Introduction
No violation of ban on dismissals
Reasons for dismissals
Comment


Introduction

Under German law, the termination of an employment relationship due to a transfer of business pursuant to Section 613a(1) of the Civil Code is not permitted. Consequently, buyer and seller often refrain from any restructuring measures, including redundancies, before or a short time after the envisaged transaction, believing that this is excluded by law. This is true even in cases where the following can be foreseen:

  • a dual occupation of individual positions after the acquisition;
  • a reduction in personnel costs by the target; or
  • a streamlining of structures which appears long overdue.

In these cases in particular, the question arises as to why it is recommended to wait to terminate employment until the transaction has taken place.

Although the termination of employment relationships due to the transfer of business is prohibited, it is not an obstacle to (mass) redundancies as long as the dismissals are based on either:

  • operational grounds due to a seller's reorganisation plan, which serves as an independent reason for the dismissals; or
  • a buyer's concept or reorganisation plan, which opens up the option to influence the structure in accordance with the buyer's interest.

This concept must have taken a tangible form at the time the dismissal notice is received.

On September 11 2013 (5 Sa 1128/12) the Cologne Regional Employment Court again made this clear based on a March 20 2003 Federal Employment Court ruling (8 AZR 97/02). In doing so it clarified that careful planning with respect to the specification and implementation of the buyer's concept is necessary in light of the requirements for valid dismissals under Section 1 of the Act on Protection Against Unfair Dismissal.

No violation of ban on dismissals

The case concerned the validity of the dismissal, for operational reasons, of an employee who had worked for the insolvent employer for over 20 years, most recently as a forklift operator and warehouse employee. The insolvency administrator (who acted as seller) of the employer and the buyer reached an agreement on the buyer's concept, according to which only one employee would continue to be employed in the warehouse and shipping division after the takeover. Two other employees besides the claimant were working for the insolvent debtor as warehouse employees. After all of the defendant's employees had been dismissed and 17 out of 32 employees had received an offer of continued employment with the buyer – which led to a transfer of business – the employee claimed that the dismissal was invalid, owing to violation of the dismissal ban under Section 613a of the Civil Code.

The Cologne Regional Employment Court ultimately favoured the claimant's argument. Although the court (following 8 AZR 97/92) stated expressly that it was true that the employer was permitted to issue a dismissal notice for operational reasons based on the buyer's concept if the employer intended to sell its establishment, it was decisive, in the court's view, whether a binding concept or buyer's reorganisation plan that had already taken on a tangible form existed at the time the dismissal notice was received. Accordingly, it was necessary that there have been no possibility of continued employment after the end of the notice period, at the latest.

This requirement was not satisfied in this case because it was explicitly provided for in the buyer's concept that one position in the warehouse and shipping division would be retained. As none of the employees employed as warehouse employees by the insolvent debtor were retained, the concept was not implemented as planned. Consequently, even the fact that the defendants cited the business decision to do away with the warehouse employee position after all and have warehouse work performed by other employees did not satisfy the court. The defendants were therefore held to the concept that they had agreed on at the time the dismissal notices were issued.

The decision makes clear what has been acknowledged in principle since the judgment on redundancies pursuant to a buyer's concept was initially rendered by the Federal Employment Court (8 AZR 97/02): a notice of dismissal by a buyer can be valid despite the dismissal ban under Section 613a(4) of the Civil Code.

Reasons for dismissals

This consequence is not in itself new, and can be inferred from the essence and purpose of Section 613 of the Civil Code. The provision is not intended to result in an artificial extension of the employment relationship if it can be foreseen that a rationalisation, reorganisation or other restructuring measure carried out by the buyer will eliminate the possibility of employment.

The prerequisites set out in Section 1 of the Act on Protection Against Unfair Dismissal must be met. However, this is something that is easily overlooked in practice. The requirements for the buyer's concept and its implementation must be measured against this provision.

The reason for the dismissal can therefore be provided with reference to the buyer's concept – but this is not carte blanche to dismiss. On the contrary, the envisaged measures and the elimination of the possibility of employment that they entail must be carefully examined during planning and implementation of the concept.

The yardstick for whether the concept can justify the envisaged dismissals – even in the event of a dismissal for operational reasons based on a buyer's concept – must thus be whether the concept is based on a business decision of the seller and the buyer that eliminates the possibility of employment. This rightly includes that no other vacant positions are available in the buyer's undertaking at the time the dismissal comes into effect. In addition, if the due selection of the employee to be dismissed based on social criteria is disputed, the seller must demonstrate that this took place with the aid of the (future) buyer, with reference to the corporate structure on the end date of the notice period. This demonstration must be agreed between seller and buyer and based on the seller's consultation with the works council.

If the buyer later decides to change the concept, this will jeopardise the dismissal's validity. It must be at least assumed that this is the case if a resulting possibility of continued employment is recognisable at the time the seller's dismissal notice is received. This is because the seller, which may have to assume responsibility for the buyer's business decision that eliminates the position that hitherto existed to the detriment of the employee, must also assume responsibility for the circumstances that make a dismissal for operational reasons impossible – to the advantage of the employee.

In this case, the determining factor for the validity of the dismissal was ultimately also the date on which notice of dismissal was issued. Therefore, whether the concept or reorganisation plan was adhered to is of decisive importance.

Comment

The prerequisites for valid dismissals based on a buyer's concept can be met only if buyer and seller have agreed on a concept that eliminates the possibility of employment and in fact has already taken on tangible form at the time dismissal notices are issued. It does not suffice if dismissal notices are issued only because the buyer wants to purchase the establishment because a staff reduction has taken place beforehand.

However, the concept need not always be agreed on in the form of an annex or schedule to the purchase agreement.

An employer's procedural burden of demonstration and proof in a potential lawsuit demands that the date on which the business decision is taken, its content and the commencement of its implementation be documented and can be proven in the event of a dispute. This can be done in the form of resolutions adopted by the management, other agreements between the undertakings, statements issued to service providers or an agreement on a reconciliation of interests. What is decisive is that the prerequisites under Section 1 of the act, particularly the underlying prognosis, are met and that this can be proven with sufficient certainty.

These rules apply to group-internal transfers and to transfers to external third parties. The structuring elements that this entails allow the contracting parties to commence the implementation of necessary restructuring measures before the acquisition has been completed.

It is important that the contracting parties agree on a binding concept in the course of the negotiations on the sale, document this agreement in due form and cause it to be implemented.

For further information on this topic please contact Bjoern Gaul, Alexandra Otto or Bernd Roock at CMS Hasche Sigle by telephone (+49 221 7716 195), fax (+49 221 7716 252) or email (bjoern.gaul@cms-hs.com, alexandra.otto@cms-hs.com or bernd.roock@cms-hs.com). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.