Termination of employment in Germany

United Kingdom
Termination indemnities to be paid in the case of the termination of an employment contract by the employer
In general, one may answer the aforementioned question under German employment law as follows: There is no obligation to pay any severance compensation if the notice of termination given by the employer can be justified in line with employment law, except when termination is caused by operational changes in a business which has a works council. On the other hand the employer - in principle - has no unilateral right to terminate an employment contract without such a reason, even if its notice of termination is connected with the offer to make a severance payment. However, this is the law in theory. In practice, in most cases, employer and employee agree on a severance payment to avoid or to settle a possible dispute regarding the question whether the employer has fair reasons for a notice of termination or not, and it is quite common to start negotiations on the basis of a calculation of 50 % of a monthly salary per year of service with the company.

In detail:

I. The employer may terminate the contract of employment unilaterally by either giving ordinary notice of termination observing the relevant notice period or by an extraordinary termination with immediate effect. Both, ordinary and extraordinary termination, are subject to legal restrictions.

1. Under article 626 of the German Civil Code an employment contract can be terminated with immediate effect for 'serious cause'. Serious cause implies that, considering all the circumstances of the individual case and considering the interests of both of the contracting parties, the terminating party cannot be expected to continue the employment relationship to the end of the ordinary notice period or to the agreed end of the employment relationship.

Furthermore, such termination notice must be served within a period of two weeks after the terminating party became aware of the reason ("cause") which justifies the dismissal.

As all circumstances of the individual case have to be considered and since the federal employment court has refused to allow that the parties agree on certain grounds which will be conclusively considered as "serious cause", it is often ? even for employment law experts - not certain whether the cause in question may in the end justify the termination or not.

In the case of an ordinary termination the employer has to observe (a) the relevant notice period and (b) additionally-in most cases-he needs a specific reason to justify the termination.

a) The statutory notice periods are ruled by article 622 German Civil Code. The basic notice period is four weeks effective as of either the fifteenth or the end of the calendar month. It may be reduced to two weeks during a probationary period of six months and it extends in steps after two years of service with the company up to seven months to the end of a calendar month (in case of twenty years of service, whereas years of employment below the age of twenty-six are disregarded). Employer and employee may agree on longer notice periods but the notice period to be observed by the employee must not exceed the period to be observed by the employer. As in the case of an ordinary notice the termination of employment does not become effective until the end of the notice period. The employee remains employed throughout this period, thus being entitled to his salary and all benefits under the employment contract and under all other agreements and applicable regulations. Depending on the circumstances, or based on a regulation stipulated in the employment contract, the employer may order the employee's release from his work duty during the notice period, but even then the employee is entitled to all compensation payments mentioned above.

b) Employees who have been employed with the employer for more than six months and who are working in a business with regularly more than five employees are protected by the act against unfair dismissals (KSchG). Under article 1 KSchG the employer is not permitted to terminate the employment, unless the termination is socially justified by a specific reason either based on the employee's person, the employee's conduct or compelling business requirements. There is complex case law governing this area and once again it mostly depends on the circumstances of the individual case (and on the personality of the competent judge) whether a reason justifies a dismissal or not.

In all cases of unilateral termination, several further statutory restrictions/formalities must be observed by the employer. Every dismissal must be in writing and signed by a person who has the authority to represent the employer. The employer must be able to prove that the employee received the termination letter in due time. Prior to serving the termination letter, the works council - if one exists ? must be notified properly. The dismissal of pregnant or disabled employees is subject to prior approval of the competent authorities, and the contracts of works council members cannot - in principle ? be terminated without an important reason or without the consent of the works council irrespective of receiving the permission of the competent employment court. Each employee is entitled to start litigation and to request the employment court to examine the validity of his dismissal. The termination is void if the court comes to the conclusion that the termination is not justified. In this case the employment contract remains valid and the employee is still entitled to his salary and may go back to his employment. If the termination is justified the employment relationship is taken to have ended accordingly. With the exception of cases highlighted below under IV and V, in principle, in both of the above cases no severance payment becomes due. Only if the employment court.

declares the termination as socially unjustified but is convinced that further good cooperation between employer and employee seems definitely unlikely and the employee applies so before the end of the final hearing (in cases of an ordinary dismissal the employer may be entitled to do so likewise), the court may dissolve the employment and fix a severance payment (article 9 KSchG). According to article 10 KSchG such severance payment may not, with the exceptions set forth below, exceed the amount of twelve monthly salaries. This sum may be increased to fifteen months' salary if the employee is at least fifty years old and has been with the company for at least fifteen years and, furthermore, to eighteen months' salary in case of twenty or more years of service and at least fifty-five years of age. The employment courts look at the individual circumstances of the case and - in general - calculate the severance payment based on 50 to 100 % of the monthly salary per year of service with the employer.

However, with respect to the aforementioned preconditions such court decisions are quite rare.

II. Most dismissal cases are not contested but settled (during a court hearing or - more often - out of court between the parties).

Most of the time, due to the fact that (i) it is often uncertain whether a termination is justified and (ii) since it is important for the employer to know whether the termination is justified or not and (iii) in many cases employees are not interested/able to stand a long lasting conflict with the employer and are reluctant to quit a new job so that they can recommence work at their old business after several months/years of litigation, the parties of the employment contract amicably agree on the termination of their contract in connection with a severance pay granted by the employer. Because there is no statutory regulation/limit setting (with exception of article 9, 10 KSchG) a settlement agreement/severance payment one sometimes finds oneself in the position of bargaining. Notwithstanding that the formula "half a salary per each year of service" is quite common (as one may take from a recent publication, NZA 1999, 342), it is in the end a question of the individual case whether and under what conditions the parties enter into an agreement or not.

Depending on the circumstances that justify the termination- the branch, the company concerned and the social situation of the employee, there is a broad scope of possible claims and agreements. Maintaining employment contracts in branches with a high percentage of unemployment vis-a-vis senior employees who have been with the company for a long time, have a much higher priority than in branches with a lack of skilled employees and vis-a-vis young "singles" who are interested in further development of their career and are willing to move.

In order to separate with employees quickly, some big enterprises offer severance payments from the start, calculated on the basis of one salary per year of service. Also severance payments of up to 1.5 salaries per year of service are not totally unusual in the case of likely unjustified terminations of elderly employees or employees not likely to find a new employment due to other reasons.

An "amicable" termination settlement with employees who enjoy special protection as works council members, disabled persons and pregnant women is generally extremely expensive.

III. Special provisions must be taken into consideration in the case of structural/operational changes within a business with more than twenty employees if the employees have elected a works council.

In the case of operational changes such as severe reductions, closures or relocations of the business, or of substantial parts thereof as well as in cases of substantial changes in the organisation or working methods of the business, the employer has to discuss his plan with the works council and to negotiate an agreement that compensates the employees for possible disadvantages and problems connected with the structural change (so-called social plan, §§ 111 ff. BetrVG, law concerning employees' representation and co-determination in business and industry). Should the operational change lead to dismissals of employees, part of the social plan normally includes regulations regarding compensation payments to the employees concerned. Such compensations are usually calculated on formulas granting 25% to 150 % of a monthly salary per year of service with the company. The formula "monthly salary x (age x years of service): Z", whereas "Z" should be a factor between 50 and 100 is customary. Formulas based on a system of points are very common, they grant a prescribed number of points for each year of age, each year of service, obligations to give maintenance, disability etc. and define the money value of each point.

However, even if the employer and works council have concluded a social plan, employees dismissed by the employer must not accept their dismissal. They may start litigation as pointed out above under II. 4 and it is not unusual that by doing so they reach an agreement with a severance payment more favourable for them.

IV. Sometimes collective agreements concluded between employer associations and unions provide for severance payments in case of dismissals based on structural/operational changes within a business. However, the dismissed employees are still free to ask the employment court to check the validity of the termination. The same regulations are applicable as in cases without such a collective agreement, there is no bonus for the company. The collective agreement grants the employee a minimum standard in addition to the statutory rules.

V. Conclusion: It usually takes the experience of an employment law expert to determine which strategy and what amount might be reasonable and sufficient to settle an individual case.

For further information, please contact Bernd Roock at bernd.roock@cmslegal.de or on +49 40 37 63 00

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