Termination due to insolvency – what employees need to know

When an employer becomes insolvent, it’s a difficult time for everyone involved. For employees, it raises pressing legal questions: What happens to existing employment contracts? Can your employer or the insolvency administrator terminate your job – and under what conditions? Which deadlines apply? And what rights do you have during this process? This guide explains the key rules, rights, and practical options for employees affected by insolvency proceedings in Germany.

Employer termination during insolvency

The opening of insolvency proceedings does not automatically terminate existing employment relationships. Insolvency, on its own, is not a valid reason for dismissal. However, the insolvency administrator can issue both ordinary and extraordinary terminations after proceedings begin.

The general and special dismissal protection rules continue to apply under the German Dismissal Protection Act (KSchG). Terminations must be based on personal, conduct-related, or operational reasons, and all formal requirements — such as written form and notice periods — must be met.

Notice periods during insolvency

If the insolvency administrator terminates the employment, the notice period is three months to the end of the month, unless a shorter contractual or collective bargaining period applies. Where a shorter period is stipulated in the employment or collective agreement, that period takes precedence. Even if a longer period has been agreed, the maximum notice period remains three months (§ 113 InsO = German Insolvency Code).

Once insolvency proceedings are opened, the insolvency administrator takes over the employer’s rights and obligations – including the right to dismiss. If the court orders self-administration (Eigenverwaltung), the employer retains management under the supervision of a court-appointed trustee (Sachwalter), who oversees the process and any dismissals.

Special rules for termination during insolvency

Even during insolvency, dismissal protection remains — but the Insolvency Code allows certain exceptions and relaxations ([§ 113 InsO]):

• If the employment contract excludes ordinary termination (e.g. due to long service), a termination with three months’ notice to month-end is still allowed.
• If the contract is fixed-term without an explicit termination clause, the insolvency administrator can terminate it with three months’ notice. If the fixed term ends earlier, the contract simply expires.
• Longer notice periods (more than three months) are shortened to three months for both employers and employees.

These rules aim to allow faster restructuring of insolvent companies while maintaining some employee protection.

Role of the works council

The works council (Betriebsrat) retains all co-determination rights during insolvency. It must be consulted before every termination — otherwise, the dismissal is invalid.

For planned mass layoffs, the insolvency administrator must inform and consult with the works council.

Reconciliation of interests (Interessenausgleich)

Under [§ 125 InsO], a reconciliation of interests agreement between the insolvency administrator and the works council can limit employees’ legal protection. If affected employees are named in this agreement, courts presume that urgent operational reasons exist.

In these cases, the court can only review the social selection (age, years of service, dependents) for obvious errors. This makes dismissals harder to challenge successfully.

Social plan during insolvency

The insolvency administrator and the works council may negotiate a social plan (Sozialplan) — a form of compensation for employees losing their jobs. However, there are strict legal limits:

• Individual severance payments (Abfindungen) are capped at 2.5 months’ salary.
• Social plan payments are considered insolvency estate liabilities (Masseverbindlichkeiten) and must be paid in full if sufficient funds exist.
• Social plan claims cannot exceed one-third of the available insolvency assets.
• The court can approve partial payments (Abschlagszahlungen) if liquidity allows.

Termination agreements and severance pay during insolvency

Employees may agree to end their employment voluntarily through a termination agreement (Aufhebungsvertrag) during insolvency. Such agreements can include a severance payment, but caution is needed: accepting severance in this situation may trigger a waiting period (Sperrzeit) for unemployment benefits (Arbeitslosengeld).

Severance offers during insolvency are usually lower because dismissals are often operationally justified and funds are limited. Social plan payments are further restricted by law and available assets.

Dismissal protection claims during insolvency

Even during insolvency, employees can file a dismissal protection claim (Kündigungsschutzklage). The deadline is three weeks from receipt of the termination letter.

Such claims are particularly worthwhile when the social selection was incorrect or when special protection applies (e.g. for pregnant employees or employees with disabilities). A successful claim may result in reinstatement or a better severance offer.

Preserve your rights – mind the three-week deadline! German labor courts tend to be employee-friendly, and many employees achieve higher settlements after filing. Because insolvency proceedings are complex, seek advice from a specialist labor lawyer (Fachanwalt für Arbeitsrecht) to assess your options.

Frequently asked questions (FAQs)