On November 20, 2018, the German Ministry of Finance sent the draft of the Brexit Tax Accompanying Act (the Act) to other ministries and industry associations for their review and input. The draft Act honors the promise—made in the coalition agreement between Chancellor Merkel´s Christian Democrats and the Social Democrats in March 2018—to loosen the protection against dismissal for certain highly paid managers. As part of the Act, it may soon be easier for banks in Frankfurt to terminate their top employees.
The departure of Great Britain from the European Union forces banks in the City of London to seek a second foothold on the continent for numerous activities subject to EU financial regulations. Advocates in Frankfurt pushed for relaxing the current protection against dismissal for well-paid bank employees to make the city more attractive and competitive as financial institutions consider where to settle in the EU.
While the termination of employment generally requires a justification in Germany, the Act would eliminate the employer's burden for certain workers in the financial sector. Specifically, an employer's request to terminate the employment relationship of so-called "risk takers" in "significant" financial institutions would be valid without any reason in the future. The rationale underlying the change, in part, is that misconduct at this level could not only lead to high losses for a bank, but could also endanger the entire financial system.
Under German regulatory provisions, "risk takers" are employees whose professional activities have a significant impact on the risk profile of a financial institution. Behind this definition, which at first glance sounds rather vague, stands a catalogue of rather handy qualitative and quantitative criteria, which are regulated in detail in the European Delegated Regulation1 (No. 604/2014, available here). Apart from representatives of executive bodies (board members and managing directors), who are not subject to dismissal protection, the following roles qualify as risk takers:
- Heads of risk management, compliance, and internal audit;
- Heads of key business areas, as well as employees reporting directly to them with management responsibility;
- Heads of an area responsible for legal matters, finance (including taxes and budgeting), human resources, remuneration policy, or information technology or economic analysis; and
- Employees responsible for credit proposals or structuring credit products with a significant credit risk.
The new Section 25a of the German Banking Act stipulates that this interpretation of the European Delegated Regulation includes employees "whose annual fixed remuneration exceeds three times the contribution assessment limit in the general pension insurance." This figure is currently equivalent to 234,000 euros (roughly $265,000).
The changes proposed by the Act would further be limited to risk takers working in "significant" financial institutions, i.e., those with at least 15 billion euros in assets or subject to supervision by the European Central Bank. This provision thereby would exempt most of Germany's local savings and co-operative banks from the change in regulation. The German Ministry of Finance estimates that up to 5,000 employees are likely to be affected by the Act, should it pass.
It is unclear, however, whether this proposal will be adopted. The Act must be discussed and approved by the ministries, industry associations, and cabinet, and then would need to pass through the German legislature. At the moment, there is resistance to the bill both from unions (that believe the law is discriminatory and unconstitutional) and employer associations (that believe it is too narrow and should also cover top bankers in "non-significant" institutions).
The legislature is unlikely to consider the Act before March or April 2019. If the law is adopted, it would come into force presumably around May or June 2019. In any event, we expect the proposal to be introduced early next year. We will continue to monitor its progress and will report back on any noteworthy developments.
1. A regulation is a legal act of the European Union that becomes immediately enforceable as law in all member states simultaneously.
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