Transfer companies as a tool to soften the edges of restructuring measures

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Introduction
In a nutshell, a transfer company or qualification company is a tool used by employers in restructuring measures, in particular where the employer wishes to act in a socially acceptable manner. Although often contained in social plans or other agreements with the works council, it can also be used in companies without a works council. The clou of a transfer company is the additional funding available from the German Federal Employment Agency (Bundesagentur für Arbeit).
Transfer companies serve to take on employees threatened by redundancy in a restructuring measure. Once the employment relationship is transferred, the transfer company will provide assistance to the employee in finding alternative employment. To this end, the transfer company may offer a range of services such as interview training or qualification measures. The scope of services offered mainly depends on the funding of the transfer company. Generally, employers do not set up a transfer company but use a service provider specialized in providing such services.

Pros and cons of a transfer company
From an employer perspective, a transfer company offers some obvious advantages. Employees accepting the transfer are quickly removed from the employer’s payroll. The employees generally leave within weeks of being offered a transfer and without observing the statutory or contractual notice period. Moreover, the use of a transfer company significantly reduces the number of unfair dismissal claims since an employee accepting the transfer cannot sue for unfair dismissal at the same time. Last but not least, offering a transfer company will facilitate negotiations with the works council on a social plan and will also be well received by the workforce and the public – in other words, it will reduce the damage to the employer’s reputation which often results from a mass redundancy. The financial burden to the employer mainly includes the service fee of the provider of the transfer company and costs for any additional benefits agreed with the works council for the transferring employees.
Why should an employee accept such a transfer rather than take his chances at court and sue the company for unfair dismissal? The main advantage from an employee perspective is not just the interview training or qualification measures offered by the transfer company. It is that a transfer company generally significantly delays the time period until the employee has to register as unemployed with the Federal Employment Agency. In a common model, the transfer company will be partly funded by the salaries the employer would have to pay during the employee’s contractual or statutory notice period. In addition, the employee will receive 60% or 67% of his former net salary from the Federal Employment Agency. With the additional funding of the Federal Employment Agency, the employee may generally double his notice period and thus stay twice as long within the transfer company as he would have stayed with the employer. Thus, the employee has more time to find a suitable new job while being supported and qualified by the transfer company. The longer the employee’s length of service, the greater the advantage of a transfer. Employees with a short notice period, on the other hand, might not be interested in a transfer at all.

Funding of a transfer company
The transfer company is thus generally funded by two sources: the employer and the Federal Employment Agency. The employer generally pays an amount equivalent to the salaries he would have paid during the notice period, any additional funding agreed with the works council to the transfer company and the social security contributions. Such additional funding may include a top-up payment on the funding of the Federal Employment Agency, qualification measures or hardship funds.
Technically, funding by the Federal Employment Agency is implemented through payment of so-called transfer short-time work compensation (Transferkurzarbeitergeld) pursuant to § 111 of the German Social Code III (Sozialgesetzbuch III). The amount of the compensation paid by the Federal Employment Agency depends on the employee’s family situation: employees obliged to maintain a child are entitled to 67%, other employees to 60% of their former net salary. Such compensation is limited to a maximum of 12 months, which is why most transfer companies are only set up for this time period.

In addition, the Federal Employment Agency may provide funding for so-called transfer measures pursuant to § 110 of the German Social Code III, i.e. measures serving to support the employee in finding alternative employment. The Federal Employment Agency basically doubles the amount paid by the employer up to a maximum of EUR 2,500 per employee.

Prerequisites for funding
Funding requires, inter alia, that employees are made redundant in a restructuring measure as defined in § 111 of the German Works Constitution Act (Betriebsverfassungsgesetz). Generally, the employer agrees to set up a transfer company with the works council in a social plan, which is required by law in case of a restructuring measure pursuant to § 111 of the German Works Constitution Act. However, the employer may also qualify for funding if no works council has been established or if the total number of employees working at the respective site falls below the relevant threshold for restructuring measures of 20+ employees pursuant to § 111 of the German Works Constitution Act. Thus, a transfer company may also be established in small-sized enterprises provided that the restructuring measure affects at least the number of employees as defined in § 17 (1) of the German Unfair Dismissal Act (Kündigungsschutzgesetz).
The employees must transfer to a separate organizational unit (eigenständige betriebsorganisatorische Einheit), which is clearly separated from the remaining employees so that the transferred employees cannot continue working for the employer after the transfer. Generally, the transfer company is a separate legal entity held by a service provider agreed between the employer and the works council. The service level, commitment and experience of the service provider determine the success rates of the transfer company in finding suitable alternative employment for the employees. If the transfer company does not have the relevant experience or if the funding is not sufficient, the Federal Employment Agency may refuse to pay transfer short-time work compensation. The employer must therefore consult with the Federal Employment Agency and ensure it approves of the setup of the transfer company. The Federal Employment Agency will issue a confirmation of the consultation.
In order to qualify for transfer short-time work compensation, the employee needs to be threatened by unemployment. Employees not affected by the restructuring measure or employees whose employment cannot be terminated may not volunteer to transfer into a transfer company. Neither do employees who have already found alternative employment qualify for compensation. Such compensation will only be paid to employees who qualify for social security; mini-jobbers therefore are not entitled to compensation. A further requirement for obtaining compensation is that the employee has participated in the profiling offered by the transfer company prior to the transfer and registers with the Federal Employment Agency. The profiling serves to determine what skills and qualifications an employee has in order to determine necessary qualification measures and help find alternative employment.

Procedure and legal documents
Eligibility, duration and benefits provided in a transfer company are generally agreed between the employer and the works council in a social plan for the restructuring measure. If no works council exists, the employer may set up guidelines unilaterally and offer the transfer directly to the employees affected.
Transfer into a transfer company is voluntary. In order to increase acceptance of the transfer company, employers generally organize town hall meetings or webcasts to present the transfer company. Employees willing to transfer are asked to sign a tripartite agreement with the employer and the transfer company setting out the details of the transfer. This tripartite agreement constitutes the end of the employment relationship with the employer and a fixed-term employment relationship with the transfer company. The term of the employment with the transfer company depends on the funding. A common model is that the employees stay twice as long as their individual notice with the transfer company. The maximum term with the transfer company is generally 12 months as the funding by the Federal Employment Agency is limited to this term.
Service level, fees and payment terms of the transfer company are agreed between the employer and the respective service provider in a separate service agreement.

Summary
The use of a transfer company in a restructuring measure offers advantages for both employers and employees. In particular, it may prove useful in redundancies of employees with a long seniority and long notice periods. These employees will generally need more time to prepare for an alternative employment and will be grateful for qualification measures and support in job applications. Employers should be careful with the choice of provider and make sure all legal requirements are met and that the Federal Employment Agency is involved at an early stage.

mtrayer@kpmg-law.com

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