Wednesday, December 14, 2011

Germany: Head count reductions in Germany - mandatory age discrimination?

Bernd Weller, Partner, Heuking Kuhn Luer Wojtek, Frankfurt am Main

It is well known that the laws of the European Union provide for several directives and principles aiming at the prevention of discrimination, in particular age discrimination. In Germany, the European anti-discrimination directives were implemented in 2006 by the Equal Treatment Act (“Allgemeines Gleichbehandlungsgesetz”). The Equal Treatment Act forbids the discrimination of employees based on their gender, age, disability, race and origin as well as religion and belief. At the same time, “discriminatory” behaviour was and still is an integral part of German culture and society. Whenever an employer implements headcount reductions for operational reasons, the German Protection against Dismissal Act (“Kündigungsschutzgesetz”) requires employers to base the selection of the employees, i.e. the dismissal decision, on the employees’ age, seniority, alimony duties and severe disability. Other criteria like performance shall not be considered.

At first glance, the demands of the German Protection against Dismissal Act seem to be discriminatory and contrary to European law. As a consequence, many expected the Federal German Labour Court (“Bundesarbeitsgericht, BAG”) to declare the German Protection against Dismissal Act at least partially void insofar as it demands that employee age be considered.

When it comes to mass dismissals, many questions trigger age-discrimination. Does the length of the notice period length depend on employee age? Are older employees per se protected against dismissal? Are younger employees always the ones to be dismissed? Must the employer pay higher severance to older employees or less?

Notice periods

According to statutory German law, Sec. 622 of the German Civil Code (“Bürgerliches Gesetzbuch”), the length of notice period depends on the years of service of the employee concerned. The longer an employee is with the company, the longer the notice period becomes. The law, however, says that years with the company are only relevant if the employee is older than 25. In other words, the notice period of a 28 year old employee who joined a company at the age of 16 is only one month. A 30 year old employee’s notice period, who joined at the age of 25, is 2 months. It took some time, but in the end both German courts and the European Court of Justice (C‑555/07) declared this stipulation to be discriminatory and void. Hence, the age-relation in Sec. 622 of the German Civil Code does not exist any more. At the same time it has become common sense that similar provisions – whether in statutes or contracts – are therefore also invalid.

Special protection against dismissal because of age

Many collective bargaining agreements (“Tarifverträge”) still provide for clauses according to which employees enjoy special protection as soon as they reach a specified age and seniority. Most of them require an age beyond 50 or 55 and a seniority of more than 15 or 20 years. Because of the link to seniority, many believe that such clauses are valid. There are, however, particular provisions that cause serious concerns. Pursuant to a collective bargaining agreement of the metal industry sector in Baden-Württemberg, employees with a seniority of more than 3 years cannot be dismissed if they are more than 53 years old. Given the relative unimportance of the seniority-related criterion in this agreement, the protection against dismissal in effect depends on age only. So far, no court has held that particular agreement invalid. It can be expected, however, that the European Court of Justice will have a different view on this issue. And that is a common situation in German employment law at the moment. After only five years of the Equal Treatment Act’s implementation, many questions have already been raised and answered. Many more questions are as yet unanswered.

For an employer, this situation results in significant legal and financial risks. Should he treat an employee in line with the (quite likely void) collective bargaining agreement and dismiss others? In that case the dismissed employee might escalate the dispute to the European Court of Justice just to find out after years of litigation that the dismissal was void and the employer must pay and employ the dismissed employee. In the other case, the employer risks losing all German court proceedings just to be approved by the European Court of Justice years later. In the end, no employer will litigate for years; the result instead will be more expensive redundancy packages.

Selection of employees to be dismissed

When it comes down to selection between comparable employees, German law requires consideration of employee age. German courts so far believe that this requirement under the German Protection against Dismissal Act does not infringe the Equal Treatment Act and the European anti-discrimination rules. They always argue that “it is well known” that older employees are unemployed for longer and have more difficulties finding new jobs than younger employees. Based on that “fact”, German labour courts believe that article 6 of the EC-directive 2000/78 permits protection of older employees rather than younger ones. Statistics, however, show in most European countries that the group of unemployed young people is far bigger than the group of older employees. Hence, it can be doubted that the “facts”, upon which the German labour courts base their decisions and arguments, are true. As a consequence, a dismissal decision that is in line with the current legal opinion of German labour courts runs the risk of being proved wrong by the European Court of Justice. So what can an employer do to avoid such risks?

The employer may establish so-called age-groups (“Altersgruppe”). Then the employer may implement the headcount reduction in each of these groups in proportion to the entire headcount. As a consequence of the age-grouping, the dismissal decision becomes far less dependent on employee age than it would have under German law.

Alternatively, the employer may establish a scheme, according to which a different number of points is accredited to each employee for his age, seniority, alimony duties and potential severe disability (e.g. 1 point for each year of life – combined with a cap of 50, 2 points for each year of service, 5 points for each alimony duty (i.e. per child) and 10 points for a disability). Ideally, the scheme results in the age of the affected employee becoming less important than it historically has in Germany.

The challenge in both alternatives lies in co-determination. Both alternatives require the consent of the works council. Works council members, however, are often the older employees and, thus, tend to protect their peers rather than protecting the young. In negotiations with the works council, the establishment of schemes and age-groups often becomes an expensive task. A task, however, that avoids legal risks related to the claims of employees against their respective dismissal.

Social plan packages

Under German law, an employer must negotiate a social plan with the works council when major redundancies are envisaged. The social plan usually provides for severance payments. There again, the age of the affected employee may play a role. In Germany, two formulas are commonly used in order to calculate the employee’s severance.

According to the first formula, the severance is equal to a factor multiplied by the years of service and multiplied by the monthly gross salary. According to the alternative formula, the severance is age multiplied by years of service multiplied by monthly gross salary and divided by a divisor.

It is obvious that both formulas directly or indirectly refer to the employees’ age. German courts so far hold that the link between age and severance amount is legitimate and valid. Here again, the German courts base their decision on the “fact” that older employees per se have worse job perspectives than younger employees. And similar to the social selection, there is the significant risk that the European Court of Justice will decide differently. In deed, the European Court of Justice has already decided upon a similar question. In a Danish redundancy scenario, severances were paid to the employees. Those employees who were close to retirement age were granted a smaller or no severance at all. The European Court of Justice (C 499/08) has held that to be an unjustified age-discrimination. According to its decision, the affected employee was granted the full severance entitlement. In Germany, it is common to cap the severances for employees close to their retirement. Here again, there are significant risks for the employer – given the decisions of the European Court of Justice.

If an employer wants to limit his legal and financial risks, he should choose the first formula as it makes no direct reference to the age of the employee. In addition, the employer should provide for a general cap for the severance. Such caps have been accepted as valid by the German courts in the past. As the cap does not necessarily affect only older employees, it can be seen only – if anything – as indirect age-discrimination. Such indirect discrimination can be easier to justify, e.g. by the need to distribute a limited budget to many employees. If necessary, an additional (lower) cap for employees close to their retirement may be implemented. In this way, the employer has several lines of defence vis-à-vis the employee.


The German labour courts so far tend to continue their decisions irrespective of the Equal Treatment Act and the European anti-discrimination rules. That may be seen as a reassurance for employers – which it is not. In fact, it is to be expected that the European Court of Justice – in a few years time – will have overruled the current German judicature. That leaves employers in a situation where they must find ways to comply with both the current judicature and the (likely) future one. The best way to do that is to avoid any direct link to the employees’ age and to refer to other criteria such as the seniority and alimony duties.