Laws on protection against dismissal and unemployment benefit amended

In December 2003, the German parliament passed a major package of labour market reform laws. Statutory protection against dismissal will now apply only to companies with more than 10 employees, rather than the previous five. The period of receipt of unemployment benefit will be reduced for older unemployed people. The tax-funded unemployment assistance scheme will be merged with the social assistance scheme to create a new 'unemployment benefit II', set at the same level as the current social assistance. Recipients of the new benefit will be obliged to accept every legal job offered to them, regardless of the level of pay. Trade unions oppose many of the reforms, while employers believe that some do not go far enough.

On 19 December 2003, the German parliament, the Bundestag, passed three major laws, involving changes to the statutory protection against dismissal and a restructuring of the unemployment benefit system (Gesetz zu Reform am Arbeitsmarkt, Drittes Gesetz für moderne Dienstleistungen am Arbeitsmarkt and Viertes Gesetz für moderne Dienstleistungen am Arbeitsmarkt). On the same day. the Bundesrat, the second chamber of parliament, gave its consent to the new laws. The new legislation is part of a major cross-party compromise on tax and labour market policy (DE0311101N) between the governing coalition of the Social Democratic Party (Sozialdemokratische Partei Deutschlands, SPD) and Alliance 90/The Greens (Bündnis 90/Die Grünen), and the main opposition parties - the Christian Democratic Union (Christlich Demokratische Partei, CDU), Christian Social Union (Christlich Soziale Union, CSU) and the Free Democratic Party (Freie Demokratische Partei, FDP).

The legislative changes to the unemployment benefit system are part of a series of legislative initiatives taken by the 'red-Green' government on the basis of proposals for changes to the social security system put forward by the Hartz Commission in 2002 (DE0209205F).

Statutory protection against dismissal

With effect from 1 January 2004, the statutory provisions on protection against dismissal- a system of restrictions on the lawfulness of termination of employment by the employer, laying down for example the valid grounds for dismissal (DE0304204F and DE0306108F) - will apply only to employees employed in companies or enterprises with more than 10 employees (apprentices are not counted in calculating workforce size and part-time employees are counted only proportionally). Prior to 31 December 2003, the statutory protection against dismissal had covered employees in all companies with more than five employees - as a result of a reform of the Protection Against Dismissal Act (Kündigungsschutzgesetz) introduced by the red-Green coalition government which had come into effect on 1 January 1999 (DE9901291N). Employees in companies with more than five but fewer than 11 employees, however, will keep their statutory protection if employed before 1 January 2004.

Changes to unemployment benefit system

With effect from 1 January 2004, a number of changes concerning unemployment benefit have come into force.

To be entitled to unemployment benefit, all unemployed people must have made compulsory contributions to the unemployment insurance scheme for a minimum of 12 months. Those doing their military service or community service as an alternative to military service are insured for unemployment during this period. However, as the existing provisions which exempted those doing their military or civilian service from the requirement for 12 months' contributions have now been repealed, such service alone will not result in an entitlement to unemployment benefit. Seasonal workers, who previously needed only six months of contributions, will also now have to cover the full 12 months of contributions.

The period prior to unemployment, within which these 12 months of insurance contributions must have been made (the 'Rahmenfrist'), will now be reduced from three to two years. Furthermore, there will no longer be exceptions to this rule for self-employed people or people caring for a relative at home. These groups will be given the opportunity to pay unemployment insurance contributions on a voluntary basis in order to maintain or to reach their entitlements.

These various amendments are likely to result in fewer unemployed people being entitled to unemployment benefit.

The maximum period for receipt of unemployment benefit was previously set at 12 months for unemployed people up to the age of 44 years, 18 months for those aged 44-47 years, 22 months for those aged 47-52, 26 months for those aged 52-57, and 32 months for those over 57. With the intention of reducing benefit payments and making early retirement more difficult, the periods of receiving benefit are now to be reduced, especially for older people, as set out in table 1 below.

Table 1. New periods of entitlement to receipt of unemployment benefit
Minimum period of compulsory insurance payments Period of receipt for unemployed people aged under 55 Period of receipt for unemployed people aged over 55
12 months 6 months 6 months
18 months 9 months 9 months
24 months 12 months 12 months
30 months 12 months 15 months
36 months 12 months 18 months

There is a transition period of 25 months - ie these reduced entitlement periods will fully affect all those claiming unemployment benefit from 1 February 2005 onwards.

The sanctions against unemployed people who do not comply with their various obligations in accordance with the conditions governing the receipt of unemployment benefit will be tightened and streamlined.

With effect from 1 January 2004, the current Federal Employment Service (Bundesanstalt für Arbeit, BA) will be restructured (DE0203204F) and renamed the Federal Employment Agency (Bundesagentur für Arbeit).

The current unemployment benefit will be renamed 'unemployment benefit I' (Arbeitslosengeld I), with a new 'unemployment benefit II' (Arbeitslosengeld II) created by merging the current unemployment assistance and social assistance schemes (see next section).

Merger of unemployment assistance and social assistance

Unemployment assistance, unlike unemployment benefit, is financed not by insurance contributions but by the federal government from general tax revenues. Unemployment assistance is granted to all unemployed people who are not eligible for unemployment benefit. It is, however, means-tested and since 1 January 2003 recipients of unemployment assistance have had to rely more heavily on savings or the individual income or assets of their partners. Unemployment assistance currently amounts to 53% of previous net income or, if the recipient has a child, to 57%.

However, with effect from 1 January 2005 unemployment assistance will be merged with the general social assistance scheme to create 'unemployment benefit II', and effectively abolished in its current form.

The new unemployment benefit II will apply to all recipients of the current unemployment assistance and all recipients of social assistance who are considered fit to work. Those who are not considered fit to work will be eligible to a new social benefit (Sozialgeld). Both benefits require an eligibility test to determine whether the claimant is in need of financial assistance. This means test includes the income and assets of spouse or partner. Compared with the current practice, the means test will be further tightened to include private old-age pension provisions above a certain minimum.

The amount of unemployment benefit II will, unlike unemployment assistance, no longer be related to the former income of the recipient. It will be set at a fixed rate at the same level as the new social benefit. There will be additional payments for any children in the household of the recipient or partners who are in need of financial assistance - see table 2 below. 'Reasonable' costs for housing and heating will be paid on top of this amount.

Table 2. Monthly rates of unemployment benefit II and social benefit (Sozialgeld) (in EUR)
. Recipient Extra for children aged up to 14 Extra for children aged 14-18 Extra for partner
% of basic benefit 100% 60% 80% 90%
Western Germany 345 207 276 311
Eastern Germany 331 199 265 298

People in receipt of unemployment benefit II who had been receiving unemployment benefit I before entering into the new scheme will receive a staged supplement to compensate partly for financial losses. This supplement will be halved after a year and expire after two years.

Recipients of unemployment benefit II will be covered by statutory health insurance and the statutory pension scheme.

Recipients of unemployment benefit II will now have to accept every legal job offer regardless of pay, even this if it is not based on or related to collectively agreed rates. This provision was introduced in the final stages of the legislative procedure and reflected the demands of the conservative and liberal opposition as well as the Confederation of German Employers' Associations (Bundesvereinigung der deutschen Arbeitgeberverbände, BDA). If the recipient refuses to accept such a job offer, their unemployment benefit II will be cut by 30% - ie approximately EUR 100 a month - and for those in receipt of a compensation payment to bridge the gap from the former unemployment benefit I, this payment will be stopped. If the recipients are under the age of 25 they will not receive any payments for three months.

The gender dimension

In its explanatory statement on the draft bill to merge the unemployment assistance and social assistance schemes, the government stated that the principle of equal opportunities for men and women was to be pursued consistently. However, the new provision, whereby only contributions during the last two years - instead of the last three - will be taken into account when assessing eligibility for unemployment benefit I, is likely to hit women especially, because they are more likely than men to have interrupted work biographies and are more likely to be in charge of the home care of relatives.

The further tightening of the means-testing criteria determining the level of need are also of particular importance to women. Even in 2002, about 34% of unemployed women in western Germany and 20% of unemployed women in eastern Germany were not eligible for unemployment assistance because of their partner's income or assets.

In particular in eastern Germany ,where 50% of unemployed women received unemployment assistance in 2002, the new unemployment benefit II will affect many women. However, as 20% of women in receipt of unemployment assistance receive less than EUR 300 a month, the new unemployment benefit II could also have positive effects for a number of women.

Views of employers, unions and welfare associations

In the course of the debate on the new labour market legislation, the Confederation of German Employers' Associations (BDA) had welcomed the merger of unemployment assistance and social assistance in principle, but criticised the fact that recipients of unemployment benefit II would be covered by the statutory pension scheme and demanded that recipients of this benefit should have to accept every legal job offer, even at pay levels below collectively agreed rates. In reaction to the final compromise, the chair of BDA, Dieter Hundt, thus welcomed the increased pressure on unemployed people to accept job offers. However, BDA criticised the fact that the relaxation of the statutory protection against dismissal did not meet the expectations of employers. BDA would have liked the statutory protection threshold to have been raised even higher.

The trade unions had opposed all relaxation of the statutory protection against dismissal and most of the changes to the unemployment benefit system. In the run-up to the final parliamentary compromise, however, their concerns became more focused on possible legislative changes to the collective bargaining system (DE0312202F). Therefore the chair of the Confederation of German Trade Unions (Deutscher Gewerkschaftsbund, DGB), Michael Sommer, expressed satisfaction that this finally did not happen. Jürgen Peters, the chair of the German Metal Workers Union (Industriegewerkschaft Metall, IG Metall) called the absence of changes to the bargaining legislation a success for the trade unions. Both Mr Sommer and Mr Peters criticised, however, the loosening of the statutory protection against dismissal and the obligation on unemployed people to accept every legal job offer if they are to maintain their full benefit. DGB fears that the latter provision might lead to 'wage dumping'. This criticism was shared by other union leaders, for example the head of the United Service Union (Vereinte Dienstleistungsgewerkschaft, ver.di), Frank Bsirske, who called the result of the parliamentary negotiations a 'compromise at the expense of unemployed people and employees', and the chair of the Mining, Chemicals and Energy Industrial Union (Industriegewerkschaft Bergbau, Chemie, Energie, IG BCE), Hubert Schmoldt, though on the whole he praised the cross-party compromise, calling it an 'important signal' for a necessary reform process in Germany.

The Joint Welfare Alliance (Der Paritätische Wohlfahrtsverband, DPW) and the German Association for Child Protection (Deutscher Kinderschutzbund) are worried that the new unemployment benefit system will lead to increased child poverty. A study by DPW has found that a new unemployment benefit II at the same level as the current social assistance will increase poverty. DPW fears that the number of children and young people who have to live on benefits at the level of social assistance will increase from current 1 million to 1.5 million (ie 10% of all children and young people in Germany).


The government regards the new legislation as a major instrument to support an economic upswing which will lead to more employment. Even the BDA employers' confederation, however, doubts that the loosening of the statutory protection against dismissal will have any positive employment effect. It remains to be seen whether the changes in unemployment benefit will statistically decrease the unemployment figures or lead to more employment. One aim of restructuring unemployment benefit is to expand the 'low-wage sector' of employment. The full consequences of the new law, however, will only become apparent after the merger of unemployment assistance and social assistance comes into force in 2005. (Heiner Dribbusch, Institute for Economic and Social Research, WSI)

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