Termination due to closure of business: Right to compensation?

When a company or business is permanently closed, it is often due to ‘termination due to closure of business’. There are clear and strict rules for this. An employer who wants to issue a termination due to closure of business must, for example, observe notice periods and, if necessary, involve the works council. This article provides an overview of the employment law framework, the role of the works council and possible claims for severance pay. It also explains in which cases a termination may be invalid and whether an action for unfair dismissal might be advisable.

General – Termination due to termination of business is permissible

In principle, an employer can issue redundancy notices if the business is permanently closed down completely. This is because the jobs are lost as a result of the closure of the business. As a rule, the conditions for a valid redundancy due to operational reasons are set out in the Protection against Dismissal Act. However, all legal requirements must be met. The dismissal must be issued in writing and the works council, if one exists, must be heard beforehand. In addition, the statutory or contractually agreed notice periods must be observed. In the case of mass redundancies, the employer is obliged to inform the Federal Employment Agency in good time. If this is neglected, the termination may be invalid.

Notice periods must also be observed when a business is closed

The notice periods are based on the statutory provisions of § 622 BGB or on individual employment contracts or collective agreements. The statutory periods are scaled according to the length of service and range from four weeks to seven months. It is important to note that these periods must also be observed when a business is closed down. A shortening of the periods is only possible in exceptional cases and requires a clear contractual basis or the consent of both parties.

Severance pay for termination due to closure of business

There is generally no general legal entitlement to severance pay – not even in the case of a termination due to closure of business. However, severance pay can be applied in the following cases:

• Social plan: In larger companies, a social plan is often agreed between the employer and the works council that provides for severance payments.
• Termination agreement: Employer and employee can mutually agree to terminate the employment relationship in return for a severance payment.
• Action for unfair dismissal: If the employee takes legal action against the dismissal, a severance payment may be made as part of a settlement.

The amount of the severance payment varies and depends on various factors, such as the length of service, the age of the employee and the financial resources of the employer.

Invalidity of termination due to closure of the business

Not every termination in connection with a closure of the business is automatically valid. The following points can lead to the invalidity of the termination:

• Formal errors: If the written form is missing or the works council has not been properly heard, the termination is invalid. If the Federal Employment Agency is not heard or is heard incorrectly in the case of mass redundancies, the dismissals can also be challenged.
• Transfer of business: If the business or part of the business is taken over by another company, this constitutes a transfer of business pursuant to Section 613a of the German Civil Code (Bürgerliches Gesetzbuch – BGB). In this case, the employment relationships pass to the new owner, and termination for this reason is not permitted. A transfer of business can also occur if essential operating resources or employees are taken over. Employees should therefore have it checked whether a complete closure or a transfer is actually taking place.
• Social selection: When selecting employees to be dismissed, social aspects such as length of service, age, maintenance obligations and severe disability must be taken into account. If this social selection is flawed, the dismissal can be contested. A precise examination is necessary, especially in the case of partial closures.
• Special protection against dismissal: Certain groups of people, such as severely disabled people, pregnant women or employees on parental leave, enjoy special protection against dismissal. In these cases, dismissal is only possible under special circumstances and with the approval of the relevant authorities. If a dismissal is carried out without this approval, it is invalid.

Employees who doubt the lawfulness of their dismissal should seek legal advice, as an action for unfair dismissal may, under certain circumstances, enable them to continue in their employment or to receive compensation.

What can the works council do if an employee is dismissed because a business is being closed down?

The works council has important co-determination rights when it comes to dismissals due to a business closure. It must be heard before any dismissal; if this does not happen, the dismissal is invalid. If mass redundancies are planned, the employer is obliged to negotiate a reconciliation of interests and a social plan with the works council. The social compensation plan is designed to mitigate the economic disadvantages for the employees, for example through severance payments or support in finding new jobs.

Frequently asked questions (FAQs)

How long is the notice period for a business closure?

The notice period depends on the length of service and, according to Section 622 of the German Civil Code (BGB), is between four weeks and seven months. Individual employment or collective agreements may contain different provisions. In addition, the employer must ensure that all notice periods are correctly observed, as a notice period that is too short can render the termination invalid.

What applies in the event of termination due to closure of a small business?

The Unfair Dismissal Protection Act does not apply to small businesses, i.e. businesses with ten or fewer employees. Nevertheless, general rules on protection against unfair dismissal must be observed. A dismissal may not be issued without good reason or arbitrarily. In some cases, an action for unfair dismissal can be successful even in small businesses, especially if fundamental employment principles have been violated.

Is the closure of the business a valid reason for extraordinary termination?

In theory, the closure of the business could also constitute good cause for extraordinary termination, especially if the business is closed down at short notice and unexpectedly. However, the hurdles for instant dismissal are very high. The employer must prove that further employment is absolutely impossible. Very difficult. Employees should always have an instant dismissal checked by a specialist lawyer for employment law, as a proper dismissal with notice is often required.

Can you be dismissed despite parental leave due to closure of the business?

During parental leave, there is special protection against dismissal. Dismissal is only possible in exceptional cases and with the approval of the relevant supervisory authority. Such an exception may apply in the event of a complete closure of the business, but an individual examination is required.

Is an action for unfair dismissal worthwhile in the event of a business closure?

An action for unfair dismissal can be useful to have the lawfulness of the dismissal reviewed and, if necessary, to obtain severance pay. However, it is important to file the lawsuit within three weeks of receiving the notice of termination. A lawsuit can be particularly successful if there are doubts about the permanent closure of the business or if mistakes have been made in the social selection or in observing the notice period.

In case of uncertainty or questions, employees should seek legal advice to clarify their individual options and rights.