Restructuring Post-coronavirus under Pre-coronavirus conditions?

Very few questions arise in companies where no works council exists. From an employment law perspective, it is quite simple for these companies to adjust measures, provided they have not already contractually fixed changes with individual employees.

The change of course is more challenging in companies where a works council exists. This is particularly the case where agreements relating to restructuring had already been concluded with the works council before the coronavirus crisis began. In particular, these would be reconciliation of interests agreements, social compensation schemes and the accompanying works agreements.

If agreements relating to restructuring are no longer appropriate due to the effects of the coronavirus crisis, changes should be considered. A closed reconciliation of interests agreement must adhere to different rules than those that apply to a social compensation scheme or other works agreements.

In a reconciliation of interests agreement the organisational details of a measure, especially a restructuring measure, are agreed upon: for example, which areas are affected? What should be changed and how? The consequence of a reconciliation of interests agreement is that the employer is bound by the guidelines of the reconciliation of interests agreement when restructuring. If the employer deviates from the terms of the reconciliation of interests agreement and restructures differently, the affected employees are entitled to compensation in the form of so-called “compensation for disadvantages” (Nachteilsausgleich), i.e. compensation for financial prejudice sustained through the employer's failure to effect the reconciliation of interests agreement. The employer is, however, not obliged to implement a measure agreed in the reconciliation of interests agreement. The employer can quite easily therefore stop the restructuring measures. It is not necessary to terminate the reconciliation of interests agreement. However, the employer must, of course, enter into new negotiations with the works council with regard to a measure that deviates from the original plan. The employer may only begin to implement this new measure when a new reconciliation of interests agreement has been entered into or when negotiations on the matter have (conclusively) failed with a conciliation committee created for this purpose.

Social compensation schemes, on the other hand, regulate the rights and claims of employees who are affected by the (restructuring) measure in order to mitigate the consequences. Social compensation schemes essentially have the same nature as works agreements. Even today, the core element of most social compensation schemes is a severance package in the event of separation. Frequently, claims for severance pay are not only connected to dismissals by the employer, but also arise if employees wish to leave of their own accord during the course of the measures. They can also arise if the employer is contemplating abandoning a measure that was agreed before the coronavirus crisis started, for example, because the endowment of the social compensation scheme no longer seems feasible to the employer. This can create a race between employees who are willing to leave the company and the employer. The legal situation can become even more complex if it has been agreed that a so-called “transfer company” or “employment company” will become involved and the framework conditions for this company have thus become unsuitable since the coronavirus crisis started.

An employer cannot give up a social compensation scheme as readily as it can a reconciliation of interests agreement. In most cases, the main focus is initially on terminating the social compensation scheme. However, in some cases, the ordinary termination of a social compensation scheme is excluded. Although the extraordinary termination cannot be ruled out, the requirements under German case law for such a termination for good cause are very high. In addition, German case law rulings handle social compensation scheme claims restrictively in the event of a termination of the social compensation scheme: under German case law, even an extraordinary termination cannot eliminate any social compensation scheme claims that have already arisen. Furthermore, under the German case law rulings, even an extraordinary termination would not lead to an immediate cancellation of the social compensation scheme: the scheme would rather continue to have effect until it is replaced by another agreement - be it with the works council or with individual employees. The second variation is very theoretical: if an employee wishes to leave the company with a severance package, this employee will hardly want to contractually reduce his or her severance pay. If, on the other hand, the employer agrees with the works council on a change to the terminated social compensation scheme, such new agreement cannot, in the opinion of the German courts, interfere with claims that already exist to date. Instead, only any future claims can be newly regulated.

However, another type of instrument does exist: under general civil law there is the concept of frustration of contract (Wegfall der Geschäftsgrundlage). If the circumstances that both contractual partners have based a legal transaction on change, the legal transaction must be adjusted or can be cancelled at the request of one party (Section 313 (1), (3) German Civil Code (BGB)). This rule also applies to works agreements and social compensation schemes: both of these are not only “laws within the company” that apply to the employees and the employer, but they are also agreements between the employer and the works council. This is acknowledged in principle. However, surprisingly little case law has been published on the related issues. This may indicate that the rules are rarely applied. Perhaps this is because the employer and the works council tend to agree more often in the event of serious changes in circumstances. The coronavirus crisis can cause such change or mean that the contract has been frustrated.

From a German case law perspective, if the inherent basis of a social compensation scheme or works agreement changes or ceases to exist (frustration of contract), this does not mean that the rules automatically cease to apply.  Rather, such a change or frustration of contract entitles either party to demand that the other negotiate on how to adapt the agreement.  If the employer and the works council cannot reach an agreement, the conciliation committee can be called in. It is only if a change is not possible or is unreasonable for one side that the rules can be completely eliminated.

German case law also interprets the further consequences of the frustration of a contract fundamentally differently from those of a termination: as long as the social compensation scheme is not changed, new claims may arise from the social compensation scheme. However, employees are procedurally prevented from enforcing such claims in court: should they sue, the German labour court would suspend the proceedings until the renegotiations with regard to the social compensation scheme have been finalised. Unlike in the case of an extraordinary termination, German case law rulings also generally allow the employer and the works council to intervene with new terms in claims from employees that have already arisen.

If, because of the coronavirus crisis, previously agreed social compensation schemes or works agreements are now no longer appropriate, it can be worthwhile to take unusual steps: rather than terminating the agreements, it may be worth considering renegotiating on the basis that frustration of contract has taken place. This legal concept is not required for the reconciliation of interests agreement: the employer may, without any special reasons and requirements, refrain from implementing the measure agreed in the original reconciliation of interests agreement and demand that the works council negotiate a new reconciliation of interests agreement. Of course, all these steps take time. This is (unfortunately) not a novelty in Germany.