Looking into the crystal ball: what if temporary layoffs become permanent?

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When Covid-19 spread like wildfire around the world at the beginning of the year, employers in Germany had to respond promptly and proactively to the new situation of social distancing and travel restrictions. In the early days of the outbreak it was hoped that the restrictions in Germany would be lifted by Easter weekend. But that hasn’t happened. Now it has been announced that the majority of restrictions will remain in place until 3 May. What does this mean for existence-endangered companies and employees affected by short-time working?

I. Initial ‘reflex’ response of introducing short-time working

Extensive restrictions on retailers, restaurants, bars and hotels, as well as supply chain interruptions and production stoppages, brought companies in non-system-relevant sectors to their knees in March. Employers had to act fast without even knowing how long the restrictions would remain in place or their full extent, and without having time to check whether they met the requirements to apply for the Kurzarbeitergeld (KUG) compensation for short-time workers. On hindsight, it would not have been possible for them to know whether they would comply with the KUG requirement of ‘temporary’ loss of work unless they had a crystal ball. How can anyone say with any certainty how long a layoff will last when the entire company’s survival depends on the duration of the restrictions? In the hospitality industry, for example, where capital resources are typically low and liquidity is dependent on a regular revenue stream, each additional day of forced closure or restricted operations means one step closer to permanent rather than temporary layoffs. More than 725,000 companies throughout Germany have now submitted short-time working notifications in an almost ‘reflex-like’ response – even though it is evident elsewhere that there are at least some alternatives to short-time working if the employer and employees work together to find solutions. In this current situation, we have to consider what will happen if the worst comes to the worst and companies start making employees redundant for operational reasons despite having already introduced short-time working.

II. Redundancies are fundamentally possible in phases of short-time working

First of all we have to point out that employers have the right to make employees redundant in periods of short-time working as long as the redundancies are socially justified under the German Employment Protection Act [Kündigungsschutzgesetz] (KSchG), i.e. they are being made for reasons relating to the person or conduct of the employee, or for operational reasons. Dismissals for reasons relating to an employee’s person or conduct are undisputedly not unusual during periods of short-time working.

However, redundancies for compelling operational reasons are never socially justified if they are effected for the same reason that led to the introduction of short-time working. At the first instance, the validity of such a redundancy depends on whether, as a result of compelling operational reasons, the employer can no longer provide employment to the employee under the originally agreed employment conditions. In other words, the affected employee’s job must be permanently eliminated. This initially appears to contradict a short-time working phase in which KUG is paid, because one of the requirements for payment of KUG is that the loss of work is of a temporary nature, and KUG is a labour market policy instrument to safeguard jobs until the crisis is over.

The Federal Labour Court’s judgement of 23 February 2012 (case no. 2 AZR 548/10) determined that short-time working is an indication for temporary loss of work: “If a company introduces short-time working this speaks against the need for permanent staff cuts.” At the same time, however, if the jobs of specific employees affected by short-time working are permanently eliminated due to subsequent circumstances, a compelling operational reason for dismissal may exist provided that the employer has exploited all available short-time working options to reduce the employees contractual working hours.

If, in addition to the reason for the introduction of short-time working, other compelling reasons justify the permanent elimination of the employee’s job, the employer may terminate the employment relationship. In this case, the onus of proof is on the employer. According to the opinion of the Federal Labour Court, the employer must provide a detailed statement of facts establishing that a lower volume of work and staffing requirements are to be expected in the future. The employer can also submit specific evidence invalidating the reasons for short-term working and temporary layoffs. This necessitates the preparation of regular substantiated business metrics and it also depends on the circumstances of the case. The following scenario would be feasible in the current crisis. As the result of an administrative order, a manufacturing enterprise had to stop production at the beginning of the coronavirus pandemic. This was the reason given for introducing short-time working. In the days that followed the company’s order volume declined substantially because, as a result of the social distancing rules, retailers were not able to sell their stocks of the companies’ products, so they had to cancel their orders. The decline in order volume is an additional reason which might justify redundancies for operational reasons during the short-time working phase.

The company also has to consider whether all other requirements for redundancies are met, irrespective of the special circumstances associated with short-time working. A company can only make employees redundant for operational reasons if there are no alternative positions for those employees in the company, and the employees being made redundant are selected on the basis of social criteria. Hearings involving the works council and other bodies, such as the Representative Council of Employees with Disabilities or the Integration Office also have to take place. Finally, if the limits for mass redundancies are exceeded, the employer has a duty of notification under § 17 KSchG and an obligation to conduct negotiations on the reconciliation of interests and set up a redundancy plan in accordance with §§ 111 ff. of the German Works Constitution Act [Betriebsverfassungsgesetz] BetrVG.

III. Impacts of redundancies for operational reasons during short-time working

When redundancies for operational reasons are announced during phases of short-time working it is necessary to consider that only employees in unterminated employment relationships are entitled to receive KUG (§ 98 Par. 1, no. 2 SGB III). As a result, employees under notice of termination generally have no entitlement to KUG. Whether the employee is entitled to receive full wages from the employer during the notice period depends on the legal basis for the introduction of short-time working. The legislator has recognised the risk of the employer refusing to pay full wages, yet it still considers the exemption from KUG entitlement for employees under notice of termination to be appropriate. The objective of safeguarding the job by granting KUG is no longer achievable if an employee is under notice of termination. Furthermore, the employee affected by a wage cut while under notice of termination can terminate the employment relationship with immediate effect for cause and apply for unemployment benefit (cf. Bundestag official record V/2291 p. 71 pertaining to § 60 SGB III, old version, as predecessor provision of § 98 SGB III). Only employees who file a complaint against unfair dismissal are, as an exception, entitled to continue receiving KUG.

When a company is a party to a collective wage agreement, it should check carefully whether the collective wage agreement includes any provisions on continued full salary payment for the duration of short-time working until dismissal.

Another consideration in extreme cases when permanent layoffs were foreseeable at the beginning of the short-time working phase is that the employer may face criminal charges for fraud, benefit fraud or similar offences. This is a possibility at companies which were on the brink of insolvency before the coronavirus outbreak and are attempting, under the guise of the current crisis, to get themselves back on track with the help of KUG.

IV. Outlook

Taking another look into the crystal ball, the announcement of the first steps to lift restrictions after 3 May offers a ray of hope to affected companies. Nevertheless, we (unfortunately) have to assume that severe restrictions will continue to apply in many sectors and that economic recovery will be gradual. It is to be expected that the surge of short-time working will be followed by a surge of restructuring measures and staff cuts. The extent and timeframes of these measures will depend to a great extent on sector and company size. It is a fact that companies can legally make employees redundant for operational reasons, even if they have already introduced short-time working, in the event that circumstances change and new compelling reasons emerge which justify the redundancies.

 

Your contact person:
Dr. Andrea Panzer-Heemeier, Managing Partnerin
+49 173 7291 414
andrea.panzer-heemeier@arqis.com

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