Germany: Reducing Personnel Costs – 11 Action Items

In light of COVID-19, businesses are facing a myriad of issues to be managed in order to cope with the pandemic and the effects of lockdowns imposed by regulators around the globe. One of the most crucial challenges is the avoidance of a liquidity squeeze. In that context, short-term measures available to reduce personnel costs whilst maintaining workforce need to be considered.

In Germany businesses and employers exploring options to save liquidity by HR measures can take advantage of the most recent COVID-19 response package enacted by the German legislator. The following is meant to provide a brief overview of practicable options currently available for immediate reduction of personnel costs - avoiding lay-offs which might create structural problems in the world post COVID-19.

1. Cut working hours and apply for short-time allowances

The German Employment Agency pays a short-time allowance for a loss of earnings caused by a temporary cut in working hours. In practice working hours can be reduced to zero, i.e. the employees can essentially be sent home during the short-time measure. In principle, the short-time allowance can be granted if an agreement has been reached by the employer and the works council, or by the employer and the employees affected, to cut working hours and this results in a substantial loss of working time and pay. The short-time allowance is based on the amount of net pay lost (based on gross remuneration up to certain ceiling amounts). In principle, employees working short-time receive 60% of the standardized net pay lost. Employees who have at least one child living in their household receive a short-time allowance of 67% of the net pay lost.

The following conditions must be met:

• ­The cut in working hours must be caused by economic reasons or circumstances beyond the employer’s control (e.g., the COVID-19 pandemic).
• ­The cut in working hours must be unavoidable and the company must have done everything possible to reduce or resolve it. 
• ­The cut in working hours must be temporary in nature. This means that, in principle, a return to normal working hours can realistically be expected at the end or throughout the period of short-time work.
• ­The Employment Agency must have been notified of the cut in working hours.
• ­The employee must remain in employment subject to social insurance contributions after the cut in working hours, and must not be made redundant.
• ­The cut in working hours must be substantial. This means that at least ten per cent of the workforce are affected by a cut in working hours and a loss in remuneration of at least ten per cent.

During the COVID-19 crisis, social security contributions relating to the income that employees lose due to the reduction in working hours, which (normally) have to be paid solely by employers, are reimbursed in full by the Employment Agency.

In terms of implementation it is important to note that German law does not provide for a statutory right of the employer to unilaterally reduce working hours. As mentioned above, consent of the works council or - in case a works council does not exist or to the extent employees are not represented by a works council - individual consent of the employees will in principle be required. Respective provisions of applicable tariff agreements, if any, will need to be adhered to.

2. Defer payment of social security contributions

Upon an employer's formal application, social security contributions that have already become due or will become due may initially be deferred for the months of March 2020 to May 2020. The Central Association of Health Insurance Organizations holds that no default surcharges or interest will be charged for the deferral. The prerequisite for the deferral is that the immediate collection of contributions without the deferral would entail considerable hardship for the employer, despite the priority use of short-time allowance (see above 1.), subsidies and/or loans; this must be demonstrated in an appropriate manner. A credible statement by the employer that he has suffered considerable financial damage as a result of the pandemic, e.g. in the form of considerable sales losses, will generally be sufficient.

3. Discontinuation of use of external workforce

The use of agency workers and independent contractors can typically be stopped at short notice. This will have an immediate effect on a company’s liquidity. One of the recent changes in the law in response to the COVID-19 crisis is that temporarily also agency workers can receive short-time allowance and, thus, enjoy economic protection.

4. Terminate employees during the probationary period

Termination of employees who have not been employed for longer than six months can be an effective measure to immediately reduce HR costs. Employers can benefit from the advantage that probationary period dismissals are much easier to implement, as they are not subject to the strict limitations of the Dismissal Protection Act and therefore do not have to be justified by comprehensive operational reasons.

5. Reimbursement of personnel costs in child care situations

Employees who cannot work because they need to take care of their children following pandemic related closures of schools and day care centers are entitled to limited compensation of their loss of earnings by the state. Under the new law, the employer is required to pay out the compensation. The employer will need to formally apply for reimbursement of the payout at the relevant state authority.

The aim of the compensation scheme is to mitigate the loss of earnings suffered by working custodians of children up to the age of 12 if they have to look after their children themselves due to the closures and are therefore unable to work. The prerequisite is that the persons concerned cannot provide any other reasonable care (e.g. by the other parent or emergency care in the facilities). Risk groups such as the child's grandparents do not have to be considered in this context. The employee's compensation entitlement is not recognized if there are other ways of staying away from work temporarily on a paid basis, such as reducing positive working time accounts. Claims for short-time allowance (see above 1.) also take precedence over claims for child care compensation. Compensation amounting to 67 percent of the net income is granted for up to six weeks and is limited to a maximum monthly amount of 2,016 Euros. The regulation does not apply to periods in which the institution would be closed anyway due to school holidays and is limited until the end of 2020.

6. Suspend or reduce benefits based on collective agreements

Employers should check whether compensation components or benefits based on collective agreements, i.e. tariff agreements with unions or works council agreements, can be suspended or reduced. This would typically require a termination and renegotiation of the respective collective agreement. In light of the COVID-19 crisis, the option of a termination with immediate effect might be available, subject to the individual situation of the employer. At the very least, this could help to exert pressure upon the union and/or works council to enter into a "new deal". Extra-tariff payments, i.e. payments that exceed an applicable tariff agreement, can be suspended or reduced without having to involve the union.

7. Suspend voluntary social benefits not based on collective agreements

Voluntary social benefits can potentially be (temporarily) suspended. This usually involves monetary social benefits (e.g., employee discounts, holiday and Christmas bonuses), allowances (e.g., travel, relocation, canteen, meal and childcare allowances, allowances for weddings and births), benefits in kind (e.g., free parking, catering services, free drinks, work clothes, the use of company apartments) or other benefits such as childcare, occupational health services, counselling services, and leisure activities. Before doing so, it should be carefully checked whether the benefit in fact qualifies as a voluntary benefit. This may not be the case if there is a contractual or statutory entitlement or if the employer has paid the benefit without any reservations over a certain period of time.

8. Suspend or reduce variable salary components

Depending on the provision of the individual respective legal framework (employment agreement, bonus policies, works council agreement, etc.), employers can consider options to reduce, postpone or even suspend variable salary components.

9. Reduce Salaries

Under German law, legal options for unilaterally enforcing reductions of contractual base salaries will realistically only be available as a last resort. In principle, all other legal options to reduce personnel costs will need to be exhausted prior to a unilateral enforcement of such salary reduction.

From a legal perspective the following options are available:

a) Salaries based on collective bargaining agreements

To the extent the salaries are based on applicable collective bargaining agreements (Tarifverträge), reductions could be agreed upon with the responsible union. In the current COVID-19 environment it needs to be considered whether, in each individual case, a termination for cause of applicable collective bargaining agreements is realistic, by which pressure could be exerted towards the union to enter into a “new deal” on fixed salaries. Please note that implementing a salary reduction – to the extent at all possible – by way of a new collective bargaining agreement will realistically take a considerable amount of time for renegotiation with the union. It cannot be unilaterally imposed by the employer at short notice. In practice it is likely that the unions would ask for some form of job preservation commitment in return for the salary cut.

b) Employment contract clauses

It needs to be checked whether current employment contract clauses validly allow for the employer to impose (limited) adjustments of the fixed salaries.

c) Consent on waiver

In principle, employees on all levels can be asked to grant their (free) consent to a reduction of their salary. To the extent the individual fixed salary is based on collective bargaining agreements, the respective union’s approval for the individual waiver will be required. In practice, employees will likely ask for some sort of job guarantee in return for their waiver. However, even in the current COVID-19 environment, the employer must not “force” employees to grant their consent.

d) Termination of employment contract for a change of employment terms

As a last resort, unilaterally terminating the individual employment contracts combined with the offer of a continuation of employment with a lower salary could be an option. The requirements for the legal validity of such a termination for change are exceptionally high. Each individual employee has the right to challenge the termination and the change to new salary terms in court. German employment courts would generally require that each individual termination for change of salary will be based on a comprehensive restructuring plan (Sanierungsplan) for the employer’s business and/or a substantiation that the salary reduction will be inevitable to avoid an insolvency situation of the employer entity.

In terms of legal process, prior to issuing a termination for change for reducing salaries the employer has to have applied all other less harsh measures to cut personnel costs (e.g., measures under the German COVID-19 response laws, application for short-time allowances, usage of positive working time accounts, usage of 2019 vacation entitlements, use of social tax alleviation etc). Terminations for change regularly will have to honor the contractual notice periods. However, in the COVID-19 environment a termination for cause (i.e. with immediate effect) may be possible if the employer could substantiate that COVID-19 is requiring an immediate reduction of salary; general objective to reduce personnel costs will not suffice in that respect. Works council consultation regarding each individual termination is mandatory prior the issuance of respective termination letters. 

10. Conclude unpaid leave agreements

Employees can be asked to take unpaid leave for a certain period of time. As with salary waiver agreements (see above 9.), this requires the consent of the employee. It is important to consider that, like the salary, during unpaid leave, the payment of social insurance contributions is suspended and the employee is deregistered from important insurances such as health insurance and pension insurance. However, the employee still continues to be insured for one additional month after the end of the salary payment. If the unpaid leave lasts longer than one month, the employee has to pay for insurance coverage himself. If he resumes work afterwards, the employer must register him with the insurance companies again.

11. Terminate or reduce company pension benefits

If an employer suffers a sustained deterioration in its economic situation, company pension commitments will not necessarily have to be maintained permanently in unchanged form. Employers may well consider reducing or even terminating the commitment. The Federal Labor Court has created a framework for this, but has also set limits on the intervention in existing commitments in order to protect employees. It is examined in each individual case whether and when reasons for a reduction or termination exist. More far-reaching interventions would then also presuppose more serious (valid or compelling) reasons