Hard but fair: workforce reductions through a transfer company

Katja Dreyer, an experienced consultant at SCHLAGHECK + RADTKE executive consultants in Düsseldorf, increasingly sees companies in difficulty having to part with strong performers.

So what can be done? As a former head of HR, Katja Dreyer knows her clients' position well. "Changed conditions leave companies wrestling with situations that force them to release executives and highly qualified specialists whom they will urgently need again sooner or later." It is therefore worth taking a few points to heart when economic circumstances make a workforce reduction unavoidable.

1. You meet twice in life
If a separation process is not handled fairly, every departing employee can turn into a problem for the employer. Employees who feel treated unjustly do not keep their anger about their previous employer to themselves. An employer brand built up over years takes a serious knock from just a handful of negative reviews on the relevant portals. And if the person let go finds their new professional home in a key role at one of your customers, the business relationship had better be solid if it is to survive undamaged. If that annoyed former employee is well connected in the industry, more damage follows. Bad word of mouth unfortunately travels fast and can become a problem in later recruitment within the same sector. So: given how quickly conditions now change, it makes sense to keep every chance open of winning that released performer back at a later date, and a fair separation process is how you do it.

2. A professional farewell culture is not optional
One interesting way of handling a necessary separation with respect is to set up a transfer company (Transfergesellschaft, TG below).
There the affected employees are supported over a longer period in preparing and qualifying for a new professional challenge, much like classic individual outplacement. These measures are funded both by the former employer and by the German Federal Employment Agency, with the aim of averting unemployment and unfair dismissal claims. The company gives the person being let go the sense that they are being properly looked after and prepared for a new role. Ideally they leave without disappointment and feel valued instead.

We spoke to Jörg Herling, project and site manager for Düsseldorf at Mypegasus, Germany's largest transfer company.

KD: What is a transfer company?
JH: The transfer company is an instrument of labour market policy. Its legal basis is section 111 of the German Social Code, Book III. Transfer companies take on employees who are at risk of unemployment and support and qualify them for a period capped at twelve months. Participants move across through what is called a three-party contract, between the releasing company, the employee and the transfer company.

KD: And what is a transfer agency?
JH: A transfer agency runs placement-support measures while the employment relationship is still running. Employees are released from work for those appointments but otherwise remain part of the business. The Employment Agency funds up to 50 per cent of the measures, capped at 2,500 euros in total. What is decisive is how much the employer puts into it. If a move to a transfer company follows, funds can be carried over.

KD: When do you use which instrument?
JH: Interestingly, you can combine the two. The transfer agency is often used when production targets still have to be met while jobs are being cut. Transfer companies always aim to give the employee a perspective rather than hand them over to unemployment. Employment in a transfer company is a proper employment relationship subject to social insurance contributions.

KD: Which companies are transfer agencies and transfer companies suitable for?
JH: In principle both work for almost any business. The law defines an operational change under section 111 of the Works Constitution Act, with an agreed social plan, as the basis for setting up a transfer company. Pure headcount reduction can also satisfy the operational requirement. Depending on the size of the business, between 5 and 10 per cent of the workforce has to be at risk of unemployment; in businesses with fewer than 60 employees, at least six people. Smaller businesses without a works council can also use the transfer company instrument as long as they observe those thresholds. In that case the necessary agreements are covered by an arrangement similar to a social plan together with a general undertaking.

KD: What are the advantages for employees and employers?

For employees:

Direct unemployment is avoided
Material security, among other things through a top-up to the transfer short-time allowance
An employment relationship subject to social insurance, with all the associated benefits
A return after suspension is possible while the transfer company is running, for example if the employee takes a job and resigns again shortly afterwards
Individual support, advice and qualification
Time gained, with no disadvantages if unemployment does occur later
Participants are available to potential employers at short notice for trial periods or internships

For employers:

Separation handled in the spirit of social partnership, which helps the employer image
Full planning certainty on time and cost
Flexible in implementation at any point
Notice periods are not relevant
The three-party contract rules out litigation risk
Funding through the transfer short-time allowance

KD: What exactly happens inside a transfer company that a "normal" unemployed person would not experience?
JH: The most important element is the intensity of the advice and coaching. The frequency is agreed individually and adapted to needs. The participant's abilities and goals are established. All of this happens in a multi-stage process that begins with the legally required profiling. Together with a personal transfer adviser, and after an analysis of strengths and weaknesses and a look at the labour market, the necessary qualification needs are defined. While the classic unemployed person is obliged to accept any reasonable work, a transfer company participant can think through possible new career paths without pressure. What can I do, what do I want to do in future, what does the labour market offer, and which qualifications do I need for that?

KD: Could you give an example of successful transfer work?
JH: We currently have the following project: setting up an organisationally independent unit, in other words a transfer company, following an operational change in which a production area was shut down. Seventy employees from production, development and administration were affected. Fifty people entered the transfer company, some of them close to retirement. All but a few are employed there for twelve months. Despite the pandemic, several participants were placed in the first six months, and after seven months almost all the production staff have found new roles. Personally I am pleased when participants have reached their own goals by the end of the transfer period. Even where no new employment has yet been taken up, people often judge their own situation as satisfactory, because they feel valued.

KD: Can the success be put in figures?
JH: Setting up a transfer company can largely be structured so that it is cost-neutral for the company. Because the transfer short-time allowance is granted, one month of notice period funds roughly two months of transfer time. Even counting the funds the company provides for qualification measures and for topping up the allowance, there is usually a financial advantage for the employer. Litigation risk also disappears, because employees terminate the old employment relationship by mutual agreement when they enter the transfer company. Funds not used up flow back to the employer. Employees have the advantage of remaining part of working life and continuing under the social and financial conditions they are used to. That also helps the employer, because it makes such a measure easier to accept. At the same time employees can qualify further or reorient themselves professionally altogether.

KD: How has demand for this service developed?
JH: Demand for transfer services is rising sharply because of the current economic situation. The labour market is in motion, and a transfer company opens up a lot of room for manoeuvre, above all through the time it buys compared with going straight into unemployment.

KD: Which service is particularly in demand today?
JH: Support through the separation process itself, above all. Employers also expect to be able to place the future of former employees in qualified hands and spare them unemployment.

KD: What role do transfer companies play right now, during the pandemic?
JH: I think the effects of the pandemic are not yet fully visible, and in this situation the transfer company is needed more than ever as a way of parting with employees in a socially acceptable manner. It will be some time before the labour market settles back at pre-crisis levels. During that time and afterwards, companies will in some cases need staff with entirely new qualifications. The groundwork for that is being laid now. That is exactly where the demands on a transfer company currently lie. Transfer is therefore also an investment in the future of the company.

KD: Thank you for a very informative conversation. Stay well.

Postscript: Mypegasus sets up transfer companies on behalf of client companies and provides comprehensive advice on them. Schlagheck + Radtke executive consultants supports companies above all in the search for specialists and executives, and also in succession and career planning and in running internal assessments, including digital ones. The human capital that remains in the company should also be looked after and deployed well after a period of adjustment, so that strong performers do not leave when you least want them to.