Dismissals and Workforce Restructuring

Dismissals in Germany: the short answer

Dismissals in Germany are tightly regulated. Once an employee has been employed for more than six months in an establishment with more than ten employees, a dismissal by the employer must be socially justified under the Protection Against Dismissal Act (Kündigungsschutzgesetz, KSchG): it must be based on reasons relating to the employee's person, the employee's conduct, or urgent operational requirements (§ 1 KSchG). Notice must be given in writing with a wet-ink signature, as electronic form is excluded (§ 623 BGB).

Where a works council exists, it must be heard before every dismissal (§ 102 BetrVG). Larger reductions require a collective redundancy notification to the Federal Employment Agency, and operational changes trigger negotiations on a reconciliation of interests and a social plan.

In practice, most terminations end in a settlement. Employees who challenge a dismissal must file a claim with the labour court within three weeks of receiving the written notice (§ 4 KSchG); if they miss the deadline, the dismissal is deemed effective. If they file, the court holds a conciliation hearing within weeks, and most cases settle with a severance payment. Severance is not a statutory entitlement in most cases, but the risk that the court will declare the dismissal invalid, with the obligation to continue employment and pay back wages, makes severance the price of legal certainty.

This page explains individual dismissals, social selection, special protection, the works council hearing, collective redundancies, reconciliation of interests and social plans, settlement practice and business transfers under § 613a BGB. It is written for HR directors, managing directors and in-house counsel planning workforce changes. For the works council's general rights, see works councils.

Protection against dismissal under the KSchG

The KSchG applies where the employment relationship has lasted more than six months without interruption (§ 1(1) KSchG) and the establishment usually employs more than ten employees; part-time employees count as 0.5 if they work up to 20 hours a week and 0.75 if they work up to 30 hours (§ 23(1) KSchG).

Below these thresholds, employers can dismiss without a statutory reason, although dismissals must not be discriminatory, arbitrary or in bad faith, and notice periods and special protection still apply.

Where the KSchG applies, a dismissal must be justified on one of three grounds. Person-related dismissals are based on the employee's inability to perform the job, most frequently long-term or repeated illness; the employer must show a negative prognosis, a significant impairment of operational interests and that the dismissal is proportionate.

Conduct-related dismissals respond to breaches of contractual duties and usually require a prior warning (Abmahnung) for similar conduct. Operational dismissals are based on an entrepreneurial decision that eliminates the need for the employee's job, such as a reorganisation or closure; the courts review whether the decision was actually taken and implemented and whether it eliminates the job, but not whether it is sensible.

Social selection

In operational dismissals, the employer must select the employees to be dismissed from among comparable employees on the basis of four social criteria: length of service, age, maintenance obligations and severe disability (§ 1(3) KSchG). Employees whose continued employment is in the employer's legitimate interest, for example because of special knowledge or to maintain a balanced personnel structure, can be excluded from the selection. Points schemes agreed with the works council are common and are reviewed by the courts only for gross errors. Mistakes in social selection are a frequent reason why dismissals fail in court.

Notice periods and special protection

Statutory notice periods for employer terminations increase with length of service, from four weeks to the 15th or end of a month up to seven months to the end of a month after 20 years (§ 622 BGB); collective agreements and employment contracts often provide longer periods.

Certain employees enjoy special protection: dismissing a pregnant employee or a woman shortly after childbirth is generally prohibited (§ 17 of the Maternity Protection Act), severely disabled employees can be dismissed only with prior consent of the Integration Office (§ 168 SGB IX), and works council members can be dismissed only for cause and with the works council's consent (§ 15 KSchG, § 103 BetrVG). Employees on parental leave and data protection officers are also protected.

Extraordinary termination for cause

Either party may terminate without notice for good cause where continuing the employment until the end of the notice period is unreasonable, taking into account all circumstances and weighing the interests of both parties (§ 626 BGB). Typical examples are theft or fraud against the employer, serious violence or persistent refusal to work.

The termination must be declared within two weeks of the employer learning of the relevant facts. Because the threshold is high and the two-week period is short, employers often combine an extraordinary termination with an alternative ordinary termination, and they should investigate facts quickly and document when they became aware of them. Suspicion-based termination is possible in narrow circumstances, but requires that the employee has been heard before the decision.

Fixed-term contracts and probation

Fixed-term employment contracts end automatically when the term expires, without the need for social justification, but the fixed term itself must be lawful under the Part-Time and Fixed-Term Employment Act: without an objective reason, a fixed term is permitted for up to two years with up to three extensions, and not if the employee was previously employed by the same employer. A probationary period of up to six months allows termination with two weeks' notice (§ 622(3) BGB), and the KSchG does not yet apply during the first six months. Employers should use this period to make an informed decision.

The works council hearing

The works council must be heard before every dismissal, and a dismissal without a proper hearing is invalid (§ 102(1) BetrVG). The employer must inform the works council of the employee's personal data, the type of dismissal, the notice period and all reasons for the dismissal that the employer intends to rely on; reasons not communicated cannot be used later in court. The works council has one week to raise concerns about an ordinary dismissal and three days for an extraordinary dismissal; silence is deemed consent (§ 102(2) BetrVG).

An objection by the works council on specific statutory grounds does not prevent the dismissal, but can give the employee a right to continued employment during the court proceedings. Because a defective hearing invalidates the dismissal regardless of its merits, employers should prepare hearing letters carefully, deliver them with proof of receipt and wait for the response or the expiry of the period before giving notice.

Collective dismissals and § 17 KSchG

Larger reductions require a collective redundancy notification to the Federal Employment Agency before the terminations are given. The obligation applies where, within 30 calendar days, an establishment dismisses more than five employees (with more than 20 and fewer than 60 employees), 10% or more than 25 employees (with 60 to 499 employees), or at least 30 employees (with 500 or more) (§ 17(1) KSchG).

Terminations initiated by the employer through settlement agreements count towards the thresholds. Before notifying, the employer must consult the works council in writing on the reasons, the number and categories of employees concerned, the selection criteria and the planned severance, and attach the works council's opinion to the notification (§ 17(2), (3) KSchG).

Terminations subject to notification take effect before the end of one month after receipt of the notification only with the agency's consent (§ 18(1) KSchG). Errors in the consultation or notification procedure have historically rendered terminations invalid, and the consequences of procedural errors have been the subject of case law at the Federal Labour Court and the Court of Justice of the European Union. Employers should treat the procedure as a formal workstream with its own timetable and documentation.

Reconciliation of interests and social plans

Where a reduction or reorganisation is an operational change in an undertaking with more than 20 employees entitled to vote (§ 111 BetrVG), the employer must inform and consult the works council and attempt to agree a reconciliation of interests (Interessenausgleich) on whether, when and how the change will be implemented. If no agreement is reached, the employer can involve the conciliation board, and only after that attempt has failed may it implement the change. Implementing without attempting a reconciliation of interests exposes the employer to claims for compensation by affected employees.

The social plan (Sozialplan) compensates or mitigates the economic disadvantages for employees, typically through severance formulas based on length of service, age and salary, plus additional amounts for children or disability. Unlike the reconciliation of interests, the social plan can be imposed by the conciliation board, except for pure staff reductions below the thresholds in § 112a BetrVG and for companies in their first four years. Transfer companies (Transfergesellschaften), funded partly by the Federal Employment Agency, are often used to give employees time to find new jobs while the employer achieves legal certainty. In insolvency, special rules ease restructurings; see insolvency proceedings.

Planning a restructuring timetable

A realistic timetable for a German restructuring works backwards from the planned effective date. Notice periods of several months for long-serving employees, the information and consultation of the works council, possible conciliation board proceedings on the reconciliation of interests and social plan, the § 17 consultation and notification, and the individual hearings all take time. For a medium-sized reduction with a cooperative works council, three to six months from the first information to the delivery of notices is common; contested cases take longer. Communication to employees, customers and authorities should be coordinated with these steps, because premature announcements can be treated as evidence that the decision was taken before the works council was consulted.

Alternatives to terminations should also be considered and documented: short-time work during temporary downturns, voluntary leaver programmes with enhanced severance, early retirement and partial retirement arrangements, and redeployment within the group. Courts expect employers to consider whether a vacant position is available for an employee before an operational termination, and voluntary programmes can reduce the number of contested cases considerably.

Settlements, severance and business transfers

Most terminations end in a settlement, either in a termination agreement concluded instead of a dismissal or in a court settlement after a claim. Termination agreements must be in writing (§ 623 BGB) and should address the termination date, severance, garden leave, bonus and holiday entitlements, references, return of property and confidentiality. Severance has no statutory formula, but a common reference point is half a monthly salary per year of service, which is also the amount of the statutory severance option for operational terminations under § 1a KSchG. Employees should be informed about possible unemployment benefit consequences, such as a suspension period where the employee actively contributed to ending the employment, and the tax treatment of severance should be planned.

Settlement agreements with senior managers often also cover post-contractual non-compete obligations, which require compensation of at least half the last contractual remuneration if the employer wants to enforce them (§ 74(2) HGB).

Business transfers raise separate issues. Where an establishment or part of it is transferred by legal transaction, the employment relationships pass to the acquirer (§ 613a(1) BGB). Terminations because of the transfer are invalid, although terminations for other reasons, such as a restructuring concept of the acquirer, remain possible. Employees must be informed in text form about the transfer and its consequences and may object within one month of receiving the information (§ 613a(6) BGB); incorrect or incomplete information means that the period does not start to run, which can leave the transfer open for a long time. Employees who object remain with the seller, which may then dismiss them for operational reasons if no job remains. See our page on mergers and acquisitions.

• Check whether the KSchG applies and which grounds for dismissal are available.
• Plan social selection and document comparability groups and points.
• Run the works council hearing and § 17 procedure before giving notice.
• Budget for settlements and social plans, and consider transfer companies.

How TRW & Co helps

We act for employers on terminations and workforce restructuring in Germany. We assess individual terminations, prepare warnings, hearing letters and notices, and negotiate termination agreements. For restructurings we plan the timeline, prepare social selection, run the consultation and collective redundancy procedures, negotiate reconciliations of interests and social plans, and set up transfer companies. We represent employers before labour courts and conciliation boards, and advise on employee transfers in M&A and carve-outs. To discuss a planned measure, please contact us.