Restructuring with staff reductions: preparation is key

The downsizing or closure of a part of a company often also necessitates staff reductions. Depending on the number of employees affected, the works council must be involved in any downsizing. The aim is then to conclude a reconciliation of interests and a social plan. Good preparation by the employer is always important for restructuring or a wind-down. These are the most important steps:

Step 1: Create the business case for restructuring

Downsizing or closing a part of the company should always be the last resort. This means that it should be clear that no other, less drastic measures will achieve the same goal. To do this, the company needs a robust business case that demonstrates the need for restructuring. It should include the following aspects:

• the economic situation of the company and the part of the company concerned
• the reasons for the decision to downsize or close the business unit (e.g. inefficiency, change in supply chains, relocation close to the customer)
• Alternatives to downsizing (e.g. temporary arrangement of short-time working, employment in other parts of the company, cost reductions)
• long-term strategic impact on the remaining part of the company and a concept for its continuation, in particular securing the remaining jobs

The works council can request the submission of the relevant documents on which the employer has based its decision. In companies with more than 300 employees, the works council can also call in economic experts to scrutinize the employer’s figures. Uncertainties can make discussions with the works council considerably more difficult. In addition, the works council is often concerned with securing the remaining jobs.

Step 2: Prepare personnel list

It may sound banal: A key success factor for negotiations is a well-maintained personnel list. This should contain all the information required for subsequent decisions, in particular for social selection and the calculation of severance payments. This includes the date of joining and date of birth, the position, basic remuneration and all other remuneration components, marital status and maintenance obligations, severe disability or other reasons for special protection against dismissal and details of the company pension scheme. On this basis, an initial cost analysis can be prepared in advance.
In practice, variable remuneration often causes difficulties. In some cases, averages are used to calculate this, so that the amounts paid in previous years are also taken into account. It can also be difficult to calculate length of service if employees have moved within the group or joined the company as a result of a transfer. Marital status and maintenance obligations are not always known and must be determined using the income tax class if necessary.

Step 3: Determine the negotiating team and schedule

Prior to the negotiations, a team with the necessary expertise and authority should be appointed for the negotiations. For reasons of efficiency, the negotiating team should be kept small; three people are ideal.

It is also important to have a timetable that takes into account vacation periods, absences and operational concerns. In simple cases, at least two to three weeks must be allowed for informing the works council, two to three months for the reconciliation of interests and social plan negotiations and another two to three weeks for the preparation and implementation of redundancies. In many cases, however, these steps take considerably longer.

Step 4: Inform stakeholders

From an employment law perspective, the most important stakeholders to be involved are the economic committee, the works council and the employees. Other stakeholders such as shareholders, customers, suppliers and the company’s managers can also be informed about the plans. If there is public interest, communication with the press and, if necessary, politicians should also be prepared.
An informal discussion with the chairman of the works council usually takes place before the official notification. Only then are the economic committee and the other works council members informed about the planned restructuring. It is important that no irreversible steps to implement the restructuring are taken in advance. Otherwise, the information would no longer be provided in good time.
In the case of major restructurings, the workforce is usually informed about the planning and the upcoming discussions with the works council at a town hall meeting. In this way, all employees learn about the restructuring at the same time and no rumors are spread in advance.

Step 5: Draft documents

The employer should submit a draft reconciliation of interests and a social compensation plan at an early stage. This gives structure to the upcoming negotiations and ensures that the relevant points are addressed at an early stage. Socially acceptable alternatives can also be discussed as part of the reconciliation of interests and social plan negotiations. For example, a voluntary redundancy program or a transfer company can be set up. In addition to being socially acceptable, such solutions have the advantage of reducing the risk of legal action. The transfer company can also be subsidized by the Federal Employment Agency. Other socially acceptable alternatives are internal job platforms, outplacement, partial retirement models and retraining. Drafts for these should also be prepared at an early stage.

Good preparation pays off

Good preparation for restructuring pays off in several areas: A resilient business case and transparent communication, a complete list of employees and good planning are prerequisites for trusting cooperation with the works council and thus ultimately for the timely conclusion of a reconciliation of interests and social plan. Good preparation also increases the acceptance of the wind-down and reduces the litigation risk in the event of any dismissal protection claims by those affected.

You can also watch the recording of our Webcasts “KPMG Law Restructuring Solutions. Wind-down” to.

Further articles on the subject of restructuring can be found under Restructuring Solutions.