Termination due to insolvency – what employees need to bear in mind

Insolvency is a special situation for companies and employees that raises various employment-related questions: What does the opening of insolvency proceedings mean for existing employment relationships? Under what conditions is termination due to insolvency possible and what deadlines apply? The question also arises as to the roles of the insolvency administrator and the works council. Even if an insolvency does not automatically lead to the termination of an employment relationship, the ‘rules of the game’ can change dramatically. The following article provides an overview of the most important legal regulations, as well as the rights and options for action for employees.

General: Is termination by the employer permissible in the event of insolvency?

In principle, an employer may terminate an employment relationship even during insolvency proceedings. However, the employer’s insolvency does not automatically lead to the termination of employment relationships, nor is there a separate reason for termination ‘insolvency on the part of the employer’. The opening of insolvency proceedings alone expressly does not constitute a reason for termination, and the employer’s insolvency does not lead to the termination of the employment relationship.

Even during insolvency proceedings, a termination remains possible only under the usual conditions – it must be based on personal, behavioural or operational reasons. In addition, the statutory protection against dismissal, in particular the Protection against Dismissal Act, must be observed. As a rule, the insolvency administrator decides on a termination and must observe a maximum notice period of three months. Whether the termination is carried out by the insolvency administrator or the employer themselves depends on the respective authority to terminate.

However, the ‘rules of the game’ change in the context of insolvency proceedings, and terminations are generally facilitated by the insolvency code. When and by whom a termination can be declared during insolvency proceedings depends, however, on the type of insolvency proceedings in the individual case:

What types of insolvency proceedings are there?

Insolvency proceedings can be conducted under the debtor’s own administration or under third-party administration:

• Self-administration: The existing management remains in office and continues to run the business. A court-appointed trustee monitors compliance with the legal requirements. In this constellation, the employer can continue to issue terminations itself, but must comply with the special insolvency law requirements.
• External administration: In this case, an insolvency administrator takes over the entire management of the company and decides on terminations. The insolvency administrator must take into account the economic interests of the creditors and can, under certain conditions, also issue dismissals for operational reasons.

In both cases, the general employment protection provisions continue to apply. This means that insolvency alone does not constitute sufficient grounds for termination; for example, there must be operational reasons that justify job cuts.

What period of notice applies in the event of insolvency?

Before insolvency proceedings begin, the normal periods of notice apply for ordinary terminations. This changes when insolvency proceedings begin. This is because the insolvency administrator can terminate employment relationships with a period of notice of a maximum of three months to the end of the month, irrespective of longer contractual or collective agreements. This applies to both employees and senior executives. This regulation serves to facilitate the restructuring of the company. For employees who originally had longer notice periods, this can mean a significant reduction – with considerable loss of income in individual cases.

Role of the works council in the event of termination due to insolvency

The works council retains its co-determination rights even during insolvency proceedings. The works council must be heard by the employer before any termination. In the case of planned mass dismissal, a social selection is required and the works council can make proposals to avoid or reduce redundancies.

A social plan reconciliation of interests between the insolvency administrator and the works council can reduce the chances of employees successfully contesting their dismissal.

Termination agreement and severance pay in the event of insolvency

During insolvency, employees have the option of agreeing to a termination agreement and terminating the employment relationship by mutual consent. These may include agreements on severance pay for employees. However, caution is advised as this can affect the receipt of unemployment benefits, in particular by imposing a blocking period.

In insolvency proceedings, severance payments are often lower than they would be otherwise, because redundancies are often justified and because severance payments are lower because social compensation plans with a reconciliation of interests are often agreed, which also frequently lead to a lower severance payment – and because the company is often in a situation where high severance payments are not possible at all.

Action for unfair dismissal in the event of insolvency

Even during insolvency proceedings, employees can file an action for unfair dismissal. The time limit for an action for unfair dismissal is three weeks after receiving notice of termination. A claim can be particularly promising if the social selection was carried out incorrectly or if special protection against dismissal exists, for example for severely disabled or pregnant persons. In many cases, a successful lawsuit can lead to a severance payment or continued employment with another employer. In the case of such a transfer of operations, the employment relationship is continued with a new employer. Due to the complexity of such proceedings, it is advisable to consult a specialist lawyer in employment law to assess the individual prospects of success and develop a suitable strategy.

Frequently asked questions (FAQs)

Can I be dismissed during preliminary insolvency proceedings?

Dismissals can also occur during preliminary insolvency proceedings. A distinction must be made here between the ‘strong’ and the ‘weak’ insolvency administrator. The ‘strong’ insolvency administrator can issue dismissals themselves, while the ‘weak’ insolvency administrator allows the employer to continue issuing dismissals. This must also comply with legal and collective bargaining requirements. It is necessary to check whether the company can continue to operate or whether jobs need to be cut. The co-determination rights of the works council must be observed.

Can you be dismissed with immediate effect in the event of insolvency?

No. Immediate termination is only possible if there is a special reason, such as gross misconduct on the part of the employee. Insolvency alone does not justify immediate termination. Such a reason could be, for example, theft at work or serious breaches of duty.

Is it possible to terminate an employment contract due to insolvency?

Yes – if the company has to reduce jobs, terminations for operational reasons are permissible. However, the employer must make a social selection and cannot terminate the contract arbitrarily. Factors such as length of service, age and social circumstances are taken into account.

What are the special features of a termination due to insolvency?

The maximum notice period is three months to the end of the month. In addition, in many cases it is no longer the employer who makes the decisions, but the insolvency administrator. Employees should also bear in mind that if their employer is no longer able to pay their salaries, the insolvency substitute will only be paid for a maximum of three months.

Should employees hand in their notice during an insolvency?

That depends on the individual situation. If a new job is on the horizon, resigning can make sense. Otherwise, employees should check whether they are entitled to insolvency money or severance pay. If redundancies are likely anyway, it may make sense to wait for the employer to terminate the contract. Resigning can also affect the entitlement to unemployment benefits, as a blocking period for unemployment benefits may be imposed. In such cases, it is advisable to consult a specialist lawyer for employment in order to weigh up the possible consequences of resigning.

How much is the severance pay in the event of insolvency proceedings?

Severance payments are often somewhat lower in the event of insolvency than they would be otherwise. However, the amount of the severance payment depends on general factors such as the length of service, salary and the effectiveness of the termination.

What is the notice period in the event of insolvency?

The maximum notice period in insolvency proceedings is three months to the end of the month, unless a longer period has been contractually or collectively agreed. Shorter notice periods remain unaffected if the employment contract or collective agreement stipulates otherwise.

Is insolvency a permissible reason for termination?

No. Insolvency alone is not sufficient grounds for dismissal. There must be economic or operational requirements that make job cuts necessary. Employees should check whether the social criteria have been correctly applied and, if necessary, consider taking action for unfair dismissal.