Dismissal Protection and Small Businesses

Dismissal protection in small businesses: the short answer

General dismissal protection under the Protection Against Dismissal Act (Kündigungsschutzgesetz, KSchG) applies only if two conditions are met. The employee must have been employed in the same establishment or company for more than six months without interruption (§ 1(1) KSchG), and the establishment must normally employ more than ten employees, excluding trainees (§ 23(1) KSchG). If either condition is not met, the employer does not need a “socially justified” reason to dismiss. Dismissal protection is not completely absent, however: written form, notice periods, special protection for certain groups, anti-discrimination law and the principle of good faith still apply.

For start-ups, family businesses and the German subsidiaries of foreign groups, the headcount threshold is a strategic question. Hiring an eleventh full-time employee can change the legal position of the entire workforce. Managers must therefore understand how employees are counted and what protection remains below the threshold.

Counting employees under § 23 KSchG

The threshold refers to the establishment (Betrieb), the organisational unit in which work is performed under a unified management, rather than to the company or the group. In principle, employees of other group companies are not counted. Two companies can, however, form a joint establishment if they share a common management of personnel and operations, in which case all employees in the joint establishment are counted together.

The statute counts heads in a weighted way. Part-time employees with regular weekly working time of no more than 20 hours count as 0.5, and those with no more than 30 hours count as 0.75; employees working more than 30 hours count as one (§ 23(1) sentence 4 KSchG). Trainees are not counted. The decisive figure is the number “normally” employed, which means the typical staffing level of the establishment looking back and, where already certain, forward, not the headcount on the day of dismissal. Temporary peaks or vacancies are disregarded, and seasonal staff count only if the business regularly relies on them for a significant part of the year. Agency workers can count where they fill positions that are regularly needed.

A transitional rule continues to matter in older businesses. For employees whose employment began before 1 January 2004, the threshold is more than five employees, and only employees who were already employed before that date count towards it until the establishment normally employs more than ten (§ 23(1) sentences 2 and 3 KSchG). In practice, this legacy protection fades as long-serving employees leave.

The burden of proof for the small-business exception lies with the employee in principle, but the employer must explain its staffing in detail if the employee raises the issue. Keeping an accurate record of headcount and working hours per establishment is therefore useful well before any dismissal.

The six-month waiting period

During the first six months of employment, dismissal protection under the KSchG does not apply, regardless of the size of the business. The waiting period runs from the agreed start of the employment relationship; earlier employment with the same employer can count if there is a close factual and temporal connection. Dismissals declared before the six months expire are outside the KSchG even if the notice period ends later, because the decisive point is receipt of the notice by the employee.

The waiting period is distinct from a contractual probationary period. A probation of up to six months allows a shorter notice period of two weeks (§ 622(3) BGB), but it does not affect dismissal protection as such. Even where probation has been agreed for a shorter time, the KSchG still only applies after six months.

Dismissal protection outside the KSchG

The Federal Constitutional Court has upheld the small-business exception but has made clear that employees outside the KSchG are not without protection. The civil courts must ensure a minimum of protection through the general clauses of the Civil Code. In practice, the following rules apply to every dismissal, including in small businesses and during the waiting period:

• Written form: a dismissal must be in writing with a handwritten signature; electronic form is excluded (§ 623 BGB). Notice by e-mail, text message or messenger app is void.
• Notice periods: the statutory notice periods under § 622 BGB apply, rising with length of service for dismissals by the employer.
• Good faith and public policy: dismissals that are arbitrary, discriminatory, retaliatory or made in an improper manner can be void under §§ 138, 242 and 612a BGB. In a small business, an employer selecting one of several comparable employees must observe a minimum of social consideration.
• Anti-discrimination: dismissals based on a characteristic protected by the General Equal Treatment Act (AGG), such as age, disability, ethnicity, religion, sex or sexual orientation, are invalid and can lead to damages claims.
• Special protection: pregnant employees, employees on parental leave, severely disabled employees after six months, works council members and others enjoy special protection independent of headcount; see our article on special dismissal protection.
• Works council consultation: where a works council exists, it must be consulted before every dismissal under § 102 of the Works Constitution Act (Betriebsverfassungsgesetz, BetrVG), also in the waiting period; failure makes the dismissal void.

Employees in small businesses must also observe the three-week deadline for a court action under § 4 KSchG if they wish to argue that the dismissal is invalid for any reason, for example lack of good faith or discrimination. Lack of written form can be raised outside that deadline, because the deadline only starts with receipt of a written notice.

What changes when dismissal protection applies

Once the KSchG applies, a dismissal must be socially justified: based on reasons relating to the employee's person (such as long-term illness), conduct (usually after a prior warning) or urgent operational requirements. Operational dismissals require a social selection among comparable employees based on length of service, age, maintenance obligations and severe disability (§ 1(3) KSchG). These requirements make dismissals considerably more complex and are the main reason why most disputes end in a settlement with a severance payment, as explained on our page on dismissals and restructuring.

A further threshold applies to collective redundancies: in establishments with more than 20 employees, dismissing a certain number of employees within 30 days requires a prior notification to the employment agency and, where a works council exists, consultation (§ 17 KSchG). Errors in this procedure make the dismissals void.

Dismissing in a small business: procedure and illustration

Even where the KSchG does not apply, the procedure deserves the same care as in a large company, because most disputes in small businesses turn on formal errors rather than on the reason for the dismissal. The notice must be signed by a person with authority to dismiss; if an authorised representative signs, the original power of attorney should be enclosed, otherwise the employee can reject the notice without delay under § 174 BGB. The notice should state the termination date or at least make it determinable, and it should be delivered in a way that can be proven, ideally by hand in the presence of a witness or by a messenger who documents the delivery.

Illustration: a software start-up with nine full-time developers and two working students at 15 hours each counts 9 + 0.5 + 0.5 = 10 employees. The KSchG therefore does not apply. If the company hires a further full-time developer, the count rises to eleven and dismissal protection applies to every employee with more than six months' service. A dismissal of a long-standing developer would then require a socially justified reason and, for operational reasons, a social selection. The start-up could instead consider whether to hire part-time staff or freelancers, but it should be aware of the risks of false self-employment.

Severance is not a statutory entitlement in small businesses. Settlements are nevertheless common where the dismissal is open to attack on formal grounds or on grounds of discrimination, or where the employer wants a clean exit with a confidentiality and non-disparagement clause. A settlement agreement must be in writing to terminate employment (§ 623 BGB), and the employer should consider the employee's unemployment benefit position, because a blocking period can make employees reluctant to sign.

Planning for growth: practical recommendations

Businesses close to the threshold should plan rather than react. Useful steps include:

1. Keep an up-to-date overview of headcount and weekly hours per establishment, applying the weighting under § 23 KSchG.
2. Consider whether separate establishments are genuinely separate, or whether shared management could make them a joint establishment.
3. Use the six-month waiting period actively for performance assessment, and document feedback.
4. Draft employment contracts with clear notice provisions; employers with no more than 20 employees may agree a uniform four-week notice period without fixed end dates (§ 622(5) no. 2 BGB).
5. Ensure every dismissal is signed in wet ink by an authorised signatory and delivered with proof of receipt.
6. Avoid any appearance of discrimination or retaliation in the timing and reasoning of dismissals.

For fixed-term employees, the end of a valid fixed term is not a dismissal and dismissal protection does not apply; see our article on fixed-term employment and part-time work. For foreign investors setting up a German subsidiary, our article on employment contracts for foreign employers covers the contractual basics.

How TRW & Co helps with dismissal protection

We advise small and growing businesses on dismissal protection: assessing whether the KSchG applies, preparing dismissals during the waiting period or in small businesses, and structuring terminations to minimise the risk of claims based on good faith or discrimination. For businesses crossing the threshold, we review contracts, establishment structures and HR processes. When a dismissal is challenged, we represent employers before the labour courts and negotiate settlements. Our employment and pensions team also supports foreign groups with their first German hires. To discuss a specific case, contact us. This article is general information and not legal advice.