Draft Bill Zukunftsfinanzierungsgesetz II: Reduced dismissal protection for all High Earner Material MRTs?!

1. Legal starting point: Reduced dismissal protection for High Earner MRT in significant institutions pursuant to Section 25a (5a) KWG - and its application in practice to date

The starting point for the reduced dismissal protection provided for in the draft bill of the ZuFinG II was the statutory provision introduced by the legislator in Section 25a (5a) of the German Banking Act (Kreditwesengesetz, KWG) with the so-called Brexit Tax Accompanying Act of 25 March 2019. According to Section 25a (5a) KWG, significant institutions should also be able to terminate the employment with employees identified as MRT within the meaning of Section 1 (21) sentence 1 KWG in such a way that they should be able to file an application pursuant to Section 9 (1) sentence 2 KSchG for termination of the employment by the labour court in a dismissal lawsuit against payment of an appropriate severance payment to be determined by the labour court without having to file the application pursuant to Section 9 (1) sentence 2 of the German Dismissal Protection Act (Kündigungsschutzgesetz, KSchG (= termination for reasons that do not (or no longer) allow for further cooperation between the parties to the employment contract that serves the purposes of the employer’s business) if the annual fixed remuneration of the MRT exceeds 3 times the contribution assessment ceiling of the statutory pension insurance within the meaning of Section 159 of the Sixth German Social Code (Sozialgesetzbuch VI) and the MRT is therefore to be regarded as a High Earner MRT.

The requirements for the effective judicial termination of the employment with a High Earner MRT in accordance with Section 25a (5a) KWG include the following: (1) The employer is a significant institution (institution-related requirement). (2) The employer has identified the employee in the current MRT analysis as MRT in accordance with Section 1 (2) sentence 1 KWG and the employee has the status of a High Earner MRT with regard to his fixed remuneration at the time of the application for termination (employee-related requirement). (3) The dismissal is socially unlawful, i.e. invalid solely on the grounds of Section 1 KSchG (dismissal-related requirement). (4) The employer files an application for the termination of the employment relationship in the dismissal dispute (application-related requirement).

Over the past five years, a number of significant institutions have made use of the provision in Section 25a (5a) KWG and filed corresponding applications for termination in court in termination disputes with High Earner MRTs. This has been met with mixed practical experience, as individual labour courts have attached requirements to the MRT status within the meaning of Section 25a (5a) KWG that go beyond the regulatory provisions of Section 25a (5b) KWG in conjunction with Del. Regulation 2021/923 and, for example, for a MRT identified in accordance with Section 25a (5b) no. 1 KWG (= employee at the management level immediately reporting to the executive board), in addition to the direct reporting obligation to the executive board with management responsibility, which is generally sufficient to fulfil the requirements of Section 25a (5b) no. 1 KWG, required that the individual employee has a material influence on the significant institution's risk profile. If the specific institution was then unable to provide any additional justification for the unreasonableness of continuing the employment in accordance with Section 9 KSchG in the dismissal lawsuit, the labour court rejected the application for termination in accordance with Section 25a (5b) KWG. Significant institutions affected by such an extended understanding of MRT status by the labour court - which goes beyond the requirements of Section 25a (5b) KWG - were then exposed to a quantitatively significant risk of default of acceptance remuneration in the termination lawsuit in view of the substantial fixed remuneration of the High Earner MRTs. Against this background in particular, significant institutions have tended to make only limited use of the application for cancellation pursuant to Section 25a (5b) KWG in practice.
 

2. Specific provisions in ZuFinG II: Reduced dismissal protection for High Earner MRTs in all financial services companies that have to identify MRTs in accordance with Section 25a (5b) KWG, as well as in all capital management companies, investment firms and insurance companies

Notwithstanding previous practical experience with Section 25a (5a) KWG, the draft bill of the ZuFinG II now provides for an extension of this reduced dismissal protection to all companies in the financial (services) sector that have to determine MRTs in accordance with the applicable regulatory requirements, specifically for

• all institutions that have to determine MRTs in accordance with section 25a (5b) KWG, i.e. all CRR institutions and all significant institutions within the meaning of section 1 (3c) KWG (see our Client Alert). To this end, the wording of Section 25a (5a) KWG is to be expanded.
• all medium-sized investment firms that have to determine MRTs in accordance with Section 3 of the German Ordinance for remuneration systems in investment firms (Wertpapierinstitutsvergütungsverordnung, WVV; see our Client Alert). A new sub-paragraph 4 is to be added to Section 46 of the German Investment firms Act (Wertpapierinstitutsgesetz, WpIG) for this purpose.
• all capital management companies that have to identify MRTs in accordance with Section 37 of the German Capital Management Company Act (Kapitalanlagegesetz, KAGB). A new sub-paragraph 4 is to be added to Section 37 KAGB for this purpose.
• all insurance companies that have to identify MRTs in accordance with Section 4 (1) sentence 2 of the German Ordinance for remuneration systems in insurance companies (Versicherungsvergütungsverordnung, VersVergV). A new sub-paragraph 5 is to be added to Section 24 VAG for this purpose.

To justify this extension of the reduced dismissal protection to all High Earner MRTs of companies in the financial (services) sector, the draft bill states that the MRT in all of these companies have a special trust relationship with the company in view of their status as MRT, and that this trust is of particular importance for the individual company, as the activities of the person concerned could also have an impact on the existence of the company and ultimately on financial stability. The draft bill uses this consideration as a starting point for the justification of the extension of section 25a (5a) KWG to all CRR institutions and applies this consideration in a generalised assessment - without further consideration of the respective regulatory framework conditions for the specific determination of MRTs - to the planned extensions of the statutory provisions of Sections 46 WpIG, 37 KAGB and 24 VAG for medium-sized investment firms, capital management companies and insurance companies.
 

3. (First) Practical issues in the application of the respective provisions of Sections 25a (5a) KWG, 46 (4) WpIG, 37 (4) KAGB and 24 (5) VAG

Irrespective of the factual labour court risks mentioned under point 1, the relevant companies would have to make the following considerations when applying the relaxed protection against dismissal in individual cases:

• MRT status of the individual employee at the time of filing the application for termination: In principle, this must be assessed solely in accordance with the relevant regulatory requirements for the company in question, in the interests of uniform application of the law. The judicial review to be carried out with regard to the application for termination would have to include an assessment of the plausibility of the specific analysis under supervisory law and the labour court would not have to carry out a correctness analysis and, in particular, not replace the risk analysis relevant to the assessment with its decision. In this respect, the legislator could make a corresponding clarification in the respective statutory provisions in the further legislative process - against the background of the practical labour court experience of the major institutions in the application of Section 25a (5a) KWG mentioned under point 1.
• High Earner status of the individual MRT: When assessing the amount of fixed remuneration, all remuneration components that are categorised as fixed remuneration in accordance with the relevant regulatory provisions must be taken into account. The draft bill does not contain any specific requirements in the individual statutory provisions on the reference period for the amount of fixed remuneration. The legislator could include a clarification in the further legislative process - systematically based on the provision of Section 5 (5) sentence 3 no. 3 InstitutsVergV - that the financial year preceding the court decision on the application for dissolution is decisive for determining the amount of fixed remuneration.
   

4. (First interim) Summary and outlook

In addition to the above-mentioned specific justifications for the individual standards, the draft bill is based on the general considerations that the relaxation of the termination rules for High Earner MRTs is intended to make the financial sector more flexible and competitive. This reduced dismissal protection for High Earner MRTs should give companies greater leeway to implement personnel decisions more quickly and efficiently. At the same time, the new regulation would include a de facto increased uncertainty in the implementation of the employment for affected High Earner MRTs in the relevant companies - also taking into account the previously cautious practice of the major institutions as described in point 1 - which they may wish to have taken into account in relevant employment contract negotiations when determining the duration of the ordinary notice period, for example. In individual cases, affected companies will also take into account the further-reaching labour law consequences for this group of persons resulting from their status as (High Earner) MRTs when exercising the annual MRTs analysis.

The further legislative process will have to take these considerations into account.