Germany: The perfect restructuring (part 3: balance of interests agreement)
Once the preparatory phase is finished (see Part 1 ) and the kick-off with the works council (see Part 2) has been completed, negotiations for a balance of interests agreement (‘Interessenausgleich’, the agreement setting out the terms and timing of restructuring) will start promptly. Employers usually want to conclude negotiations quickly so that they can start implementing the restructuring measures. Works councils, on the other hand, can delay negotiations. They want to get the best out of the negotiation process for ‘their people’ and try to negotiate, for example, for fewer jobs to be eliminated than originally planned and for employees leaving the company to receive high severance payments. How do you reach a consensus?
Agreement on an overall package?
Negotiations on the balance of interests agreement are linked to negotiation of the social plan (that is, the package of measures to mitigate the negative impact of restructuring on the workforce), although German law clearly separates these issues. Concessions made by the works council with regard to planned restructuring measures often come with demands for a higher social plan budget and vice versa. Sometimes the employer side and the employee side manage to reach an agreement on a total package. More often, this fails as works council demands cannot be accommodated.
In any case, employers are in a good position to push back on requests for amendments to the restructuring measures. They can declare the negotiations on the balance of interests agreement to have failed, first during open negotiations and then at the conciliation board. After the conciliation board fails, employers can start implementing the restructuring measures while negotiations on the social plan run in parallel. But we will examine the process step by step.
How can employers speed up negotiations?
Negotiations can take several months or be completed within a few weeks. This can be frustrating for employers, as the issues to be discussed could actually be dealt with in a matter of days if they were well prepared and efficiently implemented. However interruptions to the negotiations by the works council can delay the process considerably; this is sometimes hard to understand, in particular for international companies. The system can be reduced to a simple formula: time for money. This can create a vicious circle for companies that are permanently implementing restructuring measures (e. g. in matrix structures). Major financial concessions are made in order to be able to report successful implementation of the restructuring, for example, to foreign corporate headquarters.
Despite international accounting standards and complex restructuring budgets, the price for this type of approach can be very high and can include long-term social plans incorporating elements that go far beyond regular standards with high severance payments, or self-confident works councils requesting significant additional concessions, such as the consent of the works council being required for every dismissal for operational reasons. Once companies are trapped in such a cycle, it usually takes years to get back to a situation where they can establish fast, cooperative and realistically priced restructuring packages.
To avoid falling into this vicious circle, companies can take a number of steps such as:
- not giving in to every works council demand, including in day-to-day business;
- sending out the right signals, for example by establishing a conciliation board, even outside of restructuring measures;
- ‘just do it’: moving forward within reasonable limits and after careful consideration of the actual and legal risks;
- optimising the works council structure.
These kinds of measures put employers into a stronger position for negotiations in the long term and especially when dealing with works councils that may have unrealistic goals. They also create a constructive negotiating atmosphere that enables restructuring measures to be implemented fast, or at least more quickly, if necessary.
Do the homework
Even small steps can help and may contribute to faster completion of negotiations. These include employers offering the works council numerous negotiation dates within a short period of time, thus ensuring the availability of company representatives. In addition, each round of negotiations should be intensively prepared and efficient project management structures should be put in place. Employee representatives’ questions should be anticipated so that answers can be given directly. The sooner the information phase on the background to the operational change is completed; the sooner negotiations on the details can begin.
Can the employer declare failure of the negotiations at any time?
In principle, the employer can declare negotiations on the balance of interests have failed if an agreement no longer seems to be possible. The works council cannot prevent the declaration of failure if negotiations have already taken place.
From the employer’s point of view, however, a declaration of failure is not entirely risk free. It is true that once the employer has declared negotiations have failed, it can start implementing the operational changes. However, if negotiations have not actually failed from an objective point of view, employees who have suffered financially from the restructuring can claim financial compensation from the employer. In order to avoid such claims for compensation, employers should document the negotiation of the balance of interests agreement in detail. That way, they can prove that the negotiations have objectively failed and that any claims for compensation are unjustified.
Does a conciliation board make sense?
If it becomes apparent that an agreement on the balance of interests or on a social plan cannot be reached with the works council short term, the employer should try to establish a conciliation board at an early stage. In most scenarios, extensive negotiations prior to establishing a conciliation board are not helpful and may delay the entire process unnecessarily.
Employers should first try to establish a conciliation board amicably by concluding a (regulatory) mutual agreement with the works council, in which candidates for the position of chairman of the conciliation board are already decided. If the agreement with the works council fails, the employer must file an application for establishment of a conciliation board before the courts. In that scenario, the employer should have an exact plan of favoured candidates and how it can enforce its choice. The chairman of the conciliation board can have a decisive influence on the course and the outcome of negotiations in the conciliation board.
To be continued …