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Layoffs in Europe: Deal or No Deal?

Employers must use all their negotiating skills, not just their checkbooks, when planning layoffs in the European Union.

HR Magazine, January 2009As retailers filled with shoppers last holiday season, the second-oldest department store in Paris stood silent and empty for the fourth consecutive December.

Established in 1870, La Samaritaine has survived two world wars and outlived many other department stores, but it remains to be seen whether it will survive legal troubles that led to its closure in 2005. There reportedly are tentative plans for the facility to reopen in 2013 completely transformed into a hotel and office complex.

Owner Louis Vuitton-Moët Hennessy Group, having acquired La Samaritaine in January 2001, says the facility had become a fire risk and was closed for security.

But Deborah Sankowicz, an attorney with Paul Hastings in Paris, wonders if the closing may have been partly the result of a landmark order in 1997 by France’s high court, an order that reversed an earlier reduction in force (RIF) by the store and required reinstatement of workers. The ruling dramatically reshaped the relationship between employers and works councils that now flex their muscles well beyond Paris.

U.S. multinational employers often are surprised when they discover just how much say local works councils have in planning RIFs, according to management attorneys. That’s why the leaders of multinationals need to use all their skills as negotiators, not just their checkbooks, when planning layoffs in the European Union (EU).

The February 1997 order by France’s Cour de Cassation demonstrates the significant role of social plans—now referred to in France as plans to safeguard employment—when conducting RIFs in the EU. France’s high court ordered La Samaritaine to reinstate workers laid off in a 1993 RIF.

The laid-off workers had challenged the store’s social plan as inadequate. The high court’s remedy was unprecedented and would change the way layoffs would be conducted in France for years to come.

Severance not Enough

When there are RIFs in France, employers’ two main duties with works councils today are to inform them about the RIFs and to consult with them on the rationale of the RIFs and the “redundancy plans” that will be offered to employees, Sankowicz notes.

Employers must follow extremely technical procedures in negotiating with works councils regarding their redundancy plans. The plans must provide specifications about how the layoffs will be conducted; in France, they often specify how laid-off workers will be retrained. “Severance [pay] is not a redundancy plan,” she cautions, saying that executives with U.S. multinationals too often think they can write checks—and be done.

In France, employers usually have at least three meetings with members of works councils to hammer out the plans to safeguard employment. One of the first points of negotiation often will be a time frame for the negotiations.

When severance pay negotiations begin, Sankowicz says, employers should “not start too high” in their offer because they will lose leverage. But an employer shouldn’t start too low, either, or it will be perceived as offering a redundancy plan that is inadequate compared with the company’s financial standing.

Today, measures such as training must be included in the plans or courts probably will consider them insufficient, she cautions.

Following a June 17, 2008, law (No. 2008-561) supported by employers, a five-year statute of limitations now applies to damages for actions, including those linked to redundancy plans or RIFs. A request for a court to nullify a RIF already was limited by a five-year statute of limitations, but such requests are complicated, Sankowicz notes, saying, “Sometimes, it’s not possible to reinstate.”

Leaders of U.S. multinationals planning RIFs often “want to go very fast” and sometimes “push works councils too much,” Sankowicz observes. Works council officials then get frightened and ultimately can bring the negotiating process practically to a halt. That’s why Sankowicz says it’s “better to lose time at some points” than to rush works councils.

Human resource professionals serve as important links during negotiations and “smooth the process,” she says.

Growing Influence

In the United Kingdom, the duty to inform and consult with works councils before layoffs is newer than in France. The 1999 Transnational Information and Consultation of Employees Regulations implemented the European Works Council Directive. And the 2004 Employment Relations Act established a right for employees or their works council representatives to be informed and consulted by their employer on matters prescribed by implementing regulations, including RIFs, better known in the EU as redundancies.

The United Kingdom phased in the duty to inform and consult with works councils gradually, applying the Information and Consultation of Employees Regulations first to employers with 150 or more employees as of April 6, 2005, then to employers with 100 or more employees two years later. As of April 6, 2008, it applies to employers with 50 or more employees, as in France.

The information and consultation obligation applies in the U.K. only if at least 10 percent of all employees make a formal request for information and consultation on an employer’s undertakings.

U.K. employers should remember they have an additional duty to inform and consult individually, as well as the obligation to inform and consult with works councils, notes Christopher Walter, who chairs Paul Hastings’ employment practice in London. “It’s easier to consult with employees individually,” he says.

Not Just Numbers

The big mistake representatives of U.S. multinationals make when negotiating RIFs with works councils: They are often “not aware of the rules or the fact that they shouldn’t come to Europe with a firm, inflexible decision,” Walter says. Employers “need to go to employee representatives with an open mind and willingness to listen” to proposed alternative arrangements.

Walter recalls one U.K. department for which a U.S. multinational had planned a RIF before the employer was persuaded—by the works council—that if the U.K. operations were closed, there would be no way to provide the department’s services in the United States. The department won a 12-month reprieve from the RIF with the possibility of extending its operations.

When consulting with works councils about RIFs, expect lengthy severance pay negotiations.

In Spain, the minimum severance amount that must be paid equals at least 20 days of salary per year of service, says Vicente Calle, an attorney with Garrigues in Madrid. “You might have to go to 60 or 70 days” per year, he adds.

Negotiations about RIFs are long and hard in Spain, according to Calle, who notes that there often are political and public relations repercussions. In Spain, losing one’s job creates a social stigma, Calle explains, emphasizing that during RIFs, the way employers “talk and the way they behave is relevant even though the employer may have a business case” for layoffs.

That does not mean you can’t conduct a RIF in Spain, he adds, but there has to be a reason and procedures must be followed. Employers should “be very careful because of the social climate and the interpretation society and the media make” following RIFs.

Spain’s government requires that the employer prepare a social plan. Severance pay is important, but Calle says it’s essential for employers to be “sensitive in how they do things.”

Calle says executives for U.S. multi­nationals “overestimate money vs. employment.” The employees “need to understand first why” there will be layoffs, he cautions, recommending that employers “discuss the reasons before you talk money.”

How Much for a Picasso?

Axel Braun, chair of German employment law practice with the Luther Law Firm in Cologne, Germany, agrees that leaders of U.S.-based multinationals too often insist that a RIF should go according to plan and budget and be executed with due speed. When works councils are involved, the budget is never the final word, Braun cautions.

In Germany, every employer with five or more employees may have a works council. If there are at least 21 employees and a works council, there must be a social plan for a RIF, Braun notes.

The duty to consult with works councils about RIFs in Germany exists only if the works council existed when the RIF was announced. As a result, Braun says it’s a good idea for an employer that does not have a works council to speed up the process and communicate a RIF “as soon as possible.”

As for severance negotiations, “there’s no rule on how to calculate” severance for RIFs in Germany, Braun says, asking, “What is the price of a famous painting of Picasso? What the seller and buyer think it is.” So, the employer and works council bargain, taking into consideration what other companies in the same industry pay, the company’s profits or losses, and regional factors such as the economy.

European and Local Works Councils

There are two main kinds of works councils—European works councils (EWCs) and local works councils.

An employer may be required to inform and consult with either or both groups of employees when there are exceptional circumstances affecting employees’ interests, such as a layoff, depending on the size of the company, where it has facilities and whether works councils have been established.

A 1994 EWC Directive (EU Directive 94/45/EC) requires any company with at least 1,000 employees within the European Union (EU) and at least 150 employees in each of at least two member states to inform and consult with employees at the EU level on transnational business matters through their EWC representatives.

A large multinational must establish an EWC when at least 100 workers from at least two facilities in at least two EU countries request an EWC in writing.

In addition, companies must inform and consult with local works councils, if they have been established. A 2002 EWC Directive (EU Directive 2002/14/EC) provides a general framework for companies to inform and consult with employees through their local works councils.

This directive requires EU nations to implement the directive in a national law that covers either undertakings with at least 50 employees or establishments with at least 20 employees.

An employee laid off in Bavaria is much more likely to quickly find other work than someone in eastern Germany. Many in eastern Germany are “desperate for work,” Braun says, and are likelier to sue a company after being laid off to save their economic futures.

But controversy about RIFs can brew in western Germany as well, as a Jan. 15, 2008, announcement by Nokia demonstrated. Nokia’s plan to close a plant in Bochum, Germany, and relocate mobile phone factories to Hungary and Romania led to protests, followed by calls to revise the European Works Council Directive.

In an April 25, 2008, press release, Nokia officials noted that the total amount of the social plan to close the plant was 200 million euros, including severance payments and the establishment of a transfer company. Employees affected by the closure may move to the transfer company for 12 months to help their search for new employment. On July 3, 2008, Nokia and the City of Bochum launched a "Growth for Bochum" campaign. Nokia agreed to contribute 20 million euros for the campaign and the proceeds from the sale of its facility.

Cultural Considerations

Nokia’s experience illustrates the importance of factoring cultural considerations into a social plan. For example, Braun says there would be cultural and legal obstacles if an employer transferred employees from a factory in Germany to a Dutch or Belgian site. Although nearby, the Netherlands and Belgium still have different languages, separate legal systems and separate social security systems. Other than executives, “people are reluctant to cross borders with jobs,” he says.

Thomas Belker, SPHR, GPHR, managing director of HR for OBI—one of the world’s largest home improvement companies—near Cologne, agrees that negotiators for global companies should pay close attention to regional differences as well as company and departmental cultures when conducting RIFs.

U.S. multinationals tend to communicate details of a RIF too early and without consulting with works councils, says Belker, a member of the Society for Human Resource Management’s Global Special Expertise Panel.

An internal statement within the company that there will be a dismissal is a common first mistake, Belker adds. This kind of statement opens a company to a legal challenge because a RIF first must be discussed with members of the works council.

Belker recommends that multinational leaders have realistic expectations about how long RIF negotiations will take when works councils are in the picture. “Don’t expect anything under three months,” he says. But, he adds, if a RIF takes longer than six months, something has gone wrong in the process.

Consultation with works councils can be complicated by a reluctance among works council leaders to take responsibility for decisions, Belker cautions, saying they “normally shy back from hard decisions and want others to be responsible for them.”

In RIF negotiations with works councils, HR professionals have the difficult task of “bringing together completely different opinions to come to common agreement,” Belker says. HR professionals also have the power to gain the trust of both parties and broker a fair deal, he observes.


The author is manager of workplace law content for SHRM.

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