Study examines employment effects of statutory protection against dismissal

In March 2003, Germany's WSI research institute presented the findings of a survey-based study on the termination of employment relationships and the effects on employment of statutory protection against dismissal. In the light of government plans to reduce this statutory protection, WSI concludes that there is no evidence that the existing rules present obstacles to more employment and that most terminations of employment do not lead to either legal disputes or compensation.

On 13 March 2003, the Institute for Economic and Social Research in the Hans Böckler Foundation (Wirtschafts- und Sozialwissenschaftliches Institut in der Hans-Böckler-Stiftung, WSI) presented the findings of a survey-based study on the termination of employment relationships and the effects on employment of Germany's statutory protection against dismissal ('Die Beendigung von Arbeitsverhältnissen: Wahrnehmung und Wirklichkeit', Harald Bielenski, Josef Hartmann, Heide Pfarr and Hartmut Seifert, in Arbeit und Recht, 3/2003). The context was the recent government announcement of plans to reduce statutory protection against dismissal (DE0303105F) and claims by supporters of such amendments to the Protection Against Dismissal Act (Kündigungsschutzgesetz) that the law imposes too great a burden on employers, thus preventing the recruitment of additional personnel. The study finds that most terminations of employment relationships do not result in legal disputes and that there is no evidence that the current statutory protection against dismissal represents a considerable financial risk for employers desiring to recruit additional personnel.

WSI conducted the study in cooperation with Infratest Sozialforschung, an institute which carries out polls. The research was based on a survey amongst 2,407 employees whose employment relationship had come to an end between September 1999 and November 2000. It focuses on the terms and conditions under which employment relationships end and the effects of statutory protection against dismissal.

Volatile labour market

In response to claims that the current legal situation damages labour market flexibility, the study takes a closer look at labour market data. Figures provided by the Institute for Employment Research (Institut für Arbeitsmarkt- und Berufsforschung, IAB) show that between 1996 and 2001 labour turnover in Germany ranged between 10% and 13% of overall employment, ie between 3.5 million and 4.5 million jobs were terminated and an equal number of employees were given new contracts.

As a general trend, labour turnover is linked to the size of the establishment, - see table 1 below. The greatest labour turnover is found in workplaces with up to five employees. Whether this is due to the fact that these establishments are below the current five-employee legal threshold for statutory protection against dismissal remains in question because in the category of establishments with six to nine employees, which is above this threshold, a somewhat lower but nevertheless above-average labour turnover is found.

Table 1. Labour turnover rate, first half of 2001
Size of establishment Labour turnover rate* (%)
Up to 5 employees 19.3
6-9 employees 15.5
10-19 employees 13.6
20-49 employees 13.2
50-99 employees 12.7
100-199 employees 11.5
200-499 employees 12.5
500 and more employees 9.4

*Labour turnover rate is calculated as the sum of all terminations of employment and all recruitments divided by the mean number of employees.

Source: Bielenski et al 2003.

Reasons for termination of employment

According to the Infratest/WSI survey (see table 2 below): 38% of all terminations of employment result from resignations by employees; 32% result from dismissals; 10% follow a mutual agreement between employee and employer to terminate employment (Aufhebungsvertrag); and 20% are due to the expiry of fixed-term contracts. Fixed-term employment therefore plays a major role in the termination of employment.

Table 2. Reasons for termination of employment
Resignation 38%
Dismissal 32%
Expiry of fixed-term employment 20%
Mutual agreement to terminate employment 10%

Source: Bielenski et al 2003.

Involvement of works councils and legal disputes

The study also looks at the involvement of representative structures such as works councils or (in the public sector) staff councils. Only 10% of establishments in Germany have either of these representative structures. Nevertheless these establishments employ about 50% of the overall workforce. The law requires the employer to inform the works or staff council prior to any dismissal. The works council then has the right to object to the dismissal under certain conditions.

Only 25% of those respondents who had been dismissed stated that the works or staff council had been consulted by the employer. In 56% of all cases, there was no such consultation because no such elected bodies existed. In establishments with works or staff councils: 60% of respondents reported that the works or staff council had been consulted by the employer; 30% of respondents did not know whether these bodies had been involved; and 10% declared the works or staff council had not been consulted. Even where works or staff councils had been consulted, only 25% of all dismissals had been followed by an objection.

Only 11% of all respondents who had been dismissed stated that they had filed an application for protection against dismissal at the relevant court. Given the 1 million dismissals per year, this would represent 100,000 applications for protection against dismissal. This finding differs from figures issued by the former Federal Ministry of Labour and Social Affairs (Bundesministerium für Arbeit- und Sozialordnung, BMA), which indicate that some 250,000 applications are filed per year. This difference may partly be explained by the fact that cases which ended with reinstatement are not included in the Infratest/WSI figures. Furthermore, respondents who had finally reached a mutual agreement with the employer to terminate their employment may have answered accordingly in the survey without indicating that they had filed an application for protection against dismissal previously.

Compensation

One argument in the discussion about the statutory protection against dismissal is that the current legal situation tends to result in high compensation in the case of dismissals and therefore has a prohibitive effect on the willingness of employers to hire personnel. The WSI study, however, found that only 10% of all terminations of employment involved compensation.

Of those respondents who had been dismissed, only 15% stated that they had received compensation. This includes compensation as a result of a 'social plan' (Sozialplan- a special works agreement to compensate or reduce economic disadvantages for employees in the event of a substantial alteration to the establishment or in cases of bankruptcy).

Of those 10% of all respondents who had terminated their employment by mutual agreement, only 34% had been compensated.

The level of compensation varies considerably, but in the majority of cases where compensation was paid (58%) it did not exceed a payment equivalent to six month's salary - see table 3 below.

Table 3. Level of compensation for termination of employment
Amount Share (in % of all recipients)*
< 1 month's salary 8
1- <2 month's salary 17
2- <3 month's salary 12
3- <6 month's salary 21
6- <12 month's salary 22
12 month's salary and more 19
No answer 2

*Percentages do not add up to 100 because of rounding effects.

Source: Bielenski et al 2003.

The study found that the level of compensation is primarily related to length of service. The likelihood of receiving compensation seems, however, to be associated with formal education. Employees with a university degree are six times more likely to receive compensation worth more than six month's salary than those without any formal training. The probability of receiving higher compensation is twice as high in western Germany as in eastern Germany.

Commentary

The Infratest/WSI-survey does not lend support to the view that the current statutory protection against dismissal prohibits labour market flexibility. The number of terminations of employment remains consistently high. Furthermore, there is no indication that increasing the workforce-size threshold above which statutory protection against dismissal is granted, and thus releasing employers in small enterprises from the obligations involved, might stimulate their willingness to extend employment. From an employee's point of view; given the small number of cases where any compensation is granted and the modest amounts involved in those cases on average, one could argue in favour of a reform of the current statutory protection against dismissal to strengthen the rights of employees in the event of dismissal, thus helping more employees to keep their job. (Heiner Dribbusch, Institute for Economic and Social Research, WSI)

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