What employers need to consider under employment law when restructuring

Organisational changes, economic pressure or digitalisation may make larger-scale staff reductions necessary within a company. This is usually a multi-stage process and should be planned and implemented carefully. Mistakes in planning, social selection, works council involvement or any required mass redundancy notification can have significant legal and financial consequences.

Staff reductions as part of restructuring: different options

Restructuring as such is not legally defined. It is generally understood as a process in which a company reviews and adjusts its business strategy, organisation and processes in order to respond to changing market conditions.

Where restructuring involves reducing headcount, there are various options available, some of which are subject to strict legal requirements:

• dismissals for operational reasons,
• consensual solutions, such as termination agreements and voluntary programmes, and
• early retirement arrangements.

It is important for companies to understand these different options and use them appropriately.

Dismissals for operational reasons, including on a larger scale

Dismissals for operational reasons are also possible on a larger scale in connection with restructuring, provided the statutory requirements are met.

Basic statutory requirements

The law imposes strict requirements on dismissals for operational reasons in order to prevent arbitrary job cuts. These requirements must be examined and satisfied in each individual case.

There must be:

• an urgent operational requirement for the dismissal,
• resulting in the permanent elimination of the need for employment, and
• no reasonable possibility of continued employment for the specific employee concerned.

The dismissal must genuinely be the last resort in order to achieve the company’s operational objectives.

Note: Another important aspect is special protection against dismissal. In particular, pregnant employees, employees on parental leave, severely disabled employees and employees treated as equivalent to severely disabled employees, as well as works council members, enjoy additional special protection against dismissal. This can make a dismissal for operational reasons significantly more difficult or even impossible.

In addition to the statutory requirements: social selection

In addition to the statutory requirements for a dismissal for operational reasons, the employer must carry out a proper social selection under Section 1(3) of the German Protection Against Dismissal Act if there is a group of comparable employees and not all of them are to be dismissed.

The social selection within a group of comparable employees is based on the statutory criteria:

• length of service,
• age,
• maintenance obligations, and
• severe disability.

Works council hearing, reconciliation of interests and social plan in the event of operational changes

A works council, where one exists, should — and in many cases must — be involved in the restructuring process.

The works council must be consulted before every dismissal. Otherwise, the dismissal is invalid under Section 102 of the German Works Constitution Act.

The employer must inform the works council in good time and comprehensively, and must consult with it on the planned personnel and structural changes. This concerns, on the one hand, the so-called reconciliation of interests in relation to the restructuring itself and, on the other hand, the social plan designed to mitigate or compensate for the economic disadvantages suffered by employees.

Note: If a reconciliation of interests with a list of names specifies which employees are to be dismissed, it is presumed that the dismissals are justified by urgent operational requirements. In that case, the social selection can only be reviewed for gross errors.

Mass redundancies: what additional requirements apply?

The obligation to file a mass redundancy notification applies only to medium-sized and large establishments. Even in establishments with generally more than 20 and fewer than 60 employees, dismissing more than five employees within a period of 30 calendar days triggers a statutory duty to file a mass redundancy notification under Section 17 of the German Protection Against Dismissal Act.

Note: Under Section 17 of the German Protection Against Dismissal Act, dismissals are treated in the same way as “other terminations of employment initiated by the employer”. This means that a mass redundancy notification may also be required where several termination agreements and dismissals are involved.

In the restructuring process, a mass redundancy has three main employment law consequences:

1. Section 17(2) of the German Protection Against Dismissal Act expressly requires the employer to provide an existing works council with “appropriate” information about the mass redundancy and to inform it in writing. On this basis, employer and works council are to enter into consultations in order to discuss possible ways of avoiding dismissals or mitigating their consequences for those affected.

2. The employer must also forward a copy of the notification to the works council to the Employment Agency. If the works council’s statement is missing, where a works council exists, the notification is invalid — and the relevant dismissals are invalid as a consequence.

3. The employer must also comply with the so-called waiting period under Section 18 of the German Protection Against Dismissal Act. Under this provision, dismissals notified to the Employment Agency only become effective after the expiry of a blocking period.

This makes clear that dismissals which may in principle be legally possible can stand or fall with a substantively and formally correct mass redundancy notification. For this reason, the utmost care is required in this area.

Alternatives to dismissal: termination agreements, voluntary programmes and early retirement

Personnel measures in restructuring processes do not have to be implemented solely through dismissals for operational reasons. Employers can also adjust the company’s personnel structure through:

• voluntary termination agreements, severance programmes or voluntary programmes,
• early retirement models, or
• transfer solutions.

You can find our article on “newplacement” here: Newplacement – how employers can make departures easier for employees.

Termination agreements and voluntary programmes

A termination agreement makes it possible to end an employment contract by mutual agreement at the desired point in time. However, a termination agreement depends on the employee’s participation and is therefore not “enforceable” in every case. In practice, however, a severance payment is often the decisive argument for employees to agree to termination.

Where a termination agreement is concluded, the advantages are obvious. The employment relationship is ended in a legally secure and reliable manner, and court disputes are generally not to be expected — unlike in many cases involving dismissals for operational reasons.

An alternative to dismissals for operational reasons is a voluntary programme in the form of a works agreement. This is possible only in companies where a works council exists. Under such a programme, the employer offers employees the opportunity to end their employment relationship by way of a termination agreement.

These programmes make it possible to offer different groups of employees different packages, which may be more or less attractive. If structured carefully, this allows the employer to reshape the personnel structure by making departure more attractive for certain employees, while offering less attractive terms to others in order to retain them.

As with individually negotiated termination agreements, the advantages are clear. Social selection is not required, and lengthy unfair dismissal proceedings are generally avoided. This is beneficial in terms of both cost and planning certainty.

Note: When selecting participants for such programmes, the principle of equal treatment and the prohibition of discrimination must be observed. Any different treatment of comparable employees must therefore be objectively justifiable.

Early retirement models

Particularly in companies with an older workforce structure, various models may be considered that enable older employees to leave active employment before reaching the regular retirement age or to significantly reduce their working hours.

Possible options include:

• phased retirement, including block models, and
• time credit accounts or long-term working time accounts, allowing employees to be released fully or partly from work before the official start of retirement.

Transfer solutions

In addition to the more or less immediate termination of employment relationships through dismissals for operational reasons or various forms of consensual termination, there are also different transfer solutions designed to help employees move into new employment with as little interruption as possible.

Transfer measures are generally short-term support services provided while the employment relationship still exists, such as:

• application support,
• outplacement advice,
• assistance in finding new employment opportunities, or
• qualification and training measures for departing employees.

Transfer companies operate differently. In this model, companies establish organisationally independent units into which employees move where the employment relationship with the original employer is to end. For a limited period, employees receive further training and job search support there and may receive transfer short-time work allowance for up to twelve months.

Conclusion: plan restructuring and staff reductions at an early stage

There are many ways to adjust the personnel situation as part of a restructuring process, but the employment law hurdles are often high.

Employers should therefore be aware of the different options available and assess whether they can be applied in their own company. The first step is to make the relevant business decision, then derive the necessary and suitable employment law measures from that decision and, with professional support, define as concrete an implementation plan as possible.

Answers to frequently asked questions (FAQ):

When does restructuring become particularly relevant from an employment law perspective?

Restructuring becomes particularly relevant under employment law when it involves personnel measures, such as job cuts, transfers or a fundamental change in the organisation of the business. Depending on the scale of the measures, individual protection against dismissal, works council participation rights, social plan obligations and mass redundancy requirements may all become relevant.

Does an employer always have to carry out social selection when reducing headcount?

No. Social selection is required in particular in the case of dismissals for operational reasons where several comparable employees could be considered for dismissal. The relevant criteria are length of service, age, maintenance obligations and severe disability. In the case of consensual solutions, such as termination agreements or voluntary programmes, social selection in the same sense as for a dismissal for operational reasons generally does not apply.

When must a mass redundancy notification be filed?

The obligation depends on the size of the establishment and the number of terminations planned within a period of 30 calendar days. It is not only dismissals that may be relevant. Other employer-initiated terminations of employment, such as termination agreements, may also count towards the thresholds under Section 17 of the German Protection Against Dismissal Act.

What alternatives are there to dismissal for operational reasons?

In addition to dismissals, employers may consider termination agreements and voluntary programmes, early retirement models and transfer solutions. These approaches pursue different objectives. Termination agreements and voluntary programmes are based on consensual termination, early retirement models can enable a gradual or early exit, and transfer measures or transfer companies are designed to facilitate the transition into new employment.