GERMAN LABOR LAW UNDER RECONSTRUCTION?
Current Plans of the German Government
The German Chancellor Gerhard Schröder announced on March 14, 2003 detailed plans to reform German labor law. The extensively discussed proposals are described by the employers’ representatives as “a first step in the right direction” but definitely only a first step. In contrast, the u nions view the proposals as the destruction of the German social security system and strongly oppose them. Taking aside the polemicized debate, the planned reforms pose the question for employers is whether the proposals of the government will improve the German employment law.
Prof. Dr. Gerhard Röder GLEISS LUTZ Stuttgart Dieser Artikel ist erschienen in: Legal Week, Juni 2003
The Grounds for the Reforms
The discussions to reform German labor law were triggered by i n creasing unemployment in the country. Germany’s high unemployment rate not only results in high costs for statutory unemployment benefits but also increases the contributions that employed workers must pay into the other branches of the statutory social security system, in particular, the pension system and health insurance. The German pension system funds the payment of pensions and unemployment benefits with the contributions of current employees. Therefore, if the unemployment rate rises, the actual costs of benefits from the statutory social security system must be borne by those active employees. The current unemployment rate is regarded as a structural problem inherent in the German emplo yment system which has been exacerbated by the current economic situation.
Reform of the German Dismissal Protection Regulation
Employers’ associations identify the German Dismissal Protection Act as an important obstacle to hiring new employees. In cases where this law is applicable, an employer requires certain grounds to dismiss an employee. The representatives of the employers’ interests argue that new jobs would be created if the restrictions of the Dismissal Protection Act were lifted. To reach this aim, the following changes are being considered:
Exemption from Applicability of the German Dismissal Protection Act The German Dismissal Protection Act currently already applies if at least six employees are working in a certain facility. Employers have suggested increasing this number to 10 or even 20. However, due to opposition from the unions, this proposal has been rejected. The Chancellor has now proposed that employees with temporary or leasing contracts are not to be counted towards this threshold. However, this proposal is unlikely to improve the situation since the leased employees do not count towards the threshold and temporary employees are not necessarily relevant for the applicability of dismissal protection under current law. Therefore, the exemption from the dismissal protection are not extended by this proposal. Given the unions’ opposition, the German government will not be able to again support for further limits to the dismissal protection in Germany.
Dismissal for Operational Grounds One of the great problems for German employers is the restrictions for down-sizing. In this regard, two points are under discussion. The“social selection procedure” and the entitlement of employees to compensation. i) Social Selection Procedure Under German law the need to lay off a certain proportion of the workforce usually justifies dismissal. However, employers must follow a “social selection procedure” to determine the particular employees to be dismissed. This procedure is aimed at keeping the employees in the job who require more social protection. Basically, the selection is conducted on the principle of seniority and age, but the criteria are not limited by law or jurisdiction and are very vague. Performance criteria could only be part of the selection process in very rare circumstances. This could force an employer to dismiss employees it wants to keep and to keep those it wants to terminate. Furthermore, the provisions on the social selection procedure are very general and, therefore, lead to uncertainties in determining the employees to be actually dismissed. According to a proposal of the Ministry of Economic Affairs published on May 3, 2003, the need for social protection should be determined only by taking into consideration the length of service with the company, the age of the respective employee and the employee’s maintenance obligations. According to this proposal it would not be necessary to take into consideration other social criteria, e.g. the earnings of other family members, the health of the respective employee. Furthermore, the employer will be entitled, under certain narrowly defined circumstances, to exclude certain employees who are of special importance to the company from the social selection procedure. Finally, young employees whose engagement is required to prevent the average age of the workforce becoming too high, can be excluded. In the course of a projected lay-off, the works council and the employer are entitled to agree on the names of the employees to be dismissed. The right of the legal court to review this resulting list is limited.
In light of the discussion it would be very helpful if these proposals were to become applicable law. The uncertainties in relation to the social selection procedure would be limited. The opportunity to agree with the works council on the employees to be dismissed is an opportunity to influence the structure of the workforce resulting from a major lay-off. ii) The Right to Compensation The Chancellor proposed the right to compensation for employees in the case of dismissal for operational reasons. This proposal would increase the financial burdon for employers because under current laws, an employee has no statutory right to compensation if dismissal is justified by sufficient operational reasons. Therefore, this proposal was strongly opposed by the employers. According to the new proposal of the Ministry for Economic Affairs, employees will be entitled to compensation only if the employer agrees by making such an offer and the employees do not institute a dismissal protection suit. The compensation would be calculated on the length of service with the company and the last monthly salary. Currently a factor of 0.5 gross monthly salary per year is proposed.
Alleviation for Newly Created Companies - Employment for a Limited Period
Under current employment law, an employee can, in principle, only be engaged for a limited period if there is sufficient reason for a limited engagement. If no such reason exists an employee can be engaged for a limited time of up to two years, if there has previously been no employment relationship between the respective employee and employer. This restriction shall be partly lifted. Newly created companies shall be entitled to engage employees for up to four years without sufficient reason for the time limitation. However, this does not apply if the company is founded in connection with the restructuring of an existing company. This legal proposal might enhance the creation of new companies.
Another proposal is to reduce unemployment benefits. The government plans to limit the period in which unemployment benefits can be drawn to 12 months for employees under the age of 55, and to 18 months for employees over 55. The clear intention is to save costs for the statutory unemployment insurance. Currently, the maximum period of entitlement to unemployment benefits is 32 months for those of the age of 57 with a service period of at least 5 years and 4 months. In the first instance these proposed changes affect the dismissed employees. However, there is also an effect for employers. The relatively long period of elegibility for unemployment benefits was used as a “bridge” to retirement. In the case of down-sizing the costs for an employer to lay off older employees would increase if the period of employment benefits is shortened. Currently it is unclear whether the government will be able to pass this new regulation which is vehemently opposed by the unions.
The proposals currently on the table will not fundamentally change German employment law. Some of the proposed changes will eliminate legal uncertainties which sometimes make it difficult to assess the results of a lay-off. Other changes such as the discussed exemption from the Dismisal Protection Act will not ease the situation for employers. Whether any of these measures will reduce the unemployment rate remains questionable. The proposed reduction in unemployment benefits will objectively i n crease the costs of dismissing older employees as compared to dismissal of younger employees. As the unions currently strongly oppose some of these proposals, it is unclear which reforms will actually be made into law. There will be some amendments to German employment law, however, these changes cannot be regarded as a full reconstruction of employment law in Germany.
[ The Author
Prof. Dr. Gerhard Röder Maybachstraße 6 D-70469 Stuttgart
Tel. +49 711 8997-172 Fax +49 711 855096 email@example.com Prof. Dr. Gerhard Röder, Universities of Tübingen and Freiburg. Dr. iur. 1982. Joined the Stuttgart office in 1984. Certified labour law attorney. Since 1995 honorary professor (labour law), Freiburg University. Member: Board of Benders Labor and Employment Bulletin, Company Pensions Working Group, Working Group for Labour Lawyers in the German Bar Association, International Bar Association, the European Employment Lawyers’ Association (EELA) and editor of the Labour & Employment Bulletin (USA). Practice Areas Individual and collective employment law, employment law in connection with corporate transactions, negotiations with works councils and trade unions, codetermination, restructuring, company pension plans.
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