Newsroom / News / Media / Info Magazine LGP NEWS 02/2020 / Employment law and restructuring

Employment law and restructuring

Employment law and restructuring

The country is firmly in the grip of the coronavirus pandemic. After a tightening of measures in November, the second „hard“ lockdown to contain the further spread of the virus began on November 17. What options are there under employment law to prevent a worst-case scenario for employees and the economy? 

Despite helpful changes related to short-time working, it is likely that unemployment in this country will once again rise massively and that the number of companies affected by insolvency will also increase. This article therefore deals with restructuring measures in which employment law and related possibilities for shaping the restructuring process play the greatest role. Measures relating to a reduction in personnel or the closure of social compensation plans are intended to illustrate the options available within employment law for local companies to avoid insolvency without having to sacrifice a large part of their workforce. Lastly, alternatives to staff cuts should then be a further signpost for domestic companies. 

Although a company’s workforce is undoubtedly one of its greatest assets, it is often the first area in which savings are to be made in the event of financial difficulties and the threat of insolvency. Staff reduction is thus one of the most frequently taken measures in the course of employment-related restructuring. If the business decision is made to reduce the workforce, a number of considerations have to be taken into account in order to ensure that this is carried out in a legally sound manner and that the company is not subsequently confronted with negative legal consequences (e.g., legal action by former employees). Therefore, the following factors must be taken into account in the course of a successful staff reduction operation. 

Staff reduction guidelines 

If a large number of employees are to be laid off, timely engagement with the “early warning system” standardised in Section 45a AMFG (Labour Market Promotion Act) is advisable. According to the provisions of the Act, employers must notify the relevant AMS regional office according to the location of the business in writing if they intend to terminate a large number of employment contracts. Specifically, the AMS must be notified in writing if the company plans to end the employment of 

  • At least 5 employees in companies with more than 20 and less than 100 employees or 
  • At least 5% of the employees in companies with 100 to 600 employees or 
  • At least 30 employees in companies with more than 600 employees, or 
  • At least 5 employees aged 50 and over 

Here, the reference is to a specific company, namely the company in which the employees whose employment contracts are to be terminated are employed. If an employer has several businesses, the employees in each individual company must be considered separately for the purpose of checking whether the above criteria are met. The employees of multiple companies should not to be counted together. The wording “as a rule” in the law refers to the average employment level over the last three months prior to the filing of the report. 

It is worth mentioning in this context that not only employer-instigated terminations are covered by the “early warning system”, but also terminations by mutual agreement. According to the judgement of the Supreme Court, a distinction must be drawn between terminations by notice and terminations by mutual agreement when assessing whether the termination thresholds set out in Section 45a (1) of the AMFG are reached within the 30-day period. The number of terminations depend on how many notices of termination are actually given in the 30-day period. A notice of termination is deemed to have been given at the point it is received by the employee. 

In the case of termination by mutual consent, however, the Supreme Court bases its decision on how many employees were actually offered a termination agreement in the 30-day period. The notification must be made at least 30 days before the first declaration of termination of an employment contract, i.e., at least 30 days before the first notice of termination or the first conclusion of an agreement to terminate the employment relationship by mutual consent. It should be noted that notices of termination are legally ineffective if they are given before notification is received by the AMS regional office or within a period of 30 days after receipt of the notification by the AMS (“blocking period”) without the prior consent of the regional office. This shall apply mutatis mutandis to termination of employment relationships by mutual consent. 

It is important to note that the AMS has no legal means to prevent or delay the implementation of staff reductions. However, redundancies in a company that trigger the “early warning system” are usually discussed in the media, which is not exactly an advantage for a company in crisis. It may therefore be important to make staff reductions through an appropriate design without triggering the early warning system (staggered reduction). 

The costs that (might) be associated with a reduction in personnel are also worth mentioning in this context. A distinction must be made here between payments that are mandatory and those that are paid voluntarily on the basis of an agreement between employee and employer. The best-known compulsory payment related to employment contract termination is probably the statutory severance payment. However, this only affects employees whose contract pre-dates 1 January 2003 and who have not already changed to the “new” severance pay system under the BMSVG through written agreement with the employer. Other payments include holiday compensation for holiday entitlements which employees were unable to use before the end of their employment, aliquot special payments (holiday and Christmas bonuses), bonuses, premiums and similar benefits, and termination pay, i.e., the remuneration paid during the notice period. 

In the event of termination of employment, whether by notice or by mutual agreement, the employee and employer may also agree to make voluntary payments. For tax reasons, these payments are usually made as “voluntary redundancy payments”. The amount of a voluntary redundancy payment is not regulated by law, and in practice is determined on the one hand by the company’s interest in terminating the employment relationship, and on the other hand by the company’s risk of a possible legal challenge to termination. In general, the higher the risk of a judicial challenge to dismissal appears to be, the higher the level of voluntary redundancy that should be agreed. 

In summary, the following steps should therefore be followed in the event of a mass reduction in personnel: 

  • The number of employees to be laid off and those who enjoy special protection against dismissal must be identified 
  • The applicable notice periods and notice dates must then be determined 
  • The works council must be informed of the intended mass redundancies and the business owner must consult with it 
  • In the case of employees with special protection against dismissal, the consent of the court or the Federal Social Office must be obtained 
  • Timely notification must be given to the AMS according to Section 45a of the AMFG 
  • The works council is to be informed of individual terminations in the sense of Section 105 ArbVG 
  • Finally, the notices of termination are to be given and termination agreements concluded 

Social plan as protection 

Often, in the course of a staff reduction, social compensation plans are concluded in addition to the announcement of dismissals or the conclusion of consensual termination agreements. These are company agreements which are concluded between the works council and the employer if a works council exists, otherwise between the employer and the individual employees concerned. In principle, social plans serve to protect the economically weak and pursue the goal of preserving legal positions previously granted to the employee as long as possible or to compensate for their loss. 

Although the purpose of a social compensation plan is to compensate employees disadvantaged by changes in company operations, it is not unrestricted and, when being agreed, the interests of the company and of those employees who are not covered by the scope of the social compensation plan must be taken into account. A social compensation plan or the benefits agreed in it should be agreed after weighing up the interests of the company and the employees not disadvantaged by changes in company operations on the one hand and the interests of the disadvantaged employees on the other. 

The provisions of Sections 97 and 109 of the ArbVG regulate the criteria, which must be cumulatively present in order for a social compensation plan to be legally concluded. Necessary criteria for the successful conclusion of a social compensation plan are: 

  • A change of business in accordance with Section 109 paragraph 1 lines 1-6 of the ArbVG 
  • A minimum size of at least 20 employees 
  • A significant proportion of this workforce is affected, and 
  • Significant disadvantages for the workers concerned 

If even one of the aforementioned conditions is not met, a social compensation plan even if concluded is completely null and void from the point of view of industrial relations law. 

The existence of a change of business is to be confirmed in accordance with the provisions of Section 109 paragraph 1 lines 1-6 of the ArbVG if 

  • The entire operation or parts thereof are restricted or shut down 
  • Employment relationships are terminated which trigger an obligation to report under Section 45a paragraph 1 lines 1-3 AMFG 
  • An entire company or parts of a company are relocated 
  • A merger with other companies takes place 
  • A change in the purpose of the company, the operating facilities, the work and business organisation as well as branch organisation takes place 
  • New working methods are introduced, and 
  • Rationalisation and automation measures with considerable impact are introduced 

A mere change in the legal form or ownership of a company does not justify the conclusion of a social plan. 

Social compensation plans can only be agreed upon in companies that have at least 20 employees on a permanent basis. Only those in accordance with Section 36 paragraph 1 of the ArbVG are considered employees, executive employees are thus excluded. Furthermore, the conclusion of the social compensation plan requires that a considerable part of the workforce be affected as a minimum. There is disagreement in jurisprudence and legal theory as to what is meant by a considerable part. However, the predominant theory is that this means at least one third of the workforce. 

The conclusion of a social compensation plan is only permissible if the change in operations entails “substantial disadvantages” for all or substantial parts of the workforce. This covers both material and immaterial disadvantages. Disadvantages may include, for example, transfers, reductions in pay, longer commuting times, changes in working hours, deterioration due to changes in collective agreements or company agreements, the reduction of voluntary social benefits and the termination of employment contracts. 

It is up to the contracting parties to determine the content of the social compensation plan. The law does not provide any guidelines for specific social compensation plan benefits. 

Usually, a social compensation plan includes a voluntary severance payment, special severance pay for employees with special protection, bridging assistance for older employees who are soon to reach the statutory retirement age or educational leave. When concluding a social compensation plan, it is advisable to agree that only those employees whose employment relationship is terminated by mutual consent are entitled to social compensation plan benefits. This prevents the employer from having to provide social plan benefits on the one hand and exposing itself to the risk of a dismissal challenge on the other. 

In most cases, the conclusion of a social plan will be voluntary. Otherwise, it is possible to submit this as an “enforceable” works agreement to the conciliation body for a decision and to force the conclusion of the social compensation plan in this way. 

What are the alternatives to staff reductions? 

Unless the company is in deep long-term crisis, from which it can only recover by the last resort of staff reductions, it may make sense to give preference to certain alternatives to such drastic measures. In certain situations, it is advisable not to part for good with existing qualified specialists, especially as they could be urgently needed in the event of a future economic upturn of the company. Therefore, it is necessary to find alternatives that relieve the company economically in the short term and in the long term give both employers and employees the opportunity for a fruitful economic activity. 

Relevant examples of this are the change from full-time to part-time work, the introduction of so-called “part-time work for older employees”, which is also financially supported by the part-time allowance paid by the AMS to the employer, the introduction of short-time work and/or flexitime, and the conclusion of agreements on educational leave or part-time work for training purposes. The reduction of holiday credits or the use of time credits is also recommended for periods of low workload. 

The exact form of the restructuring measures or alternatives presented here as examples should in any case only be determined after thorough examination and consultation with experienced legal experts in order to avert any possible disadvantages that they may entail for both employers and employees. 


Dr. Julia Andras, Attorney-at-law, Managing Partner and Head of Litigation bei LANSKY, GANZGER + partner

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