1. Grounds for Termination
Under German law, the employment 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 German Act on Protection Against Unfair Dismissal (KSchG). The act 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 breach of obligation, 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.
2. Collective Dismissals
Dismissals by reason of redundancy are considered ordinary dismissals under the German KSchG. In addition, specific rules apply if the dismissals form part of a collective dismissal; e.g. prior notice must be given to the competent employment agency. In case of a so-called operational change of business such as the closure of business, collective dismissals additionally 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.
3. Individual Dismissals
If the KSchG applies, a notice is only legally effective if it is “socially justified”. Pursuant to Section 1 KSchG, a termination is justified only if it is based on reasons related to: 1) the person; 2) the conduct of the employee; or 3) compelling operational requirements which preclude the continued employment of the employee in the establishment. Notice must be given in writing and signed by the employer in order to be legally effective. All other forms of notice (i.e., those given orally or by email or fax) are void. Terminations without information/hearing of the works council (if in place) are also void.
The employee has the option to object to a dismissal. In such case, he/she must file a complaint with the labour court within 3 weeks of receipt of the termination notice. If the dismissal is void, the employee is entitled to reinstatement and continued remuneration by the employer.
a. Is a 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; 2) the parties agree upon a severance payment (in or out of court); 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 mass dismissal provides for severance payments.
4. Separation Agreements
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 termination agreement. This may occur at any time with or without severance payment.
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
- release from duty to work by offsetting any holiday 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 with the approval of their legal representatives, regularly their parents. With respect to age discrimination, especially regulations in social plans need to be drafted with due care.
d. Are there additional provisions to consider?
Besides the standard provisions of a separation agreement, the parties should consider to agree upon additional provisions, such as:
- company car
- outplacement service
- company pension
- post-contractual non-compete
- communication regulation
5. 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.