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Employment Contracts in Germany |
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 Despite some attempts to harmonise the labour law within the European
Union; labour law still widely varies
from jurisdiction to jurisdiction
due to national peculiarities. Foreign investors with employees in
Germany should be wary of the German labour law to avoid costly
mistakes.
I. Sources of Labour Law
The respective rights and obligations of the employer and the employee
are governed by the employment contract. However, mandatory, statutory
employee protection provisions, collective bargaining agreements,
single plant bargaining agreements and company usages also govern the
employment relationship. The latter can become binding if they are
repeatedly applied in the same way. Under certain circumstances,
collective bargaining agreements can be declared generally binding.
Based on such a declaration they also bind employers who are not
members of the collective bargaining unit.
Many employers have insufficient knowledge of the labour law
provisions, which can potentially have a financial impact on them.
However, adequate knowledge of all applicable employee protection
provisions as well as collective and single plant bargaining agreements
is essential for properly drafting employment contracts and calculating
personnel cost.
II. Termination of the Employment
ContractTermination notices have to be in writing. Employers have to
give between one and seven months notice, depending on the duration of
the employment with the company. The statutory notice periods can be
extended for both sides in the employment contract provided the notice
period for the employee is not longer than the one for the employer.
The contract can also shorten the statutory notice period for the
employee. In particular by collective agreement a shorter period is
also possible for the employer.
In small businesses with no more than five employees the employer can
usually terminate the employment at will observing the statutory or
contractual notice periods. However, dismissals must not constitute
discrimination and under very select circumstances, for instance
pregnancy, special dismissal protection applies. The standards for
small businesses are actually lower than in many other jurisdictions
and may also apply to small subsidiaries or small independently
operated subdivisions of corporations.
Once a business has more than five employees that are employed on a
regular basis, an employment contract can only be terminated if the
conditions of the Federal Dismissal Protection Statute
(Kündigungsschutzgesetz) are met. The dismissal protection statute, as
applied by the courts, practically excludes dismissals unless they are
based on operational requirements, meaning the shut down of production
sites or the general reduction in the work force. The courts will only
accept the generally possible performance or conduct based termination
in extreme cases.
For a termination based on operational requirements a so-called social
selection is a prerequisite. In the process of this social selection
the employer has to consider the personal and social circumstances of
all comparable employees. He might be forced to terminate the most
capable employee, if this employee is, by the applicable standards,
least deserving of protection under social considerations.
An unjustified termination is null and void, if a dismissal protection
action is filed within three weeks. In case of success of the employees
action the court will not only order the continuance of the employment
but also payment of back wages.
Generally, with very few exceptions, the employer cannot force the
employee to accept a termination in return for a severance payment.
This can only be achieved through a court settlement. However, the
employer is often forced to accept severance payments that are in no
reasonable relation to the employee’s compensation and duration of
employment. 80 % of all dismissal protection actions are settled.
The extensive dismissal protection is counter productive for the German
labour market. The legislature is starting to realise that the results
are often inequitable. It is therefore planned, but not yet definite,
to reduce the dismissal protection laws, which would allow the company
to dismiss an employee providing adequate severance pay is offered. It
can only be hoped, that additional steps will follow to better clarify
these laws.
III. Fixed Term Employment Contracts
Fixed term employment contracts can only be entered for a total of up
to two years, unless there is a valid reason for an extended term
limitation. During this two-year period the contract can be prolonged
up to three times. That means an employee can be employed for four
consecutive six-month periods at a time.
A valid reason for a limited term of employment can be of operational
nature like temporary additional demand for work force. Another valid
reason could be that the employee is supposed to temporarily fill a
position of another employee that is on sick or maternity leave and
will return afterwards.
A temporary employment is not only possible in a form of fixed term
agreement, but also on a project basis, in which case the employment
automatically ceases once a certain result is achieved.
From January 1st 2004 up to five employees with limited employment
contract who are newly employed are not taken into account on the
threshold value of the Federal Dismissal Protection Statute
(Kündigungsschutzgesetz). Partial time forces are proportionately
considered in this calculation, i.e. that in the future a small firm
with up to 5 full-time employees can employ five more full time
employees or ten more partial time employees with limited employment
contracts without the special protection against dismissal described
above.
IV. Vacation
Every employee is legally entitled to at least 24 working days of
vacation per calendar year. For the calculation Saturdays are
considered working days. The law does not prescribe a particular period
in which the vacation has to be granted. However, the employee is
entitled to full vacation benefits after six months of employment.
If an employee changes employers within a calendar year, the vacation
taken at the previous employer is considered in calculating the
vacation benefits he is entitled to at the new employer.
V. Industrial Relations
A workers council can be formed in any company regularly employing at least five employees.
The workers council has the right to be informed about and give advice
on all operational decisions of the management. In personnel matters
the council additionally has a right to co-determination. This
co-determination right of the workers council becomes most evident in
questions of the dismissal of employees.
Before an employee can be dismissed the workers council has to be
heard. If the business has more than 20 employees, the management and
the workers council have to agree before a so-called “Betriebsänderung”
(structural change) on measures to be taken, usually in form of
severance pay, to soften the social blow.
A structural change can usually be presumed, if - depending on size of
the company – between ten and twenty percent of the employees are to be
dismissed. In addition a structural change can be present even with
smaller dismissal ratios, if the dismissals are connected with certain
drastic changes in the operational organization.
Structural changes are not to be confused with mass dismissals.
Depending upon the size of the company the definition of a mass
dismissal is when between 6 and 30 employees are dismissed within 30
calendar days of each other. In these circumstances the workers council
should be informed in writing, at least 2 weeks before the dismissals
start.
Moreover it is particularly important to announce the planned mass
dismissals at the local Arbeitsamt (or the applicable national
authority elsewhere in the EU). The national authority can impose a
temporally limited dismissal barrier of up to two months in these cases.
If the obligation to inform and give notice specified above is
violated, all terminations concerned are ineffective until the
formalities are retrieved. Since the wages and salaries must be
further-paid, the developing damage can be substantial.All rights
reserved. We do not take the responsibility for the validity,
topicality or completeness of the texts or other information.
Ralf Kuisle
Rechtsanwaltskanzlei Kuisle
www.kuisle.net
Ralf practices labour law, law of associations, law of succession, real
estate and road traffic law. Working as an attorney for Rechtsanwalt
Kuisle in Munich; he speaks German and English.
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