Good news from Erfurt: social plans may cap severance payments

Judgment of the Federal Labour Court of 7 December 2021 in Case No. 1 AZR 562/20

Many employers wonder whether severance payment caps in social plans adopted to implement operational changes constitute an impermissible disadvantage for older employees. The grant of additional bonuses to employees who waive the right to bring an action for unfair dismissal also has employers on thin ice: is the separate works agreement effective or does it constitute a circumvention of the ban against making social plan benefits dependent on the waiver of the right to bring an action for unfair dismissal? Does a cap in the social plan also cover these bonuses? The Federal Labour Court (Bundesarbeitsgericht, BAG) recently looked at these and other essential operational issues.

Facts of the case

When closing a site, the employer and the works council concluded a social plan. The social plan capped severance payments at EUR 75,000. The works agreement (WA) concluded on the same day included a “waiver bonus” (also referred to as a “turbo clause”), which employees could claim if they did not bring an action for unfair dismissal. The WA contained neither a cap nor a clear reference to the rule in the social plan. The employee brought an action for unfair dismissal and was awarded the maximum amount of EUR 75,000. In addition, he claimed he had a right to the waiver bonus because it was not covered by the cap in the social plan. In addition, he argued that the settlement cap clause inadmissibly disadvantaged him because of his age, so he should have a claim to an “unlimited” settlement under the social plan.

The judgment

In contrast to the lower courts, the BAG upheld part of the claim and decided as follows:

• The cap in the social plan was not void because it disadvantaged older employees. This disadvantage is objectively justified by its legitimate aim. The cap on settlements is designed to ensure just distribution: given the limited social plan funds, all affected employees should be granted equitable bridging support. Without a cap on the severance payments, these funds would be exhausted from reaching settlements with older employees as such employees are generally entitled to higher severance pay.
• The waiver bonus in the WA was effective. In contrast to the judgments of the lower courts, the BAG held that there was no circumvention of the ban against making payments under the social plan dependent on a waiver of the right to bring an action for unfair dismissal. This stems from the interpretation of the WA. In addition, by granting settlements of up to EUR 75,000, the social plan redressed the economic disadvantage faced by the employees affected by the change in operations.
• The cap in the social plan does not affect the waiver bonus. As the WA does not cap the bonus, the BAG had to interpret whether the cap in the social plan also applied to the waiver bonus. The Court held that it did not. According to the BAG, any other interpretation would infringe the principle of equality under works constitution law because the employee who was entitled to the maximum severance under the social plan would not receive any further payment for waiving the right to bring an action for unfair dismissal. This would contradict the purpose of the waiver bonus.

Consequences for practice

The fact that the BAG chose not to follow the lower courts but considered the common practice of simultaneously negotiating the social plan and waiver bonus (in a separate WA) to be lawful is to be welcomed. To do this, the Court had to overturn its previous case law. In addition, the BAG provided clear requirements for an effective cap in social plans.

Practical tips

If employers wish to agree on a cap in the social plan and an additional waiver bonus with the works council, the following should be kept in mind:

• The social plan and waver bonus provisions should be kept formally separate:
• A separate budget (“pot”) should be set up for each type of payment and these payments should be calculated separately;
• The waiver bonus should be less than the severance cap
• If both payments are to be capped, the social plan and WA should contain separate rules for each (alternatively, fixed amounts can be agreed for the waiver bonus).
• Where there are caps in the social plan, the severance amounts should be assessed to confirm that they are still sufficient to mitigate the expected economic losses.

Dr Olga Morasch