Employment Termination Law
in Germany for Startups
Small, young and flexible! Fixed-term contracts and termination law for Startups in Germany
In general, German labour law is known for the fact that companies experience difficulties in dismissing employees. Personnel decisions are therefore having considerable financial and strategic weight. This legal situation often has a discouraging effect – especially on start-ups from abroad. However, on a second glance, the legal situation is not as rigid as it seems at first, for small and young companies. This is due in particular to two different regulations with which the law-makers explicitly wanted to provide more flexibility for small and young companies.
Small – Simple termination law for small enterprises
In large companies, employees with a minimum of six months’ employment are well protected against dismissal. They can only be dismissed under certain conditions and for a reason specified in the law. But this does not apply for small companies! The German law on protection against dismissal (Kündigungsschutzgesetz) does not apply to smaller companies. Employees can be dismissed easily and without giving reasons.
But when is a company considered a small enterprise? The exception in the Kündigungsschutzgesetz applies to companies with ten or fewer employees. When counting how many employees work in the company, a distinction must be made between full-time and part-time employees. In principle, one full-time employee is considered to be one employee. A part-time employee who works between 20 and 30 hours per week is considered 0.75 employees and a part-time employee who works 20 hours or less per week is calculated at 0.5. Trainees and interns are generally not included in the count.
Young – Special advantages for fixed-term employment contracts for newly found businesses
In order, to avoid the depths of the Kündigungsschutzgesetz in the first place, some start-ups decide to limit all employment contracts to fixed-term contracts. If the fixed-term contract expires, the company can decide anew whether it wants to continue to employ the employee.
However, it is often ignored that the German law on fixed-term contracts does not necessarily leave more flexibility than the law on termination. In order to be able to effectively set fixed-term employment contracts, a fixed-term reason must be stated in the law. If such a reason is not given, an employment contract may be limited to a maximum of two years and may only be extended three times within these two years. After the two years have been completed, the only remaining option is to offer a permanent position. Few people know, however, that start-ups enjoy a special advantage in the right of fixed-term contracts! In the first four years after the establishment of a company, the calendar-based limitation of an employment contract is permitted for up to four years without any objective reason. Within these four years, the fixed-term contract can also be extended several times.
Flexible – Does a temporary or permanent employment strategy makes better sense for my Startup?
But are fixed-term contracts for small start-ups useful at all? This must be decided in each new case! In general, fixed-term contracts are only advantageous for enterprises with a company size of 11 employees or more.
Fixed-term contracts, on the other hand, have the disadvantage that employee loyalty often suffers as a result of the time limit. Employees who are always confronted with a potential end of their employment relationship are more likely to look for other employers than employees in a permanent position. However, even for smaller start-ups, fixed-term contracts may be a better option if the company is expected to grow rapidly (over 10 employees). As a strategic question, it is therefore worth considering the type of employment contracts as soon as the first employees are hired.