This article was authored by Dr. Guido Zeppenfeld.
Restructuring through a transition company: a helpful instrument in challenging situations
Restructurings on the company and business-site levels, especially ones with mass layoffs, often involve legally complex issues and require diligent preparation and implementation. One of the employer’s most important goals is to avoid facing dismis-sal protection claims after the restructuring, as these individual proceedings may, in the worst case, consume more time and money than the actual restructuring.
One of the best instruments for mitigating the risk of a stressful post-restructuring phase is to establish a transition company (Transfergesellschaft). Since it provides benefits to the concerned staff as well as legal certainty to the employer, a transition company is often recommended as a way to implement a headcount reduction and should be seriously considered when envisaging such a challenging restructuring scenario.
This article provides a short overview of the key points pertaining to the establishment and financing of a transition company in Germany.
Definition of a transition company
A transition company is a company solely set up for a specific restructuring scenario and whose only purpose is to help employees facing unemployment find new employment within a period of up to a maximum of 12 months.
Legal basis for a transition company
A transition company is created on the basis of the provisions in Section 111 of Germany’s social security statute book III (Sozialgesetzbuch – SGB III), which stipulates the requirements for the transition short-term allowance (Transferkurzarbeitergeld; please see below for further details).
While Section 111 of SGB III is a rather short statutory provision for such a complex topic, the Federal Employment Authority (Bundesagentur für Arbeit) has published a business directive (Geschäfts-anweisung) that describes in more detail the nature of a transition company and the different steps that apply to a transition short-term allowance as well as gives some guidance with respect to the employment authority’s scope of review when deciding on whether to grant a transition short-term allowance or not.
Establishment and structure
The existence of a works council is not mandatory for the establishment of a transition company, however in practice most transition companies are, in fact, the result of negotiations between an employer and a works council on a balance-of-interests agreement and/or a social plan. If the parties intend to offer a transition company, they usually agree on the following transition company provisions:
The concerned employees have the opportunity to enter into a tripartite agreement with their current employer and the transition company. This agreement stipulates (a) that the employment relationship is terminated with effect upon the expiry of the individual’s notice period or at an earlier date and (b) that the employee enters into a new fixed-term employment relationship with the transition company on the day after the termination date. This fixed-term relationship ends at the latest after 12 months without any termination notice required. The employee may, however, prematurely terminate this fixed-term employment relationship.
Income during fixed-term relationship
During their time at the transition company, employees have a monthly claim against the transition company for their individual transition short-term allowance. For childless employees not entitled to maintenance payments, the transition short-term allowance amounts to 60% of the difference between the employee’s previous generalized net income (pauschaliertes Nettoentgelt) and the generalized net income the individual is entitled to during the term of the transition company. Employees with children who are entitled to maintenance payments receive 67% of this difference.
It is crucial to be aware that the employment authority does not take into account any amounts above the contribution assessment ceiling (Beitragsbemessungsgrenze) when calculating the transition short-term allowance.
In addition, the works council regularly requests that the employer pay a certain monthly amount on top of the transition short-term allowance (top-up). A granted top-up depends again on the respective negotiations but usually ranges from 75% to 85% of the previous net income. While it is naturally in the employer’s financial interest to limit the top-up as much as possible, it is also important to note that the prevailing opinion of the local employment authorities is that the top-up may not be too high (90% to 100%). This is to keep up the employees’ ambition to find a new job instead of staying in the transition company as long as possible because the actual difference in net income is relatively small.
The employer typically grants a further one-off amount for special qualification activities during the time the employee is in the transition company. This amount can either be linked to the individual employee or can be granted for all transferring employees. In the latter case, it is usually up to the transition company to decide which portion is to be allocated to which employee depending on subjective needs.
Lastly, the parties often agree to a “sprinter” bonus – which is encouraged by most employment authorities – for participants in the transition company. This is a special payment for employees who accept a new job prior to the expiration of their fixed-term relationship at the transition company. The exact amount and calculation of this incentive payment depend again on the negotiations, but this incentive is usually financed by the savings the employer generates through the employee’s premature departure.
Requirements for funding the transition short-term allowance
As the transition short-term allowance is the linchpin of a transition company, the following briefly summarizes the requirements for the transition short-term allowance:
The employees concerned must face a permanent, nonavoidable loss of work with loss of wages, and the local employment authority must have been informed about the permanent loss of work.
In addition, the employment authority must have advised the management of the company and the works council about the transition short-term allowance during their negotiations on a balance-of-interest agreement and a social plan. The authority may reject granting the transition short-term allowance if these agreements are concluded before the authority has formally consulted with the parties. It is therefore advisable to involve the employment authority as early as possible in the process in order to secure funding for the transition short-term allowance for all potential participants in the transition company.
Requirements on a business-site level (betriebliche Voraussetzungen)
The employment authority grants transition short-term allowance only to the concerned employees if personnel adjustment measures are conducted on the basis of an operational change in the meaning of Section 111, Sentence 3, Nos. 1 to 4 of the Works Constitution Act (betriebliche Voraussetzungen – BetrVG).
In addition, employees must transfer into an organizationally independent unit (betriebsorganisatorisch eigenständige Einheit) to avoid layoffs and to improve their chances of integration.
Lastly, both the organization and the equipment of this independent unit are to raise the expectation that the desired integration will be successful. In short: a proper transition company has to be set up.
Requirements on a personal level (persönliche Voraussetzungen)
In order to be eligible to receive transition short-term allowance, the concerned employee must be facing unemployment and may not be excluded from receiving short-term allowances.
Note: An employee who enjoys special protection against ordinary dismissal also “faces unemployment” if she or he is explicitly mentioned in a names list attached to the balance-of-interests agreement. For this reason, agreement on an official names list with the works council over the course of negotiations is recommended as this list may provide a certain amount of security for the major of funding for the transition company.
Prior to transfer into the transition company, the employee must have also registered as seeking employment with the relevant local employment authority.
And the employee must have attended a meeting called a “profiling.” This is an individual or group meeting during which the employee’s prospects for integration into the labor market are analyzed and determined.
Financing the transition company
The local employment authority finances a large portion of the transition company by paying the transition short-term allowance, provided the relevant requirements are met. It is, however, the employer’s obligation to pay the negotiated top-up amount, full social security contributions – that is, both the employer and the employee contributions (regularly calculated on the basis of only 80% of the last gross income), full compensation for vacation days and public holidays, qualification amounts and overhead costs for the transition company.
Despite these various costs, an employer is usually able to finance one full month of the transition company by paying only 50% to 60% of the former monthly costs for the respective employee. Employers should, therefore, always try to encourage employees to contribute portions of their individual notice periods to the transition company period.
The establishment of a transition company requires some effort and consideration during the preparation phase of the envisaged restructuring and incurs further restructuring costs. If, however, both the employer and the works council support the transition company as an appropriate way to reduce headcount in terms of the concerned staff, then a transition company is usually accepted by most of the concerned employees. As a consequence, these employees do not face terminations for operational reasons (betriebsbedingte Kündigungen) but can voluntarily transfer to the transition company. At the transition company, they have the chance to be trained and obtain further qualification for a new job while receiving a large portion of their previous net income. And the employer not only provides a reasonable approach to implementing a reduction in workforce but can also reduce the risk of having to deal with time-consuming and costly dismissal-protection claims after the restructuring. Due to this combination of positive effects, it is fair to say that a transition company can be a win-win instrument in challenging situations and should, therefore, be used where possible.