Unavoidable personnel reduction – negotiation strategy tips for fast, creative and legally secure implementation
A frequently chosen means of reducing personnel costs during the crisis is short-time allowance. However, this can only be a temporary solution. Often, the only way out in the long term is to reduce the workforce.
Whether a pure personnel reduction constitutes a change in operations within the meaning of Section 111 BetrVG (German Works Constitution Act) and is therefore subject to the obligation of reconciliation of interests particularly depends on whether a certain threshold number of redundancies is exceeded with respect to a certain company size. These threshold numbers are based on Section 17 KSchG (German Protection Against Unfair Dismissals Act) and can be quantified as follows:
21 - 59 employees
at least 6 employees
60 - 499 employees
10 % or at least 26 employees
500 - 599 employees
at least 30 employees
companies with more than 599 employees
at least 5% of the employees
However, these thresholds are merely a guideline. Thus, in individual cases, a change in operations requiring participation may already exist if the number falls slightly below the threshold number. Dismissals include dismissals by the employer for operational reasons, notice given by the employees themselves initiated by the employer and the conclusion of (operational) termination agreements initiated by the employer. According to case law, however, it is not necessary for such dismissals to take place within 30 calendar days, as regulated in Section 17 KSchG. The only decisive factor is whether the personnel reduction with its respective individual steps is based on uniform planning by the employer. Case law affirms a deniable presumption of uniform planning if the reduction of personnel takes place in several steps, e.g. only a few weeks or months apart.
Companies can therefore avoid a change in operations requiring participation by falling below the threshold number or by the correct design of the entrepreneurial concept of the personnel reduction.
If the threshold number of the above-mentioned redundancies is exceeded in the case of a pure personnel reduction and the company generally employs more than 20 employees with voting rights and has a works council, it is obliged to inform the works council in due time and comprehensively about the personnel reduction and to consult with the works council on this. If the personnel reduction constitutes a change in operations pursuant to Section 111 BetrVG, the employer is also obliged to at least attempt to conclude a reconciliation of interests with the works council. In order for the employer to be able to implement the personnel reduction unilaterally (e.g. by giving notice of termination for operational reasons), it is therefore not decisive that a reconciliation of interests has been concluded beforehand; the employer must merely attempt to do so. If this has not been done, however, and employees are dismissed anyway, the employee can sue the employer for payment of compensation for disadvantages (Section 113 BetrVG) in the form of a payment. Such a payment may amount to up to twelve months' earnings. In the case of older employees with longer company seniority, this severance payment can even be up to 15 or 18 months' salaries. However, an attempt to conclude a reconciliation of interests in accordance with the law can only be assumed to have been made once this has also failed in the conciliation board. Companies should not spend too much time on free negotiations within the company, but should choose to go to the conciliation board as quickly as possible in order to have the tactical negotiation option of the failure of the attempt to reconcile interests there.
It is not necessary to conclude a social plan before unilaterally implementing a reduction in personnel. It may also be concluded subsequently. Whether a social plan can be enforced in the case of a pure personnel reduction is determined in particular by Section 112a (1) BetrVG, the threshold numbers of which - in contrast to the guideline in Section 17 KSchG - are mandatory:
up to 59 employees
20%, at least 6 employees
60 - 249 employees
20 % or at least 37 employees
250 - 499 employees
15 % or at least 60 employees
at least 500 employees
10%, at least 60 employees
The German Federal Labour Court (BAG, Bundesarbeitsgericht) has recognized that a so-called "collective bargaining social plan" can be "achieved by strike" by the trade union. The company must/should therefore achieve a situation of "non-blackmailability" before negotiations begin. This is because in companies or businesses with a high degree of employee organization, trade unions often use their negotiating power to "enforce" a "collective bargaining social plan" through strike action. In such an initial situation, it is advisable, for example, to maintain a "personnel reserve" in the company by using freelancers or to have or previously build up replacement production facilities in particular abroad in order not to be "susceptible to blackmail" in the event of a strike. Such "blackmailability" is particularly imminent in those industries where companies have to pay high contractual penalties if they cannot deliver their products/services on time due to strikes. In this context, however, the ban on strikebreaking in Section 11 (5) German Temporary Employment Act (AÜG, Arbeitnehmerüberlassungsgesetz), which is subject to fines, must be observed. The hirer may not use temporary workers in workplaces that are the subject of a strike if the hirer's company is directly affected by an industrial dispute. The Constitutional Court (BVerfG, Bundesverfassungsgericht) (decision dated 19 June 2020 - 1 BvR 842/17) recently ruled that this provision is constitutional.
Employers should always keep in mind a possible claim for injunction initiated by the works council, with which it can stop the unilateral implementation of a personnel reduction before the failure of the attempt of a reconciliation of interests in the conciliation board by way of an interim injunction. However, whether such a claim for injunction exists at all is disputed in case law. Some regional labour courts are in favor of this, while others categorically reject such a claim. This means that such a claim for injunction may or may not be applicable, depending on the regional labour court district in which the company affected by the personnel reduction is located. If such a claim is affirmed in the regional labour court district, a protective letter must be filed as a precaution if it is to be feared that the works council will file an interim injunction with the court.
Careful negotiation preparation as a fundamental element of success
In order to prepare for negotiations with the works council on a reconciliation of interests and a social compensation plan, a review and examination of the most recent annual financial statements, including balance sheets and income statements, of the company concerned is essential. This is because, at least in the conciliation proceedings, the decisive factor is whether the volume of the social plan is economically justifiable for the company. Thus, economic justifiability has a "corrective function". If the social plan volume intended to mitigate the economic disadvantages is no longer economically justifiable (e.g. due to illiquidity, balance sheet overindebtedness, no longer justifiable reduction in equity), the social plan volume must be reduced until the limit of economic justifiability is reached. If the volume of the social plan proves to be completely economically unjustifiable for the company, even a "zero" social plan is possible.
As a rule, one should argue with the poor economic situation in order to counter (completely) excessive social plan demands of the works council already in the internal free negotiations. At the latest in the conciliation board, the (poor) economic situation must be (legally) taken into account when drawing up the social compensation plan, so that the employer can then regularly achieve a significantly lower, but legally adequate, social compensation plan volume.
When assessing the economic situation, it is generally the legal entity of the company affected by the personnel reduction that matters. The economic situation of the parent company, on the other hand, is not relevant. Only in very exceptional cases is it possible to have recourse to the assets of the (possibly financially strong) parent company in the group. This may be the case if, for example, there is an intra-group "hard letter of comfort" or a control agreement in the event of the realization of its hazardous situation. Consequently, a careful analysis of the group's contracts is another key to a good negotiation outcome. If a subsidiary gets into financial difficulties, its parent company often issues a hard letter of comfort. In order to avoid liability being passed on to the "parent" when a social plan is drawn up at the "subsidiary", restructuring costs (in particular social plan liabilities) should be expressly excluded in the letter of comfort.
Contrary to the view of many works council members, social plan compensation is not money for company loyalty in the form of seniority. This is because, according to the case law of the BAG, a future-related consideration is required as the social plan has a compensatory and bridging function. In other words, the social plan is intended to substantially mitigate future disadvantages of the employee due to the job loss until he or she has a follow-up job or retires (BAG, decision dated 07 May 2019 - 1 ABR 54/17, AuA 3/20, p. 184). Despite the Corona crisis, the labour market is stable as a result of a still persistent shortage of skilled workers and the use of short-time work. Consequently, in many cases, laid-off employees find follow-up employment in a timely manner. During negotiations, this enables companies to argue with the works council that the social plan volume does not need to be so high. For example, the company may point out job vacancies in the region to prove that the affected employees will quickly find a new job.
Careful preparation to achieve good and quick negotiation results also includes the following points in particular:
- Who is the responsible negotiating partner on the works council side? Practical options for determining the "right" negotiating partner include the location of the company's registered office and the establishment of the competence of the central works council by the company's decision.
- Determination of the appropriate negotiation strategy and margins and no go's after deliberate prior analysis of the advantages and disadvantages of the negotiation strategies under consideration.
- Determination of the time schedule with "best case" and "worst case" scenarios.
- Determination of the negotiation roles (e.g., negotiator, "good guy and bad guy", use of outside counsel and/or management consultants).
- Internal/external communication planning.
- Legal analysis of existing employment contracts and collective agreements (e.g. works agreements and collective bargaining agreements), in particular with regard to exclusion of dismissals for operational reasons, special protection against dismissal and duration of notice periods.
(Liability-) Trap Short-Time Work
If a company no longer considers the use of short-time work to be sufficient and therefore moves to downsizing, caution is advised. Since in such a case, in addition to criminal law risks for the acting company organs, there is also the risk of repayment of the short-time allowance and of claims by employees for back pay in respect of lost remuneration. One of the preconditions for the payment of short-time allowance is the existence of a temporary loss of work. However, the implementation of a permanent personnel reduction could lead the Employment Agency to assume that "from the beginning" there was not a temporary, but rather a permanent ineligible loss of work. In this case, an essential condition of the short-time allowance would not be met, which would mean that the short-time allowance would have to be paid back. In this respect, prior consultation with the competent Employment Agency is recommended.
The prerequisite for an effective dismissal for operational reasons is, among other things, the permanent loss of the job. Short-time work and dismissals for operational reasons (compulsory redundancies) are therefore in principle mutually exclusive. However, a coexistence of short-time work and personnel reductions due to different forecast decisions for different definable areas of the enterprise is uncritical and permissible. A side-by-side or succession of short-time work and dismissals for operational reasons increases the employer's burden of presentation and proof in a possible dismissal protection case. Insofar as a company operates short-time work, employees could cite the existing short-time work as evidence against this permanent loss of employment in the context of an action for protection against dismissal, because the employer itself assumed only a temporary loss of employment due to the introduction of short-time work. The employer must therefore be able to present and prove in the dismissal protection proceedings why there is no longer a temporary but a permanent decline in orders. The introduction of short-time work and the issuing of compulsory redundancies (dismissals for operational reasons) in the context of personnel reductions are based on the company's forecasting decisions as to whether the loss of work is merely temporary or permanent. However, these forecasts can subsequently change due to the occurrence of further circumstances, which then forces a reassessment of the initial forecast. It is therefore important that the company carefully documents the initial circumstances and the new circumstances based on its new forecast. This enables the company to explain and prove to the Employment Agency or the labour court why its prognosis had changed.
Also by designing the entrepreneurial concept, which must also be carefully documented, the employer can implement a personnel reduction in a legally secure manner, even though short-time work is still in effect in its company.
Attention: Consultation procedure!
In practice, the so-called "consultation procedure" (section 17 (2) KSchG) with the works council very often presents companies with great difficulties. The employer must inform the works council of certain minimum details and consult with it on ways to avoid or limit dismissals and mitigate their consequences. Violation of this procedure has serious legal consequences. Since, if the consultation procedure is not carried out properly, all dismissals and all termination agreements for operational reasons are invalid. The minimum details required in the consultation procedure include, in particular, the number and occupational categories of workers to be dismissed and the number and occupational categories of workers employed in the "business" ("Betrieb"). What is disputed is what is meant by the term "business". According to the former case law of the Federal Labour Court the concept of a "business" as defined in the German Works Constitution Act was decisive. However, in its "Air Berlin ruling" of 13 February 2020 (6 AZR 146/19, AuA 6/20, p. 373), the Federal Labour Court made a very recent and fundamental change in case law on the concept of a business. Accordingly, the European Union law concept of a business applies. The Federal Labour Court defines this as the unit (entity) to which the employees affected by the dismissal belong in order to perform their duties. This must be a distinguishable entity of a certain permanence and stability, intended to carry out one or more tasks and having a body of workers as well as technical means and an organizational structure to carry out these tasks. Unfortunately, this definition is very abstract and provides little legal certainty. Such an unclear definition is particularly problematic because the vast majority of companies do not have only one location and personnel reductions often take place across locations (which locations form one business?).
It is appropriate to link the ongoing reconciliation of interests and social plan negotiations with the consultation procedure.
However, it should be made very clear and documented when the negotiations on reconciliation of interests and social plan and when the consultation procedure (information and consultation) will be carried out.
Particularly in the case of negotiations in the conciliation board, the employer should ensure that the chairperson of the conciliation board records in the minutes exactly when the negotiations on the reconciliation of interests and the social plan will take place and when the consultation procedure will begin or will be continued.
No fear of the conciliation board
Companies that have not yet dealt with the issue of the conciliation board should urgently do so, because the conciliation board procedure offers them many significant advantages. The German Works Constitution Act (BetrVG) provides for the conciliation board as a statutory conflict resolution mechanism in the event that the parties cannot reach an agreement within the framework of internal negotiations.
However, only in very few cases is a decision made by the conciliation board by way of an award.
According to the authors' numerous practical experiences in negotiations, in at least 95 % of the cases of personnel reduction measures a mutually agreeable solution to the reconciliation of interests and social plan is reached with the help of the chairperson of the conciliation board.
The difference to a consensual solution within the framework of free negotiations is that for the employer, significantly better and faster results are almost always achieved in a conciliation board compared to purely internal negotiations.
Therefore, it is regularly part of the works council's negotiating strategy not to take the negotiations on reconciliation of interests and social plan to the conciliation board.
This is due in particular to the then changed legal negotiation situation in favour of the company.
Since with the help of the conciliation board chairperson, demands of the works council that are not valid (e.g. exclusion of dismissals for operational reasons) can be eliminated easily and quickly. Another advantage for the employer in the conciliation board is that the chairman of the conciliation board is obliged to legally take into account a (bad) economic situation of the company when drawing up a social plan. Furthermore, the chairperson of the conciliation board is obliged to legally assess the (good) job opportunities of the workers concerned on the labour market.
The works council regularly ignores these two factors in the free negotiations within the company.
In the negotiations before the conciliation board, however, these points regularly play a prominent role in drawing up a social plan.
This makes it possible to significantly reduce the financial volume of the social plan in the negotiations in favour of the employer.
Another advantage for the employer side is that an impartial conciliation board chairperson can move the parties towards each other and thus ensure a faster agreement, which would have seemed unthinkable in the context of deadlocked internal negotiations.
This advantage is particularly important if the works council is playing for time in the internal negotiations in order to delay the negotiations, e.g. because it wants to avoid dismissals for operational reasons for as long as possible. However, during negotiations in the conciliation board, the works council is always threatened with the "sword of Damocles" of the failure of the attempt to reconcile interests if it "slows down".
Since if the attempt to reconcile interests in the conciliation board fails, the employer can start implementing the personnel reduction unilaterally, thus nullifying the delaying tactic.
However, the conciliation board also has an important advantage for the works council.
It can "hide in it" and "shift the blame" for negotiation results that deviate downwards from "old social plans", e.g. for economic reasons, or for its own negotiation goals that it may have published to the workforce prior to the negotiations and which are not achieved later, onto the chairperson of the conciliation board in a face-saving manner.
If one weighs the advantages presented on the employer side with the only disadvantage of the additional costs of the conciliation board procedure, the advantages of the conciliation board outweigh the disadvantages.
Since the manageable costs, especially for the chairperson of the conciliation board (according to the authors' experience, approx. 2,500 to 5,000 euros per day), are completely disproportionate to the costs arising from the conclusion of an expensive social plan and, for example, the further costs arising from the works council's delaying tactics (just think, for example, of 100 dismissals for operational reasons six months later based on an average salary of [only] 3,000 euros gross; this alone would be 1.8 million euros). Works councils and their experienced advisors regularly try to avoid a conciliation board "at all costs" as part of their negotiation strategy, especially by "deceiving" the employer into believing that the costs of a conciliation board can be saved and that it would be better to engage in purely internal free negotiations instead, since they have always reached an agreement at some point in the past. In the authors' view, this is simply the wrong approach to personnel reduction measures from the company's point of view, especially if one takes into account that in a conciliation board - depending on the complexity of the personnel reduction measure - a consensual agreement on a reconciliation of interests and social plan is reached after one to a maximum of four negotiation meetings if the employer has prepared properly. Companies should always take this into account when determining their negotiation strategy and setting the financial negotiation margins and make conscious decisions in this respect, carefully analyzing the advantages and disadvantages in each case.
If the negotiations are properly prepared, the employer can declare the failure of the internal negotiations after only one, or at least two, meetings in the conciliation board. If the parties cannot agree on a conciliation board chairperson, the employer can also have a conciliation board successfully appointed by the labour court. It is true that in principle the works council has the possibility to appeal against the judicial appointment.
However, according to the numerous practical experiences of the authors, the works council often does not appeal against the first-instance judicial appointment of the conciliation board due to pressure from the workforce, which wants a negotiated result on the social compensation plan in a timely manner, or a conciliation board is immediately appointed with the help of the labour court in the first instance through a legally binding settlement of the parties.
Consequently, a quick legally binding appointment of the conciliation board (= chairperson and number of assessors) is regularly achieved already in the first instance, without the need for proceedings in the second instance.
Voluntary leave programs
A voluntary leave program is understood to be the planned reduction of personnel through consensual redundancy agreements to which the employees concerned agree on the basis of incentives created by the employer, without any prior dismissals having been made. In which cases does this make sense? On the one hand, if no dismissals for operational reasons are permissible due to collective agreements, for example. On the other hand, when companies do not want to make compulsory redundancies for corporate policy reasons because of fear of damage to their public reputation or a deterioration of the relationship with the works council/union/employees.
The advantages of a voluntary leave program are obvious: It provides legal certainty because there are no dismissal protection proceedings with the associated litigation risks. The voluntary leave program can also be implemented quickly and therefore leads to rapid financial relief. Voluntary leave programs are less sensational than compulsory redundancies, and are therefore less likely to cause a loss of reputation with the public, works councils, trade unions and the workforce. Furthermore, a usually complicated social selection is not necessary. This also has the advantage that, for example, socially stronger employees and employees with special protection against dismissal can leave the company and thus the desired new structure can be created in the company. This also has the positive side effect of permanently reducing personnel costs when mostly older "more expensive" workers leave on a regular basis. On the other hand, voluntary leave programs are usually very costly. Severance factors in the range of at least 1.5 to 2.5 gross monthly salaries per year of employment are not uncommon. Experience shows that such high factors are an unfavourable precedent for any subsequent social plans in the event of unilateral personnel reductions.
Care must be taken to define the scope precisely. The voluntary leave program should include the provision of a "double voluntary condition". This prevents employees from leaving with severance pay even though they are classified as high performers and thus should not actually leave the company. Voluntary leave programs can - if necessary in clever combination with a subsequent unilateral personnel reduction and related procedural and social plan regulations in case the voluntary leave program does not "deliver" the necessary "exit numbers" - be an alternative to unilateral personnel reductions.
10 "deadly sins" in personnel reductions
- Start of negotiations with the works council without sufficient preparations.
- Conclusion of framework social plan/non-termination of framework social plan.
- Negotiations with "wrong" works council regarding reconciliation of interests and/or social plan.
- Approaching the conciliation board too late.
- No formal separation of consultation procedure and reconciliation of interests / social plan procedure.
- Formal errors in the hearing of the works council, the consultation procedure and the mass dismissal notice form and timing.
- Failure to obtain the consent of the respective authorities in the case of special protection against dismissal (e.g. severe disability).
- Errors in the termination letter and its receipt ("problem of proof").
- Errors in social selection (wrong business concept, errors in comparability, errors in social selection in the narrower sense, etc.).
- No physical connection of the reconciliation of interests and the list of names (the statement on reconciliation of interests and the list of names must always be "stapled" together).
According to the authors' numerous relevant practical experiences in negotiations, with the right negotiating strategy on the employer's side, a social plan agreement with a factor of 0.3 to 0.7 can generally be reached within three to five months despite strong resistance on the works council side; in this context, with the use of the right further negotiating tools, it can also be achieved that there are no or at most a very small number of suits for protection against dismissal. However, this requires the early involvement of experienced labour lawyers with significant negotiating experience, especially in the preparation of negotiations. This pays off for the companies and is the key to a good, quick and successful negotiation result.
- Dr Wolfgang Lipinski, lawyer and labour law specialist, head of the labour law practice group of Beiten Burkhardt, Munich
- Gerd Kaindl, lawyer and labour law specialist at Beiten Burkhardt, Munich
Please note: A version of this article appeared in the German journal for labour law "Arbeit und Arbeitsrecht" (AuA 10/2020, p. 568 ff.).
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