Issue: May 2018

GERMANY - Germany's 2018 Coalition Deal - Significant Changes for Employers on the Horizon

By: Dr. André Zimmermann

After months of exhausting, on-off negotiations with changing negotiation partners at the table, on February 7, 2018, Angela Merkel's center-right Christian Democratic Union (CDU/CSU) and the center-left Social Democratic Party (SPD) agreed on a new coalition agreement for a third grand coalition – usually referred to as "GroKo" in Germany. The deal still requires formal approval by the 460,000 SPD members in a postal vote, the outcome not expected before early March 2018.

Given that the traditionally employee-friendly SPD has secured, among others, the Labor and Social Ministry, the new government will push for further strengthening employee rights. In fact, the 177-page coalition paper with the rather bulky title "A New Awakening for Europe, a New Dynamic for Germany, a New Cohesion for Our Country" indicates numerous changes for employers over the next couple of months and years. Below is a summary of key points.

(Even) Stricter Regulation of Fixed-Term Employment

A key SPD election pledge was to tackle the "abuse" of fixed-term employment. Already severely restricted in Germany, fixed-term employment will soon be subject to even stricter regulation.

Fixed-Term Employment Without Cause – No Longer Than 18 Months

While under current legislation fixed-term employment without cause is generally possible for up to two years including three extensions of term if the same employee has not been previously employed, the maximum term shall now be limited to 18 months including only one extension of term. Also, employers with more than 75 employees may only use these fixed-term contracts for 2.5 % of their staff.

These changes will not only take away much needed flexibility from employers, but also mean more red tape, as employers with more than 75 employees would need to check for each and every intended hiring whether they comply with the 2.5 % limit.

Fixed-Term Employment With Cause – No Longer Than Five Years

Until now, there is no maximum total duration of fixed-term employment relationships with cause (e.g., substitute employment during leave, increased demands due to special projects) or a maximum number of extensions. Generally, if cause supports a limited term, this limitation is valid.

Only in exceptional cases, where a fixed-term has been extended over and over by the employer and where, on an overall evaluation of the facts at hand, such practice can be considered an abuse of law, case law has held the fixed-term arrangement to be invalid. Also, it is generally possible to agree on a fixed-term contract with cause if an unlimited contract with the same employee has existed before.

Under the coalition paper, fixed-term employment with cause shall no longer be possible if the individual held an unlimited employment contract with the same employer before or one or more fixed-term contracts with a total duration of at least five years. Once the fixed-term has expired, a new fixed term could only be agreed on after a three-year waiting period.

Under Germany's strict dismissal protection regime, fixed-term employment was one of the few tools for more flexible personnel planning. Even though the details of the new law still need to be fleshed out, what has been presented so far already indicates a significant reduction of the flexibility fixed-term employment used to provide.

New Claim to Work Part-Time For a Limited Period

Another key issue on the SPD's agenda, the coalition partners agreed on implementing a right to work part-time for a limited period.

Except under specific circumstances (e.g., parental leave, nursing leave), German law currently only provides for a unilateral right to work reduced hours long-term if the employee has been employed for more than six months, the employer regularly employs more than 15 employees and unless working part-time is precluded by operational reasons. Companies very often struggle with demonstrating and proving that operational reasons oppose the work reduction requested. However, as the law stands, moving from part-time back to full-time generally requires the employer's consent.

This will change under the new law for companies employing more than 45 employees on a regular basis: Employees will generally be in a position to request working part-time for a specified period and afterwards return to full-time.

Special rules apply to companies employing 46 to 200 employees: The employer will be obligated to allow only one out of 15 employees to work part-time. If there are more employee requests, the employer may reject these. However, from the coalition agreement it is unclear what process has to be followed to pick the employee. It is more likely, that the new law (or at least case law) will require the employer to choose the employee based on social factors, rather than on a first-come first-served basis.

The employer may deny an employee's request if the desired duration exceeds five years or is less than one year. Collective bargaining agreements may deviate therefrom.

An employee making use of the limited part-time may not request a further reduction of hours during the part-time period or unilaterally return to full-time employment earlier.

Finally, an employee requesting to work part-time has be in full-time employment for at least one year before requesting a reduction in hours again.

Frankfurt's Brexit Pitch – Loosened Dismissal Protection for High-Earning Bankers

Undoubtedly driven by an interest in drawing UK-based banks to Frankfurt and becoming EU hub for US banks post-Brexit, a previous CDU proposal to relax dismissal protection for high-earning bankers got picked up during the negotiations:

Though specifics still need to be negotiated, the coalition partners agreed on a limited applicability of the Dismissal Protection Act (Kündigungsschutzgesetz, KSchG) for risk takers (Risikoträger) under the Ordinance on the Supervisory Requirements for Institutions' Remuneration Systems (Institutsvergütungsverordnung) if their annual base salary is higher than three times the contribution assessment ceiling (Beitragsbemessungsgrenze) for the statutory pension fund. The in-scope individuals shall be treated as executive employees (leitende Angestellte) for the purposes of dismissal protection – which will allow for easier dismissal.

For 2018, the assessment ceiling has been set at EUR 78,000, so risk takers with an annual base salary of more than EUR 234,000 (currently equalling roughly USD 287,000/GBP 208,000) would be in scope of the new regulation. The new law will generally make it easier to fire and replace these in-scope risk takers, but with severance entitlements of up to a maximum of 18 monthly salaries depending on years of service and the employee's age.

However, legislation would need to be adopted by the German parliament quickly, since banks are expected to start pulling the trigger on their Brexit contingency plans very soon.

How to Prepare

Even though the coalition agreement is not legally binding, it will set the stage for employment legislation in the coming years. Employers with business in Germany should prepare for the changes ahead. If fixed-term employment is extensively used, companies may reconsider this and should look at other suitable options – including temporary agency work and independent contractors. 

André Zimmermann

Orrick, Herrington & Sutcliffe LLP