GERMAN LABOR AND EMPLOYMENT NEWS this summer. THE SALE OF A - - PDF document

THIRD QUARTER 2004

GERMAN LABOR AND EMPLOYMENT NEWS

THE SALE OF A BANKRUPT FACILITY WILL NOT LEAD TO AN EMPLOYEE’S RIGHT TO REINSTATEMENT

By Angela Autenrieth

Frankfurt German Attorney at Law aautenrieth@jonesday.com ++49 69 9726-3977

Employees who are terminated in connection with a bankruptcy procedure do not have a claim to reinstatement of their job if the facility where they were employed is subsequently bought out of bankruptcy. This was already decided by a Cologne court way back in 2002 and was affirmed by Germany’s Federal Labor Court earlier this summer. Transfers of a facility’s assets are subject to Section 613a of Germany’s Civil Code (or to refer to the comparable British provision: Transfer of Undertaking (Protection

• f Employment) Regulation 1981) which states that if a “works” (otherwise referred

to as a “facility” or an “undertaking”) or “part of a works” is transferred, the contracts of employment of those individuals employed in that particular facility are automatically transferred to the buyer. This is in direct contrast to the general common law rule which holds that the transfer of a business causes the respective employment relationships to be terminated since employment relationships may not be assigned.

CONTENTS

The Sale of a Bankrupt Facility Will Not Lead to an Employee’s Right to Reinstatement 1 Can the Discontinuance of an Outsourcing Contract Constitute the Transfer

• f a Facility?

2 Is the Newly-Enacted Residence Act a Cure for Germany’s Soccer Woes? 3 An Employer’s Right to Reject an Employee’s Demand to Work Part Time 4 Recent Court Decision Complicates the Conclusion

• f a Settlement Agreement

5 Employment Law in Today’s 6 Globalized World Must Temporary Employment Agreements Be in Writing? 7

2 If the facility in issue has not filed for bankruptcy and, prior to the expiration of the termination notice periods, it turns

• ut that the employer’s grounds for terminating the employ-

ees is subsequently without basis, then the employees will have a claim to reinstatement against the seller. Such claims are based on various legal arguments including (i) the employer’s statutory requirement to act in good faith, (ii) an employee’s constitutional right to occupational liberty, and (iii) the fact that the termination was “socially unjusti- fiable” —and thus, invalid—since there was a possibility

• f reinstatement. If the facility is transferred only after the

termination notice period expires, then, according to the Federal Labor Court, the terminated employees may have a claim to reinstatement against the buyer, as long as such claim is made immediately after learning of the transfer. However, the facility which was the subject of the case before the above-mentioned Federal Labor Court case had filed for bankruptcy. This fact caused the court to diverge from the general rule. In that case, each of the employ- ees had been terminated as a result of the closing of the bankrupt facility. Management had decided to cease

• perations and there were no other positions available. To

the initial relief of the employees, the bankruptcy adminis- trator was able to find a buyer for the bankrupt facility and to conclude a purchase agreement before the employees’ termination notice period had expired. Several days after the employment relationships with the former employees had been validly ended, the buyer continued the opera- tions of the facility. This caused the employees to then file for reinstatement. The court denied these claims. If a termination and transfer of a facility are part of a bankruptcy procedure, the employees do not have a claim to reinstatement against the buyer regardless of whether the employees would have had such a claim had the facility not been part of a bank- ruptcy procedure. The Federal Labor Court held that poten- tial disputes in bankruptcy procedures must be resolved efficiently and with finality. This applies regardless of whether the bankrupt facility is the subject of a liquidation

• r reorganization.

CAN THE DISCONTINUANCE OF AN OUTSOURCING CONTRACT CONSTITUTE THE TRANSFER OF A FACILITY?

By Fabian Stoffers

Frankfurt German Attorney at Law fstoffers@jonesday.com ++49 69 9726-3112

As discussed in the preceding article, if a buyer acquires substantial assets of a facility and the buyer continues

• perating that facility, then the employees of that facility

will automatically be deemed to have been assigned to the buyer. However, it may be a bit of a surprise to employ- ers that there are other types of situations which may also constitute a transfer of a facility, and thus, lead to the automatic transfer of employment relationships. The transfer of a facility occurs only if a “works” or “part

• f a works” is acquired and the acquiror continues to
• perate that “works” or “part of a works”. The critical issue

is whether the acquiror truly continues operating the works (or part of a works) like the seller did, or whether the buyer changes the “identity” of this works. This question can be resolved only by examining the totality of the circumstances, including to what extent the buyer has the same employees and management, to what extent the buyer applies the same organization and methods of operation and to what extent it uses the tangible and intangible assets of the target facility in the same fashion as did the seller. In the manu- facturing sector, a facility’s identity is transferred primarily through the transfer of the machinery and equipment used in that facility while a service company’s identity is main- tained primarily through the assumption of a significant part

• f the employees.

The Federal Labor Court was asked to review to what extent the discontinuance of an outsourcing relationship would cause an employment relationship to be transferred. In that case, a third-party provider was responsible for running a warehouse for a supplier to the automobile industry. The supplier subsequently terminated the service arrangement and decided to operate the warehouse itself. Specifically, the parties’ arrangement called for the supplier to lease the warehouse from its former service provider. They had not

3 agreed that the automobile supply company would assume any of the employees working at the warehouse. However, a delivery person who had been employed at the warehouse filed an action asking the court to rule that the arrangement between the supplier and the warehouse operator caused his employment relationship to be automatically transferred to the supplier pursuant to Section 613a of the Civil Code (please see the previous article in this Newsletter for a brief description of Section 613a of the Civil Code). The court concluded that the “identity” of the warehouse

• perations, i.e., storing, distributing and shipping product,

could remain intact even though none of the employ- ees involved was to be transferred. Since the automobile supply company continued to operate the warehouse in the same fashion as had the third-party provider, the court also concluded that the supplier continued to make use of the third party’s essential assets to operate the business. Even though the delivery person was not one of these so-called “essential assets”, the court held the automobile supply company also automatically (and unintentionally) assumed the employment contract of this employee.

IS THE NEWLY-ENACTED RESIDENCE ACT A CURE FOR GERMANY’S SOCCER WOES?

By Jörg Rehder

Frankfurt Attorney at Law; Solicitor (England and Wales) jrehder@jonesday.com ++49 69 9726-3122

Though tongue in cheek, some have recently concluded that there is a direct correlation between Germany’s migration policies and its showing in major international soccer tournaments, with the reasoning that Germany may need to add some top players from foreign countries to be competitive. Shortly after Germany’s poor performance in the 2000 European Soccer Championship, Chancellor Schröder introduced the “Green Card”. Foreigners holding a Green Card are permitted to work in the IT and software sectors in Germany for up to five years. The introduction of the Green Card was a fundamental change in Germany’s migration policy as it was the first time that foreigners were permitted to work in Germany based merely on their high qualifications. In 2002, when Germany made it all the way to the finals of the World Cup, the German legislature did not introduce any migration policy changes. This summer Germany once again had an abysmal showing in the European Soccer Championship. The response? The passage of the Act Governing the Residency, Employment and Integration of Foreigners in Germany (otherwise known as the “Residence Act”), a statute which is to open Germany’s labor market to highly-qualified foreigners. It has become apparent that despite an unemployment rate that is hovering at about 10%, Germany has a rela- tively high number of unfilled positions for highly-qualified

• people. Once the Residence Act enters into effect on January

1, 2005, it is hoped that employers will be able to hire top foreign engineers, scientists, researchers and business people more easily to fill these jobs (and maybe the Residence Act will facilitate the German Soccer Association’s efforts to attract the world’s top foreign soccer players to Germany’s national team). Though the Green Card is often seen as a forerunner to the Residence Act, there are significant differences between the two. First, the Residence Act is not limited to the IT and software sectors, but instead applies to all business

• sectors. Second, there is not a maximum number of work

permits that may be issued under the Residence Act (the Green Card is limited to 20,000 people). Finally, residence permits issued under the Residence Act may be permanent, unlike the Green Card which was limited to five years. For purposes of this article, the two most significant provisions

• f the Residence Act are that (i) highly-qualified foreigners

may work in Germany because of their skills and know how, and (ii) foreign investors who invest capital and create jobs will be entitled to pursue self-employment or to work as an entrepreneur in Germany. As for highly-qualified foreigners, they may be entitled to a permanent residence permit if they can demonstrate that they are (i) highly-qualified or recognized scientists

• r scholars, or (ii) specialists with unique qualifications
• r managers with unique skills who will earn at least two

times the then-current social security contribution ceiling (the ceiling is currently EUR 41,850 per year, which is equal to slightly more than U.S. $50,000 per year). In addition to

4 having to be highly-qualified, the authorities must be satisfied that the applicant will be able to integrate him/herself into German society and will not become a welfare case. These provisions obviously give the authorities great discretion to decide whether to grant such a residence permit, but it is hoped that employers will soon be able to attract highly- qualified employees to Germany more easily as a result of this new law. Also, borrowing a page from U.S. legislation, foreigners will be able to apply for permanent residency in Germany if they invest at least EUR 1 million (approximately U.S. $1.2 million) and create at least ten jobs in Germany. This provision is very similar to a U.S. statutory provision that has been in place since 1990. In the United States, if a foreigner invests at least U.S. $1 million (or U.S. $500,000 in economically-depressed areas) and creates at least ten jobs, he will be able to obtain permanent residency in the United States. However, for a number of reasons, the U.S. program has met with only mixed success. Much like in the United States, the investor in Germany will initially be entitled to a conditional residence permit for three years (in the United States it is for two years) during which time the entrepreneur must realize his business plan. If, after three years, the authorities determine that the entre- preneur has satisfied his investment plans and created the promised jobs, they will remove the conditional status from the residence permit and issue a permanent residence permit. As is always the case with significant new legisla- tion, it remains to be seen whether the new law will lead to a reduction in Germany’s unemployment rate and cause Germany to be able to attract highly-qualified or entrepreneurial foreigners. However, one step in the right direction has already been taken. Ailton, a Brazilian who led the German soccer league in goals last season and has been playing in Germany since 1998, recently announced that he would be excited to play for Germany during the 2006 World Cup. It is probably not fair to credit Ailton’s statement to the Residence Act, but at this point, we will take what we can get.

AN EMPLOYER’S RIGHT TO REJECT AN EMPLOYEE’S DEMAND TO WORK PART TIME

By Georg Mikes

Frankfurt German Attorney at Law; Certified Labor and Employment Lawyer gmikes@jonesday.com ++49 69 9726-3939

Much to the consternation of many employers, the German legislature enacted a statute in 2001 that gave employees the legal right to demand from their employer that the employee work only on a part-time basis. Though employ- ers have been given some statutory legal arguments against such requests—most notably, employers can deny an employee’s request if operational reasons warrant such a denial—it was feared that courts would give only lip service to this argument. However, as of late, court deci- sions have clarified employers’ rights, and there has even been a tendency to limit employees’ rights to some degree. On December 9, 2003, the Federal Labor Court held that an employee who asked to be put on part-time status could not force an employer to hire an additional full-time employee if another part-time employee was not avail-

• able. The employee could also not demand that other

employees work overtime so that he could work part time. The employee also tried to require the employer to hire a temporary employee. This request also did not meet with success since the employer had successfully argued to the court that the employer did not regularly engage temporary employees. The Federal Labor Court also had decided already in September 2003 that an employer may deny an employee’s request for part-time employment if it is the employer’s policy to have every customer be serviced by one sales person (such an argument by an employer would not be persuasive, however, if the employer’s hours

• f operation were vastly different from the hours generally

worked by a full-time sales person). Similarly, the Federal Labor Court decided that the staff member of a kinder- garten could not successfully demand that she work only

• n a part-time basis as the teacher’s part-time status did

not fit in with the kindergarten’s organizational plans.

5 The above decisions, which come from various sectors and are based on different situations, make clear that employees do not have carte blanche to be put on part- time status. Additionally, the Federal Labor Court does indeed recognize that employers do not have to put forth a “significant” or “compelling” reason to deny a request for part-time work. Instead, a “rational and justifiable reason” will suffice. Though a court will review whether an employer is abusing its leverage if it rejects an employee’s request, and of course whether the reason given by the employer truly exists, a court will generally refrain from reviewing the reason given by the employer from an operational point of view. The valid rejection of a request for part-time employment presumes that the working hours as requested by the employee are not reconcilable with the employer’s orga- nizational plans, and that if the employee’s request were to be honored, this would have an appreciable adverse effect on the employer’s business interests. The court must determine whether the employer is unable to reconcile his business interests with the employee’s interests. Reasons given to deny an employee’s request for part-time status with success include that the company’s organization would be adversely affected, the company’s organizational proce- dures and security would be negatively impacted or the employer would incur unreasonably high costs as a result

• f the employee’s part-time status.

Even if the business interests for rejecting a request seem clear to an employer, he should not curtly reject an employee’s request to work part time. The employer is required, by statute, to try to reach a mutually-acceptable arrangement with the employee. However, according to the Federal Labor Court, an employer’s failure to abide by this requirement will not automatically invalidate an employer’s

• rejection. Regardless, if the employer abruptly rejects the

employee’s request, then the employee may be able to argue successfully to a court that he would have been able to arrange his part-time status to the satisfaction of the employer if the employee had been given an opportunity to have a true exchange of ideas with the employer. Employers should ensure that an employee does not have this argument available to him. Also, and maybe even more significantly, there have been a few cases where an employee was able to push through his request for part- time status by obtaining an injunction against an employer. One point that employers should not ignore: According to the Federal Labor Court, an employer may waive the statutory three-month notice period that employees must

• bserve before beginning to work part-time. It is presumed

that an employer has “waived” this three-month period if he begins discussing with the employee who has not observed the three-month period the reasons as to why the employer may not be able to honor the employee’s request for part- time status. In other words, an inexperienced employer, or

• ne who has not obtained adequate legal advice, may not

appreciate the significance of pointing out to an employee that the three-month period must be observed before engaging in discussions with the employee about the substantive aspects of the request for part time. It can only be hoped that the Federal Labor Court will review the prac- tical effects of this decision as it actually dissuades parties from engaging in discussions with one another. In the meantime, employers should consider whether they can devise a plan now to reject an employee’s future request for part-time status by using the argument that it would negatively affect the company’s operations, as this argument is not subject to judicial review. This could be helpful to employers as there is nothing more convincing to a court than a document that was clearly prepared prior to any dispute arising.

RECENT COURT DECISION COMPLICATES THE CONCLUSION OF A SETTLEMENT AGREEMENT

By Fabian Stoffers

Frankfurt German Attorney at Law fstoffers@jonesday.com ++49 69 9726-3112

If an employer wishes to end an employment relationship, it can do so either by terminating the employee and trying to conclude a so-called settlement agreement or by trying to conclude a mutually acceptable severance agreement with the employee. An employee will generally only come to terms with an employer on a severance agreement or settlement agreement if the employer agrees to pay an acceptable termination payment. Please note the difference between a “severance agreement” (Aufhebungsvertrag) and a “settlement agreement” (Abwicklungsvertrag). A sever- ance agreement is an agreement concluded between the

6 employee and the employer whereby they mutually agree that the employment relationship will end and, as a result, the employer will not need to issue a notice of termination. A settlement agreement is also concluded between the employee and the employer, but only after the employer has already issued a notice of termination. The settlement agreement generally sets forth that the employee accepts the termination and also any compensation the employer will pay to the terminated employee. In the past, the termination and settlement agreement combination was often preferred by the employee since the labor agencies always interpreted the other alter- native, i.e., the conclusion of a severance agreement, as a situation where the employee voluntarily quit his job and, therefore, the employee was subject to an initial suspension

• f unemployment benefits for 12 weeks, such initial suspen-

sion to be credited toward an overall 25 percent reduction

• f the period during which the employee could receive

unemployment benefits. A settlement agreement with an employer would typically not lead to the initial suspension

• f unemployment benefits for the employee.

However, the Federal Court for Social Matters recently

• pined that concluding a settlement agreement

also generally constitutes quitting a job. By signing a settlement agreement, according to the court’s reasoning, the employee is actively participating in ending the employment relationship. The time period for this active participation—whether by arrangement with the employer before the employer issues a notice of termination, by concluding a severance agreement or by concluding a settlement agreement after the employer issues a notice of termination—is not the determinative factor. Nevertheless, the court also insinuated that an employee may not have quit a job (and thus is not subject to the initial suspension of unemployment benefits) if, without a prior arrangement between the parties, the parties conclude a settlement agreement after the expiration of the statutory three-week period to challenge a termination

• r during the proceedings before a labor court. Employers

should be aware that as a consequence of this decision by the Federal Court for Social Matters, well-informed employees will always challenge their terminations before court and reject any proposed settlement by the employer made prior to the expiration of the three-week period

• r outside of court proceedings unless the employer is

prepared to compensate the employee for the fact that the employee’s unemployment benefits may be suspended. Of course, employers will continue to terminate employees just like in the past. However, employers should not assume that an employee is not willing to resolve the termination just because the employee filed an action chal- lenging the termination. The employee’s challenge may be nothing more than an effort not to jeopardize his full unemployment benefits.

EMPLOYMENT LAW IN TODAY’S GLOBALIZED WORLD

By Georg Mikes

Frankfurt German Attorney at Law; Certified Labor and Employment Lawyer gmikes@jonesday.com ++49 69 9726-3939

Not even employment law is immune from globalization. An ever-increasing number of employees are working on a cross-border basis, causing their jobs potentially to be subject to the laws of several countries simultaneously. Just like for any other types of agreements, the basis for determining which country’s laws apply to a particular employment relationship is whether the parties, i.e., the employer and the employee, have expressly agreed in the employment agreement which country’s laws will govern. It is essentially between the parties to decide whether to agree in the employment agreement which country’s laws shall apply or whether a selected jurisdiction has a partic- ular nexus to their employment relationship. It is generally to an employer’s detriment to insist upon the laws of a country other than the laws which would govern if the employment agreement failed to include a governing law clause. This is because—at least under Germany’s conflicts of law rules—the employer cannot contract

• ut of certain mandatory legal provisions. Unfortunately,

the German legislature has not specifically stated which provisions must apply to an employment relationship; the

• nly thing that is clear is that “mandatory” provisions are

those provisions that would apply regardless of the terms

• f any governing law clause. The legislature has given some

direction as to the last point: As long as the totality of the

7 circumstances do not clearly lead to the application of the laws of a particular country, or the employment rela- tionship does not have a nexus to a particular country, then the laws of the country where the employee generally performs his work obligations—even if the employee has

• nly been transferred to another country temporarily—or

that country where the employer hired the employee will apply to the employment relationship. Applying this general rule, however, may not be as simple as it sounds. For example, what happens if the employee’s general place of performance and the hiring entity are not in the same country, or if the employment relationship actually has a closer nexus to a different country? These types of situations are becoming increasingly common. In December of last year, Germany’s Federal Labor Court stated that the employee’s place of performance, the employer’s place of business and the employee’s domicile are the primary factors in determining which country’s laws shall apply to an employment relationship. A court may also consider other secondary factors such as the language

• f the employment agreement and the currency paid to

the employee. In the case that was presented to the Federal Labor Court, the issue as to which law would apply was quite significant from a financial point of view. The court finally concluded that German law applied to the employment relationship, and thus the defendant, a Belgian employer, was not required to pay termination compensation to the plaintiff, a German employee who had been hired in Belgium. If Belgian law had applied, the employer would have been required to pay compensation to the terminated employee. The Federal Labor Court held that the employment relationship had a closer nexus to Germany than to Belgium, and that the employee’s general place of performance— Germany as well as other countries—carried more weight than the fact that the employee had been hired in Belgium. Somewhat surprisingly, the court gave practically no weight to the fact that the parties had agreed in the employment agreement that German law would govern. One would initially think that this would have been the strongest argument against applying Belgian law, and thus would have been the employer’s strongest argument against paying the compensation that would otherwise have become due under Belgian law. The Federal Labor Court’s decision buttressed the already general view that it rarely makes sense for an employer to try to contract out of German law if German employment law would apply to the employment relationship based on the above considerations. The employer should always be careful to avoid the situation where an employee enjoys the protection of the employment laws as chosen by the parties plus—in this case, Germany’s—mandatory employment laws.

MUST TEMPORARY EMPLOYMENT AGREEMENTS BE IN WRITING?

By Angela Autenrieth

Frankfurt German Attorney at Law aautenrieth@jonesday.com ++49 69 9726-3977

As discussed in our First Quarter 2004 Newsletter, although temporary employment agreements are generally more acceptable than in the past, they are still not seen kindly in Germany. Temporary employment agreements for under a two-year period do not pose a problem. However, an employer must have legally good grounds for concluding a temporary agreement for longer than two years (unless the employer is a newly-formed company, in which case a temporary employment agreement may be for up to four years). Otherwise, the agreement will not constitute a temporary employment agreement and the employee at issue may enjoy the statutory protection against termination. German statutory law sets forth that the duration of an employment agreement must be in writing. A June 23, 2004, decision of the Federal Labor Court held that the statutory language regarding temporary employment agreements must be read literally. According to this same decision,

• nly the fact that the employment relationship is temporary

must be in writing, meaning that the specific duration of the employment relationship must be set forth. Other aspects

• f the employment agreement do not necessarily need to

be in writing nor do the grounds for the temporary nature of the employment relationship need to be set forth in writing.

The content of this newsletter is intended to convey general information about changes in German labor law. It should not be relied upon as legal advice. It is not an offer to represent you, nor is it intended to create an attorney-client relationship.

LAWYER CONTACTS

FRANKFURT Hochhaus am Park Grüneburgweg 102 60323 Frankurt Germany Tel.: ++49 69 9726 3939 Fax: ++49 69 9726 3993 Georg Mikes Practice Area Leader German Attorney at Law Certified Labor and Employment Lawyer gmikes@jonesday.com MUNICH

• Prinzregentenstr. 11

80538 Munich Germany Tel.: ++49 89 2060 42 200 Fax: ++49 89 2060 42 293

• Prof. Dr. Oliver Heeder

German Attorney at Law Certified Labor and Employment Lawyer

• heeder@jonesday.com

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