In business, the restructuring of a company (such as by the closure of an individual business unit or a necessary reduction in the number of staff) may result in an employee’s redundancy. However, dismissing an employee by reason of redundancy has strict prerequisites under German law.

The main requirements which must be observed under German law for a dismissal based on redundancy are as follows:

  • In business units with more than ten employees (more than five if hired before 31 December 2003), and if an employee has been at the company for more than six months, a specific justification for any dismissal is required. Redundancy qualifies as a sufficient justification in this sense. Smaller businesses do not require a similar justification for dismissals subject to the dismissal not being discriminatory; a dismissal is possible without any specific reason and only a minimum of social consideration is required.
  • A dismissal based on redundancy is possible only if the position of the affected employee no longer exists for operational reasons (e.g. restructuring) and if it is not possible to offer the employee any suitable alternative employment within the whole company. German case law is very detailed in this regard and courts traditionally take a rather supportive stance towards employees.
  • A management decision regarding the envisaged measure must be taken, which should always be documented to provide proof.
  • Prior to the dismissal the employer must perform a so-called “social selection”. During this process the employer has to select the employee with the strongest social background for dismissal by considering certain criteria (length of service in the company, age, family maintenance obligations, any severe disability) of comparable employees and may terminate the employment only of the employee who requires least “social protection” (i.e. who has no family, is young, healthy etc.).

Further, any applicable special protection against dismissal (i.e. pregnant women, employees on maternity/parental leave, severely disabled persons, and members of the works council) as well as co-determination rights of the works council must be observed. In particular, the works council, if there is one, needs to be informed prior to any dismissal and be allowed one week to revert with any comments or objections.

In business units with more than 20 employees, the works council has additional information and consultation rights with regard to major changes in the conduct of the business unit. A shutdown or a drastic reduction of staff (at least 10%, depending on the size of the business unit) also qualifies for such change in the conduct of the business unit. When a change in the conduct of the business unit occurs, the employer is required to inform the works council of the change well in advance and to consult with the works council about the proposed action to be taken. The aim of such consultation is to reach agreement on two issues: First, answers to the questions “if”, “how” and “when” in relation to the proposed change are to be set out in writing under a so-called “reconciliation of interests”. Secondly, issues related to the type and scope of compensation for any – in particular financial – disadvantages to the employees related to the change are to be set out under a “social plan”.

In cases of mass redundancy (which is determined considering the relevant headcount and the employees to be laid off within a specific period of time) the employer must inform the local labour agency regarding the planned dismissals in advance and – again – consult with the works council. If the employer fails to do so, the notice of dismissal is invalid. Labour Courts have recently been very strict on meeting the requirements as set out and interpreted in several cases by the European Court of Justice.

If notice of termination is given (irrespective of the size of the business), the employee may file a suit at a labour court within three weeks after receipt of the termination notice, asking the court to review the validity of the dismissal. Experience shows that most affected employees make use of this option. In Germany, officially the court can only award re-instatement of the employee where there has been an invalid termination and German law does not provide for specific compensation in cases of dismissal for redundancy. However, in practice most cases are eventually settled in consideration of a severance payment. Alternatively, to avoid dismissal and the following lengthy and cost-consuming court proceeding, the parties may terminate an employment relationship (usually in exchange for compensation) at any time by mutual consent.