Wednesday, 24. July 2024

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German or American labor law: Which is better?

The recent terminations at Twitter have once again shown how different the protection against dismissal is in German and American labor law.

U.S. employees will probably receive continued pay for 60 days, or two months, under the WARN Act, and that’s it. If Elon Musk offers the dismissed employees (instead) a severance payment amounting to three months’ salary, that is considered quite fair by American standards. After all, Musk is paying 50% more than he has to.

In Germany, we would rather draw up a social plan that grants the dismissed employees (at least) 1 gross month’s salary per year of service as severance pay, in addition to compliance with the notice period.

Where do these differences come from, and which system is actually better?

Let’s take a few considerations into account. – If you are already familiar with 1 and 2, or don’t feel like it right now, then it’s best to jump straight to 3. That’s OK.

1. Dismissals in Germany

In Germany, employees are largely protected from dismissal once they have passed the probationary period.

a) We have the Dismissal Protection Act, which gives employees general protection against dismissal. “General” as opposed to “special” protection against dismissal, for example, under the Maternity Protection Act (MuSchG) or “Severely Disabled Persons Act” (for some time now SGB IX), or the special protection against dismissal for works councils.

This general protection against dismissal under the Dismissal Protection Act states: In a company with more than ten employees, an employee may only be dismissed if the employer can show and prove a reason for doing so.

In the case of ordinary termination – we will leave out termination without notice for the moment – , a distinction is made between termination for reasons of conduct, termination for personal reasons and termination for operational reasons.

b) An employee can be dismissed for reasons of conduct if he (seriously or persistently) violates his obligations under the employment contract. For example, if he or she steals or regularly arrives late or otherwise significantly disturbs the peace in the company.

As a rule, a dismissal for conduct-related reasons requires a prior warning. The first violation is therefore rarely sufficient for a dismissal. Unless, of course, you shoot at your employer or go after him with a knife. …

c) Person-related reasons for termination are primarily illness-related. So if someone is simply no longer able to do his job properly due to physical limitations, then the employer can eventually part with him. Of course, it is usually necessary to wait some time to see whether, for example, an illness will improve again or whether there are alternative employment opportunities in the company. But if a person is simply no longer able to perform his or her work properly, then that is grounds for termination.

Example: If a concert pianist loses an arm in an accident, this will also cost him his job, even if this may sound heartless. Because he will no longer be able to do his job. The inability (even through no fault of his own) to continue to perform the contractually owed work is a person-related reason for termination.

d) The most frequent reasons for termination are operational reasons. Termination can be for operational reasons if the job is no longer available. The reason for termination is often a drop in orders, i.e. when there is simply not enough work for everyone. An extreme case is the closure of a plant or part of a plant.

If only individual jobs are lost, the employer must make a so-called social selection. In simplified terms, this means that the employer must give notice to the employee who is least affected by the dismissal. The decisive criteria here are age, length of service and maintenance obligations of the employee. As a rule, the newly hired 25-year-old has to leave earlier than the 55-year-old who has been with the company for 20 years.

Critics say, social selection ultimately prevents the employer from assembling its workforce in the way that is best for the business. Terminating a mediocre employee in order to hire a better one is not a legitimate reason for termination under German labor law.

2. Dismissals in the USA

American labor law follows a different approach. Keywords are: Hire and Fire or Employment at Will.

a) This means: In principle, the employer is free to continue employing an employee or not. The termination does not require any special justification.

One could also say that, in principle, the employer is free to decide how to compose his workforce. If he no longer wants an employee (f/m), then he simply terminates him. His company, his decision.

b) But of course there are limits in American labor law.

For example, a termination may not be discriminatory. Terminating an employee because the employer no longer likes the employee’s skin color, gender or region is not permitted.

It is also not permissible to terminate an employee because he or she has rightly pointed out wrongdoing in the company (so-called whistleblowers).

In this case, however, the employee must demonstrate and prove that a termination is exceptionally unlawful because such a ground for invalidity exists.

3. And which is better, German or U.S. labor law?

In answering this question, one must of course look at the respective point of view? Better for the employee, better for the employer, or better for the economy as a whole?

a) The employee’s point of view

Employees who are employed in a company and want to keep their job quite rightly appreciate the quite extensive German protection against dismissal. Not having to constantly fear losing one’s job for no reason is reassuring and, in our understanding, almost an indispensable part of human dignity. Understandably, an employee does not want to be exposed to the arbitrariness of his employer.

So this is a big plus for German protection against dismissal from the employee’s point of view.

b) Employer’s perspective

American employers, on the other hand, find it very difficult to see anything good in German protection against dismissal. After all, this is my company, why shouldn’t I be free to decide who I keep and who I don’t? This is how American employers sometimes express their lack of understanding of German labor law.

The employer wants the most effective team possible for his company. He wants the best employees he can have. From the point of view of an American employer, it is legitimate to replace a weaker employee with a better one and/or to be able to implement a staff reduction quickly and cost-effectively. Only in this way can a company achieve the best overall performance and be competitive in the long term.

So here is a plus for U.S. law in terms of business competitiveness.

c) Economic analysis

Let’s look at the whole thing from an economic point of view. I am not an economist, but certain considerations seem plausible and understandable to me.

The economic goal is to keep unemployment as low as possible. As many people as possible should have a job where they can effectively use their skills and earn a living.

Does that necessarily argue in favor of the broadest possible protection against dismissal? Yes and no. Of course, we don’t want the 55-year-old family man to be dismissed for no reason and then slide into unemployment.

On the other hand, isn’t it also the case that it is difficult for the 55-year-old in Germany to find a new job precisely because the potential future employer fears the far-reaching protection against dismissal (which comes into effect after the end of the probationary period)? It is much easier for an employer to hire someone if he knows that he can part with the employee again if necessary without having to pay a high severance payment.

In my opinion, Germany also prefers to hire younger employees because they have weaker protection against dismissal than older employees in the case of dismissals for operational reasons due to social selection. So protection against dismissal can also be an obstacle to hiring for people who are currently unemployed. That’s fair to say, isn’t it?

d) Statistics

Let’s look at the statistics: the unemployment rate in the U.S. is currently (Fall 2022) 3.7%. In Germany, it is 5.4%. According to the statistics, the U.S. economy created 261,000 new jobs in October 2022.

Of course, the numbers say nothing about the “quality” of employment, and everyone knows the saying: don’t trust any statistics except the ones you’ve fudged yourself.

The U.S. has a federal minimum wage of $7.25 per hour. In Germany, on the other hand, it has been 12 euros since October 2022.

4. Conclusion and convergence of two worlds

As a result, can we now say that German labor law is generally better than American labor law or vice versa? I’m afraid not. Both systems have advantages and disadvantages. Seems to me to be a question of perspective and weighting of values. In Germany, we regard employee protection from dismissal as an important social achievement to which we attach great weight. We live in a beautiful world. …

Ultimately, I believe that a certain degree of convergence can be observed since the special “prohibitions on termination” in U.S. labor law are increasingly extended. This is not yet general protection against termination, but it is at least a step in the direction of stronger protection against such dismissals that are to be disapproved of.

Conversely, in my estimation, the German labor courts no longer impose such stringent requirements on terminations for operational reasons as they did 20 years ago. If there are plenty of vacancies on the labor market, a German labor judge will sometimes ask the employee at the conciliation hearing whether it really makes sense to insist on continued employment or whether it would not actually be more sensible to take a (moderate) severance payment and look for something new.

The “land of cowboys and Indians with its Wild West methods” (USA) on the one hand and the “land of Marx and Engels, the spiritual fathers of socialism and communism” (Germany) on the other, thus come from completely different directions. But they are moving toward each other, and that is actually quite a good development. Don’t you think so?

Dr. Wolfgang Gottwald
Rechtsanwalt/Attorney at Law

Attorney at Law

Leopoldstraße 51
80802 München

Tel.: 089/383 293-10
Fax: 089/383 293-13