Remember BREXIT? Does the Brexit Transition Act still ring a bell?
On March 15, 2019, the German Parliament passed the Act on Tax-Related Provisions Regarding the UK Withdrawal from the EU (Brexit-StBG/Steuerbegleitgesetz). The new legislation introduced a first inroad on Germany’s otherwise strict dismissal protection. The move was designed by the German government to attract UK banks to relocate to Frankfurt, rather than one of the other financial centers in the remaining 27 member states of the European Union.
The strict rules under the German Dismissal Act (Kuendigungsschutzgesetz/KSchG) lie at the core of termination protection in German employment contracts. For the first time, the act provided for a specific relaxation of these rules. Since German law does not recognize the concept of employment “at will,” wherever the German Dismissal Act applies, employment can only be terminated for a stipulated cause.
The Brexit Transition Act allowed banks located in Germany - provided they qualify as “significant institutions” - to terminate employment contracts with high-paid employees (as long as their jobs qualify them as “risk takers”) without following the strict requirements otherwise imposed by German labor law. You can find more details in our 2019 article Brexit and the fate of German dismissal protection - Deutscher AnwaltSpiegel and in the interview Wrongful Dismissal Protection diminishing? - Falkenfort on FINANCE TV.
German employment law generally assumes protection against dismissal, with the consequence that employment relationships continue to exist if the courts deem a dismissal to be invalid. The burden of presentation and proof for companies in dismissal protection proceedings is high. There are a few exceptions. In practice, so-called applications for termination pursuant to Section 9 (1) sentence 2 KSchG are rarely successful and only in cases of serious misconduct by employees, usually in cases of criminal offenses. The requirements of case law in this regard are high: only in the case of so-called “executive employees” do applications for termination not have to be substantiated. In such cases, this results in severance pay regulations instead of protection of continuance.
While the Brexit Transition Act limited the scope of the simplified termination proceedings based on Section 9 (1) sentence 2 KSchG to significant financial institutions - namely major banks, pursuant to Sec. 25a (5a), Sec. 25n KWG (German Banking Act) - the draft bill of the ZuFinG II broadens the scope and will include reduced dismissal protections for all High-Earner MRTs (Material Risk Takers) in all credit institutions, investment firms, capital management companies, and the entire insurance sector. The proposed legislation aims to improve the competitiveness of Germany as a financial center.
This reduced dismissal protection for High-Earner MRTs affords companies greater leeway to implement personnel decisions more quickly and efficiently. At the same time, the new regulation may result in increased uncertainty when creating positions for potentially affected High-Earner MRTs in the relevant companies. Employers in the financial sector would be wise to consider such new regulations in relevant employment contract negotiations when determining, for example, the duration of ordinary notice periods. Affected companies must also be mindful of the consequences of the further-reaching labor laws on individuals who might fall under the definition of High-Earner MRTs when carrying out their annual MRTs analysis.
The evolving legislative process deserves to be closely monitored.
