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Staff reductions in the context of restructuring – Dealing with severely disabled persons in the social plan

In times of economic crises – like currently occurring due to the effects of the Corona pandemic, increased energy prices and high inflation – employers are often forced to take restructuring measures and, in particular, to reduce their workforce. In many companies, a social plan has to be concluded with the works council to mitigate the disadvantages for employees caused by the staff reduction. If a social plan includes special provisions for severely disabled persons1, caution is advised. The European Court of Justice (ECJ) and the Federal Labour Court implement high prerequisites for the effectiveness of such regulations. If these are not met, severely disabled persons have additional claims and the volume of the social plan can increase significantly in individual cases. 

General information on social plans

If there is a works council in the establishment (Betrieb) and certain thresholds are exceeded, it is mandatory to conclude a social plan in the event of certain operational changes (Betriebsänderung). A social plan is an agreement between the employer and the works council on the compensation or mitigation of the economic disadvantages suffered by employees as a result of the envisaged operational change. 

Typically, a social plan contains provisions on severance payments, further training measures or transfer companies. 

To calculate severance payments, it is common to apply a formula that usually can be simplified as follows:

length of service in years x gross monthly salary x factor

The factor depends in particular on the economic performance of the company and the respective industry. The factor can either be uniform or (as is usually the case) different factors can be agreed for different groups of employees. Due to their statistically poorer chances on the labour market, older employees usually receive a higher factor than younger employees do.

Special challenges in drawing up social plans in connection with severely disabled persons

According to the General Act on Equal Treatment (Allgemeines Gleichbehandlungsgesetz "AGG"), direct discrimination against severely disabled persons is not permitted. Direct discrimination occurs if a regulation is directly linked to the severe disability and is disadvantageous for severely disabled persons solely on the basis of their disability. However, indirect discrimination is also prohibited in general. This is the case if a general regulation, which is not linked to the severe disability, nevertheless results in disadvantages for severely disabled persons. In exceptional cases, indirect discrimination may be justified if an appropriate occupational requirement conflicts with equal treatment. This justification may be relevant in the context of hiring or transfers, but is generally ruled out when calculating severance payments. 

A social plan provision that unjustifiably disadvantages severely disabled persons is therefore ineffective. Subsequently, severely disabled persons have the right to be treated as if they had not been disadvantaged. In individual cases, this may lead to considerably higher severance payments for severely disabled persons. Since it is not possible to renegotiate the social plan, this increases the overall volume of the social plan ("upward adjustment", Anpassung nach oben). According to the Federal Labour Court, an upward adjustment is to be made even if it leads to considerable financial burdens for the employer. In order to avoid the risk of such additional financial burdens, close attention must be paid when drawing up social plans to ensure that their provisions do not unjustifiably disadvantage severely disabled persons. 

The following is an overview of the most common mistakes:

  • Calculation of severance payment taking into account the earliest possible receipt of a retirement pension 

Due to the future-oriented compensation character of social plans, for employees who are close to retirement age, employers and works councils may adapt benefits more strongly to the actual economic disadvantages, which these employees face as a result of the impending loss of their job and any resulting unemployment (Sec. 10 s. 3 no. 6 alt. 2 General Act on Equal Treatment). With this option it is possible to limit the increase of the amount of the severance payment, which is inevitably associated with the use of the parameters of length of service and/or age when calculating the severance payment, in the interest of fair distribution in favour of younger employees as the need for protection decreases. Specifically, this means that many social plans provide that employees close to retirement age receive a lower severance payment than other employees. According to the relevant German case law, such provisions do not constitute impermissible discrimination on the grounds of age. 

In practice, the relevant provisions are usually formulated in such a way that they are based on the start of the earliest possible retirement date. For example, a special provision is created for employees close to retirement  and the definition of employees close to retirement is based on how many years are left until their respective earliest possible retirement date (when their employment relationship ends). 

However, such a regulation leads to problems in the case of severely disabled persons: The minimum age for receiving a pension in the case of severely disabled persons is below the minimum age of other employees, i.e. severely disabled persons can retire earlier than other employees. 

The General Act on Equal Treatment implements European law (in particular the Equal Treatment Framework Directive). The ECJ is responsible for interpreting the corresponding directive. The ECJ has made it clear that basing the calculation of a severance payment on the earliest possible retirement date constitutes discrimination against severely disabled persons because of the disability. Under otherwise identical conditions, severely disabled persons receive a lower severance payment solely because they can start their retirement earlier due to their severe disability. In line with this, the Federal Labour Court has ruled in recent decisions that any reduction in the severance payment by including the earliest possible start of retirement unlawfully discriminates severely disabled persons. 

It is therefore advisable, in the case of a corresponding provision that is based on the earliest possible start of retirement, to explicitly stipulate that the possible earlier start of retirement due to a severe disability is disregarded.

  • Maximum amount limits

In practice, a formula is usually agreed in social plans according to which the respective severance payment is calculated. Since this formula usually takes into account the length of service of the employee, very high severance payments may occur in individual cases for particularly long-serving employees. These very high severance payments sometimes considerably exceed what is necessary to mitigate the impact of the operational change and also result in heavy financial burdens for the employer. According to the case law of the Federal Labour Court, so-called maximum amount limits (Höchstbetragsgrenzen) are therefore generally permissible in social plans. Corresponding clauses usually stipulate that in a first step the agreed formula for calculating the severance payment is applied. In a second step, however, it is checked whether the severance payment calculated in this way exceeds a certain maximum amount. If this is the case, the employee "only" receives the maximum amount.

However, most social plans go beyond the application of a formula and provide for certain supplements, especially for severely disabled persons. Severely disabled persons receive, for example, EUR 2,000 gross as additional severance payment. According to the Federal Labour Court, such supplements are permissible if and to the extent that they serve to compensate for disadvantages associated with the severe disability (for example on the labour market).

Problems arise if a social plan combines a maximum amount with a supplement for severely disabled persons. The decisive factor here is when the supplement is taken into account in the calculation. According to the Federal Labour Court, if the supplement is added after the formula has been applied and then compared with the maximum amount, this constitutes an inadmissible discrimination against severely disabled persons as the maximum amount is reached more easily for them than for other employees simply due to the supplement.

It must therefore be ensured that the following sequence of calculation is observed:

  1.  Application of the formula
  2.  Comparison with the maximum amount
  3.  Addition of the supplement

Alternatively, it is conceivable and probably permissible to agree on different maximum amounts for severely disabled persons and other employees. However, it is preferable from a legal perspective to consider any supplements for severely disabled persons only after the maximum amount limit has been applied.  

Practical impact

When drawing up social plans, particular attention should be paid to ensuring that they are free of any disadvantageous provisions for severely disabled persons. The more complex and differentiated (in particular according to different groups of employees) the calculation is to be designed, the more careful attention must be paid to the wording of the respective provisions. Otherwise, there may be a considerable increase in the volume of the social plan, particularly in connection with severely disabled people.



1This also includes persons treated as severely disabled employees within the meaning of Sec. 2 para. 3 Social Code IX (Sozialgesetzbuch IX "SGB IX").