Termination of employment relationship against severance payment
Working Hours Act not applicable
No responsibility of works council
Who is a key employee?
Agreements on status are irrelevant
Comment


The relationship between an employer and its key employees is characterised by a particularly close relationship of trust. Under employment law, this category of employee is subject to a number of special provisions which are beneficial to the employer. However, this does not automatically make all employees with managerial responsibilities key employees, because the statutory requirements attached to this status are very high. This update summarises the underlying statutory basis, taking account of case law, and examines whether it is still possible to achieve key employee status in a manner which is legally valid.

Termination of employment relationship against severance payment

If the employment relationship with a key employee is terminated by the employer, Section 14(2) of the Act against Unfair Dismissal must be observed. As with regular employees, key employees can be given notice only for operational reasons, misconduct or reasons relating to personal capability if the employee has been employed for more than six months and the company as a whole regularly employs more than 10 employees (social justification under the Act against Unfair Dismissal). However, the employer may terminate the employment relationship of the key employee even if the dismissal would be invalid on the grounds that it did not comply with the above criteria. In such cases the employer may file an application to the court seeking termination of the employment relationship against a severance payment. The employer is not required to provide reasons for the termination application. Contrary to the principle set out in Section 9 of the act, it need not state the reasons why "further collaboration is unlikely to serve business purposes in future". The employment relationship of the key employee is then terminated by the court subject to a severance payment without further grounds being provided. As a general rule the severance payment is a maximum of 12 (gross) months' salary; if the employee is older than 55 and has been with the company for at least 20 years, the maximum severance is 18 (gross) months' salary.

Working Hours Act not applicable

An important factor for the employer is that key employees are not subject to:

  • the daily statutory maximum of 10 working hours (Section 18(1) No 1 of the Working Hours Act);
  • the prescribed 11-hour interval between finishing and resuming work the following day; or
  • the prescribed breaks and minimum rest periods.

No responsibility of works council

A further difference between key employees and regular employees is that under Section 5(3) of the Works Council Constitution Act, the works council is not responsible for key employees. Their interests are represented by a separate committee the Sprecherausschuss. In particular, small and medium-sized enterprises seldom have a representative body for key employees as these can only be formed in companies with at least 10 key employees.

Key employees are not eligible to vote in works council elections. Thus, it is important for a company to establish who is a key employee before such elections, as an error can mean that under Section 19 of the Works Council Constitution Act the result of the election can be contested and rendered invalid. Decisions on who is a key employee are subject to objective criteria. A key employee cannot be appointed by means of an agreement between the employer and the works council.(1)

Employee status pursuant to the Works Council Constitution Act is also relevant if the employer wishes to terminate the employment relationship. If the employer inadvertently believes that the employee concerned is a key employee and omits to hear the works council as required under Section 102 of the act, termination is invalid. However, if the employee concerned is indeed a key employee, the employer is required under Section 31(2) of the Representative Bodies for Executive Staff Act to consult the Sprecherausschuss before issuing notice. Failure to observe this procedure also invalidates termination. In practice, it is often difficult to ascertain beforehand whether the key employee criteria are satisfied. The employer should therefore always take the precautionary measure of notifying the works council and the Sprecherausschuss.

Who is a key employee?

The law does not provide a standard definition of the term 'key employee'. For the question of whether an employment relationship can be terminated against a severance payment without giving detailed reasons, the applicable definition is that contained in Section 14(2) of the Act against Unfair Dismissal. For issues related to the Works Council Constitution Act and the Working Hours Act, the applicable definition is that contained in Section 5(3) of the Works Council Constitution Act.

A key employee within the meaning of Section 14(2) of the Act against Unfair Dismissal must always be authorised to hire or dismiss employees autonomously. It is insufficient for the key employee to simply have a right of proposal: he or she must have a binding right to take a final decision. The key employee's powers in human resources (HR) must also play a significant role alongside the other duties. The benchmark imposed on this in case law is very strict. For example, on April 14 2011 the Federal Employment Court ruled that it was insufficient for the head of a business division - with responsibility for around 560 employees - to sign only 20 to 30 dismissals, termination agreements and employment contracts a year. An additional factor was that branch managers - below the head of the business division in the corporate hierarchy - enjoyed the same powers for hiring and dismissing staff as the business division head himself. In terms of his HR powers, the branch manager was directly accountable to management.(2)

In judging the status of a key employee pursuant to Section 5(3) of the Works Council Constitution Act (which also applies to the Working Hours Act), in contrast to Section 14(2) of the Act against Unfair Dismissal the key employee's HR powers do not constitute a mandatory criterion and are one of three possible options. However, HR responsibility in the context of Section 5(3), Sentence 2, No 1 of the Works Council Constitution Act must apply cumulatively to appointments and dismissals (and not as under Section 14(2) of the Act against Unfair Dismissal, to only one of the two). HR responsibility must also have material entrepreneurial significance. According to a recent decision of the Hamm Regional Employment Court it is insufficient, for example, for HR responsibility to concern only 15% of the workforce, and to exclude employees with duties of particular importance or decision-making powers.(3)

Under the Works Council Constitution Act an employee who has been granted a general commercial power of attorney (which is now very rare) or Prokura(4) can therefore be a key employee. However, Prokura may not be of minor significance in the relationship between the employee and the employer (Section 5(2), Setence 2, No 2). This means that the Prokurist must carry out entrepreneurial managerial tasks and that the Prokura conferred on the employee must be of material importance in enabling him or her to exercise entrepreneurial and managerial duties. Therefore these must be tasks which are typically carried out only by a Prokurist. It is insufficient for an employee merely to prepare material entrepreneurial decisions in such a way that management is unable, in practice, to disregard the employee's proposals, even though he or she has been granted Prokura.(5) However, in some circumstances such employees can fulfil the criteria of key employees within the meaning of Section 5(3), Sentence 2, No 3. This presupposes that the employee generally performs duties which are of significance for the existence and development of the company or business and that he or she takes or materially influences the relevant decisions without receiving directives to that effect from above. However, in practice these stringent requirements are rarely fulfilled.

Agreements on status are irrelevant

Both Section 14(2) of the Act against Unfair Dismissal and Section 5(3) of the Works Council Constitution Act are mandatory. Therefore, whether an employee is called a 'key employee' in his or her employment contract or whether he or she is a non-tariff employee owing to the nature of his or her job is irrelevant. Key employee status cannot be conferred by virtue of an agreement between the employer and works council if mandatory statutory criteria are not fulfilled.

Comment

Under existing company practice, it is evident that in most cases the strict requirements of Section 14(2) of the Act against Unfair Dismissal and Section 5(3) of the Works Council Constitution Act are not fulfilled. In practice, the statutory provisions, which date back to 1969 and 1972, are rarely applied. Even where management employees are authorised to appoint and dismiss staff members on their own responsibility, it is generally unlikely that this will account for a significant part of their overall work. Material entrepreneurial decisions are generally taken at the highest managerial level, frequently as a team decision. The individual often does not have the autonomous decision-making authority required by law. Key employee status cannot be conferred by virtue of an agreement between the employer and the employee or by virtue of an agreement between the employer and the works council if the objective statutory criteria are not fulfilled in practice.

For further information on this topic please contact Bjoern Gaul, Bernd Roock, Antje-Kathrin Uhl or Eva Schäfer-Wallberg at CMSHasche Sigle by telephone (+49 711 9764 248), fax (+49 711 9764 96249) or email (bjoern.gaul@cms-hs.com, bernd.roock@cms-hs.com, kathrin.uhl@cms-hs.com or eva.schaefer-wallberg@cms-hs.com).

Endnotes

(1) Baden-Württemberg Regional Employment Court, April 29 2011, 7 TaBV 7/10.

(2) Federal Employment Court, April 14 2011, 2 AZR 167/10.

(3) Hamm Regional Employment Court, July 23 2010, 10 TaBV 43/10.

(4) Special power of attorney pursuant to Sections 48 and following of the Commercial Code.

(5) Federal Employment Court, June 29 2011, 7 ABR 5/10.

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