Frankfurt’s Brexit Pitch – Loosened Dismissal Protection for High-Earning Bankers in Germany on the Horizon?

After months of exhausting, on-off negotiations with changing negotiation partners at the table, Angela Merkel’s center-right Christian Democratic Union (CDU/CSU) and the center-left Social Democratic Party (SPD) agreed on a new coalition agreement for a third grand coalition – usually referred to as “GroKo” in Germany. The deal still has now been formally approved by the 460,000 SPD members in a postal vote, the new government has taken up work a couple of days ago. Our previous blog gives a summary of upcoming changes for employers that are addressed in the coalition agreement.

One major change for banks may be on the horizon: Undoubtedly driven by an interest in drawing UK-based banks to Frankfurt and becoming EU hub for US banks post-Brexit, a previous CDU proposal to relax dismissal protection for high-earning bankers got picked up and will likely be on the new government’s agenda soon.

The New Government’s Plans for Easier Dismissal of Risk Takers in Banks

The coalition partners agreed on a limited applicability of the Dimissal Protection Act (Kündigungsschutzgesetz, KSchG) for risk takers (Risikoträger) under the Ordinance on the Supervisory Requirements for Institutions’ Remuneration Systems (Institutsvergütungsverordnung). If their annual base salary is higher than three times the contribution assessment ceiling (Beitragsbemessungsgrenze) for the statutory pension fund, they shall be treated as executive employees (leitende Angestellte) for the purposes of dismissal protection – which will allow for easier dismissal.

For 2018, the assessment ceiling has been set at EUR 78,000, so risk takers with an annual base salary of more than EUR 234,000 (currently equalling roughly USD 287,000/GBP 208,000) would be in scope of the new regulation. The new law will generally make it easier to fire and replace these in-scope risk takers, but with severance entitlements of up to a maximum of 18 monthly salaries depending on years of service and the employee’s age.

Current Dismissal Protection Does Not Distinguish Between High-Earning Bankers and Blue Collar Workers

Under current legislation, high-earning bankers basically enjoy the same dismissal protection as blue collar workers do: If the employer regularly employs more than ten employees in Germany and the individual has been employed for more than six months, dismissal must be supported by

  • reasons in the employee’s conduct (e.g. criminal acts),
  • personal reasons (e.g. long-term sickness) or
  • operational reasons (e.g. redundancy scenarios).

Employers rarely can prove an airtight case, which is why they often do not take the risk of going through court litigation (which may take well up to two or three years), but prefer to  settle the case in return for a severance payment. There are no (binding) legal guidelines with regard to the amount of severance to be paid. Usually the employer and employee agree on a severance payment somewhere between 0.5 and 1.5 monthly salaries per year of service. However, this is just by rule of thumb and accepted practice. Amounts may differ depending on the reasons for the intended termination of employment and the company’s prospects of success in a potential unfair dismissal claim brought by the employee.

The rather strong dismissal protection creates significant bargaining power on the employees’ side. This may now change for in-scope risk takers. However, still severance entitlements of up to a maximum of 18 monthly salaries will be on the table.

Compatibility With Equal Treatment Principles?

It is doubtful whether this proposal is in line with the principle of equal treatment as laid down in the German constitution and the general principle of equal treatment employers have to observe under established case law. It is not clear why this exception shall only apply to risk takers in banks and financial institutions, but not to risk takers in the insurance sector and capital management companies (Kapitalverwaltungsgesellschaften).

Finally, legislation would need to be adopted quickly, since banks are expected to start pulling the trigger on their Brexit contingency plans very soon. It remains to be seen whether this is feasible and Frankfurt’s Brexit pitch will be successful.

A full German version of the coalition agreement with the rather bulky title “A New Awakening for Europe, a New Dynamic for Germany, a New Cohesion for Our Country” can be found here.

If you have any questions on how the upcoming changes may affect you, reach out to André Zimmermann.