Restructurings under Labour Law in Insolvency: What Employers and Employees need to know

Personnel restructuring in insolvency

Restructurings under labour law in insolvency are generally subject to the same rules as outside insolvency. In principle, the opening of insolvency proceedings does not affect existing employment relationships. The general labour law provisions – such as those of the Works Constitution Act (Betriebsverfassungsgesetz "BetrVG"), in particular the participation rights of the works council, the Dismissal Protection Act (Kündigungsschutzgesetz "KSchG") and Sec. 613a of the German Civil Code (Bürgerliches Gesetzbuch "BGB") in the event of a transfer of business – continue to apply. If, for example, the employer wishes to shut down a business or significant parts of a business and reduce staff in the process, he must continue to negotiate a reconciliation of interests and a social plan with the works council. 

Nevertheless, there are some particularities and facilitations for personnel restructuring measures which result in particular from the Insolvency Code (Insolvenzordnung "InsO") and which will be presented below. 

Shortened notice period

Pursuant to Sec. 113 sentence 2 Insolvency Code, an employment relationship may be terminated by the insolvency administrator, who assumes the position of employer after the opening of the insolvency proceedings, with a reduced notice period of three months. Pursuant to sentence 1 of the provision, any agreed term of the contract or any agreed exclusion of the ordinary right of termination may also be disregarded. As a more specific period, the period set out in Sec. 113 Insolvency Code prevails over the general periods set out in Sec. 622 of the Civil Code or in a collective agreement or employment agreement. If, on the other hand, a shorter period is provided for in the agreement, this remains applicable despite the provisions of Sec. 113 Insolvency Code, as the period is not a standard period but rather a maximum period. Sec. 113 Insolvency Code thus grants employers a certain degree of flexibility in the event of redundancies during insolvency in order to promote the reorganisation of the company. It should be noted that Sec. 113 Insolvency Code only shortens the notice period, but does not constitute a special reason for termination. Such a reason is still required – subject to the provisions of the Dismissal Protection Act.

When applying the shortened notice period, the claim for damages pursuant to Sec. 113 sentence 3 Insolvency Code must be taken into account, if applicable. Accordingly, the dismissed employee may assert a claim for compensation for so-called "premature damage". The compensable damage consists exclusively of the loss caused by the premature termination. In this case, the dismissed employee may claim compensation for salary, wages and fringe benefits that he or she would have received if the regular termination provisions had applied. However, the employee can only file this claim as an insolvency claim in the insolvency table. 

Limits of the social plan volume 

The Insolvency Code also provides for particularities with regard to the amount of the social plan volume:

The provision of Sec. 123 Insolvency Code contains certain limits on the volume of the social plan within the framework of the proceedings on operational changes pursuant to Secs. 111 et seq. Works Constitution Act. Sec. 123 Insolvency Code limits the works council's co-determination rights under the Works Constitution Act in order to protect the interests of creditors. The limitation of the social plan volume serves the comprehensive insolvency-specific protection of the insolvency estate. Pursuant to Sec. 123 para. 1 Insolvency Code, a total amount of up to two and a half months' earnings of the employees affected by a redundancy may be agreed in a social plan drawn up after the opening of insolvency proceedings to compensate for or mitigate the economic disadvantages suffered by the employees as a result of the planned operational change. The limit of Sec. 123 para. 1 of the Insolvency Code shall be the absolute upper limit of the social plan. If the social plan exceeds this absolute upper limit, it is ineffective and has to be redrafted. Sec. 123 para. 2 Insolvency Code also imposes a relative upper limit on the volume of the social plan, according to which no more than one third of the assets may be used to settle the claims arising from the social plan. If this limit is exceeded, the claims are reduced proportionately. 

Modification of Secs. 1, 17 Dismissal Protection Act

In principle, the general termination provisions apply to the termination of employment relationships, which are, however, partially modified in the event of insolvency (Sec. 125 Insolvency Code). If a change of operation is planned and a reconciliation of interests is reached between the insolvency administrator and the works council in which the employees who are to be terminated are designated by name, Sec. 1 of the Dismissal Protection Act is modified to the effect that it is assumed that the terminations are based on operational reasons (Sec. 125 para. 1 no. 1 Insolvency Code) and the social selection of employees can only be reviewed to a limited extent (Sec. 125 para. 1 no. 2 Insolvency Code). This enables rapid clarification of the personnel situation and rationalisation measures in the insolvency proceedings. 

Pursuant to Sec. 125 para. 1 no. 1 of the Insolvency Code, it is presumed that the termination of the employment relationships of the employees designated in a list of names is based on urgent operational reasons. The presumption relates both to the loss of the previous employment and to the absence of any alternative employment opportunity. If the provision applies, the insolvency administrator only has to present the essential facts for the basis for the presumption.

Sec. 125 para. 1 no. 2 of the Insolvency Code limits the review of the social selection to gross errors. In this respect, the employee has a graduated burden of proof that the social selection is grossly incorrect. He or she must present and prove the necessary facts of gross incorrectness. Only the criteria of length of service, age and maintenance obligation are to be included in the review. The social selection is not to be considered grossly incorrect if a balanced personnel structure is maintained or created.

In addition, the reconciliation of interests within the meaning of Sec. 125 para. 1 Insolvency Code replaces a required statement by the works council pursuant to Sec. 17 para. 3 sentence 2 of the Dismissal Protection Act in the event of a required notification of mass dismissal. 

Possibility of collective review of the social injustice of dismissals in the resolution procedure

In addition, pursuant to Sec. 126 of the Insolvency Code, the insolvency administrator may have the social injustice of terminations for operational reasons reviewed collectively by way of resolution proceedings pursuant to Secs. 80 et seq. of the Labour Court Act (Arbeitsgerichtsgesetz "ArbGG") if there is no works council or no reconciliation of interests is reached within three weeks after informing the works council. 

The Institute of Insolvency Payments

Restructurings under labour law also have an impact on employees' claims arising from the employment relationship. These include, in particular, wage and salary claims. These claims are treated differently depending on whether they arose before or after the opening of insolvency proceedings. Claims that arose before the opening of insolvency proceedings are insolvency claims and can be filed in the table and are only settled from the insolvency estate according to a quota. Claims that arose after the opening of insolvency proceedings, on the other hand, are claims of the insolvency estate and are paid primarily from the insolvency estate. For wage and salary claims that arose in the past three months before the opening of insolvency proceedings there is also an entitlement to insolvency payments, which are paid by the Federal Employment Agency.

Requirements for the application for insolvency payments

Pursuant to Sec. 165 para. 1 sentence 1 Social Code III (Sozialgesetzbuch III "SGB III"), employees are entitled to insolvency payments if they were employed in Germany and, in the event of an insolvency event, still have claims to remuneration for the past three months of the employment relationship. In addition to the opening of insolvency proceedings, such an insolvency event within the meaning of the provision is the rejection of an insolvency application due to a lack of assets or if business operations are completely terminated in Germany if an application to open insolvency proceedings obviously does not come into consideration due to lack of assets. An application within the cut-off period of two months after the insolvency event pursuant to Secs. 323 para. 1 sentence 1, 324 para. 3, 327 para. 3 Social Code III is required for the granting of insolvency payments. However, this only applies if the gross remuneration of the respective employees does not exceed the income threshold for unemployment insurance of currently EUR 7,300.00 gross per month (West) / 7,100.00 gross per month (East).

Amount of the insolvency payments

The amount of the insolvency payments is calculated on the basis of the remuneration of the past three months prior to the occurrence of the insolvency event, less all applicable taxes and social security contributions. In many cases, the question arises as to what is actually included in the remuneration. By law, insolvency payments are subject to the so-called "principle of accrual": Claims are therefore only eligible for insolvency pay if they were accrued or arose within the insolvency payments period. This includes all claims arising from the employment relationship which, in the broadest sense, are made in return for work performed in the eligibility period or can be attributed to this period. These include wages and salaries (including bonuses for overtime, shift work, etc.), remuneration for overtime, continued payment of wages in case of sickness, commissions and royalties, vacation pay and vacation bonuses, as well as bonuses and anniversary payments.

Pre-financing of the insolvency payments 

In principle, insolvency payments only become due after a corresponding application has been filed and thus only after the occurrence of an insolvency event. However, to enable employees to receive insolvency payments before the insolvency event occurs, it is possible to pre-finance the insolvency payments. For this purpose, the (provisional) insolvency administrator concludes a loan agreement with a bank. The loan agreement is in turn secured by the assignment of the employees' wage claims to the bank. Pursuant to Sec. 170 para. 1 of the Social Code III, the bank then acquires the claim to payment of the insolvency payment when the insolvency proceedings are opened or rejected due to lack of assets. However, pursuant to Sec. 170 para. 4 sentence 1 Social Code III, this is only possible if the Employment Agency has given its prior consent. The approval of the Employment Agency is linked to the positive prognosis that a significant part of the jobs will be preserved. In the common practice of the Employment Agency, this is assumed to be the case if at least 10% of the employees at the respective company level retain their jobs.

The insolvency payments or the possibility of pre-financing prevent employees from having to wait several weeks for the payment of wages/salary or the insolvency payments. This could prompt many employees to quit their jobs and apply for unemployment benefits. Insolvency payments, on the other hand, can largely ensure the remuneration of employees even in the event of insolvency, while at the same time business operations can be secured. Insolvency payments are therefore an important means of reorganisation in the context of insolvency. 

Conclusion 

Restructurings under labour law in insolvency are a complex and sensitive issue that requires careful planning, communication and implementation. In the process, employers and employees must know and safeguard their rights and obligations in order to find a solution that is as fair and constructive as possible.