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Germany: Less dismissal protection for top bankers

In light of Brexit the German government has tried to vamp up Frankfurt’s attractiveness for London banks. Earlier this spring, a new law was passed, which deals with tax-related arrangements for Brexit, but in addition also implements changes to dismissal protection law for top bankers.

A new provision has been introduced in the German Banking Act whereby Material Risk Takers (MRTs) of significant institutions whose annual fixed remuneration exceeds three times the income threshold in the general pension insurance (as of 2019: EUR 80,400 – ie the threshold would amount to EUR 241,200) shall no longer be subject to regular dismissal protection, which provides for reinstatement as the only remedy for an unfair dismissal.

From the end of November, if the termination of the banker is not socially justified under the Dismissal Protection Act, the employer shall be able to apply for dissolution of the employment relationship against severance payment without needing a special justification. The court may then, by way of exception, dissolve the employment relationship despite the unfair dismissal and determine the amount of a severance payment at its discretion. At present, this regulation already exists for managerial employees but is not relevant in practice at all due to the courts’ very narrow definition of “managerial employee”.

If the employer applies for dissolution of the employment relationship, the court may determine a severance payment of up to twelve monthly salaries, whereby monthly salary means “total compensation” and therefore includes bonuses and benefits in kind. For older employees with long tenure higher limits of up to 15 or 18 monthly salaries apply. In exercising its discretion the court may consider different aspects, such as age of the employee, chances in the job market, economic situation of the employer, the extent of unfairness of the termination etc. In practice, the severance amount can therefore be somewhat of a black box and may be quite significant if it can be as high as one annual total remuneration even for short periods of service.

The new law will only apply to a narrow group of people, since the vast majority of institutions are not even significant institutions within the meaning of the German Banking Act. Furthermore, whilst the threshold for the fixed remuneration under the draft bill is of course high, according to the relevant European regulations, an employee with a fixed remuneration of EUR 240,000 will not necessarily be an MRT.

The proposal may actually even do a disservice to parts of the German financial industry. Not only will it be a hard-to-calculate risk how high a severance set by the court would be – an annual total remuneration can already be enormously high for top bankers – but in addition, it may be harder in future for German significant institutions to recruit top bankers if they lose their regular protection against dismissal upon joining.

Finally, it should be noted that it is already questionable whether the new law is constitutional because it arbitrarily sets a threshold that is not even in line with existing regulatory provisions on MRTs.

Overall, the easing of dismissal protection for top earners in banks is certainly a step in the right direction that may also make sense for other industries. The specific new law, however, seems legally problematic and is unlikely to reach its primary intended goal of luring banks to Frankfurt.