According to a recent decision of the German Federal Labor Court (Bundesarbeitsgericht), a lower amount of severance can now be stipulated for older employees in a social plan.

In the case of restructuring and large redundancy exercises in German companies, it can be necessary to agree a "social plan" with theWorks Council if there is one. This plan usually contains agreements on severance payments and other benefits applicable to the dismissals. The amount of severance pay is often calculated according to a standard formula based on age, seniority and gross monthly salary. Under this formula older employees tend to get higher severance payments, even if they were already due to retire shortly thereafter and so were not looking for a new job.

Is it possible to agree a lesser provision in a social plan for employees who will shortly be in receipt of retirement benefits based on their age (and so would not suffer the same extended loss of anticipated income), or would this constitute unlawful age discrimination?

The Federal Labor Court has now taken a clear position on this issue in a recent decision on 26 March 2013. It held that when agreeing on the amount of severance payable in a social plan, it is lawful for the employer and theWorks Council to take into consideration the fact that employees will receive statutory retirement benefits in the foreseeable future and to reduce their entitlement accordingly. This approach does not violate the equal treatment principle or the prohibition of age discrimination under EU law, said the Court.

In this particular case, the 62-year old plaintiff would have been entitled under the formula in the social plan to a severance payment of almost €240,000. However, the social plan also contained a provision which stated that employees should receive a reduced payment after reaching the age of 58, based on their financial loss up to the earliest date for receipt of statutory retirement benefits. The employer referred to this provision and paid the plaintiff a reduced severance payment of only €4,974.62. Ouch.

In a decision which is good news for employers, the Federal Labor Court approved the corresponding provision in the social plan – and thus consequently the significantly reduced amount of severance. It did not consider the regulation to represent unjustified age discrimination or a violation of the European principle of equal treatment with other employees.

The Court based its decision on the fact that the purpose of a social plan is to provide compensation for employees and to reduce any financial suffering incurred as a result of restructuring or redundancy exercises. The Court took into consideration that employers regularly only have limited funds available and that these need to be distributed to the worstaffected employees. On this basis it is legitimate for employers to focus more strongly on the actual disadvantages being suffered, particularly in the case of older employees.

In light of this new decision, there should be more leeway for employers engaged in large redundancy and restructuring exercises in Germany, which could lead to significant cost reduction for companies in the case of severance payments. Employers in Germany should be aware of this new court decision and the resulting options for designing agreements.