In the first of our international monthly series of articles by guest lawyers, Dr Thilo Mahnhold of JUSTEM Rechtsanwälte, explains dismissal protections in Germany.
Dismissal Protection in Germany – Temporary Agency Work and its Consequences for Permanent Staff
There has definitely been more than one employer doing business in Germany who has learned his lessons after having been confronted with German employment and labour laws for the first time. The density of regulations is impressive and the interaction of social partners such as the trade unions, local works councils, central works councils or employee representatives at board level guarantee a vivid mix of employee representation.
One of the cornerstones of German employment and labour laws is the Dismissal Protection Act, which severely restricts the opportunities of an employer to terminate the employment relationship with an employee. It is no doubt surprising and difficult for employers accustomed to “employment at will” that low performers can rely on a whole range of dismissal protections and that in the case of layoffs for operational reasons the employees who are made redundant must be selected on the basis of social criteria and not in accordance with the degree to which the company benefitted in the past from their contribution to the company.
The Dismissal Protection Act applies to all establishments employing more than ten employees and protects employees after six months of employment. In establishments with ten employees or less and during the six-month waiting period, the employer is generally free to terminate the employment relationship as long as the dismissal is not arbitrary. If the Unfair Dismissal Protection Act is applicable, a dismissal is only valid where the dismissal is justified on one of the following three grounds:
- Misconduct of the employee;
- Personal grounds related to the individual employee;
- Operational grounds.
Although these three grounds seem to be quite manageable at first glance, the German courts, driven by the highest German labour court, the Federal Labour Court, have applied a strict standard for interpreting these three grounds. For example, an employee may only be terminated for misconduct, as a rule, if he has received a prior warning letter for misconduct of a comparable nature. There are only a few exceptions to this rule such as severe breaches of contractual duties of a criminal nature. Termination on personal grounds may be considered when for example an employee is unfit to work due to a long term illness or inability to work due to illness which occurs recurrently to an extent considerably exceeding the statutory salary continuation in the event of illness.
Dismissals for operational reasons must meet several formal and material prerequisites. Specifically, the loss of a position must result from a sound management decision. Although German labour courts do not review every aspect of management decisions, they do examine whether the management decision was arbitrary. This means that, first of all, the employer is required to prove that his decision is based on sound reasoning. Secondly, if not all employees are to be terminated, the employer must select the employees to be terminated by carrying out a “social selection” among those employees who may be compared with one another. The employees from this group with the least social protection must be terminated first. The social selection is based on four criteria, which are: seniority within the company, age, number of dependants and presence of a severe disability.
When one considers this procedure, it is not surprising that many employers have sought alternatives and found temporary agency work to be one tool to adapt their workforce to volatile workloads without facing the challenges of dismissals on operational grounds. In this scenario, it is the employment agency, and not the employing third party, who must comply with the Dismissal Protection Act with regard to temporary agency workers. However, as temporary agency work has become increasingly popular, the Federal Labour Court has become more sensitive to protecting permanent staff against a decrease in social protection in the wake of an increase in temporary agency work. Recently (24 January 2013), the Federal Labour Court (case no. 2 AZR 140/12) made another strong move in this direction when it broke with the prevailing opinion that temporary agency workers are irrelevant to the threshold of ten employees of the Unfair Dismissal Protection Act. From now on, temporary agency workers must be counted if temporary agency workers are employed on a regular basis within an establishment. To give an example: an establishment with only one employee but 10 full-time temporary agency workers now is subject to the Dismissal Protection Act, which means that this single employee is fully protected.
To cut a long story short, the Federal Labour Court has closed another loophole for circumventing the application of the Dismissal Protection Act. This means that even more employers need to be mindful of some basic rules when doing business in Germany:
- Do not miss the six-month waiting period to evaluate the performance of an employee;
- Carefully consider if fixed-term employment is an alternative to permanent employment for the position at hand. In general, fixed-term employment is allowed without specific justification if it does not last for more than two years;
- Temporary agency work can prove to be a reasonable alternative to cover workload peaks;
- Carefully consider if warning letters need to be issued for misconduct. Prior warning letters can be essential for a later dismissal.
- Make sure you take the necessary time to properly plan and draft dismissals on operational grounds.