Dismissals for Business Purposes

Job restructurings in Germany rarely go through easily – both in the human factor sense and in the legal sense. In the vast majority of cases, dismissals are brought before court, becoming subject to strict legal scrutiny and calling for detailed elaboration on part of the employer. Following cost-benefit-analysis, it has become common practice to conduct settlement negotiations early on, shortening the legal process and resolving the case at tolerable costs. Below we provide some generic guidelines on how to optimise outcomes when going about this.

Legal Justification

The starting point for any strategy is the legal merit of the dismissal. Firstly, there is the assessment of whether the employee in question is eligible for general termination protection. General termination protection is granted by the German Unfair Dismissal Act to all employees that (1) have been with the employer for at least six months and that (2) work at a business unit (typically the office / plant) which comprises more than ten employees (a figure of five employees applies for employees that were hired before 1 January 2004).

If the employee fulfills these requirements, the dismissal in turn requires the following:

• The employer must represent what tasks have been carried out by the employee and why they have become redundant. A legitimate employer concept may be the closure of the respective office or business sector, the outsourcing of tasks to a third party provider or the general scaling-down of activities in order to increase profits. To the contrary, the employee may not simply be replaced by a new hire. Also, if some of the tasks will effectively be carried on by colleagues, the employer must demonstrate in detail that this does not overstrain the contractual working time of these colleagues

• As a second requirement, the dismissal is not justified if any vacant job position is available within the company (including at other offices / plants, excluding positions at separate legal entities) – even if its terms (such as compensation) are less favourable.

• When dismantling a job position, the employer has no free choice on which employee may be dismissed. Instead, the employee to be dismissed has to be determined within a "social selection" process. This requires establishing a group of employees that are interchangeable with regard to their job qualification. Among this group, only the employee with the least eligibility for social protection may be dismissed. The comparison mainly looks to company seniority, age, number of dependents and disability.

It is on the employer to substantiate the relevant facts. Courts interpret the requirements generally rigidly in favour of the employee. While some cases may be clearly in favour of the employer (e.g. the closure of an entire plant leaves little room for accommodations), employers frequently face uphill battles. In particular, redistributions of tasks within existing work-forces are difficult to accurately substantiate. In many cases, the actual implementation deviates from original planning, providing the employee with an argument that the whole concept is flawed.
Please note that the foregoing pertains to general termination protection only. In some cases employees will enjoy special termination protection, resulting e.g. from recognised disability, pregnancy or a membership in the works council ("Betriebsrat").

Litigation and Exposure

An employee that receives a notice of dismissal is required to bring suit within three weeks. If this deadline passes unchecked, the dismissal is deemed legally justified – no matter the circumstances. As a result, employees have to go before court simply to retain their rights.

The court proceedings begin with a conciliatory hearing which usually takes place within a month. This hearing aims at exploring possibilities of a settlement. Resulting from this purpose, the legal merit of the dismissal is at best briefly discussed. If the hearing ends unsuccessfully, the employer is requested to submit a written statement of defence, giving a detailed account on the dismissal's legal justification. The employee may then file a responding statement with differing factual and legal statements from his/her side. A few months after the conciliatory hearing, a second hearing will take place in which the dismissal is analysed in depth. If deemed appropriate, the court may schedule one or several follow-up hearings and query additional written statements before it renders its judgement.

The material exposure of both sides comes down to an "all or nothing". If the court deems the dismissal justified, the employee will have lost his/her job effective at the date specified in the dismissal notice. If the court deems the dismissal unjustified, the employer will have to treat the employee as if never dismissed. As such, the employer must reinstate him/her in the respective previous position and back-pay him/her for the full interim duration.

As the employee must be back paid, the financial exposure increases over time. Efforts to win the case in legal terms are typically time-consuming and may require unwelcome disclosures. At the same time, judges frequently look for weaknesses in the employer's legal reasoning and stress these in order to facilitate a settlement. The combination of these factors leads to the occurrence that the majority of cases are resolved by way of a mutual settlement, incentivising the employee to cede his/her job by way of a severance payment.

Negotiating a Settlement

The amount of severance payment is the cornerstone of most settlements. In common practice, severance amounts are determined as a mathematical product of the following:

1. the employee's total monthly gross compensation,

2. the years of company seniority, detailed down to months and

3. an additional variable factor. This additional variable factor typically ranges between 0.5 (lower end) and 1.5 (higher end), subject to negotiation.

Other key negotiables in any settlement are the end date, the question of whether the employee will be working for the duration of his/her employment or released on "garden leave", the content of the reference letter and further benefits such as outplacement.

Negotiation tactics are to a large extent guided by a consideration of the alternative outcomes, in particular the likelihood of the employee winning the case (i.e. the strength of his/her legal argument) and the scenario of the employee ultimately getting reinstated at the company. In a number of cases, employees will have finished mentally with their former workplace, especially if relationships with superiors/colleagues have suffered through recent events. In this setup employees will keep on litigating merely to maximize the terms of mutual separation. At some point the perspective to "accept back" the employee then becomes an effective threat by the employer that may lead the employee to soften his/her demands.

In general, it serves employers well to reach a settlement in the early stages of litigation. This will save significant resources going into the legal defence, which could become void spending in case a settlement is concluded later. On the other hand, two factors may weigh in favour of saving concessions up for a later time: The first is the "weariness-factor", meaning that the inclination to end the dispute will typically increase over time. While this pertains to both sides, the employer generally has more leverage to sustain a drawn-out process. The other factor is the effect on the remaining workforce. Fast concessions and other obliging actions can set adverse precedents for future cases. This risk should be mitigated with all means possible, including confidentiality agreements and penalties in case of violation.

Conclusion

In total, dismissals for business purposes are presented with legal challenges that are, from a cost-benefit-view, not always worth working through. Mutual settlements often provide for optimised outcomes, however they are subject to the legal risk assessment and further circumstances on a case-by-case basis. The timing and scope of concessions require careful navigation, reflecting both the situation of the employee and the effects on the remaining workforce.

If you have questions related to this topic please feel free to contact
Dr. Philipp Lammers (Lawyer)