Dismissals for economic reasons

Dismissal for economic reasons is one of the most common forms of termination of employment contracts in Germany. It is declared by the employer if economic or organisational reasons make make a continuation of employment impossible. In today's working world, which is characterised by rapid change, this form of dismissal is particularly important. However, it sets high legal demands on the employer. A dismissal of an employee who is covered by the General Dismissal Protection Act is socially justified if, among other things, it is due to serious operational requirements that prevent the further employment of the employee in this workplace.

1 Kündigungsschutzgesetz (in the following KSchG) = Dismissal Protection Act

The KSchG applies if

a) the employment relationship has existed in the same company for more than six months without interruption and

b) the company usually employs more than ten employees – excluding trainees (Section 23 (1) sentence 1 KSchG).

2 Requirements for dismissal for economic

reasons

The employer must prove that economic or organisational reasons make the dismissal absolutely necessary.

a) Operational requirements

The workplace must be eliminated for economic, technical or organisational reasons.

Examples:

– Decline in orders or loss of sales

– Restructuring or outsourcing

– Company closure or relocation

– Rationalisation measures

– Operating restrictions

b) No possibility of continuing employment

The employer is obliged to check whether the employee can continue to be employed in another vacant position in the company. Retraining or relocation is also possible.

c) Social selection

If there are several potential dismissals, a social selection must be made.

The following criteria are taken into account:

– years of employment

– age

– maintenance obligations

– severe disability

d) Compliance with the notice period

The statutory or contractually agreed notice period must be complied with.

The statutory notice periods (§ 622 Bürgerliches Gesetzbuch) are based on the number of years of employment and are at least four weeks. For longer periods of employment, the notice periods are extended up to seven months.

e) Consultation of the works council, if existing

In companies with a works council, the works council must be consulted before the dismissal. Without this consultation, the dismissal is already invalid.

If there is a works council, it must be consulted prior to the dismissal (Section 102 Betriebsverfassungsgesetz). The employer is obliged to explain the reasons for the dismissal. Without proper consultation, the dismissal is invalid.

3. special protection against dismissal

Special groups of employees enjoy special protection and can only be dismissed under strict conditions.

The following groups are specially protected:

a) Pregnant women and mothers (Section 17 Mutterschutzgesetz)

Pregnant women may not be dismissed for economic reasons.

The protection also applies up to four months after the birth.

An exception is only possible with the consent of the competent authority.

b) Parents on parental leave (Section 18 Bundeselterngeld- und Elternzeitgesetz)

During parental leave, dismissal for economic reasons is excluded.

In exceptional cases, such as a complete closure of the company, it may be possible with the approval of the supervisory authority.

c) Severely disabled persons (§ 168 Sozialgesetzbuch IX)

Dismissal is only possible with the approval of the competent authority.

The employer must also select employees with special social selection care.

d) Works council members (Section 15 KSchG))

Works council members cannot be dismissed during their term of office and for up to one year thereafter. Dismissal for economic reasons is only permissible for extraordinary reasons and in very rare exceptional cases.

e) Persons on care leave (Section 5 Pflegezeitgesetz)

Employees on care leave are protected against dismissal for the entire period of care leave. Here too, exceptions are only possible with the approval of the authorities.

Conclusion on special protection against dismissal: The special protection against dismissal does not mean that dismissal is completely impossible. In exceptional cases, e.g. in the event of serious breaches of duty or with the approval of the relevant authorities, dismissal may still be possible. However, employers must adhere to strict requirements in order to legally enforce these dismissals.

4. Tips for the legally compliant execution of a dismissal for economic reasons

a) Detailed review of the requirements

First of all, the employer should examine the operational requirements and ensure that the dismissal is based on them. The operational reason for the dismissal should be documented in detail (preferably in writing) in order to be able to prove that the dismissal was justified in the event of a legal dispute.

Detailed analysis of the company’s current situation
Determine whether there are actually economic or organisational reasons that justify a dismissal
Collection of objective and comprehensible evidence to prove operational requirements

Documentation of relevant information: Decline in sales/lack of orders (statistics, data, annual reports, internal communication/reports), changes in company structure, technological changes
Examination of alternative options to fulfil operational interests: Transfers, introduction of short-time working

Solid documentation helps to create transparency and dispel any doubts about the justification for the dismissal.

b) Observing the social selection

Social selection is an important step in dismissals for economic reasons. When selecting the employees to be dismissed, the employer must take into account criteria such as age, length of employment, maintenance obligations and severe disability. The aim of social selection is to find a solution that is as socially acceptable as possible and to avoid social hardship. It is important that the employer documents in a comprehensible manner which criteria it has applied in the selection process and why these employees in particular are affected by the dismissal.

c) Compliance with the notice period

The exact length of the notice period depends on various factors, such as the length of employment of the employee and the legal regulations. It is recommended to check the notice periods in the employment contract or the applicable collective agreement to ensure that they are adhered to. If the notice period is not observed, this can lead to the termination being invalid, which can have legal consequences. It is therefore important to observe the notice period carefully and to send the notice of termination in good time in order to avoid any problems.

d) Alternative termination option: Cancellation agreement or termination with severance pay offer

aa)

The employer can alternatively avoid the high requirements for a termination of employment by concluding a cancellation agreement with the employee. However, this requires the employee’s consent. One possible motivation for signing the agreement could be the payment of an appropriate severance payment to the employee, which is intended to compensate them financially for a certain period after the dismissal. A specific severance payment amount is generally not stipulated by law in Germany.

The following rule of thumb is regularly used to calculate the amount of severance pay:

Years of employment x 0.5 gross monthly salary

A higher severance payment than the standard severance payment can be negotiated between the parties, particularly if, for example, the employee has special protection against dismissal (e.g. severely disabled persons and pregnant women).

bb)

Finally, the employer may also dismiss an employee who falls under the scope of the general protection against dismissal for economic reasons in conjunction with an offer of severance pay. Section 1a KSchG does not contain a general or even mandatory statutory entitlement to severance pay. Rather, this provision presupposes that the employer gives notice of termination for economic reasons and makes a voluntary and explicit promise of severance pay.

A dismissal with an offer of severance pay in accordance with Section 1a KSchG therefore requires the following:

The dismissed employee must have worked for more than six months in a company in which more than ten employees are employed (Section 1 (1) KSchG, Section 23 (1) KSchG).
The employer must have given notice of dismissal for economic reasons. In the case of employees who cannot be dismissed with notice, this can also be an extraordinary dismissal for economic reasons with the granting of an expiry period.
The letter of dismissal must expressly state that the dismissal is based on urgent operational requirements and that the employee can claim a severance payment in accordance with Section 1a KSchG if the statutory period for taking legal action (3 weeks) expires.

The amount of severance pay pursuant to Section 1a KSchG is stipulated by law and amounts to 0.5 gross monthly salaries per year of employment (i.e. corresponds to the rule of thumb).

Conclusion

To summarise, a dismissal for economic reasons is a complex and strictly regulated process. In order to give notice with legal certainty, employers must provide a plausible reason, observe the social selection and the reconciliation of interests and provide comprehensive information at an early stage. Observing the above aspects can help to ensure that the dismissal process is carried out in a structured and correct manner. It is also important to consult with the works council and to be aware of possible dismissal protection claims and severance payments. By observing these important legal aspects, an employer can prevent the risks of dismissal for economic reasons and organise the process fairly and transparently.