21 October 2015

Freedom to dismiss? Update on the scope of application of the German Termination Protection Act

Introduction

It is of particular importance both for the employee and the employer to know the scope of application of the German Termination Protection Act (Kündigungsschutzgesetz – hereinafter “KSchG”). Any uncertainty can have extensive (financial) implications for both parties.

According to section 1 KSchG, the Termination Protection Act is applicable once the employment relationship in question has existed for more than six months (waiting time) and, according to section 23 KSchG, if the undertaking regularly employs more than ten employees (threshold). If these conditions are met, any dismissal by the employer requires a special social justification, i.e. a certain reason for the dismissal, in the absence of which it is invalid.

Even if the Termination Protection Act is not applicable, the employer is still subject to certain restrictions because an arbitrary exercise of the dismissal right or an exercise of such right in breach of trust is generally prohibited. 

Protection from dismissal only after compliance with waiting period

In practice, the waiting period under the Termination Protection Act is often confused with the probationary period. Although a probationary period of six months is frequently agreed at the beginning of an employment relationship with the effect that both legal institutions exist side by side, the probationary period is only legally significant with respect to the applicable notice period (section 622(3) German Civil Code: 2 weeks) but not to the question of whether the special provisions under the Termination Protection Act need to be observed.

In a case before the Regional Labour Court of Baden-Wuerttemberg (case no. 4 Sa 94/14) the employer had terminated the employment relationship in the first six months. The employer had not given the statutory minimum notice but instead had given three months' notice to take effect at the end of the month. The employee argued that the longer notice period constituted an improper circumvention of the Termination Protection Act.

Notice to terminate which is given just before the end of the waiting period may be in breach of trust if it is aimed at avoiding statutory dismissal protection provisions. Such fraudulent intent needs to be assessed in each individual case and requires specific evidence. If the employer gives notice to terminate the employment relationship within the waiting time but does so with a very long notice period, this might in some instances be interpreted as an indication that the employer has no real intention of separation but rather wants to prevent employment protection legislation from becoming applicable.

Although in the case at hand the notice period of three months to take effect at the end of the month was significantly longer than the statutory minimum notice period, the employer was able to provide credible evidence that this notice period was not exclusively in the employer's interest but was primarily intended to serve as another chance for the employee to prove himself. The employer had intended to continue the employment relationship if the employee had proved himself during the notice period. The court did not regard this as “premature” notice in breach of trust and accordingly rejected the action for unfair dismissal.

No age-discriminatory dismissal in small businesses

Subject to certain exceptions, the Termination Protection Act does not apply to small businesses which regularly do not employ more than 10 employees. The employer therefore does not have to have a particular reason to be able to terminate the employment relationship. The effectiveness of the dismissal merely needs to be measured against the prohibition of arbitrary actions and/or the principle of good faith. In addition, a dismissal is void if it violates statutory law. 
The Federal Labour Court had held that a dismissal in a small business was void because it breached the general principle of equal treatment (case no. 6 AZR 457/14).

The dismissal letter contained the following wording:

“[…] we have been working together closely for over 20 years now. […] In the meantime, you have become eligible for retirement and we are starting a new phase in the life of the practice, too.”

The Federal Labour Court saw the phrase “eligible for retirement” as evidence of illegal age discrimination, which the employer was not able to rebut effectively. It is possible for differences in treatment on the grounds of age to be objectively justified in accordance with section 10 German General Equal Treatment Act if the difference in treatment serves a legitimate goal. However, it appears that such an objective reason was not credibly argued in this case as the Federal Labour Court upheld the unfair dismissal claim (to date, the judgment is only available as a press release).

In the case of collective redundancies, managing directors are to be treated as employees

Employees’ rights apply - as the name suggests - usually only to employees. Managing directors of a GmbH (limited liability company), however, are excluded from the scope of various employees’ protection laws because they are a representative body of the company. This includes, inter alia, the Termination Protection Act, section 14(1) no. 1 KSchG.

However, many national employees’ protection provisions are based on European EC-Directives, which means that the European Court of Justice frequently has to assess national legal norms in order to determine whether German legislation is consistent with European standards.

Accordingly, the ECJ had to again decide whether the managing director of a GmbH may be regarded as an employee within the meaning of EU law. The background to this decision was a German action for unfair dismissal in which an employee defended himself against the termination of his employment for operational reasons. He submitted that the dismissal was invalid due to the failure to issue a notification of collective redundancies according to section 17 KSchG. Section 17 KSchG is based on the European Directive on collective redundancies and states that, when exceeding certain thresholds, the employer is required to notify the Federal Employment Agency (Bundesagentur für Arbeit) in advance. For example, an employer who employs more than 20 employees and plans to lay off more than 5 must notify the Federal Employment Agency of that intention beforehand. In the case at hand the question arose whether the managing director should be included as an employee when calculating the threshold, even though section 17(5) no. 3 KSchG explicitly states that managing directors, among others, are not employees for the purposes of this act.

The ECJ has now decided that the managing director of a GmbH is included in the EU definition of an employee and thus confirmed the Danosa judgment of 2011 (case no. C-232/09). The Danosa case already made the point that the managing director of a GmbH is comparable to an employee because he, too, performs services under the instructions of another in return for remuneration, is integrated into the company and can be dismissed at any time by the general meeting of shareholders. It was held that he therefore meets all the criteria of the term “employee” for the purposes of EU law. As a result, employees’ protection rights, insofar as they are based on European provisions (e.g. the German Maternity Protection Act; Federal Parental Allowance and Parental Leave Act) are applicable to managing directors of GmbHs as well. The provision of section 17(5) no. 3 KSchG is therefore in breach of European law.

For the case at hand, this meant that the managing director should have been counted when calculating the threshold in accordance with section 17 KSchG and that the threshold had thereby been exceeded. Accordingly, prior to the notice of dismissal it would have been mandatory to issue a notification of collective redundancies. Since this was not undertaken, the dismissal of the employee is likely to be invalid. In practice, this means that in relation to a collective redundancy notification the managing director of a GmbH must not only be taken into account with regard to the question of whether the relevant threshold has been exceeded, but also when determining the number of employees and the number of those to be made redundant. In future it is important to prepare a collective redundancy notification even more carefully in order to avoid any negative consequences. 

Conclusion

There is no such thing as a total “freedom to dismiss”. Even outside of the Termination Protection Act an employer must observe a certain degree of social consideration. Furthermore it should be noted that, owing to ECJ case-law, the managing director of a GmbH is increasingly approximated to an employee so that typical employees’ protection rights – if they are based on European provisions – may also be applied to managing directors. 

The frequent changes of labour court case-law means that each individual case must be examined in detail with regard to the applicable legal norms in order to avoid exposure to any unnecessary legal risks.

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