6. Cost-Reduction Strategies

To what extent can employers implement the following cost-reduction strategies as a result of COVID-19, and what are the primary limitations on each? 

• Furloughs.

Instead of a furlough, the key tool during the crisis in Germany was and is so-called short-time work. Short-time work can be introduced in the event of a temporary reduction of working time (partially or fully) based on a collective or individual agreement. If short-time work is validly introduced, a short-time work allowance (KUG) will be paid by the labour agency for up to 12 months. The allowance is usually 60% or 67% (with children) of the net wage difference (capped at social security income ceiling). In 2020, higher KUG amounts may be possible depending on the duration of short-time work. Short-time work requires a significant loss of working hours, which results in loss of remuneration. It needs to be based on economic reasons or an unavoidable event, which results in a temporary loss of working time of at least 10% of the employees of the business in the calendar month; further, employees need to be affected by a loss of remuneration of more than 10% of their gross remuneration. KUG is only possible if there is a legal basis, e.g. a collective agreement or provisions in an employment contract or a newly concluded individual agreement. The labour agency has to be notified on the basis of standard forms, which have to be submitted at the latest by end of the month for which KUG shall be first claimed.

• Salary reductions.

The employer may agree on salary reductions with employees. These however cannot be enforced unilaterally. During the current crisis, salary reductions are the preferred method of choice, especially with regard to high earning employees, as short-time work generally does not make sense in light of applicable caps for KUG benefits.

• Redundancy.

A redundancy due to the current situation (compulsory redundancy) requires a reason and has to be socially justified. The crisis alone is not automatically a justification for a permanent elimination of roles, unless the employer can prove that the work will fall away for the foreseeable future, e.g. at least for the next 9 to 12 months. Temporary work reduction will not justify redundancies, but will only merit short-time work arrangements. If short-time work would be sufficient to bridge a temporary reduction of workload, a termination would be disproportionate and therefore invalid. This only applies to employees who have been employed for more than six months in a business unit with usually more than ten employees.

• Facility closure.

If the employer can no longer maintain the business and therefore can no longer employ the healthy employees who are willing to work, its obligation to pay remuneration remains. It is in default of acceptance, even if it cannot employ the workforce for technical reasons through no fault of its own. The employer bears the "business risk", i.e. the risk of not being able to operate his business. Employees therefore receive their normal remuneration, including variable remuneration components such as commissions, even during the unexpected compulsory break. The aforementioned compensations in accordance with the German Protection against Infection Act, only arise in the event of an officially ordered closure of the facility due to risk of infection. In principle however, if an employer needs to close down a facility, it may wish to consider whether short-time work may be possible.