If an employment relationship is to be terminated unilaterally, employers in Germany often find themselves between a rock and a hard place. The protection against Unfair Dismissal Act (Kündigungsschutzgesetz, KSchG), if applicable, sets high thresholds for validly terminating an employment relationship. Due to this, if a notice of termination is issued by the employer, employees in most cases file a claim for protection against unfair dismissal with German labour courts. As German labour courts can only decide whether an issued notice of termination is valid or invalid, a successful claim for protection against unfair dismissal means that the employee is reinstated into the employment relationship. In this case, the employee is generally entitled to backpay of the contractual compensation from the end of the notice period to the close of the court proceeding.
The financial risk for employers therefore increases with the length of the litigation. A typical proceeding in first instance takes between six to nine months and possibly longer. A subsequent proceeding in second instance can take additional six months or more. In some (luckily rare) instances legal proceedings can take several years. Depending on the salary of the employee in question, the financial exposure can easily reach six-figure amounts, not including the legal fees.
Against this background, most employers are eager to resolve claims for protection against unfair dismissal as soon as possible. This typically means a settlement agreement which contains a severance payment to the employee. As a result, employees can use time as bargaining chip and negotiate rather high severance payments. Recently, however, German labour courts have shuffled the cards and improved the situation of employers to defend against claims for payment brought by employees for the period after the lapse of the notice period:
1. Legal background
If an employer is not able or not willing to accept the workforce of an employee for example due to the lack of raw materials, the employee is generally entitled to their contractual compensation. This principle also applies if the employer has issued a notice of termination, the notice period has lapsed but the labour court subsequently finds that the notice of termination is invalid and therefore that the employment relationship continues without interruption. Section 11 of the Protection against Unfair Dismissal Act (Kündigungsschutzgesetz, KSchG) and similarly also Section 615 Civil Code (Bürgerliches Gesetzbuch, BGB) clarifies, however, that the employee has to allow a deduction of amounts which the employee actually has earned during the respective period and/or which the employee could have earned if they had not maliciously failed to accept reasonable work. While this is not a new provision in German law, it was widely disregarded by employers in the past as courts applied the provision very restrictively so that the clause in practice was widely irrelevant. Typically, courts found it sufficient if the employee was registered as job seeking with the Federal Labour Agency. As this registration is a requirement for receiving unemployment benefits, not many employees missed it.
2. Decision of the Federal Labour Court
In a decision dated 27 May 2020, the Federal Labour Court found that an employer is entitled to request information on job offers suggested to the employee by the Federal Labour Agency and the outcome of the employee’s applications. The respective entitlement of the employer is based on fiduciary duties of the employee towards the employer (Section 242 paragraph 2 BGB). In subsequent court decisions this right to request information was extended to the employee’s own efforts to find a new position.
With this ruling, the Federal Labour Court opened a new defence for employers against claims for payment brought by employees. Employers are now able to effectively argue that an employee did not sufficiently apply for new jobs and therefore maliciously failed to accept reasonable work. If the employee cannot show that they actually put sufficient effort into finding a new job the employee is likely to lose their entitlement to outstanding compensation. Technically, the employer can argue that if the employee would have put sufficient effort into finding a new job, they would have earned compensation for the period after the lapse of the notice period. This fictitious income is deducted from the claim brought by the employee.
As a result, even if an employee wins the claim for protection against unfair dismissal, it can no longer rely on receiving the full outstanding compensation for the period of the litigation proceeding. This risk significantly shifts the position of the employee in negotiations for a settlement.
3. Subsequent decisions of regional labour courts
In subsequent decisions of regional labour courts which apply the principles of the decision of the Federal Labour Court outlined above, the requirements for sufficient efforts by employees are outlined in more detail:
- One decision (Regional Labour Court Berlin-Brandenburg, 30 September 2022) argued that the employee would have to apply for a new job with an effort comparable to a full-time occupation. The court found that 103 applications in 29 months of unemployment would not suffice especially as the applications contained mistakes, were not individualized, and not tailored to the respective job offer. Additionally, the court argued that the employee would have had to follow-up on applications he did not receive feedback to. Due to this lack of sufficient effort, the employee lost a claim for compensation for almost four years.
- In another decision dated 25 June 2021, the Regional Labour Court Hesse found that an employee could not limit applications to job offers provided by the Federal Labour Agency but would need to consider and apply for job offers received from third parties (like for example the previous employer). The court found, however, that the employee would not be obligated to actively search for a new position.
4. Recommendation for employers
In light of the above decisions, employers are well advised to regularly search for and forward suitable job advertisements to a terminated employee. This can significantly improve the negotiation position of the employer regarding a settlement of a claim for protection against unfair dismissal but also to reduce the financial risk of lengthy litigation. At the same time, it is of course important to analyse the job advertisements to avoid jeopardizing the validity of the issued notice of termination.
As a consequence, while it is often still the best option in a termination scenario to find an amicable settlement, the recent decisions of the German labour courts ease some of the pressure on employers.
We are of course available to discuss how this development can be used in your particular case at hand.