Dismissal Protection

From the mid-aughts till today, the German labour market has seen a marked rise in the number of employees. This positive trend – interrupted only by the downturn in 2009, which was mild given the gravity of the recession – has quelled debate about labour market inflexibility in Germany. It has even been suggested that the rigidity of German labour laws stimulated the rise in employment.

Now, after Schlecker’s bankruptcy, we know better. According to reports, fears of thousands of unfair dismissal suits have kept investors from buying up assets and restructuring the company. Unions agree. The district negotiator for the German trade union ver.di said in an interview, “The high number of unfair dismissal suits has scared away investors.” Neither the union representative nor the interviewer raised an obvious point, though: reforming dismissal protection laws, which are inimical to employment creation.

In the Schlecker case, the problematic labour law appears in section 613a of the German Civil Code (BGB). This law stipulates that if a business passes to another owner by legal transaction, the new owner succeeds to the rights and duties under the employment relationships existing at the time of transfer. Specifically, this means that an employer’s bankruptcy does not automatically terminate its employment relationships. But according to article 113 of the German Insolvency Statute, bankruptcy does give the insolvency administrator a special right to terminate employment (Brox, Rüthers, Henssler, Arbeitsrecht, 18th edition, Stuttgart 2011, margin number 614).

The criticism of existing dismissal protection laws goes far beyond the Schlecker case. The reason is not that employee termination is impossible in Germany. As unemployment statistics show, each year millions of employees lose their jobs. The real problem is the high costs associated with dismissal protection. Employees who have been terminated can drag former employers before labour tribunals, and possibly through several courts of appeals, backed by legal protection insurance. This wouldn’t be a problem if labour tribunals had not come to a number of bizarre decisions in favour of employees who did not meet basic standards of performance and if the smallest of formal errors did not serve to nullify a dismissal. On the open sea and before judges we are all in God’s hands, so to speak. This is why many employees prefer to negotiate expensive settlements, even if employees have no claim to one. As long as the severance pay is high enough, a company can practically get rid of any employee.

The point is not to make the case for the unrestrained power to hire and fire. In the vast majority of cases, employees rely on a stable employment relationship more urgently than companies do. Much could be achieved if the formal dismissal procedures were simply made less complicated and, most of all, more predictable. Several years ago the German Council of Economic Experts put forward a proposal that satisfies these criteria. It recommends that company layoffs be generally permitted provided employees have signed a severance pay agreement. This does not apply of course to performance-based dismissals. Employees who do not meet company expectations should not be seen off with a golden handshake. But a severance pay agreement does provide legal certainty. They do not necessarily make dismissals less expensive but they do make their costs more predictable.

It is up to legislators to seriously examine such proposals, however plagued they may be by countless other cares, for ignoring the issue will not solve it.