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Saving Jobs with Short-Time Work?!

Short-time work is a very important instrument in times of economic downturn in order to prevent redundancies

Short-time work in response to declining capacity utilisation

Over the past months there have been increasing reports that orders are significantly declining in some industries, such as in the automotive, mechanical engineering, chemical and textile industries, together with reports by some important enterprises that either short-time work or redundancies might be inevitable for this reason. The ifo-Institut also predicted that the German industry will have to expect a clear increase in short-time work within the next months.

Since most recently short-time work has been "dormant" due to the excellent economic situation and the situation on the labour market, this instrument for cost reduction is rapidly becoming a focus for enterprises and the public once more.

Concept and purpose of short-time work

Short-time work is an instrument of employment policy designed to prevent employers being obliged, in the event of a – temporary – underutilisation of existing capacities, to dismiss their well-trained, experienced and qualified workforce, who will lose their Jobs.

Following the introduction of short-time work, the working time and remuneration of the employees in the enterprise will be reduced. This loss of earnings will be compensated, in part, by the Bundesagentur für Arbeit (Federal Employment Agency) through the granting of short-time allowances. In doing so, the employers are saving personnel costs and are able to save the frequently high costs of severance pays and re-employment.

Short-time work gained in importance enormously during the economic crisis that unfolded in the second half of 2008 due to the so-called financial crisis. However, at that time the existing legal framework conditions were clearly improved for a temporary period in favour of employers and, thus, facilitated higher flexibility upon the introduction of short-time work in enterprises and a higher level of cost relief for employers. At its peak, approximately 1.5 million employees were on short-time work, while, at present, approximately 50,000 employees work short-time.

Legal requirements for the introduction of short-time work

The introduction of short-time work always requires an agreement either with the employees directly or with the works council if the enterprise has one. The employer cannot unilaterally order a reduction of working time or a reduction in the associated remuneration.

Matters requiring regulation in a typical company (works) agreement concerning the reduction of working time normal in the business include: start and duration of short-time work, location and distribution of working time, divisions and employees affected, scope of short-time work or reasons for a premature termination of short-time work.

In enterprises without a works council, short-time work can only be introduced by entering into an individual agreement with each employee. However, standard employment agreements can already include and specify the company’s entitlement to introduce short-time work, which will facilitate its introduction.

Apart from this, there are numerous collective bargaining provisions for the introduction and arrangement of short-time work. They are only valid for enterprises in which such collective bargaining agreements are applicable, for example, due to memberships in employer organizations or by appropriate references in employment agreements. The subject-matter of such collective bargaining agreements is – as a rule – an additional, collectively agreed allowance paid towards the compensation for short-time work, as a result of which the employer's cost relief decreases.

Qualifying conditions for short-time allowance (section 95 et seq. Social Code III)

There has to be a loss of working time based on economic causes or an inevitable event. This is, for example, the case when orders are declining or are lost.

However, the loss of working time may only be temporary. This requirement is met if it is expected, with a certain degree of probability, that the transition to full-time work will occur in the foreseeable future.

Furthermore, the loss of working time may not be avoidable, i.e. the employer must have taken all reasonable precautions to prevent the occurrence of loss of working time.

The loss of working must have a minimum level. This means that in a calendar month, in which short-time should take place, at least, one-third of the employees working in the enterprise must be affected by a loss of remuneration amounting to more than 10% of their monthly gross remuneration.

The entitlement to short-time allowance further requires that the employee affected continues his employment relationship and, thus, his employment that is subject to compulsory insurance. These requirements are not met if the employment relationship comes to an end by notice of termination or termination agreement.

The application for the payment of short-time allowances has to be filed with the competent employment agency in written or electronic form. The enterprise will then pay the short-time allowance to the employees.

The amount of the short-time allowance is based on the amount of the unemployment benefit, i.e. in the event of a complete loss of working time, the employees will receive 60% of their net wage lost as short-time allowance. If a child is living in the household, then the employee will receive 67% of his lost net wage.

The maximum eligibility period for short-time allowance amounts to 12 months.

No linear reduction of costs upon introduction of short-time work

If an agreement concerning short-time work is concluded with the works council or the employee directly, then the employee only receives the remuneration for the work actually performed. If, for example, 50% short-time work is agreed upon, then the employee only receives half of his contractual remuneration and, accordingly, works only half of the weekly working hours. For the work that is actually performed, the employer and employee will each still bear half of the social insurance contributions. However, to the extent that a short-time allowance is paid, the employer is responsible for paying the contributions to the health, care and pension insurance alone. The so-called calculation base for the amount of these contributions is 80% of the difference – in simple terms – between the former fulltime remuneration (planned gross remuneration) and the lower remuneration payable following the reduction of working time (actual gross remuneration).

On the basis of various collective bargaining agreements, for example the "Collective Agreement concerning Short-Time Work and Employment", which was concluded between the Verband der Metall- und Elektroindustrie Baden-Württemberg e.V. (Federation of the Metal and Electrical Industry of Baden-Wuerttemberg) and the Gewerkschaft IG Metall (Metal and Engineering Workers' Trade Union) in 2012, in addition, a collectively agreed surcharge on the short-time allowance has to be paid. This collective bargaining agreement regulates that, in the case of a reduction of the monthly gross remuneration due to short-time work, the employer has to grant the employees a surcharge in addition to the reduced monthly remuneration and the short-time allowance. This surcharge is calculated on the basis of the difference between the actual monthly net remuneration during the short-time work plus short-time allowance, on the one hand, and a certain percentage of the full net remuneration. This percentage varies depending on the degree of loss of earnings. In case of a loss of earnings totalling up to 10%, it amounts, for example, to 97%, in case of a loss of earnings of more than 80% by short-time work it amounts to 86.5%.

Even if no collective bargaining agreement of such kind applies in the respective enterprise, the introduction of short-time work always means that the costs are not reduced to the same extent as the working time through the contributions to the social insurance.

A linear reduction of personnel costs in case of reduced working time is possible on the basis of various collective bargaining agreements, inter alia, in the metal industry. Thus, for example, the Collective Agreement concerning the Safeguarding of Employment in the Metal and Electrical Industry of North-Rhine Westphalia of 24 May 2012 provides for a reduction of working time in case of temporary employment problems to prevent dismissals for operational reasons by company (works) agreement. Accordingly, the weekly working hours can be reduced uniformly for all employees or for parts of the enterprise only to a level ranging between 30 and less than 35 hours. Thus, the working time can only be reduced by one-seventh which – in many cases – is not sufficient due to the economic situation.

Actual legislative proposals

The economic downturn in 2019 also did not escape the notice of politicians. Therefore, the Federal Minister for Employment, Mr Hubertus Heil, intends to respond and react to this increasingly difficult economic situation by providing new rules concerning short-time work and promoting further training by the Bundesagentur für Arbeit (Federal Employment Agency). He wants to submit the draft for an "Act on Tomorrow's Labour" in September. The subject-matter of this act shall be, inter alia, that the short-time allowance in a crisis can be paid more quickly and in a less complicated manner. Obviously, the intention is to revert to tried-and-tested instruments of the 2009 economic crisis. At that time, the Government, inter alia, determined temporarily that 50%, in case of further training during short-time work even 100% of the additional payments to the social insurance attributable to short-time work were refunded to the enterprises. At that time, the proof of loss of earnings of more than 10% - instead of 30% - of the employees was already sufficient. Further training measures for employees during the period of short-time work were also largely supported.

As in the former time of economic crisis, the act should provide for an eligibility period for short-time allowance exceeding 12 months. Also, access to short-time allowances for employees in transfer companies shall be alleviated. The Federal Minister is also intending to develop the Qualification Opportunities Act, which entered into force only at the beginning of 2019 and which grants more employees access to state-subsidised further training measures than was previously the case.

Conclusion

The labour market policy instrument of short-time work will still be very important in times of economic downturn in order to prevent redundancies. However, it is only partially a cost-saving instrument, since due to the additional payments to the social insurance for the part of the short-time allowance and also in case of the obligation to make collectively agreed additional payments to the short-time allowance, no linear cost reduction is possible. Since the total personnel costs, in general, are reduced disproportionately to the loss of working hours, the costs per hour worked are – accordingly – rising with an increasing loss of working hours. The unit labour costs in manufacturing enterprises are increasing, too.

The Employment Minister's initiative is to be welcomed. It remains to be seen how the regulations will be drafted in Detail.

However, we must not forget that should structural adjustment measures become necessary in an enterprise to safeguard the latter's existence or to improve its economic situation in a sustainable way, short-time work is not a reasonable and appropriate solution. Making use of short-time allowances would perhaps only delay the necessary steps and would, thus, contribute to a worsening of the economic situation. In such cases, fundamental restructuring measures combined with a reduction in employment could hardly be avoided.

If you have any questions related to this topic, please feel free to contact Markus Künzel (Lawyer, Licensed Specialist for Labour Law) and Dr. Erik Schmid (Lawyer, Licensed Specialist for Labour Law).

Note: A similar version of this article appeared in the Labor Law Magazine, 3/2019 on page 6.

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Markus Künzel T   +49 89 35065-1131 E   Markus.Kuenzel@bblaw.com
Dr Erik Schmid T   +49 89 35065-1127 E   Erik.Schmid@bblaw.com