Germany and COVID-19: How short-time work can mitigate the financial impact and avoid talent drains

The COVID-19 pandemic has the potential to affect the health and life of everyone. Furthermore, COVID-19 will have dramatic consequences for the economy and businesses as well as for workers and their families.

According to current estimates, the impact of COVID-19 on the economy will be much greater and more global than the 2008/9 financial crisis, and the massive aid packages just adopted by governments in the United States and Europe give an indication of what to expect.

German Chancellor Angela Merkel and her government team, with the approval of parliament, swiftly passed massive aid packages. One part of this aid package focusses on short-time work, which has been a legal tool in Germany for many years and which has been copied in many other European countries after the financial crisis. Short-time work is a tried-and-tested tool for the German labor market. During the 2008/9 financial crisis, 1.4 million employees worked on a short-time basis and more than 200,000 jobs were saved. The German unemployment rate fell from 7.9% to 7.0% during the recession compared to an Organization for Economic Cooperation and Development (OECD) rise by 3% to 8.6%. No noteworthy talent drain occurred during the recession thanks to short-time work.  

Thus, short-time working has ensured that the financial crisis, at that time the most severe economic crisis since World War II, passed almost without leaving its mark on the German labor market.

Short-time work means that companies agree with their employees or the works councils or unions that for a limited period of time, work will be significantly reduced or that no work will be done at all.

Back to the future: In the COVID-19 crisis, the Federal Government expects approximately 2.15 million employees to be on short-time work. Considerable funds have been made available for this purpose. The Federal Employment Agency expects costs of about 10 billion euros for the first three months. The reserves of the Federal Employment Agency amount to approximately 26 billion euros, so that further months are financially secured.

In addition, the Federal Government has created new laws that make the short-time work subsidies even more accessible for a number of companies.

Many German companies are making use of these regulations and are trying to use short-time work not just as an option but rather as a “silver bullet” to survive.

What are the requirements of short-time work?

Short-time work requires a substantial loss of working hours. This means that at least 10% of the employees of a business or a business department are affected by a loss of earnings of more than 10% of their monthly gross salary in the respective calendar month. The loss of working hours must be temporary, unavoidable and based on economic reasons or an unavoidable event. These requirements are usually met in pandemic times such as the current COVID-19 crisis.

What are the consequences of short-time work?

In a nutshell: Companies agree with their employees, works councils or unions to reduce the working hours for a limited period of time; working hours can even be reduced to zero (so-called “short-time work zero”). As a consequence, employees receive reduced salaries proportionate to their reduced working hours. The pay gap is subsidized by a state allowance (so-called “short-time work allowance”).

How much will be compensated by the German State?

Salary losses resulting from short-time work will be compensated by a short-time work allowance administered by the Federal Employment Agency. This allowance amounts to 60% or 67% (for employees with at least one child) of the difference between the normal salary and the reduced salary. As part of the state aid package, social security contributions are temporarily compensated by the Federal Employment Agency as well.

And for how long?

Short-time work allowance can be paid for a maximum of 12 months.

Can short-time work be implemented unilaterally?

No, the implementation and introduction of short-time work arrangement requires an agreement with the individual employee (employment agreement or addendum/ad-hoc agreement) to reduce working hours and remuneration, a collective bargaining agreement with the union or a works council agreement with the works council. An employer cannot unilaterally implement such an arrangement.

How and where to apply for short-time work?

Where the statutory requirements are met, the employer has to report the work loss to the appropriate employment agency as a first step, and then submit the application for short-time work compensation for the respective month as a second step.                    

What to achieve and avoid by implementing short-time work?

In the past, short-time work arrangements significantly helped German companies avoid very costly (mass) redundancies and mandatory compensation payments for the loss of employment in works council agreements (so called “social plans”) as well as a talent drain. As a result of these arrangements, companies were able to immediately re-start production and provision of services after the crisis to stave off further losses.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.