One of the difficult realities of running a business is that companies occasionally find themselves needing to make reductions to their staff headcount, be it because of workplace shutdowns due to economic difficulties, reorganizations, the need for synergy after acquisitions, or any number of other legitimate business reasons.
As with any employee termination, termination processes that have the potential to impact multiple jobs need to be carefully prepared and carried out. Formalities under the law of the country in which affected employees are based need to be observed. In February 2023, we summarized the 10 most important considerations for navigating workforce reductions and pointed out that where employees outside the United States are affected additional complexities and obligations — and often considerably extended timeframes — arising under local laws may apply. Companies with an international workforce need to be aware that specific regulations—similar in principle, but often with different and sometimes more onerous practical requirements for employers, to the U.S. federal WARN law—for collective redundancies exist in Europe.
In EU member states, these regulations are determined by the local legislation that implemented the 1998 European Collective Redundancies Directive (Directive 98/59) (the “Directive”). This alert sets out a brief reminder for companies with employees in EU member states of the key issues to be aware of when contemplating headcount reductions, along with an indication of how the implementing legislation works in Germany and the UK (where the previously existing collective redundancy legislation was amended in 2013, while the UK was an EU member state, to reflect the Directive’s implementation).
The European Collective Redundancies Directive
EU directives do not apply directly to employees and employers but are solely aimed at the member states. Each member state needs to implement a directive’s regulations into national law in order for them to become binding within the jurisdiction. A directive only sets out the minimum standards for local legislation, which means that member states can apply or introduce provisions that are more favorable to employees. Accordingly, there are variations across how each EU member state has implemented the Directive but many of the principles remain the same.
Under the Directive, a dismissal is any termination of employment initiated by the employer for one or more reasons not related to the employee concerned. Thus, it includes not only a termination notice handed over by the employer, but also the conclusion of a settlement/termination agreement if initiated by the employer. In other words, even where an employee opts for voluntary redundancy—in a situation where a company looking to reduce headcount offers enhanced exit benefits if employees agree to leave voluntarily—this would still be deemed a dismissal under the Directive and respective national laws and, therefore, will count towards the “collective” dismissal threshold (see more below).
The Directive sets out the following key elements to collective redundancy:
- Threshold: The Directive provides two options for the threshold for the number of notices of termination that need to be issued within a certain time period in order for the proposed redundancies to amount to a collective redundancy. Each individual member state had the discretion to choose which of the two alternatives to implement into national law. The relevant thresholds options under the Directive were:
- Option 1: within a 30-day period, notice of termination issued to:
- at least 10 employees in establishments where between 21 and 99 employees are employed;
- at least 10% of the employees in establishments where between 100 and 299 employees are employed; and
- at least 30 employees in establishments where 300 or more employees are employed; OR
- Option 2: within a 90-day period, notice of termination issued to at least 20 employees regardless of the number of employees employed at the establishments in question.
Note that the Directive refers to “establishments” and not the total number of employees employed by a company/employer. For the purposes of the collective redundancy threshold, redundancies are counted on a per establishment basis meaning that redundancies by employers with multiple establishments (e.g., multiple plants or offices) will not necessarily trigger a collective process where impacted employees are spread across different establishments.
- Consequences for non-compliance: Each member state must implement laws to ensure that employee representatives and/or employees are able to enforce the obligations either by judicial and/or administrative procedures. However, the Directive does not detail any specific penalties or consequences for non-compliance with any aspects of the collective process. Accordingly, it was up to the member states to decide whether non-compliance with a procedural step could impact the validity of the redundancies as well as, or instead of, penalties on the employer for failure to follow the proper collective redundancy process.
How did Germany implement the Directive?
Germany opted for the 30-day period alternative but determined different, in effect lower, thresholds for what would constitute a collective redundancy meaning that a collective process could be triggered in Germany where it wouldn’t be the case in another EU member state even though the same number of employees were impacted. Employers with employees in Germany need to have the following thresholds in mind, depending on the size of the business in Germany, when contemplating collective redundancies:
- more than five employees in establishments with between 21 and 59 employees;
- 10% of the regularly employed employees or more than 25 employees in establishments between 60 and 499 employees; or
- at least 30 employees in establishments with 500 or more employees.
In addition to the comprehensive information and consultation obligations set out in the Directive, under German law collective redundancies may trigger additional works council rights. Depending on the size of the establishment, the implementation of collective redundancies could be deemed to be an “operational change”. As a result, the company would be obliged to negotiate and agree with the works council on measures to mitigate the economic consequences for the employees. This process can take up to six months (sometimes even longer) depending on the circumstances and needs to be completed before any redundancies can take effect.
Interestingly, the German implementing legislation did not set out any sanctions or consequences for non-compliance with any aspect of the information, consultation or notification process. However, German labor courts filled this silence. Up until recently, the view of the labor courts was that the correct, timely, and complete collective redundancies notification to the German employment agency (the competent public authority in Germany) and the prior information and consultation process with the works council were mandatory steps for a dismissal to be effective. If an individual employee challenging their termination filed a protection against dismissal lawsuit, the burden was on the employer to prove that the notification was correctly filed and met all standards and requirements. This added another layer to the preparation process, and in many cases a termination was held invalid by labor courts because of mistakes made in connection with the collective redundancies notification.
However, the importance of these procedural steps may be about to change. Following a ruling of the European Court of Justice (the “ECJ”), a chamber of the German Federal Labor Court (the highest labor court in Germany) announced in December 2023 that it intends to change its position that a termination is deemed to be invalid solely as a result of a failure to properly notify the unemployment agency. It remains to be seen whether the highest labor court in Germany will in fact abandon its previous case law and allow dismissals to take effect even where certain procedural formalities have not been complied with. If it does, German lawmakers may look to take action and instead implement an alternative sanction for non-compliance with the full collective process. We will continue to monitor these developments.
Is the collective redundancies process different in the UK?
In short, yes. Although it is worth noting that the UK’s approach to collective redundancies remains broadly unchanged from when the Directive was first implemented into English law through a 2013 Order amending the Trade Union and Labor Relations (Consolidation) Act 1992 (“TULCRA”).
In simple terms, TULCRA requires employers who are proposing to dismiss 20 or more employees at one establishment within a period of 90 days or less to inform and consult with elected employee representatives. Minimum periods for consultation apply before the first dismissal can take effect: 30 days where fewer than 100 redundancies are proposed at a single establishment and 45 days where 100 or more redundancies are proposed. The same periods, 30 and 45 days respectively, broadly apply to the advance notice required to be given to the UK Secretary of State (the relevant competent public authority for this purpose).
There are various ways in which TULCRA diverges from the Directive, but the most notable are the phrase “redundancies proposed”, which is said to allow for consultation to start at a later date than the Directive’s “contemplated” language, and the requirement for redundancies to be at one establishment to meet the 90-day threshold, whereas the Directive’s second limb option spanned dismissals over a 90‑day period across establishments.
Unlike in Germany, it is not the case that a dismissal would be deemed ineffective where one of the procedural steps required by TULCRA has not been followed. Instead, employees could seek to bring claims for unfair dismissal and/or failure to comply with the obligation to consult, both of which carry the potential for significant financial awards. The specific penalty for failing to provide the required advanced notice to the Secretary of State in the prescribed “Form HR1” carries an entirely separate penalty—failure to notify the Secretary of State is a criminal offence with potential criminal liability for both the employer and the individuals involved. See our recent article in the MoFo Restructuring Round-Up on this potential liability.
This alert provides a small flavor of the types of variations that exist when dealing with multiple employee dismissals in just two European jurisdictions. In other European countries the processes required can be more onerous and the potential risks greater. We strongly recommend employers seek local law advice as soon as they determine any possibility of redundancies or other dismissals as the pitfalls of getting the process wrong can be grave.
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