Crisis in a crisis – how will coronavirus influence ongoing restructuring? - ARQIS

14. April 2020

The coronavirus crisis continues to ravage the global economy and the full extent of its consequences will only emerge in time. But action is already being taken. Restructuring packages are being put together, austerity programmes drawn up. And here’s a common question: was it the current crisis which drove a business to restructuring, or was the firm already in troubled waters whose waves it now seeks to flatten in conjunction with the coronavirus pandemic? In other words, is it trying to kill two birds with one stone? One thing is for sure: while the Covid-19 storm rages around us, businesses that were already planning or performing restructuring have much to ponder when it comes to labour law.

I. Short-time work and short-time work compensation for planned layoffs

Few labour law instruments have been as widely discussed in the face of the spreading pandemic as Kurzarbeitergeld –KUG for short, the compensation available to short-time workers under §§ 95 ff. SGB III.The legal requirements for obtaining this compensation and its impact on other areas of employment relationships have been numerously described. In March alone, employment offices in Nordrhein-Westfalen received around 96,000 notifications of short-time work. But caution is required when it comes to restructuring involving staff cutbacks, be they part of a cost-cutting package or the closure of an entire business. One of the normal preconditions for obtaining KUG is that the loss of a work is of a temporary nature. There is no entitlement if work is lost permanently, since the purpose of KUG is to safeguard jobs. If a job was due to be cut regardless of the coronavirus crisis, then there is no right to KUG, otherwise it would create unfair competition.

So, if it is already clear that certain jobs were to be cut, or whole or partial operations permanently closed, KUG cannot be claimed – regardless of whether this business decision had been made before the outbreak of Covid-19, or whether it has been caused by it.

This means businesses would be advised to review the planning stage of their restructuring carefully. It may make tactical sense to postpone restructuring projects in their early stages, and make decisions about job cuts and compulsory layoffs later, partly to see what effects the current crisis has and to include them in plans. But beware: intentionally reversing or suspending decisions already made, in order to profit from KUG, could entail considerable compliance risks. Firstly, it is perfectly possible that the employment office involved will notice that the loss of work is not of a temporary nature and refuse to pay KUG. If, on the other hand, payments are wrongfully made, those responsible may find themselves personally culpable, in particular of fraud as described in § 263 Par. 1 StGB or subsidy fraud as described in § 264 StGB. Furthermore, such actions can be included as elements leading to corporate fines under § 30 OwiG (the German law on regulatory offences), which can be imposed directly on the legal entity concerned.

II. Transfer of personnel as an alternative to short-time work

If work threatens to be suspended by coronavirus and KUG cannot be used as a financial stop-gap, alternatives will be required to maintain a company’s short-term liquidity. It is worth noting that while many companies are maintaining nothing more than emergency operations, there are others with an acute shortage of labour (agricultural production and processing, food logistics, healthcare – to name some examples). A transfer of personnel can offer significant opportunities. This, incidentally, applies not only if KUG cannot be claimed on account of layoffs already planned, but also for other affected groups such as the marginally employed (who are never entitled to KUG) and low-income workers, for whom short-time work and claiming KUG represents a significant financial burden. The Arbeitnehmerüberlassungsgesetz (AÜG, Germany’s employee lending law) relieves certain kinds of employee transfer configuration from tight legal strictures, in cases in which the legally intended social protection of employees is not at risk. As well as the corporate group privilege described in § 1 Par. 3 No. 2 AÜG, which gives privileged status to the transfer of employees between group companies – provided the employee concerned is not recruited and employed for the purpose of secondment – the current situation is especially conducive to the ‘occasional transfer’ described in § 1 Par. 3 No. 2a AÜG. While the elements required for this to apply are usually interpreted very narrowly, the Federal Ministry of Labour has made it clear that a privileged, occasional transfer of personnel should currently be permissible under the following circumstances:

  • The employees concerned have agreed to transfer;
  • The business does not intend to act permanently as a transferor of employees;
  • Each transfer is limited in time to the current crisis situation.

III. Transferkurzarbeitergeld

If KUG cannot be claimed because work is lost permanently, a remaining option is that of Transferkurzarbeitergeld (Transfer-KUG) pursuant to § 111 SGB III. This requires the existence of a Betriebsänderung or operational adjustment as defined in § 111 BetrVG, which can include limiting, shutting down or relocating an entire operation or a major part of thereof. Claiming Transfer-KUG is usually done in conjunction with the employee moving into what is known as a Transfergesellschaft or interim employment society, on the basis of a transfer severance scheme, which is negotiated between the employer and employee representatives. But businesses without employee representatives can also consider setting up an interim employment society.

The purpose of an interim employment society and Transfer-KUG as an instrument of labour market policy is to avoid unemployment. Unlike ‘normal’ and ‘cyclical’ KUG, the (original) job cannot be saved, because compulsory layoffs have already been decided. By moving to an interim employment society, those affected receive the opportunity to take up subsequent employment as smoothly as possible, without a phase of unemployment. Financial aid is augmented by qualification and support measures delivered in collaboration with the responsible employment office.

Because setting up an interim employment society and conducting the associated negotiations between the various parties in a business involves a certain amount of organisational work and expense, Transfer-KUG cannot be used as a short-term ‘patch-up’ to the extent that cyclical KUG can. But if businesses that were already in need of reorganisation before the crisis now realise that the burden of coronavirus is making manpower cost-cutting unavoidable, they should begin to investigate the potential of transfer benefits as soon as they can.

IV. Severance scheme volume

Operational restructuring in the sense of a Betriebsänderung or operational adjustment as described in § 111 BetrVG doesn’t just enable transfer benefits to be claimed, it obliges a business with employee representatives to negotiate a balancing of interests and severance scheme. Changed economic conditions can impact especially on the negotiation of severance scheme volumes. When it comes to the criteria determining an appropriate severance scheme volume, reference is regularly made to what an Einigungsstelle or arbitration committee would decide in a dispute pursuant to § 112 Par. 5 BetrVG. This stipulates that the lower limit of the severance scheme volume is basically compensation of the economic disadvantages suffered by employees on account of operational adjustments. These economic disadvantages can consist in particular of a reduction of earnings, the loss of special benefits or entitlements to company pensions, relocation costs and increased travel expenses.

So severance schemes actually intend to compensate or at least lessen all these disadvantages. But the law offers a corrective, stating that the severance scheme must be ‘economically justifiable’. The total benefits offered by the severance scheme may not threaten the continuation of the business or those jobs that will remain after the operational adjustment. So when the severance scheme is set up, a forward-looking assessment of objective circumstances should be made regarding predicted liquidity, equity base and the relationship between assets and liabilities. Many businesses will have to downgrade their economic forecasts because of the coronavirus crisis. In the case of ongoing restructuring negotiations, this can justify a reduction in the severance scheme allocation.

A ‘zero severance scheme’ may even be justified by the current crisis, if the continuation of the business and the retention of remaining jobs can only be assured by a severance scheme without remuneration. Düsseldorf State Labour Court stated in its 26 November 2007 ruling (reference no. 17 TaBV 86/07): “If a severance scheme causes a business to become excessively indebted or unable to pay, then this is no longer financially justifiable, since the concomitant insolvency is the most extreme threat to its continued existence.” As a consequence, employers facing severance scheme negotiations should prepare their economic forecasts all the more prudently and restrictively in the face of the crisis, whose effects may well be more serious than the 2008/2009 financial crisis.

B. Summary

The extent of the restructuring and streamlining wave breaking over German businesses in the global Covid-19 pandemic is uncertain. But break it will. Employers who were already looking at operational changes can ride this wave, up to a point. But in terms of labour law, they should be warned against unthinkingly adapting planned and ongoing restructuring under the pretext of the coronavirus crisis.

Your contact persons:
Dr. Andrea Panzer-Heemeier, Managing Partnerin
+49 173 7291 414

Tobias Neufeld, LL.M., Partner
+49 172 6865 911
E tobias.neufeld@localhost


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