When establishing the budget for a social plan, in corporate groups the question is regularly raised whether one may or may not fall back upon the wealthy "parent" or the group as a whole when calculating such budget. The BAG has now provided clarity in cases where no substantial assets have been removed during a divestment of the operating company.

The company K-AG ran six rehabilitation clinics, five of which were owned by it and one of which was only leased. The lease agreement was transferred during the course of a divestment of all of the clinics to a transferee. The transferee employer wanted to discontinue the extremely loss-making clinical operations at the end of 2006. The arbitration board set up drew up a social plan in an overall volume of 1.3 million euro. The employer's balance sheet at such time showed a deficit not covered by equity capital in an amount of about 3 million euro. The arbitration board established the overall volume by including the assets of K-AG in the assessment of the financial situation.

The motion filed by the employer for the declaration of the invalidity of the decision of the arbitration award was successful before the 1st Senate of the BAG.

If an enterprise undertakes a change of business, then under certain circumstances negotiations must be conducted on a compromise of interests and social plan. The purpose hereof is to compensate for the disadvantages associated with the measure, typically by granting settlements.

The arbitration board decides in the management's and employees' stead if they are unable to agree on the establishment of a social plan. Pursuant to Sec. 112 V German Shop Constitution Act (Betriebsverfassungsgesetz, "BetrVG"), its decision must duly account for the social welfare interests of the employees and the economic reasonableness of the social plan for the enterprise. The financial capacity of the enterprise is determinative of the economic reasonableness.

Especially in case of group companies, one must consider whether the financial capacity of the enterprise or that of the group behind the enterprise is relevant. According to established case law of the BAG, in principle only the economic situation of the respective enterprise is decisive and one may not fall back on affiliated enterprises.

The Regional Labour Court of Hesse (Landesarbeitsgericht, "LAG") nevertheless upheld the decision of the arbitration board in analogue application of Sec. 134 German Mergers and Reorganisations Act (Umwandlungsgesetz, "UmwG"). The Senate of the BAG based the success of the appeal against the decision of the arbitration board on the fact that no assets of substance for the continuation of the clinical operations had been removed from the employer. The arbitration board had denied resorting to the wealthy K-AG via Sec. 134 UmwG, as this constituted a violation of the principle of economic reasonableness pursuant to Sec. 112 V BetrVG.

By creating clear requirements for the arbitration board, the BAG has ensured a greater degree of legal certainty. However, according to the decision of the BAG, it would seem that a piercing of the corporate veil is not ruled out in cases of a withdrawal of substantial assets prior to the divestment. It will be easier to appraise this with greater certainty once the reasons for the judgment have become available.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.