundancies that have taken place in Germany are not available. The only relevant time-series information relates to all those persons previously employed and now entering unemployment; these data come from the Federal Labour Office (Bundesanstalt für Arbeit). Identifying the unemployment arising from collective redundancies is impossible as there is insufficient information in this data-set. Therefore, these data are not provided here.

Major statistical information on the issue is only available from the company panel data-set of the Institute for Employment Research of the Federal Employment Services (Institut für Arbeitsmarkt- und Berufsforschung, IAB). This indicates that almost 1 million working relationships are terminated by employers every year. Lawsuits are filed by employees as a result in around 11% of cases.

A recent study by the Institute for Economic and Social Research in the Hans Böckler Foundation (Wirtschafts- und Sozialwissenschaftliches Institut in der Hans-Böckler-Stiftung, WSI) (DE0304204F) is the only specific empirical research into the issue of termination of employment relationships in Germany for more than 20 years. Although the study includes both types of termination - collective redundancies and dismissals for reasons related to the individual concerned - its findings are quoted here as more specific information with regard to collective redundancies is lacking. The survey was based on a representative poll of 2,400 people whose employment relationship was terminated between September 1999 and November 2000. According to this study, the importance of dismissals by employers is overestimated in the public debate. They account for 32% of all terminations of employment relationships, while 10% are the result of a mutual termination agreement. The risk of an employee being dismissed by an employer decreases steadily as the size, in terms of numbers employed, of the business unit increases. Moreover, it was found that the majority of dismissals by employers, 67%, were due to restructuring. Furthermore, the study argues that compensation payments are comparatively rare, and that their amount is often overestimated. According to the WSI study, 10% of employees in the survey received compensation, as did 15% of those dismissed by their employer. According to the study, 34% of people who concluded a legitimate termination agreement received a compensation payment.

Looking at dismissals by employers, the study finds that the majority of compensation payments result from individual agreements. Some 40% of compensation payments resulted from a social plan. According to the authors, social plans are nonetheless responsible, to a considerable extent, for compensation payments. This is because only in a small proportion (12%) of all dismissals by employers are the conditions required to conclude a social plan met. With regard to the amount of the compensation paid, as a rule of thumb (Faustregel) for every year that an employee has been with a firm, he or she will receive a payment equal to 50% of one month's income, according to this study. The table below gives the amount of compensation payments in terms of monthly income for the individuals concerned. Other forms of monetary payments have not been included. As the table indicates, 37% of compensation payments amount to less than three months' pay. About 20% amount to three to 5.9 months' pay, 20% to six to 11.9 months' pay and 20% to more than 12 months' pay