2020 has been an unpredictable year to say the least. An obscure virus, thought initially to be a China problem, has now impacted the world in a manner never imagined by the best of the prediction models in their worst case scenarios.
While the toll on the human life has been unfortunate and immense, the economic impact is going to be far worse. It is predicted that more people will be affected economically than ever in our history. The severity of this pandemic is so immense that its closest parallels happened almost 100 years ago - Spanish Flu and Great Economic depression.
The 2 global events which were the biggest before Covid19 were:
Y2K bug at the turn of century,
2008 financial crises,
In retrospect, compared to Covid19, these 2 appear to have been training events for what was to come in 2020. The official US unemployment has already crossed 33 million mark. This has plummeted the US unemployment rate from a historic low of 3.5% couple of months back to about 14.7% as of writing of this article.
While the US business approach is to fire/furlough/lay off employees in tough times, things are a bit better in Germany for the normal employees. Germany, in such tough times, goes back to a tool it has been using for a long time - "Kurzarbeit" or "Short time work".
Useful read: What are the pros and cons of living in Germany?
This is a collaboration between the German government, corporate and the employees to bear the burden of an unprecedented downturn in the economy. While all of the stakeholders bear the burden, on the flip side - a single party is not left alone to fend for themselves. The biggest beneficiary of this system is the employee - who will not have option to seek alternate employment due to a pan industry impact of Covid19.
So, how does Kurzarbeit works?
There are certain conditions that need to be fulfilled by the corporate to qualify for this assistance:
The working hours should have been reduced by atleast 10%,
Atleast 10% of the total workforce must be impacted (currently only upto Dec, 2020, in normal times atleast 33% of the workforce should be affected),
The reduction in working hours is due to factors beyond the control of the corporate,
Firms pay the employees social security contributions (reimbursed by the government),
The working hours reduction is temporary in nature, normal working hours will be restored by the corporate once the situation returns to normal,
and some more statutory compliance. (Detailed English document from Federal Ministry of Labor is available here).
While the above might sound too complicated, most of the German corporate are highly efficient when it comes to being prepared. Especially, when it concerns employee laws and statutory compliance.
If all of the above conditions are fulfilled, the employee can get upto 67% of their monthly salary lost due to reduced working hours (in case of children, 60% otherwise).
Useful read: Is 63,000 a good salary to live in Berlin, Germany?
Kurzarbeit calculation in case of reduced working hours:
Assume a case of an employee, where his working hours are reduced by 25%, then the salary is reduced by 25%. In such a case, the employee will get 75% of the salary from the company and 67% of the remaining 25% of salary from the government.
Example : A gets a normal net salary of 2,000€ per month. Due to Covid19, his working hours are reduced by 25%. In such a scenario, he will get salary as follows:
From company: 75% of 2,000€ = 1,500€
From the state:
either 67% of (2,000-1,500) = 335€ OR > 60% of (2,000-1,500) = 300€
So, in this case, A will get a net salary of 1,835€ in case if he has kid/s or 1,800€ in case of no kids.
In this case, the company reduces the salary burden as per the working hours, German government steps in to cover some part of lost salary and the employee loses ~200€ only from his monthly salary. Everyone bears the burden for the reduced economic activity.
Note : The above is a simple example to convey the calculation of Kurzarbeit payment. The details will differ based on each individual's tax class in Germany.
Kurzarbeit calculation in case of 100% reduced working hours:
This implies that your employer has suffered severe impact due to Covid19 (think aviation, hotel and tourism industry as a reference point). Due to this, there is absolutely no work for you. In this case, for no fault of anyone, the company sales has dried up and hence, the company is unable to pay your salary.
Example : X gets a normal net monthly salary of 2,000€. Since he worked in hotel industry, the bookings at the hotel has gone down to 0. Due to this, he is not required to work at all by the hotel. In such a case, X's salary will be calculate as:
From company: 0% of 2,000€ = 0€,
From state: 67% of (2,000€ - 0€) = 1,340€ (or 60% of 2,000€ = 1,200€ if he has no kids).
This means, that the state is now paying X some part of his monthly net salary. The hotel company is allowed a break and preserve their cash to deploy when the guests return after the pandemic is over.
Benefit for the employees:
For the employee though, there is a slight loss of salary. Though not ideal, this is better than:
Being jobless in an economy where jobs are disappearing,
Having no monthly salary at all,
Having some cash inflow, especially since the length of this pandemic is unknown,
Not having to worry about the basic monthly necessities - rent, groceries and kid's expenses,
Having the possibility of returning to the same job, if the economy and demand picks up,
I am personally aware of atleast 2 professionals who are being supported entirely with this program. Both of them are non EU nationals and highly thankful for this support from the German government, while the newly unemployed in US are struggling to fulfill basic necessities.
Kurzarbeit is a tried and tested tool in the Germany's fight against an economic downturn. The same was used during the 2008 financial crises. This led the German economy to bounce back much earlier after the crises was over.
Though a useful tool, it is helpful if the Covid19 pandemic lasts for a specific period of time. As of now, this mechanism applies till Dec,2020, which is still 7 months out. The key factors that become critical for the success of this program are :
The economic demand needs to pick up considerably, as soon as the pandemic is over,
The companies might run out of cash to restore their operations even if the demand picks up,
There is (as of now) a limited budget allocation for this program (expected impact is about €10 Billion, budget allocated is €26 Billion),
The global demand for German exports needs to come back (Germany is an export oriented economy)
If the demand is not enough, then not all of the employees put on Kurzarbeit or reduced hours, might be called back for their jobs.
While the future is unpredictable, the German government and relevant stakeholders are doing all that they can to weather the Covid19 storm. This is such an unprecedented event that no one really knows what the post Covid19 world will look like.
It always helps to have a mentor, who has worked and lived in Germany for some of the best brands. For personal consultation with Arun Mahajan, book a time with him.