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Brexit in Germany - Government set to relax dismissal protection for risk takers in significant institutions

In December 2018 the German Government submitted the Draft Bill Supplementing the Act on Tax-Related Provisions Concerning the Withdrawal of the United Kingdom and Northern Ireland from the European Union ('Brexit-Steuerbegleitgesetz') ('Draft Bill') which, inter alia, aims to relax the dismissal protection regime for risk takers of significant institutions. 

Legal Background

Reinstatement as the general legal consequence of an unfair dismissal

When an employer in Germany wishes to cut ties with an employee it must be able to demonstrate one of three legally recognized justifying grounds which often proves difficult in practice. Upon challenge of the dismissal by the employee in court dismissals are often declared void having the effect that the employee must be reinstated. Unlike in other countries, employers in Germany are not normally in a position to terminate the employment contract unilaterally against payment of a severance. As a general rule with only few exceptions, this dismissal protection regime applies to all levels of staff including high earning managerial employees (but not to members of the executive management board).

Dissolution application against payment of a severance

In certain limited circumstances German dismissal protection law allows employers – who are unable to demonstrate justifying grounds for the dismissal – to request a dissolution of the employment contract by the court against payment of a court determined severance – so called dissolution application ('Auflösungsantrag'). However, this exception is rarely available as it applies only to managerial employees who are authorized to either hire or dismiss staff without anybody else's approval, an authority that is hardly ever granted.

Proposal for a dissolution application in relation to risk takers

Relaxed dissolution application for risk takers

The Draft Bill introduces a new provision in the German Banking Act (sec. 25a para. 5a of the Banking Act ('Kreditwesengesetz' – 'KWG')) according to which institutions may apply for dissolution of the employment contract by court order against payment of a severance without the need for a special justification of the dissolution application.

According to the Draft Bill this option will apply where:

  1. the employer qualifies as a significant credit institution which is in particular the case where its average balance sheet volume over the past three business years amounts to at least 15 bn Euro);
  2. the employee qualifies as a risk taker (as determined by the institution on the basis of the applicable technical standards of the EU and the institution's internal guidelines); and 
  3. the annual fixed remuneration of the risk taker exceeds three times the contribution threshold for contributions to the state pensions system, which as of 1 January 2019 amounts to 241,000 Euro for the former West and 221,400 Euro for the former East of Germany.

Severance instead of reinstatement / limitation of financial risk

If the Draft Bill is passed, the proposed dissolution regime allows a significant institution to file a dissolution application in court without having to present any justification. The court will then have to dissolve the employment contract with the risk taker by means of a court order and order the institution to pay a severance. This will apply even where the risk taker’s dismissal lacks sufficient justification so that the risk that the employee returns to his / her former position falls away.

The court can determine a severance of up to twelve months' pay (including variable remuneration and benefits in kind) but not more. For employees as of the age of 50 and at least 15 years of service the severance cap will be 15 months’ pay and for employees as of the age of 55 and at least 20 years of service 18 months' pay. This will limit the financial risk involved in unfair dismissal litigation.

Transitional provision

The new rules shall not only apply to newly hired staff but to all risk takers of significant institutions whose fixed remuneration exceeds the threshold as set out above so that current employees may lose their unfair dismissal protection. The Draft Bill provides only for a short transitory period in that the new rules will apply only to dismissals served after an eight-month period following the entry into force of the Draft Bill on 29 March 2019.

Entry into force

It is expected that the legislative procedure for the adoption of the Draft Bill will be finalized on 22 February 2019 and that the new legislation will enter into force on 29 March 2019.