The German Government published a draft legislation which would facilitate the dismissal of so-called “risk takers” in the German financial sector.  This is one of various measures by which the German Government intends to address upcoming Brexit challenges and to increase the attractiveness of Germany as business location for financial institutions currently based in the UK.

Current Legal Situation

German employees are benefitting from extensive protection against dismissal.  Under German labor law, the termination of an employment relationship requires a valid justification (e.g., redundancy or misconduct) for which the German labor courts have set high standards.  Therefore, the affected employee is often in a good position to challenge the validity of the termination and claim the continuation of the employment relationship before court.

In case the court decides that the termination is invalid, the employment relationship remains in place and can only be terminated by way of mutual termination agreement.  To induce the employee to enter into such agreement, the employer will usually offer a severance payment (which would not be required if the termination were valid).

For “executive employees” (leitende Angestellte), the protection against dismissal is limited to a certain extent:  Even in case the termination is considered invalid, the employer may nevertheless ask the court to dissolve the employment relationship against severance payment without providing any justification (sections 14(2) and 9(1) of the German Dismissal Protection Act (Kündigungsschutzgesetz)).  The court will determine the amount of the severance payment based on certain factors (e.g., the length of employment and the monthly remuneration (which includes salary, bonus and fringe benefits)), however, capped at an amount between 12 and 18 times the monthly remuneration (such cap depending on the employee’s age and length of employment).  This is an exception to the general rule of German labor law that the employment relationship will have to be continued in case the termination is invalid.  Thus, an executive employee cannot use the dismissal protection as leverage in the course of the negotiations about a mutual termination agreement and the related severance payment.

However, the definition of an “executive employee” under the German Dismissal Protection Act is very narrow, i.e., it requires that the employee is authorized to act alone and independently when hiring and dismissing employees.  In practice, only few employees qualify as “executive employees” when it comes to the termination of their employment relationships.

Expected Changes

According to the draft legislation, certain “risk takers” in the financial sector shall be treated like “executive employees” for purposes of the dismissal protection under German labor law.

Thus, employers would be in a position to terminate the employment relationship with a “risk taker” without the requirement of a valid justification, but simply by paying a severance payment (which will be determined by the labor court, but even in the worst case will not exceed 18 times the “risk taker’s” monthly remuneration).  As a consequence, the amount of the severance payment is much more predictable.  On the other hand, the employee has no means anymore to avoid the termination of his or her employment relationship and to insist on the continuation of employment, even if no valid justification for the termination existed.

Who Will Be In Scope?

In principle, all “risk takers” of “major institutions” with an annual fixed remuneration of at least three times the social security contribution ceiling (i.e., currently an amount of € 234,000) will be affected by the new legislation.

“Risk takers” are those employees whose professional activities have material impact on their institution’s risk profile as determined under the EU Delegated Regulation 604/2014 of March 4, 2014 as corrected by the EU Delegated Regulation 2016/861 of February 18, 2016 (the “Risk Taker Regulation”).

In this context, “major institutions” are, inter alia, (i) financial institutions with total assets of at least € 15bn, or (ii) institutions explicitly classified as systemically relevant by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) or the European Central Bank.

What Financial Institutions Should Consider

Financial Institutions planning to relocate their business to Germany should consider whether they meet the criteria of a “major institution”.  In such case, they would benefit from a more flexible legal framework with respect to the employment relationship with their “risk takers”.

It should be taken into account that there are several corresponding obligations of the employer concerning the qualification of employees as “risk takers”.  Employers have an obligation to evaluate and document their assessment as well as to notify any individual employee who is classified as a “risk taker”.  However, an employee is not considered a “risk taker” simply as a result of the employer’s classification, since such classification needs to meet the criteria for “risk takers” under the Risk Taker Regulation.

Outlook

The proposed draft legislation promises considerable simplifications and flexibility with regard to headcount changes in the financial sector.  It is currently unknown when the German legislator will come to a vote on this draft, but the proposed changes are supposed to enter into effect on March 29, 2019, upon the UK leaving the EU.  As such legislation would only apply to bankers, some voices have already expressed concerns of discrimination and claim a breach of the constitutional right of equal treatment.  However, there are arguably valid reasons that justify such differentiation.  According to the German government’s explanatory statement, the proposed changes are justified, in particular by the high remuneration and the significant responsibility of “risk takers” compared to other employees in the financial sector.

Political resistance is rather unlikely, since the proposed legislation will only affect high earners in the financial sector.  While some perceive the planned changes as a gateway for a general overhaul of Germany’s extensive dismissal protection, we see no reasonable indication for this assumption.