When a company downsizes its workforce, Section 112 of the Works Constitution Act (BetrVG) requires employers to negotiate a reconciliation of interests with the employees and to conclude a social plan. The social plan should compensate for or at least mitigate the economic disadvantages suffered by the employees who have been laid off. This usually involves allocating a limited budget. According to the case law of the Federal Labor Court, employers and HR managers have to take into account what is referred to as distributive justice: Wherever possible, all employees who are laid off should receive interim aid until they have a new job or obtain their pension. Age and length of time at the company play an important role when determining the amount of severance pay. At the same time, the General Equal Treatment Act (AGG) also has to be observed.
In the current case before the Nuremberg State Labor Court (LAG), the parties had negotiated a social plan which included severance pays for employees who had lost their jobs because a plant was shut down: Employees up to 61 years old received 0.6 gross monthly salaries for each year which they had worked for the company. However, employees who had already reached the age of 62 by a specific date had their severance pay entitlement reduced to a flat one quarter. After receiving the unemployment benefit I for 24 months, the employees, who had been laid off, then had the option of either drawing an early pension with deductions or the standard pension.
The plaintiff cites age discrimination
The plaintiff had worked for the defendant as a weaver for over 25 years and previously earned approximately 2,500 euros per month. He was already over 62 years old on the specified date. Without the reduction for employees approaching retirement age, he would have been entitled to a severance pay of slightly less than 37,000 euros. As a result of the age factor, the defendant employer calculated a severance pay of approximately 9,250 euros. The plaintiff demanded the difference before the labor court, arguing that the provisions in the social plan regarding the lump-sum reduction in severance pay for employees approaching retirement age represented age discrimination and was also not justified pursuant to Section 10 sentence 3 no. 6 of the General Equal Treatment Act (AGG). The act states that differentiation by age in social plans may be permissible in specific exceptional cases.
Reduction permissible pursuant to Section 10 sentence 3 no. 6 of the General Equal Treatment Act
In line with the previous ruling by the Bayreuth Labor Court, the Nuremberg State Labor Court reached a different decision: Section 10 sentence 2 and sentence 3 no. 6 of the General Equal Treatment Act (AGG) states that the parties to a social plan may be justified in reducing the severance pays for employees who have already reached the age of 62 when they leave the company. With this regulation, the German legislator aims to base the benefits of the social plan on the economic disadvantages which employees face if they lose their jobs as a result of a change in operations.
Severance pays provided via social plans serve as interim aid and not as compensation for losing a job
The economic disadvantages incurred by the employee as a result of the loss of pay would be at least substantially offset by the severance pay of approximately 9,250 while the employee receives unemployment benefits. It is sufficient if the remaining amount of the severance pay is at least suitable to significantly mitigate the possible economic disadvantages. The amount of the retirement pension to which the employee is actually entitled must not be taken into account. The Nuremberg State Labor Court (LAG) ruled that the severance pay provided via a social plan does not represent additional remuneration for work performed in the past, nor is it compensation for losing the job. Instead, it is exclusively represents an interim aid until economic security is achieved.
Cuts for employees approaching retirement serve distributional justice
The Nuremberg judges stated that as the volume of the social plan was severely limited by the defendant employer’s difficult economic situation, the parties needed to optimize the funds available to compensate for future disadvantages. For reasons of distributive justice, no group should be given undue preference. Reducing social plan benefits for employees approaching retirement age and even excluding them from severance pays represent a suitable means of making more financial resources available to other employee groups. This would serve the legitimate objective of distributing the limited funds of the social plan as needed.
Younger employees may face prolonged unemployment
The Nuremberg judges regarded capping the severance pay for employees approaching retirement age as a permissible form of different treatment due to age in accordance with Section 10 sentence 3 no. 6 of the General Equal Treatment Act (AGG). Accordingly, the typical assessment that employees entitled to a pension and those approaching retirement are generally more financially secure than those who are far away from retirement is an assessment which the parties to the agreement are entitled to make within the scope of their discretionary powers. The State Labor Court ruled that this is due to the fact that employees who can draw a statutory pension after receiving unemployment benefits face fewer economic disadvantages. Conversely, workers further from retirement could face the risk of prolonged unemployment.
Future pension not decisive
The Nuremberg labor judges also confirmed the proportionality pursuant to Section 10 sentence 3 no. 6 of the General Equal Treatment Act (AGG), pointing out that the plaintiff still received almost four months’ gross earnings despite the reduction. This would at least substantially mitigate the economic disadvantages because he would at least be entitled to early retirement benefits immediately following unemployment benefits. The relatively small amount of the early pension and later full pension is not important. Compensation for reductions due to drawing pensions earlier was also not necessary.
The Nuremberg State Labor Court has allowed an appeal against the ruling and the Federal Labor Court will decide on 19 September 2023.
The ruling by the Nuremberg State Labor Court clearly shows that the parties may be justified in reducing severance pays for employees approaching retirement age by a lump sum as part of a social plan. However, the remaining amount for older employees must at least be suitable to significantly mitigate the impending economic disadvantages. With this decision, the State Labor Court follows the current case law of the Federal Labor Court, which grants the parties discretionary freedom when distributing the typically limited volume of the social plan.
However, the increasing shortage of skilled workers raises the question of whether the employees furthest from retirement actually face the risk of longer unemployment. HR managers need to monitor the further development of case law concerning this issue.