Termination due to insolvency

What does insolvency mean for employees of the affected company and what happens next? Here is an overview of the most important questions and what employees need to be aware of in the event of insolvency. 

1. termination due to insolvency - is that possible?

The opening of insolvency proceedings alone does not change the existence of the employment relationship. Insolvency in itself is not a reason for dismissal. However, the opening of insolvency proceedings is a clear sign that changes are imminent in the company.

This is often followed by a production stop, restructuring and, in the worst case, even plant closures. These circumstances are usually the basis for a reduction in staff. In the event of dismissals for operational reasons, employers or insolvency administrators must explain in detail the reason for the loss of the job and that this loss is permanent. They must therefore prove, among other things, that employees will also be affected by this loss in the future and not just temporarily. The other requirements for dismissal for operational reasons dismissal also continue to apply in insolvency proceedings.

2. it is important WHO declares the termination!

Once insolvency proceedings have been opened and an insolvency administrator has been appointed, only the insolvency administrator can effectively declare a termination from this point onwards. Declarations by employers are generally no longer effective once insolvency proceedings have been opened. Insolvency administrators often also appoint third parties, for example lawyers. A termination by such a third party of the insolvency administrator requires an original power of attorney. Otherwise, a notice of termination issued by a third party without a power of attorney must be rejected immediately in accordance with Section 174 BGB.

3. attention - the notice period can be shortened!

Another change in connection with the opening of insolvency proceedings relates to the notice period. In accordance with Section 113 (1) sentence 2 InsO (German Insolvency Code), a notice period of three months replaces the contractually agreed notice period. If the contractual notice period is less than three months, the contractually agreed shorter notice period applies. Insolvency administrators can also terminate fixed-term employment relationships, which cannot normally be terminated with due notice, with three months' notice. If insolvency administrators make use of this right to terminate with a shorter notice period, this triggers claims for damages by the employee, which must be asserted as an insolvency claim. The claim for damages includes the loss of earnings until the end of the regular notice period.

The situation is different if special protection against dismissal applies. In this case, ordinary notice of termination cannot be given.

4. wages or insolvency money?

Despite the opening of insolvency proceedings, the obligation to pay wages remains unchanged. However, it is often the case that employers have already paid no wages or only partial wages before insolvency proceedings were opened. In these cases, employees are entitled to insolvency money. The employment agency pays the insolvency money retroactively for loss of earnings up to three months before the insolvency event. Employees must apply for insolvency money at the employment agency.

An insolvency event is not only to be assumed when insolvency proceedings are opened, but also when employers simply no longer continue to operate the business or it has otherwise been determined that the company is over-indebted. Furthermore, employees are no longer obliged to perform their work if the employer has significant payment arrears until these arrears have been settled. According to established case law, arrears are significant in any case if they exceed two months' salary. Employees are entitled to remuneration even if they justifiably do not perform their work for the time being.

Any employee who was employed by the employer can apply for insolvency money. However, it is only paid once. This means that employees receive the outstanding net salary for the last three months before the insolvency event as a one-off payment. The good news is that this also includes commission, Christmas bonuses and other salary components that were due during the insolvency period.

5. save severance pay!

When economic problems arise in the company, employers regularly have an interest in reducing personnel costs. With existing protection against dismissal, the termination of employment relationships is not possible without further ado. In practice, employers seek to terminate the employment relationship by means of a termination agreement. It is important for employees to secure the agreed severance payment from such a termination agreement. However, if insolvency proceedings are subsequently opened, the severance payment is no more than one of many insolvency claims. Claims that arose before the insolvency are to be settled on a pro rata basis as part of the insolvency proceedings. This means that often only a small part or even nothing of the insolvency claim is paid out. It is therefore advisable to make such a settlement "insolvency-proof". We will be happy to advise you on this. This also applies to severance payment claims that are negotiated as part of court or out-of-court settlements prior to insolvency.

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