Termination due to closure of business: Right to compensation?

If a company or branch closes for good, employers often issue a termination due to business closure. In principle, when business activities are not continued, it is legal to fire the employees. But this is Germany, so rules apply, even when employers are winding up the business completely. Employers must observe notice periods, involve the works council where it exists and, in some cases, notify the Employment Agency of mass redundancies. Our guide explains how a termination due to business closure works, what role the works council plays, when severance is realistic and in which situations you can challenge a dismissal in court within the three week time limit.

General principles: Termination due to business closure is possible

When complete and permanent business closure occurs, employers can – in general – legally issue dismissals for operational reasons. This is because jobs are eliminated through facility closure. Requirements for valid operational dismissal under the Dismissal Protection Act are typically met. However, all legal requirements must be observed. Dismissal must be in writing, and the works council, if present, must be consulted beforehand. Additionally, statutory or contractually agreed notice periods must be observed. For mass layoffs, employers must inform the Federal Employment Agency in time. Without notification, dismissal is often invalid.

Notice periods even with business closure

Notice periods follow statutory provisions¹ or individual employment or collective agreements. Statutory periods range from four weeks to seven months based on length of employment. Note that even with business closure, these periods must be observed. Period reduction is only possible in exceptional cases and requires clear contractual basis or both parties’ consent.

Severance for termination due to business closure

Generally, no statutory severance claim exists – even for operational dismissal due to business closure. However, severance pay can apply in these cases:

• Social plan: In larger companies, a social plan between employer and works council often provides for severance payments.
• Termination agreement: Employer and employee agree on a termination agreement to end employment in exchange for severance payment.
• Dismissal protection lawsuit: If employees sue against unfair dismissal, even with business closure.

Severance amount varies and depends on various factors, including length of employment, employee age, and employer’s financial capacity.

Invalidity of dismissal due to facility closure

Not every dismissal related to facility closure is automatically valid. These points can lead to dismissal invalidity:

• Formal errors: Missing written form or works council consultation makes dismissal invalid. Defective or missing Federal Employment Agency consultation for mass layoffs can also enable challenging dismissals.
• Business transfer: If the business or part is taken over by another company, a business transfer per Section 613a BGB exists. In this case, employment relationships transfer to the new owner, and dismissal for this reason is impermissible. Business transfer can also exist when essential operational assets or employees are taken over. Employees should therefore verify whether complete closure or transfer is actually occurring.
• Social selection: When selecting employees for dismissal, employers must consider social factors like tenure, age, dependents, and severe disability. If social selection is flawed, dismissal can be challenged. Particularly with partial facility closures, precise examination is necessary.
• Special dismissal protection: Certain groups, like disabled persons, pregnant women, or those on parental leave, enjoy special dismissal protection. Dismissal is only possible under special conditions and with competent authorities’ approval. If dismissal occurs without this approval, it’s invalid.

Employees should seek legal advice if doubting their dismissal’s legality, as a dismissal protection lawsuit may enable continued employment or severance.

What does the works council do for termination due to business closure?

The works council has important co-determination rights for dismissals due to business closure. Without consultation, dismissal is invalid. For planned mass layoffs, employers must negotiate a reconciliation of interests and a social plan with the works council. The social plan serves to mitigate economic disadvantages for employees, for example, through severance payments or job search support measures.

What to do if you are affected by a termination due to closure of business?

• Act quickly: In Germany, you usually only have three weeks from getting the termination letter to file a lawsuit. If you miss that deadline, even a clearly illegal dismissal often becomes untouchable.
• Don’t just trust the word “closure”: Ask what is really going on – re customers, assets and teams. If parts of the business are taken over elsewhere, this can be a business transfer – and then your job may actually “move” to the new owner instead of disappearing.
• Protect your money and benefits: Register as job-seeking/unemployed early with the Employment Agency and make sure you claim everything you’re owed (salary, overtime, vacation). If insolvency is on the table, ask about Insolvenzgeld for unpaid wages.

Frequently asked questions

1. Section 622 BGB ↩︎