Differentiation criteria in regulations concerning severance payments in social plans

Introduction

If jobs are cut due to reorganisation and the company has a works council, social plans will generally be drawn up to mitigate financial disadvantages to employees. A social plan usually contains provisions regarding the amount of severance payments paid to employees who lose their jobs. In practice, employees who are about to retire often receive lower severance payments than younger employees. In a November 17 2015 decision (1 AZR 938/13), the Federal Employment Court decided that this differentiation is not permitted if the employee is entitled to early retirement only because he or she is disabled.

Severance payments

In a social plan the employer and works council generally regulate the amount of severance payments. The parties frequently agree on a factor system which is linked to gross monthly salary, seniority and age.

Employees who can retire in the near future often do not receive a severance payment, or they receive less than they would be entitled to based on the standard formula. This normally also includes employees who are entitled to early retirement due to a disability.

Permissibility of differentiation

Social plans are works agreements. The regulations set out in social plans are subject to judicial review. The differentiation criteria are measured on the principle of equal treatment as set out in Section 75(1) of the Works Council Constitution Act. This states that the employer and the works council must ensure that there is no discrimination based on the grounds mentioned in the act (eg, disability, age, origin, race and nationality). The employer and the works council may not enter into agreements which discriminate against employees based on these characteristics.

Impermissible discrimination against disabled

The Federal Employment Court ruled(1) that a provision regulating a severance payment in a social plan that is linked to the entitlement to receive a pension due to a disability directly discriminates against disabled employees. The decision concerned a social plan which stipulated that employees who could receive pension benefits at the end of their employment due to their disabilities would receive a lump sum of €11,000. Based on the standard formula for calculating the severance payments, the disabled plaintiff would have been entitled to a payment of approximately €65,000. The plaintiff sued for the difference.

The court found that the provision granting a lower lump sum was invalid and the plaintiff was entitled to a higher amount based on the formula. The court held that the disabled individual was in a situation comparable to that of the employees who were not disabled, since both had lost their jobs and salaries due to the closure of the business. The direct discrimination was not compensated by the fact that the plaintiff could collect pension payments due to his disability. Disabled employees have a greater need of protection; the plaintiff therfore did not have to merely accept the lump sum. It was irrelevant that the provision could have been more beneficial to some disabled employees than if the standard formula had been used to calculate the severance payment.

The decision is linked to a European Court of Justice (ECJ) decision from December 6 2012.(2) The ECJ decided that a provision in a social plan which stipulated a lower severance payment for employees who could retire early due to a disability constituted a breach of the prohibition against discrimination under EU law. Disabled employees have higher financial expenses to bear due to their disabilities, which is a burden that may increase with age. As a result, a reduction of the severance payment under the social plan is therefore not justified based on social or political objectives and is thus not permissible.

Pensions based on reduced earning capacity

However, according to the Federal Employment Court,(3) it is permissible for parties to agree to exclude employees from receiving payments under social plans if they receive pensions based on reduced earning capacity in cases where it is not expected that the employee will be able to work again.

The court held that the situation was not comparable and there was therefore no disadvantage. Unlike an employee who loses his or her job, the recipient of a pension based on reduced earning capacity does not receive a salary before operational changes. This differs from the November 2015 decision, where the disabled employees and the employees without disabilities both received salaries before the closure of the business and ceased to do so after the restructuring.

Different treatment due to imminent retirement

The court has previously ruled on whether it is permissible to reduce entitlement to a severance payment if an employee is entitled to receive a retirement pension when the employment relationship ends. The court has ruled that such distinctions based on age are permissible.(4) This is justified in social plans which serve to compensate or bridge a gap following loss of employment. Employees who are entitled to receive a retirement pension already have financial security. For this reason, it is permissible under the social plan for them to be disadvantaged in comparison to the other employees. The legislature has bestowed these powers on the parties to the social plan in Section 10(3)(6) of the General Equal Treatment Act. Employees who are financially secure due to their entitlement to a retirement pension can be excluded from the benefits under the social plan or receive reduced severance payments. Reduced severance payments under a social plan may also be permissible in cases where retirement does not directly follow termination of the employment relationship. In these cases the employee would receive an unemployment benefit before receiving a retirement pension.(5)

Age-related additional payments

The court also allowed regulations which provide for additional payments based on age. The amount of the severance payment increases once a certain age is reached.(6) This does not constitute a disadvantage for younger employees, as parties to the social plan are free to grant older employees (eg, those not yet old enough to retire) a higher compensation for the disadvantage in the form of compensation for social disadvantages, since their opportunities on the job market are not as good.

Comment

As a rule, it is permissible to stipulate that employees who are close to retirement age are entitled to reduced severance payments. Since they can receive a pension, they are in a more secure financial position than employees who cannot retire for a long time. The age of the employees may also be used as a differentiation criterion.

However, according to the case law of the ECJ and Federal Employment Court, there can be no connection between the entitlement to the benefit and the disability. It is not permissible in a social plan to stipulate that employees who can retire early due to a disability will not receive a severance payment, or that they will receive only a reduced severance payment.

For further information on this topic please contact Antje-Kathrin Uhl or Eva Schäfer-Wallberg at CMS Hasche Sigle by telephone (+49 711 9764 250) or email ([email protected] or [email protected]).

Endnotes

(1) Federal Employment Court, November 17 2015 – 1 AZR 938/13.

(2) ECJ, December 6 2012 – C-152/11 (Odar).

(3) Federal Employment Court, June 6 2011 – 1 AZR 34/10.

(4) Federal Employment Court, November 11 2008 – 1 AZR 475/07.

(5) Federal Employment Court, May 26 2009 – 1 AZR 198/08.

(6) Federal Employment Court, April 12 2011 – 1 AZR 743/09.

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