Restructuring business operations: you better have your ‘storybook’ well prepared
By Michael Magotsch, LL.M. (Georgetown), and Kathrin Schlote
Restructuring business operations, in particular if connected with a reduction in force (RIF), is often complex and demands careful advance planning. This is especially true for companies having a works council and in cases where the number of affected employees exceeds the collective dismissal filing requirement.
The codetermination right of an existing works council concerning an operational change (Betriebsänderung) pursuant to Section 111 of the Works Constitution Act (Betriebsverfassungsgesetz, BetrVG) only exists in entities generally having more than 20 employees who are eligible to vote for the works council – agency workers (Leiharbeitnehmer) may also need to be taken into account (see Federal Labor Court [Bundesarbeitsgericht, BAG] ruling dated October 18, 2011, 1 AZR 335/10). If the thresholds are met, the employer must inform the works council about any planned operational changes that may result in material detriments to the workforce or large portions of it. Such operational changes include:
- Reduction, closure or relocation of the entire operation or of significant parts thereof
- Merger with other operations or the spin-off of operations
- Fundamental changes to the organization of the operation, its purpose or its facilities
- Introduction of fundamentally new working methods or manufacturing processes
- Potentially also: a mere reduction in personnel
Action plan and timelines
The time frame and, in particular, the duration of the information and consultation process with the works council is hardly predictable. Preparatory work serves as a key driver for negotiations with the works council over agreements to balance the interests of the parties and the social plan. This work includes, for example, drafting a “storybook” for the works council to consult and obtain information, notifying the works council about each individual dismissal, preparing mass dismissal filings and so on. Negotiations with a works council can often take many months and easily more than half a year.
This is especially true if the company has more than 300 employees and the works council hires its own adviser – in addition to its lawyer – to review, question and analyze the restructuring plans of the company and to prepare alternative plans pursuant to the second sentence of Section 111 of the Works Constitution Act. Experience has shown that in such an event, the timeline of balance-of-interest negotiations could easily extend over many more months. Employers are well advised to closely monitor “plan B” exercises recommended by “economic experts” who used to be union representatives in their former lives and are hired by works councils. In these circumstances, it is particularly important to have a well-prepared “plan A” storybook presented and rehearsed within the project team at the management level prior to initiating the consultation and information process with the works council.
Implementation of any operational changes, including redundancies, may generally be divided into three phases:
Step one: preparation
This phase comprises thorough initial internal preparation, including planning for the restructuring measures as well as timely and comprehensive information to be provided to the works council.
We highly suggest investing enough time to internally prepare a well-reasoned storybook with all project leaders and devoted team members at the management level of the employer. In practice, it is also very helpful to prepare and draft Q&A lists containing all potential questions and counter arguments in advance in order to ready the – often untrained in legal matters – HR managers and technical experts of the company. The goal must be to proactively address all potential allegations, complaints and claims the works council may raise against plan A so as to convince the works council and all affected staff that the restructuring was well thought through in the first place. The better and more detailed and the more convincing the storybook is, the better the chances of reducing the timeline for negotiations. Actual rehearsals and dry runs with project leaders of restructuring programs have proved very successful in practice.
Step two: information and consultation with the works council
The second phase includes providing timely, comprehensive information and consultation with the works council concerning the intended restructuring measures, potential alternatives to these measures and compensation for the detriments suffered by employees.
> The keys to a successful restructuring measure are diligent and comprehensive preparation and timing. <<
This consultation process usually results in two agreements with the works council: a balancing of interests (Interessenausgleich) describing the measure and a social plan (Sozialplan) to mitigate the economic disadvantages employees may suffer as a result of the change in operations.
The works council may be able to obtain a preliminary injunction to assert its negotiation rights in several state labor courts (Berlin, Brandenburg, Hessen, Bremen, Hamburg, parts of North Rhine-Westphalia, Mecklenburg-Western Pomerania, Lower Saxony, Schleswig-Holstein and Bavaria). If so, the employer is prevented from dismissing employees or executing any other changes until conclusion of the discussions concerning the balancing of interests. The balancing of interests is intended to determine the particular measures related to the change in operations, the number and scope of affected employment relationships and the way in which the employment relationships are affected.
Should no agreement on a social plan be reached, a conciliation committee proceeding needs to be initiated that can bindingly decide on the social plan – but not on the balancing of interests. The means offered in a social plan depend on the concrete circumstances; typical forms of mitigation are, for example, severance payments in cases of termination or payment of moving costs in cases of relocation. Also, mere redundancies may require preparation of a social plan. This is, however, only the case if the thresholds pursuant to Section 112a of the Works Constitution Act are met.
Labor unions are allowed to increase pressure on the employer to conclude collective-bargaining agreements on social plans that satisfy employees’ demands. In this respect, the labor union may even call upon employees to arrange a lawful strike for a collective social plan (Tarifsozialplan).
Any benefits under a social plan may not be made subject to the condition that employees not file a wrongful dismissal claim. It is only permissible to offer such payments under a separate works agreement. Furthermore, when setting up a social plan, the equal treatment principle, for example, and other regulations against discrimination have to be observed, in particular the German Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz, AGG). In practice, it is often discussed whether severance payments may differ on the basis of the employee’s age. Whereas a linear increase is generally considered invalid, age groups or supplement payments on the basis of age may – also according to case law (see, for example, BAG ruling dated April 12, 2011, 1 AZR 743/08; BAG, ruling dated May 26, 2009, 1 AZR 198/08) – still be valid. The same is basically true for capping the overall severance amounts (see BAG ruling dated July 21, 2009, 1 AZR 588/08).
Another considerable question is whether it would be permissible to reduce severance payments for older employees close to the statutory pension start date. Generally, this is considered permissible by BAG (see, for example, BAG rulings dated April 23, 2013, 1 AZR 916/11, and March 26, 2013, 1 813/11). It is, however, crucial to note that statutory pensions due to severe disability (Schwerbehinderung) may not be taken into account in this regard (EJC ruling dated December 6, 2012, C-152/11).
Step three: implementation
The implementation phase of a restructuring includes, from a legal perspective, inter alia (a) the filing of a mass dismissal with the local labor agency should the respective thresholds be met, (b) information for the works council about each individual termination, (c) the filing of applications with the responsible authorities to obtain approval for terminations and (d) the serving of termination notice letters to each employee.
Concerning the filing of a mass dismissal, employers should be very diligent: Procedural mistakes result in the terminations being null and void. Section 17 of the German Dismissal Protection Act (Kündigungsschutzgesetz, KSchG) contains two procedures: providing comprehensive information to and consultation with the works council and providing information to the employment agency. Each proceeding needs to be duly observed for a valid termination (see BAG, ruling dated January 20, 2016, 6 AZR 601/14). It should also be noted that according to EJC case law (ruling dated July 9, 2015, C-229/14), managing directors (Geschäftsführer) of limited liability companies who hold no shares in the company as well as interns are also to be considered for determining the thresholds.
The keys to a successful restructuring measure are diligent and comprehensive preparation and timing as well as diligent processes with regard to providing information to and consultation with the works council. This particularly also applies to potential mass dismissal filings.
We can’t stress enough that initial internal preparation with all involved project leaders and RIF team members at the employer’s management level is a key to later success in all negotiations with the works council and – where applicable – union members and their respective advisers.
Employers are also well advised to closely monitor case law in order to not be surprised by recent developments concerning pitfalls, in particular concerning costly discrimination issues under social plans or mistakes in mass dismissal filings.