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Germany – Employment Law in the COVID-19 Crisis- What Companies can do now

23 March 2020
Many companies ask themselves what to do best to survive the current economic crisis due to the COVID-19 virus on a short-term basis. A summary of the measures announced by the Government and from the Labour Law to mitigate the negative economic losses.

The number of people infected with COVID-19 increases daily. This not only heightens the fear of becoming infected in the workplace. The COVID-19 crisis already has a negative economic impact on freelancers, companies and entrepreneurs of considerable and even existence-destroying economic losses (e.g. caused by massive supply shortfalls, decrease in orders or even closure of companies). Many companies ask themselves what to do best to survive the current economic crisis due to the COVID-19 virus on a short-term basis. Therefore, we have compiled a summary of the measures announced by the Government and from the labour law to mitigate the negative economic losses.

I. Financial measures:

Due to the COVID-19 crisis, the German Federal Government announced numerous financial measures to support companies that are economically affected by the effects of COVID-19. However, these measures have not yet been finally implemented, so it is not possible to predict with certainty, which conditions will be established. In particular, the following measures were announced:

  • Tax measures: Deferral of taxes already due or becoming due and adjustment of advance payments for income and corporation tax; 
  • New measures with unlimited volume, such as: Extension of existing liquidity assistance programmes such as KfW and ERP credits to ensure the liquidity of companies; loans to co-finance the restructuring of companies, which may be granted interest-free; 
  • The German Federal Government will also work for a coordinated and determined approach at European level. Among other things, the Federal Government welcomes the European Commission‘s idea for a "Corona Response Initiative“ with a volume of 25 billion euros.

Please note that an application must be filed with the competent authorities for each of these measures.

II. Salary reduction and short-time work:

One of the most current topics to mitigate the effects of the COVID-19 crisis in Germany is short-time work, especially as the parliament has passed an amendment to the law on March 13, 2020 relaxing the conditions. Because of the changes Germany expects over 2 million short-term workers in 2020 which costs the state 10 billion euros. Short-time work is the (partly or complete) reduction of the working time with a corresponding reduction of remuneration. The reduced earnings of the employees are partly compensated by the short-time work compensation paid by the Federal Employment Agency. The legal requirements are:

  • Short-time work requires a considerable loss of working hours (possibly after reduction of overtime and residual vacation). The loss of working hours must be temporary and be due to economic reasons or an unavoidable event. This applies in particular to a (partial) shutdown of the operation due to the COVID-19 crisis (e.g. due to order reductions, activity bans, quarantines).
  • The loss of work must reach a certain minimum level. Ac¬cording to the (new) current legal situation, 10% of the employees of a operational unit or a part of a operational unit must be affected by a loss of earnings amounting to more than 10% of their monthly gross income.
  • Company requirements: 
    - At least one person must be employed subject to social insurance contributions. 
    - It is also possible to apply for short-time work benefits for just one department.
  • Personal requirements:
    - Applies only to employees subject to social insurance contributions. Marginally employed employees do not meet the requirements for receiving short-time work compensation. The same applies in principle to trainees and freelancers. In the case of trainees, all means must be exhausted to ensure that they can continue their training. 
    - Short-time compensation is paid for those employees who are not in a terminated employment relationship.
  • The implementation of short-time work requires a legal basis. This can result from a collective bargaining agreement, a works agreement or an agreement with the employee. In this respect, please review if your employment contracts already provide a corresponding provision. 
  • The statutory period of remuneration for short-time work is currently twelve months. This period can be extended to up to 24 months. 
  • However, if the economic situation improves, short-time work must be interrupted. 
  • Notification to the Federal Employment Agency:
    - As a first step, the employer must notify the Federal Employment Agency of the loss of working hours and the implementing short-time work in writing or electronically. This notification can be made by using a form provided by the Federal Employment Agency, which can be found under the link below: 
  • In a second step, the employer must submit an application for short-time work compensation within a cut-off period of three months. 
  • This application must be accompanied by a payroll list as an annex, in which in particular each individual employee concerned must be listed with the corresponding reduction in working hours and loss of wages. Both the application for short-time work compensation and the payroll list provided by the Federal Employment Agency can be found under the following links: 
  • Usually, the Federal Employment Agency in whose district the business unit affected by the short-time work is located will be responsible. The existence of a considerable loss of working hours and the operational requirements for the short-time work compensation must be substantiated.
  • The amount of the short-time compensation is based on the flat-rate net remuneration difference. Employees with at least one dependent child receive 67%, all other employees 60% of the net pay difference.
  • According to the previous legal situation, the employer bears the majority of the social security contributions due on the short-time work compensation. The legislator has decided on various simplifications with regard to access to short-time work compensation. These also provide that social security contributions attributable to the short-time work compensation can be reimbursed in full by the Federal Employment Agency.

III. Forced PTO/ Furlough/ unpaid leave/ Company vacation/ Reduction of overtime hours:

Bridging the crisis period by imposing compulsory vacation/ fur¬lough or demanding employees the employees is not a safe legal option. Demanding (unilaterally) that employees take unpaid vacation is in principle not possible as the employer bears to risk of ope¬ration (Sec. 615 S.3 BGB, Civil Code) and therefore needs to continue to pay the employees. Unilaterally ordering compulsory vacation/ furlough is also problematic as the employer needs to consider the employee‘s vacation requests according to Sec. 7 para 1 BUrlG, Federal Vacation Act. When push comes to shove it could be that the courts consider the vacation to be not taken so that the employees are still entitled of a unreduced amount of vacation. In view of the current situation, however, there is a debate in Germany as to whether the COVID-19 crisis does not constitute an urgent operational concern which could nevertheless entitle employers to unilaterally order so-called „company holidays“. If a works council exists, its co-determination rights would also have to be observed. In companies without a works council this is basically possible if there is an urgent operational need, but it is not clear how many days of leave could be ordered.

According to (not current) case law this could be up to a limit of 3/5 of the annual holiday. Further, subject to the contractual agreements it is thinkable that the employer orders paid time off in lieu regarding accrued overtime hours. Mainly it is recommended to speak with the employees and look for mutual flexible solutions on how to deal with the crisis. Employers should openly communicate the current situation and developments to the employees to make them aware of the complications and to openly discuss with the employees on what measures can be taken so that both sides benefit from it in the future and to avoid terminations.

IV. Terminations:

If and under which prerequisites an employer can counter the COVID-19 crisis with dismissals cannot be answered in general terms as it depends on the individual circumstances. While smaller companies with operational units of no more than 10 employees are still relatively free to terminate employment relationships and may only have to observe the notice period and other formal requirements (wet ink signature; Sec. 623 BGB), the Act Against Unfair Dismissal generally applies above this threshold and dismissals are, among other factors, only permissible if one of the justifications stated in the Act is given. 

In principle, a considerable loss of working hours could be suitable to constitute an urgent operational reason entitling to dismissal. However, this would require a permanent surplus of workers, whereas the COVID-19 crisis is currently regarded as temporary. However, dismissals for operational reasons would be conceivable if the COVID-19 crisis were merely the trigger for a more far-reaching entrepreneurial decision to close down a business permanently. Irrespective of this, operational redundancies are, however, subject to further conditions. First and foremost, all measures that are less severe than dismissals must be exhausted, which could also include bridging a period of crisis with short-time work. In business units with more than 20 employees, the effectiveness of dismissals may also require a mass dismissal notification towards the Federal Employment Agency prior to declaring any terminations, which should be carefully prepared. If a works council has been formed, it must be consulted before any dismissals are declared and negotiations on a balancing of interests and social plan benefits may be necessary, which may take significant extra time and costs extra money. 

We therefore recommend to carefully analyse the current situation and its development on a day-to-day basis and to thoroughly evaluate whether there are any other options to overcome the crisis before lay-offs.

Further Reading