Grounds for Termination
Under German law, the employment relationship can be terminated by mutual consent, by expiry of a fixed-term contract or by notice given by one of the two parties. Protection against dismissal is divided into general and special protection. Special protection is provided to employees who generally face a greater risk of dismissal such as handicapped or pregnant employees and members of the works council. In such cases, the permission of relevant government authorities is required prior to issuing a termination.
As to the general protection, the freedom of the employer to dismiss an employee is substantially restricted by the Dismissal Protection Act (“DPA”), which applies if: 1) a business establishment has generally more than ten employees; and 2) the employee has worked in the same company or business establishment for six months without interruption.
In case of severe breaches of obligations, the employment can also be terminated for cause with immediate effect by either party without observing a notice period. Among the valid reasons for immediate termination are crimes against the employer. The employer must provide notice within 2 weeks after becoming aware of the relevant circumstances.
Dismissals by reason of redundancy are considered ordinary dismissals under the DPA. In addition, specific rules apply if the dismissals form part of a so-called mass redundancy of a certain scale; e.g. prior notice must be given to the competent employment agency and a violation of this formality will result in dismissals being void. In case of a so-called operational change of business (e.g. closure of the business), collective dismissals may, in addition, require the negotiation of a social plan and the attempt to negotiate a reconciliation of interests with the works council, if the undertaking employs more than 20 employees. Certain reprieves exist during the first four years of a company’s existence.
If the DPA applies, a termination is only legally effective if it is “socially justified”. A termination is justified only if it is based on reasons related to: 1) the person; 2) the conduct of the employee; or 3) urgent operational requirements which preclude the continued employment of the employee in the undertaking.
Person-related reasons include, in particular physical or mental impairments, extensive absenteeism due to illness and reduced working capacity. Conduct-related reasons include a wilful or severely negligent breach of contract. A dismissal based on the employee’s conduct, usually requires that a written warning be given to the employee. In terms of operational reasons, the employer must prove that the employee’s dismissal was necessary for compelling business reasons, such as reorganisation. These measures must result in the loss of the position and there may not be any alternative position available that the employee could occupy.
Additionally, dismissals due to operational reasons are only socially justified if a social selection has been carried out. Among employees having comparable personal and technical qualifications and working in similar jobs, the employer must select the employee with the weakest social standing based on specific criteria which are; age, length of service, support obligations for dependents and severe disability. Employees whose further employment is crucial for the functioning of the undertaking may be excluded from this selection process. Such exclusion however is a rare exception and will usually not be possible. Poor performance is not a selection criteria, nor is not having a valid reason for a termination under the DPA.
Notice must be given in writing (wet ink signature) and signed by a duly authorised representative of the employer, in order to be legally effective. All other forms of notice (i.e. those given orally or by e-mail or fax) are void. Terminations that fail to adhere to the information / consultation / internal hearing processes and procedures afforded to the works council (if in place) or the representative body for severely disabled persons (if in place and in case of a termination of a severely disabled person) are also void.
The employee has the option to challenge their dismissal. In such case, they have to file a complaint with the competent labour court within 3 weeks from receipt of the termination notice. If the dismissal is ineffective, the employee is entitled to reinstatement and continued remuneration by the employer. In practice, most cases are settled in or out of court against payment of severance.
An employee, who is severely disabled, enjoys several benefits in order to be treated with respect to such disability. Employees who are severely disabled are protected against termination. Authorisation by a public authority is necessary prior to a termination. Additionally, a consultation of the representation of severely disabled persons, if such representation is established in the company, is necessary prior to a termination. The consequence of a consultation, whether incorrect or omitted, is that the termination will be deemed invalid. They may also claim part-time employment, if this is necessary with respect to the disability. A severely disabled person may refuse to work overtime. The conditions of employment need to be organised, taking into account the restrictions of the disabled person. The employer may only deny such organisational measures that are unreasonable or disproportionate.
If the employer employs more than 20 employees but does not employ disabled persons in a specified number, he is obligated to pay compensation. The number of disabled persons, who need to be employed, depends on the number of employees. Generally, at least 5 percent of the employees should be disabled persons.
Is Severance Pay Required?
Severance payments are paid at the end of employment in the following cases: 1) the employment agreement provides for a contractual severance payment (which is very unusual); 2) the parties agree upon a severance payment (in or out of court) to settle a termination dispute; 3) the court dissolves the employment against payment of severance if it finds that despite the invalidity of the termination, continued employment would be intolerable either for the employer or the employee; or 4) a social plan concluded with the works council in connection with a collective redundancy provides for severance payments. The following (non-binding) formula is often used by labour courts and is regularly incorporated into separation agreements as well as social plans, to calculate severance:
monthly gross salary multiplied by years of employment multiplied by factor x
X is generally a factor between 0.5 and 1.5 and may be lower or higher, depending on the circumstances, business sector and region of Germany.
a. Is a Separation Agreement required or considered best practice?
Due to the high standards of protection against dismissal, it is not uncommon for the employment to be terminated by contract between the employer and employee, i.e. a separation agreement. This may occur at any time with or without severance payment. The provisions on protection against unfair dismissal do not apply in such cases.
Even employees enjoying special dismissal protection may conclude a separation agreement without requiring permission of the authorities. The employer will generally offer a severance payment to induce the employee to accept the termination by agreement.
b. What are the standard provisions of a Separation Agreement?
In a separation agreement, typically the following conditions are regulated:
- termination date
- severance payment
- outstanding bonus payments and treatment of other benefits upon termination
- release from duty to work by offsetting any vacation claim
- letter of reference
- return of company documents and work items
- settlement clause
c. Does the age of the employee make a difference?
Underage persons are generally only able to conclude a separation agreement (just like the employment or trainee contract) with the approval of their legal representatives, regularly their parents.
With respect to age discrimination, particularly regulations in social plans compensating for disadvantages to older employees, need to be drafted with due care
The age of an employee may also have an impact on negotiations, as older employees may find it more difficult to find new employment and therefore typically ask for higher severance amounts.
d. Are there additional provisions to consider?
Besides the standard provisions of a separation agreement, the parties should consider agreeing upon additional provisions, such as:
- outplacement service
- post-contractual non-compete
- agreement on communication
Remedies for Employee Seeking to Challenge Wrongful Termination
As there is generally no statutory entitlement to severance payments in Germany, the employee can only claim reinstatement. The burden of proof regarding the validity of the termination is on the employer, and in practice it is often difficult to establish the social justification for the dismissal. If the termination is deemed invalid, the employee returns to their position. In practice, most dismissal protection proceedings are settled in exchange for a severance payment.
In the past, there has been no general legislation covering whistleblowing in Germany. The newly introduced Whistle-blower Protection Act, which is based on the EU Whistle-blower Directive 2019/1937, recently implemented general rules regarding whistle-blowers.
Whistle-blowers can use reporting units set up specifically for this purpose to report violations of national and European law that occur in connection with their employment relationship. Employers with more than 250 employees must set up internal reporting units for this purpose. The same obligation will apply to employers with more than 50 employees as of 17 December 2023. The internal reporting units can be operated by the employer itself. Trained personnel should handle incoming reports. The group of persons who may become aware of the reports should be kept as small as possible for data protection reasons. Alternatively, the internal reporting unit can also be provided by external service providers. Independent of the internal reporting units, employees can also contact the external reporting unit at the Federal Office of Justice.
If a report is received, the reporting unit has seven days to acknowledge receipt of the report. It examines the validity of the allegation and the extent to which it falls within its factual scope. In doing so, the whistle-blower may be consulted for further information. If there are indications and/or evidence of the violation, internal investigations may be conducted or be forwarded to the competent authorities. The whistle-blower is notified of the further course of proceedings within a three-month period. The reporting unit is obliged to follow up every report in this way. It should also do so in cases of anonymous reports, although the legislator has refrained from imposing an obligation to process anonymous reports.
In the past, whistle-blowers did not enjoy any special protection. Under the new HinSchG, a prohibition of discrimination against whistle-blowers must be observed. As a consequence, employers always bear the burden of proof that a reprisal (e.g. dismissal) of a whistle-blower has not occurred as a result of the whistle-blower’s report.
Furthermore, in certain business sectors, special legal provisions exist, such as e.g. in the financial services sector. The Trade Secrets Act, implementing the European Directive on the Protection of Trade Secrets, has legally defined the term “trade secret” for the first time, focusing primarily on objective measures (with newly enhanced requirements) for the protection of sensitive trade secrets. Trade secrets will only be safeguarded if the owner has taken “confidentiality measures appropriate for the circumstances”.