Restructuring in Germany – collective redundancy dismissals and the social justification requirement

German businesses hit hard by the impact of the pandemic have welcomed news that the Justice Ministry is planning to let them restructure and avoid insolvency proceedings, provided they have a "compelling" business model. As Law.com reports, it's rare that lawyers and advisors in Germany so unequivocally praise new bankruptcy legislation as they have with a new draft bill to facilitate restructurings, a bill specifically designed to help in view of the impact Covid-19 is having on businesses in Germany. Deutsche Welle explains the country's planned relief for debt-ridden firms, a plan to let them restructure and avoid insolvency proceedings, provided that "compelling" business model condition is satisfied. The change essentially entails establishing a legal framework for the restructuring, and extending the deadline for over-indebted companies to file for insolvency - it changes from 3 weeks to 6 weeks, so buying more time. The news has been welcomed by businesses across every sector but especially those hardest hit by the pandemic. So which sectors have been hardest hit in Germany? That question has been answered by the National Law Review. Their latest study shows, at the centre of restructuring efforts, are two of Germany’s key industries – the automotive sector and engineering. In addition they say, as in the UK, aviation and the tourism sector have been hit very. The FS sector in Germany is also under intense pressure. Frankfurt is the corporate headquarters of most of the major German financial institutions, including Deutsche Bank and Commerzbank, and the FT reports that Deutsche Bank plans to close 1 in 5 banks in Germany as the virus drives more customers online. Deutsche Welle carries that news too, of course, and their headline is Frankfurt is facing massive banking job cuts and reports how the city appears to be struggling to tempt financiers from London despite Brexit. So that is the background. So, just as in the UK, a lot of job cuts, a lot of restructuring, a lot of redundancies right across the country. So what about Germany's employment laws when it comes to mass redundancies? As in the UK, carrying out mass redundancy exercises has strict prerequisites but under German law, unlike the UK, there is an important social dimension which a business must address. What does that mean exactly? On the line from Düsseldorf to explain, Johannes Altstadt: 
 
Johannes Altstadt: “According to the German law against unfair dismissal, basically nearly every dismissal requires a so-called social justification. There are exactly three reasons that can socially justify a dismissal and the important one in the context of collective redundancies is the so-called dismissal for operational reasons or, less technically, the dismissal for economic reasons. So what do we need to prepare for a proper dismissal for operational reasons? There are basically four steps. The first step is the so-called entrepreneurial decision, or the management decision. This is the rather easy part because in Germany companies basically can freely run and structure their business as they would like to, but that's only the theory because in the second step it becomes more tricky because you now require a comprehensive and very clear concept that shows exactly how the implementation of your restructuring measures leads to the elimination, or to the lapse, of a concrete position of a concrete job for a concrete employee. The second relatively high hurdle in most projects would be so-called social selection. You cannot just dismiss the employee who has the position that has lapsed due to your restructuring decision, or due to your concept, you have to make a group of comparable employees which means you have to take all employees with similar qualifications, similar hierarchical status in your operation and have to rank them according to their social strengths. The kind of problematic result with this often is that older employees with family, or maybe with health issues, are socially protected and you have to dismiss the younger ones. There are some exemptions from this rule but they are not easy to implement so this general social selection principle is, at least from a management perspective, always a little bit problematic, in particular, of course, in terms of having a healthy age structure to your to your organisation. The last aspect to consider is the ultima ratio principle which basically says that you have to find any reasonable potential other employment in your entire company to prevent the dismissal and if you don't the dismissal will be invalid. So, basically this was the legal outset for a dismissal for operational reasons, in a nutshell, but of course there are several further aspects to take into account when you do such a redundancy project. For example, if you have a works council you have very strict consultation, information obligations, there is such things as special dismissal protection for certain groups of employees and, for having a proper dismissal. So, summing things up, it's definitely challenging and requires really good preparation to make a restructuring that leads to a headcount reduction in Germany and, ideally, you have a good employment lawyer who advises you.”

If you want more detail on dismissal procedure in Germany you can find it on the Out-law website. It is one of a number of Out-law guides which have been put together by the team in Germany.