Limits of social compensation plan endowment in the case of economic unjustifiability

Compliance with the discretionary limits of the conciliation committee subject to unrestricted review

If the social plan negotiations between the employer and the works council come to a standstill and no agreement can be reached on the exact terms of a social plan, the so-called conciliation committee mediates. The conciliation committee is comprised of equal numbers of members appointed by the employer and the works council and an impartial chairman. The decision of the conciliation committee replaces the agreement between the employer and the works council. When deciding on a social compensation plan, the conciliation committee must, in accordance with Sec. 112 para. 5 sentence 1 German Works Constitution Act (Betriebsverfassungsgesetz – BetrVG), on the one hand take into account the social interests of the employees affected, i.e. their economic disadvantages as a result of the operational change are to be compensated. On the other hand, the conciliation committee must also ensure that its decision is economically justifiable for the company. In this context, the total amount of the social compensation plan benefits must be calculated in such a way that the continued existence of the company and the remaining jobs are not jeopardised. The discretionary powers of the conciliation committee in this regard are fully subject to legal review.

The economic circumstances of the contractual employer must be taken into account

According to the decision of the BAG, the question of the economic justifiability of the social compensation plan only depends on the circumstances at the respective contractual employer, which is already indicated by the wording of Sec. 112 para. 5 sentence 2 nos. 2 and 3 BetrVG ("company”). In particular, existing jobs could also be more likely to be preserved if the economic justifiability of the social compensation plan endowment is assessed in relation to the contractual employer in each case, according to the reasons for the decision. The BAG left the question open as to whether this also applies in the case of a control and profit and loss transfer agreement pursuant to Sec. 302 para. 1 German Stock Corporation Act (Aktiengesetz – AktG).

No economic justifiability in the event of severe economic imbalance

Generally, the economic justifiability of a social compensation plan is not regulated by law. This must always be assessed on the basis of the individual case. Generally, the economic disadvantages for the affected employees must be compensated even if the company is in economic difficulties. In this case, a social compensation plan is not automatically considered economically unjustifiable. In the case of insolvency – which, however, did not apply in the case decided by the BAG – Sec. 123 Insolvency Act (Insolvenzordnung – InsO) provides for a total amount of up to two and a half months’ salaries of the employees affected by the dismissals as a social compensation plan volume. However, this so-called absolute upper limit may not be applied by in analogy in cases outside of insolvency and may not serve as a guideline for every social compensation plan. Rather, the relation of assets and liabilities as well as the liquidity situation of the company must be taken into account when assessing the economic justifiability of a social compensation plan outside of insolvency proceedings. In the decided case, the finding of the conciliation committee provided for a social compensation plan endowment of EUR 2.9 million. In contrast, the company's equity had already been completely depleted for several years. In addition, the company lacked sufficient liquidity to be able to cover the social plan liabilities when they fell due. On the one hand, most of the bank balance had been seized. On the other hand, a limited liquidity commitment by the British group company was unable to eliminate the financial bottleneck. According to the decision of the BAG, the conciliation committee could not assume that the financial situation would change in the short term, for example by disposing of fixed assets. Overall, it therefore assumed that the endowment of the social plan was economically unreasonable and the discretion of the conciliation committee therefore exceeded.

Conclusion

The BAG has once again confirmed its previous case law. The amount of the social compensation plan decided by the conciliation committee must be economically justifiable for the employer. If the conciliation committee does not take the economic situation of the company into account sufficiently, it exceeds its discretionary powers and the social plan is consequently invalid. In this context, only the economic situation of the contractual employer is relevant - even within a group of companies.

Written by Michelle Eiberger