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International Highlight — Germany’s Government Extends Partial Unemployment Compensation

February 2009
Executive Compensation, Benefits, Employment and Labor Focus
Björn Theis

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In the US, laid-off employees are eligible for state unemployment compensation. But the benefit amount is somewhat meager, and does not replace most of the final average pay. Also, US employees are eligible for unemployment compensation only when they lose their job. American employees subject to a cut in pay or hours are ineligible.

Many other countries, however, offer richer unemployment benefits. Germany, for example, has a partial unemployment compensation fund ("short-time work subsidy") that pays government money to workers who remain employed, but who are furloughed or whose work hours get cut and thus their pay reduced. This benefit helps employers, because it softens the blow when an employer needs to cut labor costs. The short-time compensation benefit paid by the state equals two-thirds of a covered employee's lost pay.

Employers in Germany actively structure their cut-backs so as to allow their workers to qualify these funds. Indeed, a cut-back in Germany that fails to qualify would not likely win necessary approvals from the workers' council (workers' representatives) under the German "co-determination" system.

As of 2009, the German government has now extended the benefit period for this partial unemployment compensation from six to 18 months, because of the downturn and concern that there will be a wave of lay-offs.

In Germany, more than 6,000 companies are currently introducing reduced hours. It is estimated that in 2009 around 250,000 employees will be affected, and the state will pay around 1.5 billion euros in these so-called "short-time work subsidies." This is five times the amount paid in 2008.

What are the eligibility requirements for these "short-time work subsidies"? Short-time work subsidy is granted by the German Federal Employment Office on request by the employer or the workers' council if:

there is a "significant" "lack of work" with corresponding loss of pay, and the German Federal Employment Office has determined in a written notice that the requirements are fulfilled (a "significant" "lack of work" means "temporary", unavoidable economic reasons outside the employer's control in which one-third of the employees experience a loss of more than ten percent of their monthly pay; a "lack of work" is "temporary" if the employees will, within a foreseeable period, work full-time again; a "lack of work" is considered "unavoidable" if the employer and, if appropriate, the workers' council have attempted, unsuccessfully, to avoid or restrict the short-time work before notifying the lack of work to the German Federal Employment Office)
the employee remains in an employment relationship covered by unemployment insurance
the employment contract is not terminated or otherwise cancelled
the employee is not excluded from short-time compensation

As to how short-time work gets implemented: Since short-time work affects a core element of the employment contract, its introduction requires a "legal basis." This "legal basis" could be a collective bargaining agreement or a "shop agreement" with the workers' council, or individual employment agreements. Introducing short-time work may trigger "co-determination rights" of the workers' council and short-time work would then require prior approval of the workers' council.

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