Business Closure: Notice Period

In the event of a business closure, employers must observe the same notice periods as they would for any other ordinary termination.

Despite urgent operational needs, no notice periods other than those prescribed by law, agreed upon in the employment contract, or specified in a collective bargaining agreement apply.

But what exactly is a business closure? And what obligations do I have as an employer in the event of a business closure?

In this article, we address these questions and explain which notice periods apply in the event of a business closure, what employment law obligations employers must observe, and why seeking early legal advice on employment law is particularly important in the event of a business closure.

1. What Does a Business Closure Mean?

To ensure a company’s continued economic success—or to prevent failure—it may be necessary to reduce the number of locations or branches. In situations where a company is struggling financially, the closure of production facilities, branches, or similar operations is often considered as a cost-saving measure.

A business shutdown or closure refers to the permanent cessation of the business’s purpose, accompanied by the dissolution of the business organization. A closure is not considered a cessation of operations if it is only temporary. The company is the owner of a business unit and thus its operator. Since a company may consist of multiple business units, the closure of one business unit does not necessarily mean that the entire company is financially at risk or must be affected by the closure.

Nor is it necessary for the company to be in poor financial condition in order to close a business unit. Business closures can also occur in financially sound companies.

2. What legal considerations should employers take into account when closing a business unit?

The business unit to be closed does not have to be the entire company. However, when determining whether a business unit exists under employment law, it is important to note that such a unit is considered to exist only if it has its own human resources management. For example, the business unit must have a human resources department with the authority to issue instructions, or there must be supervisors in place.

2.1 Size of the Business Is Decisive

The number of employees at a business is decisive for the employer’s legal obligations. The thresholds for what is known as a mass layoff are set forth in Section 17(1) of the German Employment Protection Act (KSchG). If the business that is to be shut down or closed typically employs more than 20 employees, the mass layoff must be reported to the Employment Agency in all cases. This applies even if the employer is laying off only more than 5 employees (Section 17(1)(1) of the German Employment Protection Act (KSchG)).

The “ headcount ” must be used as the basis for this calculation; that is, the number of regularly employed workers applies, regardless of whether they are full-time or part-time employees. Workers for whom the waiting period for general protection against termination under Section 1(1) of the KSchG has not yet expired are also included in the calculation of the number of employees.

2.2 Notice of Mass Layoffs

If the business to be closed has more than 20 employees, the employer must file a so-called notification of mass layoffs pursuant to § 17 of the German Employment Protection Act (KSchG). According to § 17(3), fourth sentence, of the KSchG, this notification must include certain information (“mandatory provisions”).

These include, for example, the reasons for the intended layoffs, the number of employees to be laid off, the occupational groups of the employees to be laid off, etc. In agreement with the works council, certain additional details may also be provided, such as the age, occupation, gender, or nationality of the employees to be laid off (recommended provisions).

If the employer fails to submit such a notification to the Employment Agency, even though it was required to do so, the notification and the terminations are invalid. If only errors were made in the notification, not every error renders the terminations invalid. For example, if one of the mandatory provisions is missing from the notification or if they are incomplete, the notification and the terminations are invalid. Errors or omissions in the recommended provisions do not render the terminations invalid.

3. What obligations must employers comply with?

In addition to the notice of mass layoffs, the employer may also be required to inform the works council. This obligation is governed by § 17(2) of the German Employment Protection Act (KSchG). As with the notice of mass layoffs, the employer must inform the works council of the reasons for the layoffs, the number of employees to be laid off, the layoff period, etc.

This obligation also arises from the provision of § 111 of the Works Constitution Act (BetrVG), since the closure of the business constitutes a change in operations (§ 111, sentence 3, no. 1 BetrVG). If the business has more than 20 employees, the employer must inform the works council of the planned closure as early as possible.

The employer must negotiate with the existing works council, without prejudging the outcome, on how the planned layoffs can be mitigated or avoided.

3.1 Reconciliation of Interests or Social Plan

The employer and the works council must also negotiate a so-called reconciliation of interests. The outcome of the reconciliation of interests may be that the closure is abandoned entirely. The subject of the reconciliation of interests is whether the business will be closed at all, to what extent jobs will be cut, and when this is to take place.

However, the works council cannot force the employer to enter into a reconciliation of interests if the employer has already decided to close the business and is therefore unwilling to engage in such negotiations.

The works council can, however, enforce a social plan. This plan must include measures to mitigate the adverse effects on the affected employees resulting from the layoffs associated with the plant closure.

4. Does the plant closure justify termination for operational reasons?

The shutdown or closure of the business constitutes what is known as an “urgent operational necessity. ” This justifies termination for operational reasons by the employer. As an employer, however, you must be aware that certain employees may be subject to special protection against termination.

For pregnant employees and mothers up to four months after giving birth, employees on parental leave, or employees with severe disabilities and those deemed equivalent, approval must be obtained from the relevant state authority or the Integration Office before issuing a termination for operational reasons.

4.1 No Termination for Operational Reasons

However, there are also cases—such as those related to a planned business closure— that do not (yet) justify termination for operational reasons. This is the case, for example, if the business closure is only temporary. If the business closure is not permanent, the employer may not terminate employment for this reason. Nor may the employer terminate employment prematurely due to a business closure. The end of the notice period must coincide with the date of the permanent closure of operations. Plans for a closure of operations also do not justify termination.

If an employer intends to close a business not all at once but, for example, department by department, the employer may not simply terminate the entire department. In this case, a social selection process must be conducted before issuing the terminations. In this process, all comparable employees of the business to be closed form the pool of employees who may be terminated.

Through the social selection process, a sort of ranking of employees deserving of social protection is established based on specific criteria (e.g., length of service, age, support obligations, severe disability), grouped horizontally according to the work performed and the level of the organizational hierarchy. The employees deemed least deserving of social protection must then be laid off first.

The initiation of insolvency proceedings also does not justify termination for operational reasons.

In many cases, it may not actually be a business closure; rather, the business or part of the business is sold after all, resulting in a transfer of operations under Section 613a of the German Civil Code (BGB). A termination based on a transfer of operations is invalid under Section 613a(IV) of the German Civil Code (BGB). Furthermore, under the provisions of the law, the acquirer assumes the rights and obligations arising from the employment relationship, and no termination or termination agreement is required in the event of a transfer of business.

5. What is the notice period for a business closure?

Terminations for operational reasons are almost exclusively issued as ordinary terminations. Extraordinary terminations for operational reasons are very rare and represent an absolute exception.

The length of the notice period is determined by the provisions in the employment contract or in an existing collective bargaining agreement. If no notice period is specified there, the standard statutory notice periods under Section 622 of the German Civil Code (BGB) apply. The notice period is therefore based on the length of service.

6. What can we do for employers?

If you, as an employer, wish to close a business, it is advisable to seek legal guidance early in the closure process, as business closures and shutdowns can be legally complex. As certified specialist lawyers in employment law, we can support employers and companies throughout the entire process and provide expert advice.

Marten & Graner advise you on matters related to consultation with the works council, notification of mass layoffs to the Employment Agency, obtaining official approval for terminations for operational reasons involving employees with special protection against dismissal, the drafting and finalization of social plans, the selection of employees for layoffs, the legally sound structuring of terminations and termination agreements, as well as legal representation in court proceedings related to plant closures.

7. Conclusion

1. Notice periods in the event of a business closure: Employers must observe the standard notice periods for terminations for operational reasons in accordance with statutory requirements, the employment contract, or the collective bargaining agreement.
2. Business Closure: Business closures refer to the permanent cessation of business operations, accompanied by the dissolution of the organizational structure, and may occur for economic reasons, even in financially sound companies.
3. Layoffs for operational reasons: Business closures justify layoffs for operational reasons, but only as ordinary terminations with proper notice. Extraordinary layoffs for operational reasons are an absolute exception.
4. Employer’s obligations: The works council must be informed, and negotiations regarding the reconciliation of interests and a social plan must be conducted. In addition, if the business exceeds a certain size, the employer must submit a notice of mass layoffs to the Employment Agency before issuing the notices of termination.
5. Legal Support: Plant closures are highly complex processes under employment law. Employers should therefore seek legal support and advice early on to avoid mistakes.

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