International Labor & Employment Law Committee Newsletter

Issue: May 2013

Editor: Tim Darby | Africa and Middle East Editor: Karen Seigel | Asia and Oceania Editor: Ute Krudewagen | Canada Editor: Gilles Touchette | European Editor: Paul Callaghan | Latin America Editor: Juan Carlos Varela | Law Student Editor: Irene Lehne, Earle Mack School of Law at Drexel University | USA: Trent Sutton


Landmark European Court of Justice Decision Validates Redundancy Social Selection Plans and Severance Payment Formulas in Germany Except as Regards Effect on Disabled Individuals

Bernd Weller, Heuking Kühn Lüer Wojtek, Grüneburgweg 102, 60323 Frankfurt, Germany

In the case of Odar v. Baxter,1 the European Court of Justice has deemed use of age factors in calculating severance pay under a German social plan to be lawful. Furthermore, the ECJ has deemed the social plan caps or reductions likewise to be lawful in the case of employees close to retirement age. Such a clause is impermissible, however, when it does not consider the special situation of severely disabled employees to their benefit, the ECJ said.

Given past uncertainty over whether or not German social selection and severance calculation be in line with European anti-discrimination laws, in many cases it has been difficult to find an agreement that provided enough flexibility to meet the needs of employers and works councils. Further, it sometimes happened that likely invalid provisions were agreed upon because that gave room for employer and employee to find settlements in court. The new decision of the ECJ brings clarity to many questions. That will have a massive impact on whether and how agreements will be made between employers and works councils in future, not just in Germany but across the member nations of the EU.

The Disability Discrimination Issue

In the Odar decision, the ECJ had to deal with a social plan concluded in Munich. Under its terms, all employees, who were not older than 54 years of age received a standard severance payment according to a factor calculation, supplemented by an age factor. The severance payment was to be calculated according to the following formula for employees older than 54 years: months until earliest possible beginning of pension x 0.85 x gross monthly pay. The lower amount of this special formula and the standard formula was always to be paid, however, at never less than half the standard formula. The plaintiff Mr. Odar was severely disabled within the meaning of German Social Code IX and therefore could claim his old age pension (at a reduced amount) earlier than an able-bodied employee. Therefore, Mr. Odar received a severance pay of approximately €308,000 gross instead of a standard severance pay of approx. €615,000. Up to the time when the reduced pension was taken, he would have received a severance pay of just under €200,000. The ECJ had to deal with the question of whether the alternative calculation method for severely disabled employees--as well as for employees above and below 50 years of age--was permissible.

In its decision, the ECJ approved of most of the German system, but not of this element. Employers and works council will have to agree on different wording as regards disabled employees in future to avoid the voiding of their agreements, since the ECJ has decided that in that any retirement-age related provision must reflect the particular situation of severely handicapped employees in the statutory German pension schemes. Any social plan providing for a severance cap in relation to the earliest retirement possibility must clearly provide that severely handicapped employees must be treated like able-bodied employees, i.e. that early retirement for severely handicapped people shall not be capped in a way that does not apply to able-bodied employees.

ECJ Disapproval of the the Disability Severance Calculation

In the opinion of the German Federal Labour Court,2 in Germany a graduation of the severance pay under a social plan is permitted, according to which employees at an age close to retirement obtain reduced severance payments under a social plan or are completely excluded from severance payments under a social plan. This case-law of the Federal Labour Court has been accepted by the ECJ in general, but must be questioned insofar as it has approved cuts for recipients of reduced earnings capacity pensions3 in light of the Odar judgment of the ECJ.

The fact that, due to the plaintiff's severe disability, the earliest possible beginning of a pension was even earlier than for able-bodied individuals was discussed intensively by the ECJ. The receipt of an old-age pension by severely disabled employees at a time earlier than for able-bodied employees of the same age is always possible. However, without a disability, the plaintiff would also have received a higher severance payment by approx. €260,000. The ECJ saw therein an unjustifiable multiple discrimination against severely disabled employees. As a result of the severe disability, discrimination in the labour market--and for this reason the economic disadvantages occurring through the dismissal--are greater in any case than in the case of able-bodied employees. The closer severely disabled employees move towards retirement age, the more this fact comes to bear. The social plan has not only not considered this fact, but has even reinforced it. According to the assessment of the ECJ, this was such a serious discrimination against severely disabled employees that it could no longer be justified by the broad discretion of the social partners in agreeing on social plans.

ECJ Acceptance of the Age-Related Calculation of Severance Payments Otherwise

In the framework of the social plan design, social criteria--in particular age--are taken into account when calculating the individual's severance payments. Severance payments are usually calculated according to one of the two following formulas:

  • 1. Factor calculation:

Factor x years of employment in the company x gross monthly pay = severance pay

  • 2. Divisor calculation:

Age x years of employment in the company x gross monthly pay / divisor = severance pay

According to both formulas, older employees tend to receive higher severance payments. The ECJ approved of this approach in the decision.

  • The Federal Labour Court presumes that according to the general experience of life, older employees are more severely affected by the loss of employment since they are unemployed longer and have greater difficulties in being reintegrated into the labour market. Therefore, in the opinion of the Federal Labour Court not only linearly rising severance payments are lawful; rather the employer may even add age supplements to the severance payment under a social plan in favour of older employees.4 The ECJ has ultimately confirmed this opinion in the Odar case.
  • Moreover, according to established case-law of the Federal Labour Court,5 it is lawful to provide a maximum or cap limit for the severance payments under a social plan equally applicable to all employees. The fact that, due to the factor or divisor calculation, older employees are more frequently affected by such cap limits does not lead to illegal age discrimination. The ECJ in approving this approach explained that the aim associated with the capping rules, to give the limited financial resources of the social plan to those in need of protection, is legitimate and therefore can also justify different treatments based on age. Furthermore, the ECJ emphasizes that broad discretion of assessment is given both to the national legislative bodies as well as to the social partners. Furthermore, the ECJ held that the differentiation according to age and the different severance pay calculation tied to it (indirectly including the intended age factors) are in compliance with the guidelines under European law.

Additional Discrimination Issues May Arise in Future

The Odar judgement has clarified many discussed questions and one not-yet-discussed question. German dismissal protection laws have, however, many more links to criteria which are protected by anti-discrimination directives (see below). It remains to be seen to which extent the system that has been developed in Germany during the last six decades entails further discriminatory aspects.

Background: The Social Selection Scheme in Germany

In redundancy scenarios, German law requests a social selection among all comparable employees. Section 1(3) of the Protection Against Dismissal Act includes an exhaustive list of the criteria, which may and must be taken into account in the social selection, namely age, length of employment, any alimony duties and the existence of a severe disability. The employer may not consider additional criteria since otherwise the social selection may be invalid overall.6

Participation of the Works Council in the Social Selection

A right of the works council to codetermination of the social selection is neither provided in Section 111 nor in Sections 99, 102 of the German Works Council Constitution Act. Nevertheless, as a general rule the criteria for the social selection are agreed upon between employer and works council in reconciliations of interests. The reason for this practical finding is the following: Especially where larger staff reduction measures are concerned, it is of essential importance for the employer in the framework of proceedings for protection against dismissal that it can demonstrate and prove the social selection made between the comparable employees in detail. If the employer does not want to fall back on the vague representation of the exercise of its individual assessment criterion, but rather make the burden of demonstration and proof easier in the proceedings by submitting selection schemes, it must negotiate with the works council. Pursuant to Section 95(1) of the Works Council Constitution Act, an enforceable right of codetermination of the works council exists in the case of agreement on selection guidelines and also in the case of a merely one-time use (which relates to a multiplicity of work places).7 If more than 500 employees are employed in the business concerned, the works council in any case also has the right to require its agreement on such a selection guideline proactively.

The essential advantage of a selection guideline in accordance with Section 95 of the Works Council Constitution Act lies for employers in Section 1(4) of the Protection Against Dismissal Act. Under its provisions, a selection decision in the individual proceedings for protection against dismissal, which is based on a selection guideline according to Section 95 of the Works Council Constitution Act, can only be challenged by employees if it is based on gross defectiveness. The review standard and thereby the question of the burden of demonstration and proof shift therefore massively in favour of the employer when the selection guideline has been set in accordance with Section 95. It goes without saying that the employer's interest in this regard results in a better negotiation position for the works council. In the end, usually an agreement is obtained by (significantly) increasing the social plan budget, i.e. the severance amounts paid to employees.

The Selection System in Detail

The Federal Labour Court, and the ECJ in the Odar decision, both presume that age and length of employment may and must still be considered as part of the social selection.8 Sections 10(1) and (2) German Anti-Discrimination Act as well as Section 2(4) Anti-Discrimination Act and Article 6(1) of Directive 2000/78/EC continue to justify the consideration of the selection criteria cited in Section 1(3) of the Protection Against Dismissal Act. Through consideration of age and length of employment, older employees are in practice more strongly protected against termination than younger employees. The legitimate purpose justifying this lies in the protection of the older employees, who--as the Federal Labour Court has ruled again and again--are at greater risk of unemployment and in the event of unemployment would have more difficulty re-entering the labour market. (It should be noted, however, that literature9 may be considered to have refuted the general experience of life with which the Federal Labour Court justifies its opinion by means of the official statistics of the Federal Employment Office. According to these statistics, a proportionally higher unemployment exists among younger people than among older people. Also, as a rule, it is more difficult for younger people to enter the labour market and therefore they are unemployed longer than older employees. This statistical finding is confirmed by the media reporting about the alarmingly high level of youth unemployment, but not about unemployment among the elderly. Since this finding is even more evident in the other Member States of the European Union than in Germany, the question very seriously arises whether the position of the Federal Labour Court and ECJ judges10 will be at some point change.)

Since the legitimacy of the consideration of age and length of employment may and must be presumed to be legal according to current case-law, the question arises as to the extent of the consideration. The Federal Labour Court gives employers a large level of discretion as to design and evaluation in developing point systems. The discretion granted is so large that his social selection of the employee can only be challenged successfully when the weighting of the criteria leads to the fact that an employee with discernibly greater need for protection should be terminated at the expense of another employee who is less in need of protection and therefore the selection decision is no longer justifiable. If the social selection is made based on point systems agreed upon with the works council, the test standard of gross defectiveness applies in any event. Such gross defectiveness exists where an "evident, eye-catching severe error exists and the reconciliations of interests lack any balance."11 The Federal Labour Court explains further in paragraph 29 that "a . . . point table . . . [is] only not to be used where one of the statutory selection criteria is not assessed at all or to such little extent that it does not carry any weight as a relevant selection criterion and plays a role only in exceptional cases."

Age Group Selection

The next level of complexity in the social selection of employees is the agreement on age groups, meaning that not only social selection criteria are defined, but also age groups. This is because the reduction in staff then does not occur by means of a complete list of employees, but rather proportionally in each age group. The prerequisite for the agreement on permissible and valid age groups is on the one hand that no rejuvenation of the staff structure may occur through the social selection according to age groups and sn the other hand, that the formation of age groups must be measured by the requirements of Section 10 of the Anti-Discrimination Act and Article 6 of Directive 2008/78/EC. On this basis, the division of the staff into specific age groups must initially be appropriate. Age groups are no longer appropriate when they offer guides for a targeted intervention into the social selection for the protection of individuals.12 The courts even go so far as specifying that the employer does not have to divide the age groups into continuous, equal increments. Rather, the employer may determine how many age groups it would like to form and may then also design these groups differently with respect to age ranges. In this respect, in the determining of age groups there is also broad discretion in design. Here again the abuse criterion of gross defectiveness applies.

1ECJ, 6 December 2012, C-152/11--Odar.

2Federal Labour Court, 26 May 2009--1 AZR 198/08.

3Federal Labour Court, 7 June 2011--1 AZR 34/10.

4Federal Labour Court, 12 April 2011--1 AZR 743/09.

5Federal Labour Court, 21 July 2009--1 AZR 566/08

6Federal Labour Court, 12 August 2010--2 AZR 945/08.

7Federal Labour Court, 6 July 2005--1 ABR 29/04.

8Federal Labour Court, 12 April 2011--1 AZR 764/09; Federal Labour Court, 6 November 2008--AZR 523/07.

9Kaiser/Dahm, NZA 2010, 473.

10ECJ, C-141/11--Hörnfeldt, ECJ, C-499/08--Andersen.

11Federal Labour Court, 5 November 2009--2 AZR 676/08, paragraph 21.

12Federal Labour Court, 22 September 2005--2 AZR 208/05.


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