Social plan & reconciliation of interests: severance pay and criteria

Companies often have to adapt to changing economic conditions. These adjustments can range from organisational changes to the closure or downsizing of a business. In the event of an operational change, such as the closure of a business, the works council and the employer first negotiate a reconciliation of interests to regulate the implementation of the measures. A social plan (or redundancy plan) is then negotiated. This is intended to compensate or mitigate the economic disadvantages suffered by affected employees, for example by providing severance pay in the event of redundancies for operational reasons, or by facilitating transfers or retraining. This article explains the differences between a reconciliation of interests and a social plan, and the claims that may arise from the plan.

The most important points at a glance:

• If an employer is planning an ‘operational change’ (e.g. closure of operations) in a company with more than 20 eligible voters, they must negotiate a reconciliation of interests and a social plan with the works council.
• The objective of the social plan is to: To mitigate or compensate for the economic disadvantages of the operational change for the affected employees. The social plan establishes direct rights for employees.
• Contents of the social plan: The contents depend on the operational change in question. These include claims for severance pay in the event of redundancy for operational reasons, possible transfers to transfer companies, retraining and reimbursement of relocation costs.
• Severance payments in the social plan: The calculation of the severance pay claim is based on the respective social plan. Employers and works councils have considerable leeway in this regard. The payment can be determined using a points system or various calculation formulas (e.g. length of service x age x specified factor).

Reconciliation of interests and social plan in the event of operational changes

If there is an operational change, an employer with more than 20 employees must negotiate a reconciliation of interests and a social plan with the works council.

This can include reducing, relocating or closing the business, merging with other businesses, or making fundamental changes to the business organisation. A pure reduction in personnel can also constitute an operational change. Furthermore, an operational change must be capable of causing significant disadvantages for the workforce.

Negotiation of the reconciliation of interests

The employer and the works council must first negotiate a reconciliation of interests:

• This determines how the planned measures will be implemented, including what changes will be made to the company, how many employees will be dismissed or transferred, and when dismissals will take place.
• The reconciliation of interests does not grant employees any direct rights.
• If the employer and the works council cannot reach an agreement, the employer can implement the measures without one.

Negotiation of a social plan

This is followed by negotiations to finalise a social plan.

• The social plan is a binding agreement between the employer and the works council. Its purpose is to mitigate or compensate for any economic disadvantages suffered by employees as a result of operational changes.
• The social plan automatically confers certain rights on employees, such as severance payments and retraining.
• If the works council and employer cannot agree on a social plan voluntarily, a company conciliation committee must draw one up.

Social plan obligations do not apply to start-ups

In newly founded companies, the employer and works council can reach a voluntary agreement on a social plan within the first four years of the company’s foundation. If no such agreement is reached, no social plan can be enforced during this period; a conciliation committee cannot impose a social plan on the parties involved.

This does not apply to existing companies and groups that are being restructured. The four years begin when business activity commences. As this must be reported to the tax office, the works council can verify the start date. It is only the age of the company (not the age of the business) that is decisive. Example: If a company that is less than four years old takes over a business that has been in existence for more than four years, there is no obligation to implement a social plan.

Contents of a social plan

The works council and the employer have considerable leeway when negotiating a social plan. They can decide which disadvantages to compensate or mitigate, and how to do so. Decisive factors include what is changing in the business, its impact on employees, the company’s financial situation, and the amount invested in the social plan.

A social plan usually covers issues such as:

• Severance payments: If redundancies are announced for operational reasons, the works council and the employer will determine the formula or system used to calculate the payments. The negotiating parties also decide whether certain groups of employees can be treated differently within the framework of equal treatment. Example: In practice, employees approaching retirement age are often treated differently from those who still need to enter the labour market. Further information on the criteria used to calculate severance pay can be found in the following chapter.
• Social plans often contain terms that specify the conditions under which an employee can receive severance pay if they resign or agree to a mutual termination.
• Transfer company: Social plans often give employees the option of transferring to a transfer company for up to 12 months instead of being made redundant for operational reasons. The purpose of this is to support employees in their job search through counselling and further training. The social plan specifies the additional top-up payments that the employer will pay on top of the state transfer short-time working allowance. In most cases, the social plan also includes a severance payment arrangement for this group.
• Further training initiatives: Employers and works councils can offer redundant employees training and further education.
• Reimbursement of relocation and transport costs: If the company or individual employees are changing location, the social plan will cover the costs of relocation or travel expenses.
• Wage compensation is provided for a different job assignment, provided that it is only a transfer and not a dismissal for operational reasons.
• There are also regulations on remaining in company housing.

Severance payments according to the social plan

Entitlement to and calculation of severance pay are determined by the respective social plan. This plan is agreed by the employer and the works council, who decide which groups of employees receive which severance payments in a given situation, as well as the criteria for calculating the pay. There are many different possibilities. The two most frequent examples in practice are as follows:

1. Severance pay according to a points system

The points system is defined in the social plan as follows:

• How many points are given for each age group? The older the employee, the higher the number of points awarded. The number of points awarded may also be capped. However, the company’s stakeholders can stipulate that the number of points decreases from a certain age. For example, employees approaching retirement age no longer need to be placed on the labour market and often have financial security through their pension, so they are awarded fewer points.
• How many points are given for length of service?
• Points can also be allocated based on other criteria, such as marital status, maintenance obligations and severe disability.
• It is important to determine the monetary value of a point in euros.

Example of a social plan points table:

A simple points system might look like this:

Criterion	Points allocation
Length of service 1st – 10th year	1 point
Length of service from 11th year onwards	2 points
Age (for each full year of life up to 58)	1 point/per year
Age over 58 (employees approaching retirement)	None (special regulations)
Maintenance obligations per child	4 points
Recognised severe disability (up to 50% GdB)	5 points
Recognised severe disability (for every additional 10% above 50%: 1 additional point)	1 point/10%

An employee who has worked for the company for 20 years, is 52 years old, and has three children would receive 94 points in total. In the same situation, a severely disabled person with a 50% GdB would receive 99 points.

2. Severance pay according to specific formulas/criteria

In the social plan, severance payments can also be determined using specific formulas, for example:

• Formula: ‘Length of service x age x factor’. The factor is specified in the social plan depending on the company’s financial situation. For example: The factor is 0.5 for employees with five years of service, 0.7 for ten years, and so on.
• Base amount: A minimum amount that every employee receives, regardless of the formula.
• There are maximum amounts for certain groups, e.g. employees aged 50 or 55, for which the amount is capped.
• Additional severance pay components: The social plan may stipulate that certain groups of employees receive additional severance pay, e.g. severely disabled persons or certain age groups.

Tip: The content of a social plan is usually announced at work meetings or via the company’s usual communication channels. However, social plans are often very extensive and complicated. In such cases, employees are advised to obtain information from the works council or the human resources department, and to seek advice if necessary. If further advice is needed, employees should consult a solicitor who specialises in employment law.

Social plan and prospects of success of an action for unfair dismissal

Redundancies for operational reasons are only valid if they are socially justified. Therefore, the employer must prove that the dismissal is justified by demonstrating that:

1. urgent operational requirements have led to the loss of the job; and
2. there are no less severe measures in the form of alternative employment within the company/organisation. and
3. the employer has carried out a social selection, i.e. they have selected the employees who are least socially vulnerable in terms of length of service, age, maintenance obligations and severe disability from among comparable employees.

The same conditions apply if a social plan is in place. Even with a social plan, the employer must prove these conditions in subsequent unfair dismissal lawsuits. If the employer cannot prove these conditions, or if errors have been made in the social selection process, the dismissal will be deemed invalid. The likelihood of success in an unfair dismissal lawsuit depends on whether the conditions have been met, rather than on the existence of a social plan.

Exception: If a reconciliation of interests is in place alongside the social plan and the employees to be dismissed are named in the reconciliation, it is assumed that the dismissals are due to urgent operational requirements and that the social selection may only be reviewed for obvious errors. In this case, the chances of success in an unfair dismissal claim are very low.

Ineffectiveness of a social plan

When drafting a social plan, the parties involved in the business can decide which disadvantages for employees should be compensated. They can also decide which disadvantages should only be mitigated. In addition, they determine the extent of the compensation or mitigation. However, the regulations must be just, fair and objective, and comply with the principle of equal treatment, for example. The social concerns of the affected employees and the company’s economic interests must, of course, be taken into account. If these principles are violated, the following applies:

• Courts will at first assume that only a specific part of a social plan is invalid. For example, this could be an invalid provision on severance pay for employees approaching retirement age. The rest of the plan remains valid as long as it still makes sense.
• However, if the invalid part is so essential that the social plan no longer makes sense without it, the whole plan becomes invalid. For example, this can apply to an invalid provision on the calculation of the basic severance payment.

If the social plan is invalid as a whole, the following applies in the second case:

• The redundancy remains valid. An action for unfair dismissal can be brought separately.
• Employees cannot make any claims under the invalid social plan.
• However, either the employer and the works council must negotiate a new social plan, or the conciliation committee must decide.
• Employees can then assert their claims under the new social plan.

Furthermore, employees may be entitled to disadvantage compensation if they meet the following criteria:

• An employer who deviates from a reconciliation of interests without compelling reasons (e.g. by terminating employment earlier or dismissing a larger number of employees) can be sued for payment of severance pay or compensation for other economic disadvantages. Employees dismissed as a result of this can sue for severance pay or claim compensation for other economic losses.
• The same applies if the employer implements a change in operations (e.g. business closure) without seriously negotiating a reconciliation of interests with the works council first.

Frequently asked questions (FAQ)