A Useful Tool for Global Employers

Short-time work is a temporary reduction in working hours which is implemented for a whole site or an identified part of an employer's site. It is intended to maintain employment relationships while at the same time reducing salary expenses. Cost savings result from the fact that the employees' remuneration claims are automatically reduced in proportion to their reduced working hours. For example, a 50% reduction in working time would lead to a 50% reduction of the fixed salary. What makes short-time work particularly attractive to employees and employers alike is the availability of public funding. If certain requirements (as described below) are met, Germany's Federal Employment Agency will compensate the employee's loss in remuneration to a certain degree. Short-time work therefore often creates a win-win situation: The government saves unemployment benefits, the employer retains a qualified workforce and saves salary costs and the employees keep their jobs while their pay is reduced to a smaller extent than their working hours.

Implementation of Short-Time Work

Although it has many advantages, short-time work can be quite challenging to implement. The reason is that German employment law is ' especially in comparison to its U.S. counterpart ' very protective of employees. Every employee has an employment contract and often benefits from agreements with works councils and/or unions. Working hours are typically regulated in the employment contract or by collective bargaining agreements. As a result, the employer cannot change working time or implement short-time work unilaterally. Indeed, terminating the employees and offering them new employment contracts with reduced hours is hardly ever permissible. Such terminations would usually violate German unfair dismissal protection laws and therefore be void.

Employers must therefore be careful to comply with applicable law in implementing short-time work. If this is introduced improperly, the employee's working hours will not be reduced. This has two consequences: First, the employees would then be entitled to their full, unreduced salary. Second, they could also demand to be returned to full-time status. In other words, even if the employer were willing to pay the employees their full salary, it could still not reduce their working hours. Instead, it would have to keep its business operating and employ the employees full time even if it had no use for their services.

Collective Bargaining

Collective bargaining agreements often serve as a legal basis for the introduction of short-time work. While they usually address the topic of short-time work, their terms vary significantly. In most cases, these agreements set only a general framework for the implementation of short-time work and leave it to the works councils to negotiate the specifics with the individual employer.

A works council is the representative of employees at site level ' in contrast to unions, which represent employees industry-wide. There is no obligation to establish a works council. Rather, works council elections must be initiated by employees or a union. If a works council is elected, it has various co-determination, information and consultation rights. Thus, a works council has the authority to conclude agreements with the employer, which will apply directly to the employees.

If the employer is not unionized or if the applicable collective bargaining agreements do not comprehensively regulate short-time work, it may be implemented only by way of an agreement with the works council. It is important to note that the works council has a full co-determination right when it comes to the introduction of short-time work; without the works council's explicit consent, the employer cannot proceed. Should the works council refuse to give consent, the employer's recourse is to try to have the works council's refusal reversed through arbitration proceedings. These proceedings can, however, last several months ' time that is usually not available in periods of economic crisis.

In practice, employers typically avoid such delays by making concessions to their works council. For example, it is common practice for an employer to guarantee that the employees will receive more than their pro rata share of their remuneration (50% in the example above). The employer can either pay a premium or agree to apply for government funding (the more common practice) to minimize the employees' wage loss. In the latter case, an employer is well advised to state in the agreement with the works council that it will not pay more than its pro rata share of the remuneration if the Federal Employment Agency refuses its application for funding. Otherwise, there is a high risk that the employer could be liable for the whole amount, i.e., for both the pro rata share and for whatever the Federal Employment Agency would have paid in government funding. In that case, short-time work could be considerably more expensive than the employer had hoped.

In reality, the existence of a works council is a considerable advantage to the employer in implementing short-time work. Without a works council ' and in the absence of a collective bargaining agreement that comprehensively regulates short-time work ' the employer would have to agree with every single employee individually on the terms for short-time work. This is hardly practicable. For this reason, employers without a works council should make sure that their employment contracts contain a clause which explicitly grants the employer the unilateral right to introduce short-time work. In order for such a clause to be enforceable, it must set forth under what conditions, to what extent and for how long short-time work may be implemented.

Government Grants

One of the reasons that short-time work has become a popular tool to deal with economic difficulties is that it is heavily state-subsidized. Government grants ' so-called short-time work allowances ' are available for up to six months and can amount to as much as 60% or, depending on family status, even 67% of an employee's last net salary. Short-time work allowances are capped at ' 4,800 per month for East Germany and ' 5,600 per month for West Germany. However, the government will approve short-time grants only if several requirements are met.

1. Eligible Events

Short-time working allowances are only available to compensate employees for an unavoidable, temporary lack of work which is caused by economic necessities or uncontrollable events. Typical cases in which such allowances are granted include significant declines in orders or sales and, consequently, in required production. These events must be beyond the control of an individual employer. In other words, the lack of work must be attributable to the larger economic climate ' as opposed to the employer's own mismanagement. Moreover, only a temporary lack of work is subsidized. If the employer has already planned to shut down its business permanently, the employees will not be eligible for short-time working allowances. On the other hand, an employer is not required to commit that it will not discharge employees in the near future. It is sufficient if the employer can reasonably forecast that a considerable number of jobs will be saved by short-time work.

Last but not least, the lack of work must be unavoidable. Notably, this is not the case as long as the employees still have untaken vacation days or a positive balance on their working time accounts. (These accounts, which are common in Germany, allow employees to accumulate “plus hours” and “minus hours.” The former accrue when employees work more than their contractual hours while the latter are accumulated when the employees work less.) Until any positive balances in these accounts have been used in full, the employees may not receive a short-time allowance.

2. Covered Employers/Eligible Employees

Employers may apply for an allowance once at least one third of the employer's workers have experienced a wage cut of more than 10% of their monthly gross wages due to reduced working hours. Employees are eligible for short-time work allowances if they are affected by a substantial loss of income (more than 10% of their monthly gross wage), provided that they are subject to social security contributions.

3. Procedure

The employer or its works council must notify the local government employment agency in writing about the planned short-time work and apply for short-time working allowances. If the agency approves the application, it is the employer's obligation to calculate and pay out the short-time allowances to its employees.

Conclusion

While the effects of short-time work on the overall economy are not undisputed, it has become a popular alternative to layoffs for employers in Germany during challenging economic times. Its popularity skyrocketed during the economic crisis of 2008-2010. According to data from Germany's Federal Employment Agency, after the government relaxed the funding requirements for short-time work, the number of applicants increased from 68,317 in 2007 to 1,144,407 in 2009. The costs for the German taxpayer were enormous: associated government grants exceeded ' 10 billion during the economic crisis. Still, with another recession potentially looming, the German opposition is already making demands to further promote short-time work. According to these plans, employees would be entitled to short-time working allowances for up to 24 months and under relaxed requirements. Employers with operations in Germany may therefore expect to experience another surge in short-time work applications.

John D. Shyer, a member of this newsletter's Board of Editors, is a labor and employment law partner in the New York office of Latham & Watkins LLP and co-chair of the firm's Employment Law practice group. Tobias Leder is an employment law associate in the firm's Munich office.

While readers outside of Germany may not have heard of “short-time” work, within that country its use is on the rise again. With the economy facing yet another possible downturn, some large companies have publicly announced that they may reduce their employees' working hours in order to realize substantial salary savings. The legal tool to implement such a reduction of working time is known as “short-time work.” For the benefit of global companies with operations in Germany, this article explores how short-time work can be introduced, and which rules must be observed in order to qualify for associated government grants.

Introduction

Employers have several options with which to respond to an economic crises. A first step to increasing the profitability of a business is often the layoff of temporary agency workers. Since they do not stand in an employment relationship with the user company, it is normally fast, simple and therefore cost-efficient to discharge them. Increasing the efficiency of the permanent workforce is considerably more difficult. Many companies are reluctant to implement a reduction in force. Not only can a staff reduction lead to considerable costs due to strict German employment protection legislation, but most companies are also eager to retain well-trained and qualified staff, rather than having to replace them once the economic situation has improved. Short-time work provides a more flexible method to respond to short- or medium-term economic difficulties.

Short-time work is a temporary reduction in working hours which is implemented for a whole site or an identified part of an employer's site. It is intended to maintain employment relationships while at the same time reducing salary expenses. Cost savings result from the fact that the employees' remuneration claims are automatically reduced in proportion to their reduced working hours. For example, a 50% reduction in working time would lead to a 50% reduction of the fixed salary. What makes short-time work particularly attractive to employees and employers alike is the availability of public funding. If certain requirements (as described below) are met, Germany's Federal Employment Agency will compensate the employee's loss in remuneration to a certain degree. Short-time work therefore often creates a win-win situation: The government saves unemployment benefits, the employer retains a qualified workforce and saves salary costs and the employees keep their jobs while their pay is reduced to a smaller extent than their working hours.

Implementation of Short-Time Work

Although it has many advantages, short-time work can be quite challenging to implement. The reason is that German employment law is ' especially in comparison to its U.S. counterpart ' very protective of employees. Every employee has an employment contract and often benefits from agreements with works councils and/or unions. Working hours are typically regulated in the employment contract or by collective bargaining agreements. As a result, the employer cannot change working time or implement short-time work unilaterally. Indeed, terminating the employees and offering them new employment contracts with reduced hours is hardly ever permissible. Such terminations would usually violate German unfair dismissal protection laws and therefore be void.

Employers must therefore be careful to comply with applicable law in implementing short-time work. If this is introduced improperly, the employee's working hours will not be reduced. This has two consequences: First, the employees would then be entitled to their full, unreduced salary. Second, they could also demand to be returned to full-time status. In other words, even if the employer were willing to pay the employees their full salary, it could still not reduce their working hours. Instead, it would have to keep its business operating and employ the employees full time even if it had no use for their services.

Collective Bargaining

Collective bargaining agreements often serve as a legal basis for the introduction of short-time work. While they usually address the topic of short-time work, their terms vary significantly. In most cases, these agreements set only a general framework for the implementation of short-time work and leave it to the works councils to negotiate the specifics with the individual employer.

A works council is the representative of employees at site level ' in contrast to unions, which represent employees industry-wide. There is no obligation to establish a works council. Rather, works council elections must be initiated by employees or a union. If a works council is elected, it has various co-determination, information and consultation rights. Thus, a works council has the authority to conclude agreements with the employer, which will apply directly to the employees.

If the employer is not unionized or if the applicable collective bargaining agreements do not comprehensively regulate short-time work, it may be implemented only by way of an agreement with the works council. It is important to note that the works council has a full co-determination right when it comes to the introduction of short-time work; without the works council's explicit consent, the employer cannot proceed. Should the works council refuse to give consent, the employer's recourse is to try to have the works council's refusal reversed through arbitration proceedings. These proceedings can, however, last several months ' time that is usually not available in periods of economic crisis.

In practice, employers typically avoid such delays by making concessions to their works council. For example, it is common practice for an employer to guarantee that the employees will receive more than their pro rata share of their remuneration (50% in the example above). The employer can either pay a premium or agree to apply for government funding (the more common practice) to minimize the employees' wage loss. In the latter case, an employer is well advised to state in the agreement with the works council that it will not pay more than its pro rata share of the remuneration if the Federal Employment Agency refuses its application for funding. Otherwise, there is a high risk that the employer could be liable for the whole amount, i.e., for both the pro rata share and for whatever the Federal Employment Agency would have paid in government funding. In that case, short-time work could be considerably more expensive than the employer had hoped.

In reality, the existence of a works council is a considerable advantage to the employer in implementing short-time work. Without a works council ' and in the absence of a collective bargaining agreement that comprehensively regulates short-time work ' the employer would have to agree with every single employee individually on the terms for short-time work. This is hardly practicable. For this reason, employers without a works council should make sure that their employment contracts contain a clause which explicitly grants the employer the unilateral right to introduce short-time work. In order for such a clause to be enforceable, it must set forth under what conditions, to what extent and for how long short-time work may be implemented.

Government Grants

One of the reasons that short-time work has become a popular tool to deal with economic difficulties is that it is heavily state-subsidized. Government grants ' so-called short-time work allowances ' are available for up to six months and can amount to as much as 60% or, depending on family status, even 67% of an employee's last net salary. Short-time work allowances are capped at ' 4,800 per month for East Germany and ' 5,600 per month for West Germany. However, the government will approve short-time grants only if several requirements are met.

1. Eligible Events

Short-time working allowances are only available to compensate employees for an unavoidable, temporary lack of work which is caused by economic necessities or uncontrollable events. Typical cases in which such allowances are granted include significant declines in orders or sales and, consequently, in required production. These events must be beyond the control of an individual employer. In other words, the lack of work must be attributable to the larger economic climate ' as opposed to the employer's own mismanagement. Moreover, only a temporary lack of work is subsidized. If the employer has already planned to shut down its business permanently, the employees will not be eligible for short-time working allowances. On the other hand, an employer is not required to commit that it will not discharge employees in the near future. It is sufficient if the employer can reasonably forecast that a considerable number of jobs will be saved by short-time work.

Last but not least, the lack of work must be unavoidable. Notably, this is not the case as long as the employees still have untaken vacation days or a positive balance on their working time accounts. (These accounts, which are common in Germany, allow employees to accumulate “plus hours” and “minus hours.” The former accrue when employees work more than their contractual hours while the latter are accumulated when the employees work less.) Until any positive balances in these accounts have been used in full, the employees may not receive a short-time allowance.

2. Covered Employers/Eligible Employees

Employers may apply for an allowance once at least one third of the employer's workers have experienced a wage cut of more than 10% of their monthly gross wages due to reduced working hours. Employees are eligible for short-time work allowances if they are affected by a substantial loss of income (more than 10% of their monthly gross wage), provided that they are subject to social security contributions.

3. Procedure

The employer or its works council must notify the local government employment agency in writing about the planned short-time work and apply for short-time working allowances. If the agency approves the application, it is the employer's obligation to calculate and pay out the short-time allowances to its employees.

Conclusion

While the effects of short-time work on the overall economy are not undisputed, it has become a popular alternative to layoffs for employers in Germany during challenging economic times. Its popularity skyrocketed during the economic crisis of 2008-2010. According to data from Germany's Federal Employment Agency, after the government relaxed the funding requirements for short-time work, the number of applicants increased from 68,317 in 2007 to 1,144,407 in 2009. The costs for the German taxpayer were enormous: associated government grants exceeded ' 10 billion during the economic crisis. Still, with another recession potentially looming, the German opposition is already making demands to further promote short-time work. According to these plans, employees would be entitled to short-time working allowances for up to 24 months and under relaxed requirements. Employers with operations in Germany may therefore expect to experience another surge in short-time work applications.

John D. Shyer, a member of this newsletter's Board of Editors, is a labor and employment law partner in the New York office of Latham & Watkins LLP and co-chair of the firm's Employment Law practice group. Tobias Leder is an employment law associate in the firm's Munich office.