Member Firm: Kliemt

By: Markus Janko

The first of a series on ‘the perfect restructuring’ in an employment law context, this article examines best practice in the preparation and planning phases of a business restructure.

When it comes to restructuring projects, companies often face a range of challenges. These include numerous factors that may directly or indirectly trigger employment law consequences. The perfect restructuring succeeds and begins in (allegedly) prosperous times and not when signs already point to a crisis. In this series of articles, we will examine the strategic and employment law aspects of restructuring. Part 1 deals with the business context, the different phases of restructuring and some core elements of the preparation and planning phase.

The business context

Whether, when and how companies have to deal with employment law restructuring often depends on the economic and organisational framework conditions under which they operate. The conditions are as diverse as economic life itself. For example, the following factors may influence the need for restructuring:

• loss of sales;

• rising commodity prices;

• optimised or new production methods;

• pressure from competitors;

• inflated personnel costs;

• excess personnel;

• wrong personnel (too many underperformers);

• need to streamline the organisation or individual processes;

• adaptation of a local organisation to international requirements (e. g. the implementation of a matrix organisation);

• adjustment of the company structure to optimise employee representation structures (fewer works councils or works council members);

• preparation for acquisition or sale of business units;

• preparation for upcoming works council elections.

As diverse as the economic framework for employment restructuring may be, the basic employment law processes used to facilitate the management of any such business challenge are similar.

Phases of an employment law restructuring

Any employment law restructuring process can be roughly divided into three phases:

• Phase 1: Preparation or planning;

• Phase 2: Negotiation;

• Phase 3: Implementation.

All of these phases can be subdivided into further individual steps. Understanding this is an integral part of successfully managing an employment law-related restructuring project.

Phase 1 – Key factual elements of planning and preparation

Phase 1 of a restructuring process involves tackling the legal aspects and creating a common understanding of the economic context of the planned restructuring. In addition, organisational aspects play an important role in ensuring that companies complete all phases of a restructuring process successfully.

Analysis of the business context

In phase 1, a thorough analysis of the business context and related legal issues is essential. A comprehensive understanding of all business and stakeholder objectives is needed to ensure tailor-made employment law tools can be implemented to achieve them. The phases and legal requirements of all restructuring processes may be similar and easy to identify (e. g. ‘We have to get the works council on board’), but there can be enormous differences in details such as the processes, strategy or chronology depending on specific circumstances. Analysing the business context of a restructuring is essential in order to identify and manage these legal and practical specifics successfully.

Asking the right questions

Experience with restructuring processes demonstrates that it is crucial to ask the right questions. Asking the right questions establishes the factual background and facilitates an early understanding of the business context. This allows organisations to assess which employment law tools should be deployed and the consequences of using them. Asking the right questions requires instinct and experience. If the company's objectives are not thoroughly explored before the first appointment for discussions with employee representatives is made, this can have unfortunate consequences for the restructuring process.

Thinking out of the box

It is also often important to ‘think out of the box’. This may refer to legal issues, such as transformational or other corporate law issues. Depending on the business context, tax law can also play a role.

In addition, it is important to keep an eye on ‘soft’ factors. This includes communicating about restructuring measures internally (e. g. to the supervisory board, works council, and employees) and to external stakeholders such as customers and shareholders. How communication is managed for a particular restructuring project is subject to various factors. These may include, for example, the negotiation goals to be achieved, time available, money available for a redundancy scheme and the impact of restructuring on customer relationships.

Project management – who?

Efficient project management is essential to create and maintain an overview of the legal and other processes involved in restructuring. Ideally, the project would be managed by the company itself. If this is not possible, external support is advisable and may be necessary. From what sector external project management help should be recruited depends on the business context and the objectives of the restructuring. If the employment law restructuring is part of a broader overarching project (e. g. corporate law or organisational restructuring), a corresponding overarching project management function outside of employment law or HR may be appropriate. If, on the other hand, employment law issues are paramount, project management should focus on employment law and HR. Where there are overlaps between parts of the project or if there are parts that can be separated out, it may be worth considering multiple project management teams with clearly assigned individual responsibilities. In this scenario, coordination at a higher level (e. g. by a steering committee) is just as important as clearly assigned overall responsibility. This can be the management board’s responsibility, if that is compatible with the board members’ commitments. In many cases there are executive departments located below the management board in the company’s hierarchy that are also qualified to assume overall responsibility.

Project management – how?

Once it is clear who will take over project management, the organisation should establish effective, functional processes, which work even where there is time pressure. This extends to mundane tasks such as keeping and updating to-do lists, preparing internal and external meetings and steering regular project meetings. However, organisations should anticipate that crises will arise and will need to be resolved swiftly: the necessary crisis management procedures should be put in place. Efficient, goal-oriented, problem-solving communication between project teams is crucial, both in calm times and in crises. In an international context, it is particularly important to take into account local differences in communication style. British people communicate differently from the French or Americans and not just in times of crisis. A basic understanding of these nuances in communication style is important in order to assess whether all teams involved in a restructuring project are communicating on the same wavelength and share a common understanding of timing and to-dos, some of which will be time critical.

To be continued …