workforce restructuring

Bracing for impact – 3 reasons why many German HR departments are getting nervous

What does the German labour market look like?

At a first glance the German economy seems to be quite robust despite ongoing Covid crisis. A closer look – however – reveals a number of warning signs that the situation is not quite as rosy as it portrayed by the government.

In June 2020 about 2.9 million employees (= 6.2 %) were unemployed, another 6.83 million employees where covered by the short time work scheme and about 4 million persons where covered by the basic subsidy system Hartz IV. Another one million employees are not included in the statistics due to sickness or government programs, often not at all registered are self-employed persons (since they are regularly not entitled to any benefits of the unemployment insurance). Taking  into account that the regular number  of employed persons is 44.8 million (out of 81 million inhabitants) and that only 27 million out of those employees are net tax payers (including 12 Million state employees) it becomes clear, that the financial burden  of the crisis must be borne by a relatively small basis of employees.

What did the German government do?

As other countries Germany accompanied lockdown measures with huge financial programs trying to alleviate the burden for companies and employees. Among the most notable non-financial emergency measures were the temporary suspension of the obligation to pay rent, to pay for certain essential services (e.g. telephone, electricity, gas) and the extension of loan contracts. Many companies made use of these options as well as offered tax breaks and the possibility to defer social security contributions.

3 reasons to be careful

1. Temporary corona payment suspensions ended on June 30th, 2020

Although unpaid bills of the kind mentioned above generally can be settled over time (e.g. the next 3 years) the importance to punctually resume all current payments as of July 1st 2020 cannot be underestimated. Especially in hardly hit industries and service sectors the burden to pay rent without having any sufficient income will likely lead to a new financial calculation by financial departments all over the country, whether the suspension of salary payments alone (due the continued short time work scheme) is sufficient for the survival of the business.

2. Insolvency filing obligations resume at the end of next quarter

More important for many companies is the temporary suspension of the duty for management of a company to immediately file for insolvency, if Corona is the reason for the difficult financial situation of the company. This suspension will end on September 30th 2020 and it is generally expected that a wave of insolvencies might immediately follow that date (if the government does not renew the suspension for another 6 months (which is provided for in the originally law)).

It needs to be pointed out – however – that many companies seem to be a under a wrong impression when looking at their legal obligations. The fact, that the management must not immediately file for insolvency does only apply, if Corona is the reason for the financial difficulties and there must be a positive business prognosis for the remainder of 2020 and thereafter. A company, which is not sure or even assumes, that after September 30th 2020 bills cannot be paid anymore, might even be subject to criminal liability e.g. by ordering goods or services in the current situation. Since all insolvency proceedings under German law trigger a criminal investigation there is a real danger that many officers of German companies already are in the precarious situation without knowing.

3. Dire economic outlook
Notwithstanding the legal situation and past, present and future government and EU measures the economic outlook for some core industries and services sectors in Germany is gloomy. This does not only, as in many countries, apply to directly affected services sectors such as airlines, travel agencies, hotels, pubs and restaurants, event mangers and trade fair organisers, but also the heart of the German economy, namely the automotive industry and – due to ongoing export and supply chain difficulties – other industrial manufacturing and (financial) service sectors.

Reconsideration of business prospects imminent

Taking it into account the above many companies currently are in the process of seriously reconsidering the business options. Despite the ongoing short time work, which takes some burden of salary payments from businesses, companies will have to look realistically at their business prospects for the current and oncoming years. In many cases this must lead to a restructuring plan involving a substantial reduction of the work force. German newspaper these days are full of company news announcing the layoff of  tens of thousands of employees, including workforce reductions at large companies, such as Commerzbank, Lufthansa, Bosch and Airbus.

Employment law in focus

Any reduction of the work force immediately leads to employment law questions.

Although German law has a certain reputation for being difficult as regards individual employee terminations in a situation such as the Corona crisis the process to issue a notice of termination is ultimately quite straightforward.

Things get considerably more difficult, when a works council or a trade union is involved. In these cases much more time and financial planning is needed to ensure a success of a restructuring project.

Companies and their advisors interested in more detailed information about the labour and employment law issues at stake, useful strategic considerations and time and budget planning should take look at our new brochure “Practical Guide to Redundancy and Restructuring in Germany”. Available as free download: