All questions

Discontinuing employment

i Termination

The possibilities for dismissing an employee are limited by the Dismissal Protection Act. This Act applies to employees who have completed at least six months' service with the employer and are employed in an operation with more than 10 employees.

Under the Dismissal Protection Act, the termination of an employment relationship needs to be justified on objective grounds, these being the following:

  1. operational reasons (i.e., redundancy);
  2. conduct-related reasons (i.e., misconduct); or
  3. reasons related to the person of the employee (e.g., inability to perform the work owing to long-term illness).

In particular, with regard to terminations for operational reasons, there must not be any vacancies within the company on the same or lower hierarchy levels that could be filled by the affected employee.

A termination for good cause with immediate effect is possible under circumstances that make it unacceptable for the employer to employ the employee until the expiration of the notice period (e.g., fraud against the employer).

Any works council must be heard prior to the issuance of each notice of termination. The works council cannot veto the termination.

The applicable notice period must be observed. It can be stipulated in the individual employment contract, collective bargaining agreement or statutory law. Statutory law provides for notice periods depending on the employee's years of service (ranging from four weeks during the first two years of service, to up to seven months after 20 years of service).

Employees continue to be employed by the company during the notice period, which means a unilateral payment in lieu of notice is not permissible. Employees may generally be released from the duty to work (i.e., gardening leave).

Any notice of termination must be in writing and it must be signed by a person authorised to legally represent the company.

Employees can challenge the validity of the termination by filing a termination protection suit with the competent labour court. There is no discovery or jury trial under German law.

If the labour court finds a termination to be unlawful, it can, from a legal perspective, only award reinstatement; in other words, generally, it cannot grant a severance payment. In addition, the employee would be entitled to back pay.

Although the legal consequence of an invalid termination is reinstatement, approximately 90 per cent of the termination protection suits are settled in court. The employer pays a severance and the employee accepts the termination. The severance is usually paid in addition to the notice period.

The employer can always offer the employee the chance to conclude a mutual termination agreement. This type of agreement usually provides for the termination of the employment and the payment of severance.

There is no statutory formula for calculating severance payments. The following formula is often applied: severance payment = factor × gross monthly salary × years of service.

The factor usually ranges between 0.5 and 1.5.

ii Redundancies

The termination of employee contracts for operational reasons (i.e., redundancy) is generally permissible if a position (job) is eliminated. A redundancy does not automatically result in termination of the contract of the individual whose job ceases to exist. Instead, a social selection procedure is used to determine which employees must be dismissed. This means that from a group of comparable employees, the individual with the least need for social protection in terms of age, years of service, maintenance obligations and disability will be dismissed.

The works council has many more rights in the case of an operational change (e.g., mass redundancy). If a planned restructuring constitutes an operational change, the employer must negotiate a reconciliation of interests regarding the scope of the restructuring and its implementation (in particular, steps and timing), and a social plan with the works council (usually providing for severance payments). Again, there is no statutory formula for calculating the severance payments. In practice, formulas similar to the one described in subsection i, above, are commonly used in social plans.

The conclusion of the proceedings on a reconciliation of interests and a social plan does not implement the redundancies. The employer still has to implement the redundancies concerning the individual employees by issuing notices of termination or concluding mutual termination agreements.

If a substantial reduction in personnel constitutes a mass redundancy under German law, the employer has to notify the employment agency of the mass redundancy. A mass redundancy occurs if the employer dismisses a certain number or portion of its employees employed in an operation within 30 calendar days. The employment agency does not review whether the mass redundancy is justified. The procedure is more of a formal requirement, which is, however, a precondition for validity of the termination.