Layoffs: What conditions must be met?

The German Protection against Dismissal Act (KSchG) stipulates that an employer can only terminate an employment relationship if there is a justified reason for layoffs. In addition to the employee’s characteristics and behaviour, grounds for layoffs (Betriebsbedingte Kündigungen) can also be based on operational aspects. Such a dismissal for operational reasons is justified if urgent business necessities preclude the continuation of the employment relationship.

Reasons for layoffs

Declining orders and falling sales:

In tense economic situations, companies can fall victim to a shortage of orders and declining sales. This can lead to necessary redundancies of employees for operational reasons. However, the employer is obliged by law to make it clear that it has less work to allocate in the long term. Alternatively, an employer may decide to reorganise its business in the event of a decline in orders and/or turnover in order to adapt the company structure to the new situation in the long term. Unfortunately, this usually leads to the elimination of positions.

Restructuring:

A reorganisation of the company can be initiated if the employer deems it necessary to modernise his company, and not only during an economic crisis. Employers generally have the freedom to make such decisions and, if necessary, to lay off employees for operational reasons, provided that the reorganisation plan is well thought out and long-term.

Closure of the business:

If reorganisations and adjustments are unsuccessful, an employer may close the business. This usually justifies compulsory redundancy, as the employees cannot be kept on.

Change of ownership or transfer of business:

If an employer sells the company and a change of ownership or transfer of business takes place as a result, a layoff is not permitted, unlike a closure of business.

Insolvency:

If insolvency proceedings are opened against the employer, the decision on the future of the company usually lies with the insolvency administrator. He determines whether the business or parts of it should be closed or whether it is necessary to introduce rationalisation measures. In such a case, the insolvency administrator, and not the employer itself, gives notice. With regard to certain requirements in insolvency proceedings under self-administration – in which case there is no insolvency administrator – certain simplifications apply, but these are now relevant for the employer itself.

What is the notice period for layoffs for operational reasons?

Termination of employment does not immediately end the employment relationship. The employment relationship continues until the end of the notice period. The statutory notice period applies, unless the labour or collective agreement provides otherwise. The length of the notice period depends on how long a person has been employed by the company. Labour and collective agreements may provide for different periods within certain limits. The exact notice periods are set out in § 622 BGB. During the probationary period, a shortened notice period of only two weeks applies (§ 622(3) BGB). In addition, other provisions may apply in the case of special regulations on protection against dismissal.

Is there an entitlement to severance pay in the event of layoffs?

There is no general obligation for employers to pay severance to their employees in the event of layoff. It is therefore up to the individual employer whether or not such a payment is made. However, there is often a good chance of receiving severance pay if you are made redundant for operational reasons. Employees may be entitled to severance pay in the following scenarios:

• When a company is reorganised or closed, it is not unusual for the employer and works council to agree measures in the redundancy plan that benefit the employees affected. A severance payment is often provided for here.
• In the event of an action for unfair dismissal brought by the employee, both parties can reach an agreement in court. In this case, it is usually agreed that the employee will accept the dismissal in exchange for a severance payment.
• Employers can offer the employee a severance payment in the event of dismissal for operational reasons if the employee promises not to take legal action against the dismissal.

Our conclusion on layoffs

• A lack of work orders, falling revenues, reorganisations and plant closures can lead to dismissals for operational reasons. However, a transfer of business or a change of business owner alone does not justify such a dismissal.
• In the event of a company insolvency, the decision regarding redundancies is often in the hands of the insolvency administrator.
• The length of the notice period depends on how long the employee has been with the company: the longer the employee has been with the company, the longer the notice period.
• Employees are generally not entitled to severance pay, but the chances of receiving this benefit are nevertheless quite good.
• There is only a short period of three weeks to contest a layoff. Due to the potential errors in a dismissal for operational reasons, employees should definitely have their dismissal reviewed by a labour law expert.