Restructuring of a business in Germany – an overview

Where restructuring measures comprising collective redundancies become necessary, the employer must fulfil a number of legal requirements to successfully implement such measures. While it is sometimes tempting to implement the necessary restructuring in a way that ignores the various legal requirements (e.g. co-determination of the works council etc.), there are only exceptional situations in which such a way does not lead to a total failure of the original plan. For the employer, unlike for the employees, there is usually no alternative than to adhere closely to the rules of the law, which requires financial preparation, a solid planning, open communication and clear execution.

The most important legal issues are the works council’s consultation rights. The usual time frame for such consultations is 3 to 6 months, which can even be exceeded if the negotiations become complicated. However, a well-prepared employer will be able to control the situation and to limit delays to the process beyond the usual time frame to a minimum. Typically, the employer is forced by financial circumstances to undertake restructuring measures, albeit this is not a requirement. The main financial risks in restructuring measures are the length of the negotiation/implementation phase (with associated remuneration costs) and the amount of severance compensation. In order to keep both risks as small as possible, an employer should prepare the restructuring in great detail and give as much information as possible when informing the works council. This will limit delays to the consultation process and improve the negotiation atmosphere. The employer is obliged to inform the works council as soon as the restructuring is seriously planned, and before a final decision has been made.
Moreover, the employer is legally bound to negotiate with the works council about the restructuring measures to be taken with a view to reaching a so-called balance of interests agreement (Interessenausgleich). Even though there is no legal duty to come to such an agreement, the employer is banned from starting the implementation of the restructuring (e.g. by issuing termination notices) unless the negotiations with the works council end in agreement or have finally broken down. Furthermore, the employer and the works council must agree on a severance plan (Sozialplan) for all employees affected by the restructuring in order to provide compensation for the financial prejudice sustained by staff as a result of the envisaged restructuring measures.

Another important issue relates to the European Directive relating to collective redundancies (Mass Dismissal Directive) which also requires as prior information and consultation with employees’ representatives and the Employment Administration (Agentur für Arbeit).

In addition, individual protection of employees against dismissals has to be considered and dealt with, as even after successful agreement of collective agreements each affected employee can bring an unfair dismissal claim at the employment courts. A dismissal for business reasons is justified if the employer can prove that the employee’s function does not exist anymore, e.g. due to the closure of a production line or due to restructuring and downsizing of a working area. In addition, the employer must prove that he made the selection of those employees dismissed according to social criteria. This selection takes place among all employees at a site working on the same hierarchy level and having similar job qualifications. The social data to take into account are age, time of service at the company and family data such as the number of dependent children. It is important to note that a dismissal which is not valid under these legal criteria is void and the employee has the right to be reinstated.

The crucial point in each such reorganization is therefore to ensure that the employees remaining in the business are the right employees in terms of skills, willingness to perform and personal ability, while at the same time respecting in particular the above requirements of the information and consultation procedure and the social selection process.