In the event of a termination for redundancy or similar reasons, employees in Germany have the right to file a lawsuit in order to have a court review the validity of the termination. If the termination is invalid, the law provides for a continuation of the employment relationship. As a basic principle, there is no statutory right of an employee to receive any kind of financial compensation in the event of a termination. De facto, however, most termination cases are settled by the payment of a negotiated compensation.

Where there is a major redundancy and a works council exists, the employees may have a compensation claim under a social plan negotiated between the employer and the works council. Also, a compensation claim can exist under a tariff agreement entered into between the competent trade union and employer’s association.

Statutory rights

Employees are entitled to challenge the validity of a termination by filing a lawsuit within three weeks after being served a notice of termination. Once this period has lapsed without a lawsuit being filed, the termination is deemed valid and the employment relationship will end on the expiry of the notice period.

A termination will be invalid if, for example, the termination is not socially justified or if a special protection against dismissals applies. One reason for a social justification of a dismissal is a redundancy based on operational reasons, though several conditions need to be met:

  1. the job of the affected employee no longer exists for operational reasons;
  2. no vacant positions exist on the same or lower hierarchy levels, for which the affected employee is qualified or can be qualified by additional training; and
  3. the terminated employee requires the least “social protection”, i.e. has no family, is young enough to find an alternative job, etc.

In order to determine which employee requires the least “social protection”, a comparison of all employees who are personally and legally able to perform the remaining position on the basis of certain social criteria (length of service in the company, age, maintenance obligation towards children or spouses) is mandatory.

In addition, if a works council exists, an employer is required to consult with the works council before any notice of termination is issued. In addition, certain groups of employees, such as pregnant women, employees on maternity leave, severely disabled persons and members of the works council, can only validly be given notice if further specific requirements are met.

Due to the complexity of all these legal requirements, employers are usually willing to negotiate a financial settlement instead of risking an adverse judgement. The amount of the compensation depends on the likelihood that the courts will regard the dismissal as valid.

There even exists a legal provision that gives employees a claim to (the most commonly seen) compensation equal to half of one month’s gross salary per year of service, if the employer states in the notice letter that:

the notice of termination was issued due to a redundancy; and the employer will pay such compensation if the employee refrains from filing a lawsuit against the dismissal.

However, as this instrument is generally only used if the employer is unsure about the validity of the dismissal, employees generally opt for the court proceedings in order to negotiate a higher compensation. In reality, the compensation claim option is therefore very rarely used.

Rights under a Social Plan

If an employer has more than 20 employees, a major change in business (e.g. a reduction of staff (approx. 10%, depending on the size of the business unit)) also triggers participation rights of the works council. The employer is required to inform the works council of the intended reduction well in advance and to consult with the works council about the intended actions, even if the reduction is to be implemented by termination agreements rather than dismissals. During this consultation, a Reconciliation of Interests and a Social Plan are negotiated. In a Reconciliation of Interests, the questions “if”, “how” and “when” the proposed changes are to be implemented are answered, whereas a Social Plan provides for the type and scope of compensation for any – in particular financial – disadvantages of the employees due to the intended changes. So the Social Plan gives the employees an individual claim for compensation.

If an employer violates the obligation to commence negotiations of a Reconciliation of Interests or fails to comply with an agreed Reconciliation of Interests the employees will have a statutory claim for compensation of any economic disadvantages against the employer.