Socially responsible downsizing for SMEs and/or international shareholders

For responsible entrepreneurs, it is important to provide the best possible support to those affected when staff cuts are unavoidable. Small and medium-sized companies often do not have the relevant previous experience and consider transfer companies to be too expensive and complicated an implementation option. However, with the right partners, this path can be implemented easily and cost-effectively. As an interim manager, I have already been able to realize this several times. This resulted in the general process model described below.

Analyze the regional labor market

The regional labor market is crucial for an initial analysis of current placement opportunities and severance pay levels.

Here are some questions that should be researched for an initial assessment:

• How are the unemployment figures developing?
• Which sectors are typical for the area?
• Are there plans for new companies to open up and/or is it apparent that others are weakening?
• What restructurings have taken place in recent years, and with what characteristics?

This research can be carried out by the expert without naming the company. In addition to using digital press archives and their own network, they will also make direct contact with the employment agency and, if necessary, with transfer companies if they have carried out similar projects in the recent past.

The partners involved at this  early stage are familiar with such situations, understand that this must be anonymous and strictly confidential in the phase before a final decision is made by the company, and are very interested in contributing their expertise to the planning in this exploratory phase. In a later phase, these early contacts can be built upon to save time.

This first phase also provides important indications of expected severance factors and placement opportunities for the employees concerned.

Clarify the availability of transfer short-time allowance

During initial explorations with the employment agency, the possibility of using transfer short-time allowance and other support options can also be clarified without naming the company.

The person at the employment agency responsible for approving short-time work transfer benefits usually has a great interest in being involved in the planning of placement support at an early stage. They will provide the company with comprehensive advice on which funds are available and which requirements and framework conditions need to be observed.

A so-called transfer consultation is a basic prerequisite for subsequent funding. The preliminary talks make this a formality that can be carried out together with company representatives once the planning phase has been completed.

In addition to the transfer short-time allowance required to finance the transfer company, further training costs can also be covered (in part or in full). The earlier the start of further training measures is defined and begun, the more funding opportunities there are.

For older employees, a transfer company can offer the possibility of early retirement after a subsequent 2-year period of receiving unemployment benefit. These „bridges to early retirement“ of up to 3 years are attractive for many older employees. For communication purposes and subsequent implementation, it is important to know how the regional employment agency deals with cases in which there is little or no interest in placement on the part of those affected.

These preliminary discussions provide clarity on the minimum requirements for a transfer company, in particular the duration, qualification budgets, net salary increases and so-called sprinter bonuses, which are used to reward early placement in subsequent employment. This in turn provides reliable key data for estimating the costs of the measure.

Involving the employment agency at an early stage also increases process reliability with regard to securing the transfer short-time allowance and a formally correct and timely submitted mass redundancy notification.

Analyze the workforce structure

Various implementation scenarios can be evaluated on the basis of (anonymous) employee data. The focus is on the following aspects:

• What effect would a social selection have?
  • Legally sound examples (e.g. from the case law of the Federal Labor Court) can be used to determine who would be affected first in the event of dismissals for operational reasons.
  • The data available in the personnel system on jobs (job titles) is an initial point of reference for the delimitation of employee groups. An early review of the available data is an important basis for further action planning.
• What are the notice periods? Are these regulated in individual contracts or are only the statutory minimum periods (corresponding to length of service) to be observed? What would this mean for termination periods and costs?
  • A transfer company offers the possibility of an immediate transfer of all affected employees at the time of the measure (e.g. relocation, organizational change, (partial) closure).
  • The notice periods are incorporated into the transfer company, determine the individual minimum term and thus make a major financial contribution to the transfer company.
  • The (individual) minimum employment period in the transfer company is an important design element in a social plan. This is often determined, for example, by doubling the  notice period. In addition, a minimum employment period applicable to all can be defined. As the maximum period of employment is determined by the maximum period of support with transfer short-time allowance of one year, social plans often contain formulations such as „employment period in the transfer company corresponds to twice the notice period, maximum one year, minimum four months“.
  • It is important to know the financial implications of these design parameters before entering into negotiations on a social plan.
• What is the age structure? How many employees are eligible for a special scheme for people approaching retirement?
  • As severance pay is intended to be appropriate compensation for the loss of a job, employee representatives do not favor the application of severance pay for this age group, which is largely determined by length of service. Instead of awarding a very high severance payment to someone who is a few years away from retirement but can look back on many years of employment, it makes sense to change the perspective and base the financial compensation on the time until retirement. The application of appropriate formulas has a significant impact on the overall costs and results in potential savings and more structuring options.
  • An analysis of length of employment, age and activity also enables a qualitative assessment of employment and placement opportunities.

Model calculations using personnel structure data with severance factors and the design options for a transfer company can be used to determine a budget to be applied for the personnel costs of the restructuring measure.

This creates the basic framework for a personnel data set, which can be used to quickly determine the effects of parameter changes in subsequent negotiations.

Obtain offers from transfer companies

Research into regionally established and certified transfer companies deepens the assessment of the specific absorption capacity of the local labor market and provides a reliable cost framework based on anonymized data.

• The relevant parameters for the costs of the transfer company are determined by the monthly salary, the individual duration and a customary top-up of the transfer short-time allowance. As soon as an initial set of data on the employees affected by the redundancies is available, a transfer company can very quickly determine the so-called retention costs, i.e. the costs that the company has to pay in order to guarantee net pay at, for example, 80% of the previous level for the entire period.
• The rule of thumb „one month’s salary finances two months in the employment company“ serves as a rough guide. This makes it clear that the phase-out costs determined by the notice periods cover a significant proportion of the costs of the transfer company.
• Additional cost elements result from the administrative costs, the training budgets and the advisory services to support professional reorientation. While the calculation of wage costs should lead to the same results for all providers, there are differences in the design and amount of the actual services provided by the transfer company.
• It is advisable to obtain references, in which the administrative performance should be requested in addition to the quality of advice and placement. A good transfer company organizes billing efficiently and reliably and tracks and reports on placement successes in monthly status meetings. The basic use of the funds released by early placement must be clarified in advance and can then be decided jointly at the status meetings. They can be used for hardship cases, for example.

Compare the advantages and disadvantages of the various implementation options

Together with severance payment models, this results in various implementation options that can be evaluated in terms of costs, legal risks and time frame. You receive a qualified basis for an entrepreneurial decision on staff reduction.

One of the major advantages of the transfer company is that

• employees can transfer on a specific (joint) date – regardless of individual notice periods. This enables very rapid redundancies.
• The acceptance of the transfer company option is generally very high: employees gain time for professional reorientation and remain in an employment relationship subject to social security contributions without disadvantages for pension and unemployment benefit claims.
• From an employee perspective, the additional funding from the employment agency also makes the offer financially more attractive, even though the company’s overall budget remains the same.
• As the path to the transfer company only leads via the „tripartite contract“ (between the company, transfer company and employee), which must be concluded by mutual agreement, companies have maximum legal certainty.
• This leads to a comparatively „calm“ implementation of the staff reduction, which can be described as socially acceptable and also leaves a comparatively positive image for the employees remaining in the company and in the region: an effect that should not be underestimated! The press coverage and the reactions of politicians to the staff reduction will be significantly different thanks to the support provided than if there is a pure severance solution and the employees are „sent out onto the street“ after short notice periods in some cases.
• Contrary to the usual preconception of a „high administrative burden that medium-sized companies cannot meet“, it has been shown on the contrary that the early involvement of the transfer company in the implementation process does not place any additional workload on the companies: the time-consuming consulting services after the transfer offer (three-page contract) is handed over are carried out by professional experts who are provided to the required extent. The HR department is only involved in the final accounting (remaining vacation, time balances, severance payments) and in the preparation of certificates.
• As described, the „planning and preparation hurdle“ can be taken care of very quickly and discreetly by an expert. The fact that this can be done without naming the company means that this preparatory work is even easier and quicker to complete than if attention is already focused on the company in an early planning phase.

Prepare a negotiation and communication strategy

Before entering into negotiations, key persons (works council, trade union, politicians) should be identified who should be informed in advance and won over for the procedure.

Mayors and, if applicable, members of parliament greatly appreciate it when they are informed at an early stage about the planned measures, their operational economic basis and the planned implementation steps. They are thus prepared for subsequent press inquiries, can show that they are informed, but also know that the decision and the procedural planning have been soundly and professionally prepared. Even if confidentiality can be assumed, this information should be provided no more than two days before the workforce is informed.

You should be prepared for press inquiries and have an appropriate statement ready. With a transfer company, the frequently used formula of „social compatibility“ becomes tangible and the focus shifts more quickly from denying the necessity of the measure to supporting the professional reorientation of those affected.

Finally, key staff representatives (works council chairpersons, trade union representatives) should be informed in advance in smaller meetings. They should have the opportunity to familiarize themselves with the new situation before they have to position themselves on a larger stage. With the transfer company option, the company can give the employee representatives an early success in the negotiations and an agreement can be reached on when this is considered to be „agreed“ and who will communicate this. Employee representatives should also be given at least a say and veto right in the final selection of the transfer company.

In fact, it is important to clarify at an early stage whether a transfer company is fully supported or whether there are negative voices. This may be the case, for example, if the employees concerned are highly qualified, have very good career prospects and the regional labor market is very receptive. Short-time work-based approaches are also not popular for incomes above the income threshold.

But these points should have already been noticed in the first steps of the expert analysis (see above) ….

Conclusion: legally waterproof, socially responsible job cuts with manageable costs are possible

When planning a responsible downsizing, you should

• based on an analysis of the regional labor market,
• Clarify the implementation options with regard to the workforce structure
• and contact the employment agency at an early stage: There is tangible and financial support available in cooperation with the employment agency.

In particular, the use of a transfer company should be considered. This is because transfer companies help to implement staff reductions quickly and reliably.

Even if this instrument is often associated with large companies and is considered to be complex and expensive, an experienced interim manager can make the advantages of this implementation method accessible to medium-sized companies and intenational shareholders.

Feel free to get in touch! A solid basis for negotiations with employee representatives can be established within a few days.