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Briefing

Alternative measures to short-time working arrangements

The Coronavirus disease (COVID-19) continues to massively restrict economic life in Germany. As a result, many German companies have introduced short-time working arrangements (Kurzarbeit) in the last few weeks. According to the German Federal Employment Agency (Bundesagentur für Arbeit), 470,000 companies notified short-time working arrangements in March 2020 alone, compared to just over 1,900 in February.

The introduction of short-time working arrangements is a well-proven method of keeping workers in employment while reducing personnel costs. However, short-time working arrangements and the associated financial benefits are subject to strict legal requirements. Not all companies meet these requirements (see Eckert, Arbeitsrecht in Zeiten von Corona Kurzarbeit und Kurzarbeitergeld – Voraussetzungen und Problemfelder). Not surprisingly, many companies ponder whether alternatives exist for reducing personnel costs. The answer is a clear ”yes”: German employment law provides numerous other possibilities – both short and long term.

Short-term measures

Personnel reductions through expiry of fixed-term contracts / terminations during probation period

In times of COVID-19, employers still have the opportunity to reduce jobs by allowing fixed-term contracts to expire or issuing terminations within the probation or waiting period.

In contrast to employment contracts for indefinite terms, fixed-term employment relationships are temporary by nature. The employment relationship ends automatically upon their expiry if the fixed term is valid. Employers need not provide grounds (for termination) to end them.

Further, during the probation period, employers have the option to terminate employment contracts more easily. In legal terms, this is referred to as the "waiting period" under the Protection Against Unfair Dismissals Act. In Germany, employees are protected against unfair dismissal after the employment relationship has existed for more than six months. In addition, companies should consider contractually agreeing on a probation period to benefit from a shortened two-weeks’ notice period.

Practical note: The shortened two-week notice period applies until the expiry of the probation period, even if the end of the termination notice period falls outside of the probation period. For example, in case the probation period expires at the end of May 2020, a probation period termination is still valid if the employee receives it within the probation period (i.e. up to and including 31 May 2020).

Establishing (company) principles for annual leave

The COVID-19 crisis also provides companies with additional leeway in terms of holiday. In particular, the question is whether and to what extent the employer can (unilaterally) direct the employees to take outstanding annual leave. Such a directive may conflict with the employees’ interests to freely determine the duration and timing of annual leave according to their own recreational needs. This conflict of interests should not be underestimated: According to the Federal Annual Leave Act (Bundesurlaubsgesetz), employees are entitled to paid recreational leave. In this respect, it seems prima facie possible for the employer to set annual leave. However, the employer must consider the employees’ wishes for their leave, provided these do not conflict with urgent business interests or overriding leave wishes of other employees. Urgent business interests in this regard are those based on operational organisation, technical work processes or similar circumstances. These requirements could certainly be met in individual cases, e.g. loss of revenue or a declining order situation due to COVID-19. In the past, the unilateral setting of annual leave was not recommended from an employer’s perspective in order to ensure staff satisfaction. In COVID-19 times, however, such unilateral arrangement is feasible. Above all, this applies if employees fail (for months) to express any leave requests.

Moreover, the employer has the option to set company principles for annual leave in consultation with the works council via a works agreement. The employer and the works council can mutually agree on company holidays (in times of COVID-19 probably with only a short announcement period). These are deemed "urgent business interests" within the meaning of the Federal Annual Leave Act which generally override divergent employees’ wishes for leave. For instance, such works agreement could determine that two thirds of leave entitlement for 2020 must be taken by 31 August 2020.

Practical note: The employer and the works council retain the right to mutually set COVID-19-induced operational principles for annual leave. Employers should bear in mind that they are prohibited to set all employees’ entire annual leave in the form of operational holidays. Employees must (at least partially) retain the possibility to request individual leave periods based on their personal needs.

Unpaid leave / inactive employment relationship

Agreements with the employees on unpaid leave may also bring short-term financial relief for the company. During unpaid leave, the employer suspends the employees’ duties to perform under the employment contract. This model may apply if the requirements for short-time working benefits have not been satisfied or employees wish to take time off for a self-determined period (e.g. to care for family members).

From a legal perspective, unpaid leave is a temporary and mutually agreed suspension of the primary performance obligations while maintaining secondary obligations under the employment contract. This is referred to as an inactive employment relationship. For the period of unpaid leave, social security contribution also ceases, as the employee does not receive remuneration for this period. For the period of one month, however, the social security law assumes continued existence of employment and thus insurance coverage is provided.

Practical note: As soon as unpaid leave lasts longer than one month, employees lose their insurance coverage. Employers should advise their staff in this regard to avoid liability for damages.

Use of working hour accounts

At companies with working hour accounts, employers may instruct employees in accordance with the relevant provisions to both expend positive time balance and to build up negative time balance. However, companies must be aware that this does not result in a short-term reduction of personnel costs. The employer must rather remunerate such hours. From an economic perspective, building up negative hours equals advance payment by the employer.

Nevertheless, the use of working hour accounts is a proven method of staving off under-utilisation. Building up negative time balances is primarily of interest to companies that are expecting an above average amount of work after the crisis.

Deferral of social insurance contributions and remuneration payments

Another measure to relieve the financial burden on companies is the option to defer social insurance contributions, which is currently being facilitated. At least for contributions due for April and May 2020, the Central Association of Statutory Health Insurers (GKV) stated in a circular that companies and enterprises which find themselves in serious payment difficulties as a result of the Corona pandemic can relieve the financial burden on them by deferring social insurance contributions without providing any security. Deferment interest, default charges and reminder fees are also not being charged. However, this requires companies to use primarily short-time working arrangements and other state-aid measures. Deferment of social insurance contributions occurs upon application by the employer to the relevant health insurer. Further information can be found in an FAQ by the GKV (link).

Deferment of employee’s remuneration payments may also be possible under certain circumstances. However, this requires an agreement with the employee that postpones the due date for the wage payment. It does not remove the payment obligation for the relevant period at all, but merely adapts the payment date to the temporary crisis. Until the agreed date, the employer is not in payment arrears and does not have to pay default interest. However, when concluding a deferment agreement, various requirements must be observed from the employer’s perspective. If the employment contract includes the clause for written form, the agreement must not only be in writing but must also adhere to the rules of the Minimum Wage Act (Mindestlohngesetz). In the case of a waiver in standard forms, the employer must also observe the limits of the law on general terms and conditions.

Personnel partnership between companies

Some companies also benefit from the current crisis. For example, food retailers and online companies are experiencing increased demand. Temporarily, these companies even need additional employees. These employees can – with their consent – be "obtained" from companies that are more affected by the crisis (so-called personnel partnership). Employees can be employed on a part-time or full-time basis. As a consequence of the personnel partnership, the company "hiring out" directly reduces its personnel costs. Employers may consider two different models for a personnel partnership:

Hiring-out of employees

In such situations, it is not uncommon for the companies involved to be advised to "hire-out" employees. The company with the surplus of employees hires out workers to the other company, the hirer, which temporarily increases its number of employees. As a rule, the requirements of the Temporary Employment Act (Arbeitnehmerüberlassungsgesetz) must be observed. The company temporarily hiring out generally requires a so-called transfer permit. In the absence of such a permit the hirer may be forced to assume the original employment relationship. In addition, both companies may face severe monetary sanctions.

However, the Temporary Employment Act also offers exceptions to the strict requirements for such temporary employment. Group companies can usually rely on the so-called group privilege. Furthermore, smaller companies with less than 50 employees do not require a permit, when the company transfers an employee who is not hired and employed for the purpose of transfer to another employer in order to avoid short-time work or redundancies.

At first glance, especially for larger companies there is another promising solution to perform a personnel partnership via hiring-out of employees: Large parts of the Temporary Employment Act do not apply if the transfer is only occasional and the employee is not hired and employed for the purpose of the transfer. Nevertheless, strict conditions are imposed on the characteristic "occasional". Even informal agreements between companies may indicate an intention to repeat the lease and therefore conflict with the condition "occasionally". Even though the Federal Ministry of Labour and Social Affairs (Bundesministerium für Arbeit und Soziales) considers such temporary employment to be appropriate in the current crisis situation in the context of its aid to interpreting legislation on the hiring-out of employees (without legally binding effect), this constellation bears some risks in practice. A personnel partnership based on the Temporary Employment Act should only take place after a detailed legal analysis due to the strict legal consequences of unauthorised hiring-out of employees.

Temporary employment with the "new" employer

A personnel partnership can also be achieved in another way: The employment relationship with the "actual" employer is temporarily suspended or the working hours are temporarily reduced, and the employee concludes a fixed-term employment contract with the new employer. As a rule, in these cases it should be possible to set a temporal limitation of an employment agreement without substantive grounds. However, this possibility does not exist if the employee was previously employed by the new employer. A temporal limitation of an employment agreement without substantive grounds can (only) be agreed up to a total duration of two years. Up to this duration, three extensions are possible.

Practical note: The parties to the personnel partnership should pay attention to the time frame when drafting the contract. The duration of the suspension of the employment relationship or the reduction of working hours at the "actual" employer and the fixed-term duration of the new employment relationship should be arranged as synchronously as possible. Employees should be advised to obtain permission from both employers for secondary employment.

Dealing with (variable) remuneration

Under German employment law the employees’ duty of loyalty towards their employer does not entail an obligation to waive salary if the employer is in financial difficulties. However, various companies have already announced that their managers are temporarily waiving part of their salaries voluntarily in response to the Corona crisis. Legally, such a waiver requires a mutual waiver agreement. Employers must observe various legal limits to avoid the invalidity of such an agreement. Waivers of certain remuneration claims are prohibited by law, such as continued remuneration in case of illness or holiday pay. Furthermore, rights from a collective agreement can only be waived if approved by all parties to the collective agreement. The same applies to claims under works agreements. In the case of a waiver by standard form, legal obligations on general terms and conditions must also be observed. In addition, in some cases compliance with the requirement of the written form must be observed.

Further financial relief can be obtained by dealing with the variable remuneration of employees. Depending on the design of the incentive program, the economic effects of the Corona crisis can already be considered in the achievement of targets and therefore in the calculation of the variable remuneration. It is also possible in individual cases to postpone bonus decisions and bonus payments in order to better assess the extent of the Corona crisis. In addition, in the case of a performance-related discretionary bonus, according to the court rulings of the Federal Labour Court (Bundesarbeitsgericht), it is possible to set such bonus to "zero" if there are particularly important, exceptional circumstances despite the achievement of personal targets. The Federal Labour Court has found such exceptional circumstances in the context of the financial crisis at banks which were only able to avoid insolvency through state liquidity aid. Whether the effects of the Corona pandemic will lead to a comparable situation and whether the decisions of the court on the financial crisis are transferable depends on the content of the bonus agreement and the economic situation of the company.

Long-term measures

In addition to short-term solutions, companies should also consider long-term measures to adapt personnel costs to the effects of the Corona pandemic. This includes a reduction in the level of remuneration and, as a last resort, a reduction of headcount for operational reasons.

Reduction of the remuneration

Even in economic crises, companies can practically only reduce the remuneration of their employees by mutual agreement – except for the dismissal with the option of altered conditions of employment (Änderungskündigung), which is subject to strict rules. Employees will usually only want to reduce their contractually agreed remuneration in return for (valuable) consideration. Against the background of large losses in turnover and the scenarios of (mass) redundancies for operational reasons, which are quite concrete in these times, the "negative" incentive is initially the temporary waiver of dismissals for operational reasons by the employer, e.g. in the sense of an "employment guarantee" for a concrete period (Beschäftigungsgarantie). It is also possible to agree a reduction not in terms of fixed salary, but only in terms of variable remuneration components. As a "positive" incentive, employees could be offered the prospect of (retrospective) premium or bonus schemes for better economic times.

Headcount reductions due to redundancies for operational reasons

Ultimately, employers in crisis situations have, as a last resort, the possibility of redundancies for operational reasons. For this purpose, the requirements of the Protection Against Unfair Dismissals Act (Kündigungsschutzgesetz), such as the duty of social selection and the notice period for termination, must generally be observed. Even if the prerequisites for a dismissal for operational reasons are often fulfilled in longer periods of crisis, the dismissal of numerous employees has other drawbacks, which can make the dismissal ineffective, despite the existence of a reason for dismissal. As before any dismissal, the works council must be properly consulted. In the case of collective redundancies (Massenentlassung), i.e. when the threshold values of the Protection Against Unfair Dismissals Act are reached, the obligation to notify the local Employment Agency and the upstream consultation procedure with the works council must be observed (the rules on collective redundancies can be applicable as of five affected employees). This notification and consultation procedure is very time-consuming and prone to errors. Nonetheless, compliance with all regulations is essential, as violations lead to the invalidity of all notices of termination issued. With careful preparation, however, the conditions are manageable, and the rescue of the entire company can be achieved by cutting individual jobs or closing individual departments.

In this context, there is often a misunderstanding that short-time working arrangements (Kurzarbeit) and dismissals for operational reasons are mutually exclusive. This is not correct (see decision of the Federal Labour Court of 23 February 2012). Employers can announce dismissals for operational reasons even during short-time working arrangements. This is also possible concerning employees who are on short-time working, provided that no regulations to the contrary apply in the company (e.g. based on works agreements or collective bargaining agreements). Both instruments pursue different objectives: In the case of short-time working arrangements, the employer assumes a temporary decline in workload. A dismissal for operational reasons, on the other hand, requires the (presumably) permanent work tasks cessation of the dismissed employee.

If, during the short-time working phase, the employer discovers that, contrary to his previous assessment, circumstances exist which lead to permanent loss of work and employment opportunities, it is possible to issue dismissals for operational reasons based on a business decision. However, within the framework of a protection against dismissal, the employer must demonstrate that the structural situation in the company has changed after the introduction of short-time work arrangements.

Practical note: Employers should carefully assess the situation before introducing short-time work arrangements for areas in which dismissals could be issued in the foreseeable future. This increases the amount of time and effort required for justification in the context of an action for unfair dismissal.