Shutdown of a Business in Germany

Transcription

1 Shutdown of a Business in Germany Anke Kuhn ems Rasche Sigle l<rankhaus 1, 1m Zollhafen Kaln Tel: Fax: anke.kuhn@cms-hs.com

2 Outline I. Introduction 2 H. Special Issues to Be Considered 2 1. Applicability of the Act Against Unfair Dismissal 2 2. Shutdown as an Urgent Business Reason 2 3. Notice Period 2 4. Written Form 3 5. Participation of the Works Council 3 6. Social Selection 4 7. Special Dismissal Protection 4 HI. Reconciliation of Interest/Social Plan 5 1. Change of Business/Shutdown of Business 5 2. Participation of the Works Council 5 3. Reconciliation of Interest 5 4. Legal Consequence if no Reconciliation of Interest is Concluded 6 5. Social Plan 6 6. Severance Pay in Social Plan 7 7. No Right to Strike 7 IV. Caveat (When No Works Council is Established yet) 8 V. Court Proceedings 8 1. Three-Week Period 9 2. Decision by the Court 9 3. Severance Pay 9 a. Mandatory Severance Pay 9 b. Optional Severance Pay 9 VI. Summary 10

3 Shutdown of a Business in Germany I. Introduction The shutdown of a business means the definitive finish ofbusiness activity and the dissolving ofbusiness organisation. The shutdown of a business must involve the organizational and areal entity, but it may not be temporary. II. Special Issues to Be Considered Every time an entire site is shut down, there are special issues to be considered in order to rightfully tenninate the existing employment contracts: 1. Applicability of the Act Against Unfair Dismissal The Gennan Act Against Unfair Dismissal is applicable on a mandatory basis whenever there is a tennination in a business with five or more employees and the employment relationship lasted longer than six months. 2. Shutdown as an Urgent Business Reason Only if there is an actual shutdown of the site, the tennination of the existing employment contracts will be justified by legitimate urgent business reasons. A shutdown under German law is accepted by the courts, when the employer stops its economic activity pennanently or for an indefinite, but economically relevant time. If these standards are not met, the courts will not accept the situation as a shutdown of the site, but rather as a fom1 of a transfer of the undertaking. This would result in an unlawful dismissal of the employees and thus the employees would have a right to be reinstated. It is however sufficient, when, at the time the notice of telmination is given, it is to be expected under a rationally economic view that at the end ofthe notice period the grounds oftennination will be matched. 3. Notice Period The notice period for every employee is detem1ined individually on the basis of the employees' seniority. The length of a notice period is detennined on the basis of the Gennan Civil Code. The legal notice periods according to the provision are as follows: When the employment relationship lasted shorter than a period of 2 years: 4 weeks notice period/employee can either be notified ofhis/her tennination until 15 th /or end of the month 2

4 It It When the employment relationship lasted longer than 2 years but shorter than 5 years: 1 month notice period/employee can only be notified ofhis/her tennination by the end ofthe month When the employment relationship lasted longer than 5 years but shorter than 8 years: 2 months notice period/employee can only be notified of his/her tennination by the end ofthe month It When the employment relationship lasted longer than 8 years but shorter than 10 years: 3 months notice period/employee can only be notified of his/her tem1ination by the end ofthe month It When the employment relationship lasted longer than 10 years but shorter than 12 years: 4 months notice period/employee can only be notified of his/her tem1ination by the end ofthe month It When the employment relationship lasted longer than 12 years but shorter than 15 years: 5 months notice period/employee can only be notified of his/her tennination by the end ofthe month It When the employment relationship lasted longer than 15 years but shorter than 20 years: 6 months notice period/employee can only be notified ofhis/her tennination by the end ofthe month It If the employment relationship lasted longer than 20 years there is a notice period of 7 months/ employee can only be notified ofhis/her tennination by the end ofthe month Notice periods can also be individually stipulated in the employment contracts. They may, however, only grant the parties a longer notice period than the statutory one. Shorter individually stipulated notice periods in an employment contract will not be accepted by comis and the more favorable statutory notice period will be applied on the case in question. Hence if all employment contracts shall expire on the same day, they have to be detennined individually for every employee. 4. Written Form The notice of tennination has to be canied out under all circumstances in writing. An notifying the employee of the tennination will not meet the statutory standard and thus will not make the tennination effective. The document must/should contain: It It The point in time when the employees' contract is to be tem1inated (must) The reason ofdismissal (should) In any case the tennination has to be stipulated clearly and precisely. Finally the notice of termination has to be signed by the employer or by a person that is authorized to represent the employer. 3

5 5. Participation of the Works Council in Advance of Terminations In the case of tennination (i.e. in the case of the absence of an agreement with the employee) the works council must be heard, as in the case of any dismissal. The hearing may be done in the course of the negotiation on the balance of interests, but not before the negotiations have started. 6. Social Selection When the complete site is closed at once, no social selection will be necessary. If the tennination is executed in several steps, a social selection will be necessary during every step ofthe tennination. During the social selection the employees will be graded according to their social status and only those employees with the strongest social status can be tenninated at the time. Seniority, number of dependents and age has to be taken into account when the social selection is conducted. Therefore, we advise to tenninate if possible - the entire site at once in order to avoid having to conduct a social selection for every employee. 7. Special Dismissal Protection Under some circumstances there is a special dismissal protection, e.g. if a pregnant woman, a handicapped person or a person on parental leave is to be tenninated. In this case the competent authorities have to give their approval before giving notice to the respective employee. Handicapped employees may only be dismissed after a pennit of the local state authority has been obtained. Pregnant employees and those presently on maternity/paternity leave can only be dismissed after a pennit by the local authorities has been obtained. Usually, a time span of about 1 to 2 months must be taken into account between applying for and issuing ofthe pennit. Members of the works council may only be dismissed for extraordinary reasons or in case of a total closure of the business. They have the right to leave the business with the very last group of employees. In case of a partial closure, members of the works council have a right to continue to be employed within one of the remaining patis of the business. 4

6 Employees being drafted into the army, navy or civil service generally may be terminated only in case of closures (complete or partial) of a business. Holders of certain functions such as data protection officer, specialist for security questions may also only be tenninated in case of closures (complete or partial) of the business offor extraordinary cause. Some collective agreements also provide for specific recommendations with respect to dismissal protections. III. Reconciliation of Interest/ Social Plan In companies with a works council and more than 20 employees in the average, reconciliation ofinterest has to be negotiated between the employer and the companies' works council, whenever the company is to be shut down. Additionally a social plan may have to be negotiated with the works council. a 1. Change of Business The Gennan Works Constitution Act contains detailed regulations concerning changes in the organizational structure which could entail major disadvantages for the employees. The purpose of these regulations is to protect the employment and social position of the employees. Changes in the organizational structure of establishments are the following: reduction or shut-down ofthe whole business or essential parts thereof, relocation ofthe whole business or essential parts thereof, merger with other businesses, fundamental changes of work organization, business goals, or facilities, introduction offundamentally new work methods or manufacturing processes 2. Participation of the Works Council Pursuant to the Works Constitution Act any works council elected for the business is to already participate in the planning of changes in the business. Such participation should take place in advance of the re-organization at a time when the works council still has the possibility to not only state an opinion on the implementation and realization of the change of business, but also on the question of whether the change of business should be put in effect 5

7 after all. The works council may inspect the planning documents and, if need be, use external experts for its examination. The right ofdecision, however, remains with the employer. 3. Reconciliation of Interest The works council can demand the conclusion of an agreement on a reconciliation of interest relating to the nature and manner of the implementation of the business change. The reconciliation of interest deals in this respect with the question of whether the change of the business should take place at all, when it should be put into effect, and in which way it should be implemented. This reconciliation ofinterest gives the works council a right to negotiate. It is disputed whether the works council can demand that the change ofbusiness does not take place, e.g. by applying for a preliminary injunction, in the event that the negotiations on a balance ofinterests have not yet been concluded. Therefore, there is a risk that, if consultation and negotiations on the measures to be taken are not sufficient, the works council may demand that measures not be implemented at least until the negotiations come to an end. 4. Legal Consequence if no Reconciliation of Interest is Concluded If a reconciliation of interest is agreed upon, it does not result directly in economic costs for the employer. However, all negotiations with the works council on a balance of interests involve the danger for the employer of having to pay a compensation for disadvantages. This compensation for disadvantages is an amount awarded by the court to individual employees, ifthe employer deviates from a reconciliation ofinterest without any compelling reasons, or if he fails to attempt to agree on a reconciliation of interest with the reconciliation works council. An attempt to come to an agreement on a balance of interests means that the employer must exhaust all possibilities which can result in a reconciliation of interest. Under the case law, the employer is even obliged to submit to conciliation proceedings to avoid claims for compensation for disadvantages. The reconciliation of interest cannot be brought about by the works council against the employer's wishes, but should be diligently pursued by the employer, because of the above-mentioned financial sanctions. They may add up to a severance payment of a twelve month salary plus any other financial disadvantages the employee suffers from because being tenninated. 5. Social Plan Additionally a social plan must be set up, when the company employs more than 60 employees. It can be set up - if the employer and the works council agree on it - when there are less than 60 employees working in the company. The social plan is meant to make employees' economic losses socially tolerable for the individuals affected. Such a social plan usually fixes compensation payments for the employees in accordance with the calculation fonnulas contained therein. In addition, social plans can deal with hardship funds for special 6

8 payments and further benefits, e.g. compensation payments for the disadvantages arising from the change of job. The works council can bling about a social plan against the employer's wishes. If the works council does not agree with the employer, either party may tum to the conciliation board, which will generally meet with a labor judge acting as the chainnan. The award of the conciliation board is binding on both parties. In its decision, the conciliation board must take account on the one hand of the social interests of the employees concemed and, on the other hand, of the economic feasibility for the company. For this, the conciliation board has many possibilities of obtaining infonnation on the economic situation of the company in order to detennine the amount of social plan payments. Nevertheless, the entire matter ofplanning and implementing the change ofthe business is delayed thereby. 6. Severance Pay in Social Plan The amount of compensation is a matter ofnegotiation. Generally the calculation ofthe amount ofcompensation for the loss ofthe job is based either on a point system which, among other things, takes account ofthe employees' age, seniority, maintenance obligations, and severe disablement, or the amount ofcompensation is detennined by means of a fonnula taking account of such aspects. Costs for the employer will range from monthly salaries for each year of employment. A common fonnula for calculating the compensation is therefore: Duration ofemployment x gross monthly remuneration x It is therefore important for the company to first obtain clarity as to the social data ofthe employees to be given notice to tenninate, in order to evaluate appropriate calculation factors in the negotiations. In this connection it is possible that a collective agreement applicable to the company already sets out minimum amounts for compensation payments. 7. No Right to Strike The employees concemed do not have a right to strike. Such a strike would constitute a breach ofthe employment contract which may entitle the employer to tenninate the contract. Irrespective of the reconciliation of interests and the social plan, the requirements of the Act Against Unfair Dismissal have to be fulfilled in each and every individual case. In other words, the reconciliation of interests and the social plan do not automatically lead to valid individual dismissals according to the Act Against Unfair Dismissal. Nonetheless, it is usually easier for the employer to argue dismissal cases in couli where the aforementioned agreements have been concluded. 7

9 IV. Caveat (When No Works Council is Established yet) We strongly recommend not to infonn any of the employees about an intended shutdown of a company. Ifone chose to inform the employees about an intended shutdown, he would run the risk, that the employees constituted a works council. Considering the size ofthe company, this constitution could happen as fast as within a week. The constitution of a works council would involve rights of its co-determination during the shutdown process. The conduction of a reconciliation of interest as well as the conclusion of a social plan with mandatory severance pay would be the legal consequence of the existence of a works council. These developments would be time consuming and cost-intensive. V. Court Proceedings Should the employer and the works council not agree on a reconciliation of interest and/or the social plan, the dispute arising is carried out on a mandatory basis in front of the establishment-level arbitration committee. The ruling of the committee is binding for the parties. It can be appealed at the labor courts, but ultimately a final decision will be made. This process can be quit costly for the employer, as the law stipulates, that the employer has to bear all costs - including the works councils' costs - ofthe process. However, irrespective of the reconciliation ofinterests and the social plan, the requirements of the Act Against Unfair Dismissal have to be fulfilled in each and every individual case. other words, the reconciliation of interests and the social plan do not automatically lead to socially justified dismissals according to the Act Against Unfair Dismissal. Nonetheless, it is usually easier for the employer to argue dismissal cases in court where the aforementioned agreements have been concluded. Compare the details below: In There are general rules concerning dismissal proceedings in Germany: Usually there are no damages granted by courts in dismissal proceedings. There are no punitive damages. The invalidly dismissed employee may only claim re-instatement. There are no jury trials. There is no discovery or pre-trial. The proceedings are very speedy (average length of dismissal proceeding 111 1st instance: 3 months). 8

10 1. Three-Week Period There is a three-week period after receiving notice of tennination within which the employee may claim his re-instatement. The dismissal is deemed effective and can not be appealed, if the employee does not claim his re-instatement within the three-week period. 2. Decision by the Court The validity of the tennination is detennined by the court. The court can decides whether the termination was effective or not. In these cases damages are not awarded by the court. If the court holds that the tennination was valid, the employment relationship continues to be effective only until the end of the appropriate notice period. A justified extraordinary termination is confinned by the court. In these cases the court rules that the employment relationship was validly tenninated by the employer with immediate effect. If on the other hand the court deems a tennination as ineffective, it will find that the employment relationship continues, i.e. salary continues to accrue. Damages are not awarded to the employee in these instances. 3. Severance Pay a. Mandatory Severance Pay In some cases of an invalid dismissal of the employee the employer has to disburse a mandatory severance pay instead of the continuation of the employment relationship. These are nonnally cases of hardship. The employee must prove that the continuation of the employment relationship would be unbearable. If the couli shares the employee's point of view, it will declare the employment relationship tenninated and award the employee a severance pay. There is no legal limit for the amount of the severance pay. The courts, however, tend to grant 0.5 monthly salaries per year of seniority and nonnally not more than 12 months of salary. b. Optional Severance Pay In litigation cases it is quite common that the fonner employer agrees to an optional severance pay to the fonner employee. The employee then accepts the validity of his dismissal and agrees not to claim his reinstatement anymore. Usually this severance pay is in the range of 0,5 up to 1 gross monthly salary per year of seniority. There are however individual cases when a severance pay is not accepted by the employee. The employee will then try to be reinstated again. 9

11 VI. Summary In summary the employer has to pay attention to a lot of regulations and guidelines. The employer has to comply with the requirement ofthe notice period. The notice period for every employee is determined individually on the basis of the employees' seniority. In case of tennination the works council must be heard, as in the case of any dismissal. Besides in a companies with a works council and more than 20 employees in the average, a reconciliation of interest has to be negotiated between the employer and the companies' works council, whenever the company is to be shut down. Additionally a social plan may have to be negotiated with the works council. 10