Voluntary redundancy programs as an alternative to unilateral staff cuts
By Dr. Wolfgang Lipinski
For various reasons, companies may be forced to make short-term decisions on staff reductions. Staff can be reduced traditionally by termination by the employer for operational reasons, or through termination agreements signed by common consent on the basis of voluntary programs. After thoroughly analyzing the existing situation (among other things, existing job security, company image, works council and trade union decision-makers, economic situation), the company should make decisions on a case-by-case basis. This article shows that voluntary programs can be a genuine alternative to unilateral staff reductions, and how they can work.
The pros and cons of voluntary redundancy programs
Voluntary programs can be implemented quickly and therefore bring swift financial relief. As termination agreements are concluded to ensure legal compliance, there will be no dismissal protection lawsuits involving legal risks. Voluntary programs are low profile, with minor impact on the company’s image. The programs do not require social selection, enabling separation agreements with older employees and employees under special protection against dismissal in order to achieve a new age structure. This often reduces staff costs permanently if older and more expensive employees leave. In contrast to unilateral staff reduction, voluntary programs do not usually induce strike action by trade unions with representation in the company, or at least only limited action.
The disadvantages of voluntary programs are that they are often (very) expensive and might constitute a negative precedent for any later social plans with unilateral staff reduction. From the company’s point of view, a voluntary program that is poorly designed bears the risk that key employees the company actually wants to retain leave with high severance payments, and the company has to bring in expensive replacements for them later.
Negotiations with the works council
Voluntary programs may be implemented in businesses with or without works councils. If a works council exists, the voluntary program constitutes a measure which must be negotiated with the works council and which is subject to a reconciliation of interests and a social plan, insofar as the planned downsizing is covered by the requirements of section 17 of the German Protection Against Unfair Dismissal Act (Kündigungsschutzgesetz, KSchG). If the works council supports the voluntary program, the additional challenge of a collective social plan with the trade union typically will not arise, or will at most assume a subordinate role. For the voluntary program to be successful – from a business perspective – careful consideration should be given to an exact definition of the scope of its application during negotiations with the works council. Furthermore, the works agreement regarding the voluntary program should include a provision reserving its double voluntary nature. Such a provision can prevent key employees leaving with severance payments. However, a guideline must be drawn up to cover the risk of repercussions for employees if they state an interest in the voluntary program but the company refuses to conclude a termination agreement as it does not want to lose them. It would also be beneficial to define clear financial terms (for example compensation formula with ceiling). We consider it highly recommendable to include a bonus, meaning an additional payment for employees who sign the termination agreement within a very short period of time (for example, 10 to 14 calendar days). Additionally, the number of jobs to be eliminated should be specified.
The company should prepare guidelines for unilateral staff reduction which might become necessary as a follow-up measure if the number of jobs to be eliminated is not reached. Such guidelines provide reliability, a time schedule and thus the ability to plan, which both frequently save the company a lot of money. From a business perspective, a voluntary program runs particularly well if it is possible to negotiate with the works council, in addition to the works agreement for the voluntary program, a social plan with lower benefits in the event of unilateral terminations. The social plan applies if the desired reduction numbers have not been reached after the voluntary program has been finalized.
Blocking period and mass dismissal notification
Since it is common for voluntary programs to make severance payments of more than 0.5 monthly salaries per year of employment, the employee often faces a blocking period of twelve weeks before he or she can claim unemployment benefit. Insofar as the business does not wish to bear these costs, it should attempt everything with regard to labor and social security law, partly in cooperation with the works council, in order to avoid a blocking period (i.e., a collective decision). As voluntary programs frequently conclude more termination agreements than the standard number pursuant to section 17 KSchG within 30 calendar days, a mass dismissal notification must be sent to the relevant employment agency (Agentur für Arbeit) before signing the termination agreements. If this is not carried out in the correct form, the concluded termination agreements will be invalid. As voluntary programs usually grant a bonus for those who make a quick decision, it is often not possible to navigate the process in a way that renders a mass dismissal notification unnecessary, for instance by not exceeding the threshold. Businesses frequently fail to consider that the threshold includes terminations that are not part of the voluntary program (e.g., terminations by employees for operational reasons and dismissals with the option of altered conditions of employment).
Implementation and communication
The voluntary program should be openly supported by the works council (for example at works meetings through joint declarations by the employer and works council to employees). In order to have the works council on its side, a company should consider the budget for the voluntary program carefully and ensure a transparent restructuring concept, which has ideally been confirmed by a works council expert. In any case, a well-planned and thorough communication strategy is essential for the success of any voluntary program. In this context, the following should be taken into consideration: Time schedule, guidelines for termination talks, preparation of flyers, posters and letters to individual employees.
Businesses that have to downsize should look closely at the advantages and opportunities offered by voluntary programs. The employer may openly enter into negotiations with the works council on a reconciliation of interests and a social plan and suggest a voluntary program. Alternatively, the company may initially declare its intention to implement a unilateral staff reduction. The works council may then discover the possibility of using an initial voluntary program prior to the implementation of a unilateral staff reduction during the course of negotiations. However, this depends on the existing situation of the business and on the negotiation strategy chosen by the employer. Businesses should take reasonable advantage of their opportunities to design and control this situation.
- Voluntary programs, which may be skillfully combined with a unilateral staff reduction and respective regulations for handling and/or designing a social plan, are an effective method and a genuine alternative to unilateral staff reductions.
- Thorough analysis of the legal and current situation, careful preparation and a reasoned negotiation strategy on the part of the employer are all important factors for the success of a voluntary program.
- It is essential to involve labor lawyers early in the process to ensure the voluntary program is designed and implemented successfully.
- Voluntary programs are regularly successful if supported by the works council.
- In spite of the high costs, voluntary programs offer considerable advantages.