Current geopolitical developments are having profound consequences for numerous industrial sectors. In light of global conflicts, notably the war in Ukraine and the threat posed by Russia, worldwide demand for armaments is increasing. Defense sales are currently reaching record highs. Regardless of diplomatic efforts to end the war in Ukraine, the importance of defense contractors will continue to grow as governments increasingly invest in defense and security. Companies are having to adapt to new security policy realities. In this context, the transformation of civilian production facilities toward defense‑oriented manufacturing is moving increasingly into focus – with significant effects on the labor market and, as a result, on how employment law frameworks are designed.
Changed market conditions and new staffing requirements
While defense contractors and their suppliers are desperately searching for qualified staff and additional production capacity, traditional industries such as the automotive and metalworking sectors are in deep crisis, marked in particular by massive job cuts. In many places, there is a noticeable surplus of personnel.
This imbalanced market situation clearly holds significant potential for synergies that can ultimately benefit all parties involved. Realigning production sites can help safeguard jobs, but it also requires complex human resources management and new strategies for transferring know‑how.
Transformation of production sites – opportunities and challenges
A new trend is emerging in Germany in the form of “conversion” or “retooling”, in which former production facilities from civilian industries, particularly metal processing, are being repurposed as sites for the manufacture of military goods.
In this way, existing overcapacity is tapped for a new purpose, while skilled workers are given the opportunity to remain employed in a future‑oriented industry. Defense contractors, in turn, benefit from the existing infrastructure and an experienced workforce. Such transformation processes are, however, organizationally and legally demanding. Transferring employees, adapting their employment contracts, and upgrading their skills are key factors in the success of these measures. In this context, close cooperation between employers, the works councils, and unions is essential.
A good illustration of this is the rail technology group Alstom: Its plant in Görlitz has been transferred to the defense contractor KNDS. KNDS plans to manufacture components there for the LEOPARD 2 main battle tank, the PUMA infantry fighting vehicle, and modules for various Boxer vehicles. Around half of the workforce, or 350 to 400 of a total of 700 Alstom employees, will move directly to KNDS as part of the transfer; Alstom avoids the cost of extensive social plans, and KNDS immediately gains experienced skilled workers in its new production facility.
The switch from civilian to military production therefore offers a pragmatic solution to safeguard jobs and know‑how in industry while markets are changing. The transfer of the Görlitz industrial site can serve as a blueprint for structural change in other sectors as well.
Operational organization and cooperation with defense contractors
Beyond the model of site transfers such as the Alstom case, a growing number of civilian companies are considering expanding their existing production, particularly of dual‑use goods, to include military components. Integrating military manufacturing, however, requires clearly segregated production areas and the implementation of strict security regulations. Companies must decide whether to organize military production within a separate establishment or through a distinct legal entity. This in turn raises the question of the extent to which employees can be deployed across both civilian and military operations. Close coordination with works councils is therefore essential, as new frameworks need to be created for both staffing structures and operational processes.
Where dual‑use goods – products that can be used for both civilian and military purposes – are manufactured, market access is often achieved in cooperation with established defense contractors. In addition to operating a joint establishment, the formation of a joint venture is also an option. Both models give rise to legal questions, including with respect to employee co‑determination rights, transfers of selected employees, and, in particular, protection of know‑how shared in the course of such cooperation.
Key employment law issues in the transition to the military sector
In many cases, the shift from civilian to military production involves significant employment law decisions:
- Transfers of employees and protection of know-how: Where employees are transferred to a separate company (potentially in the form of a joint venture), for example, as part of a transfer of business or by means of individual tripartite transfer agreements, legally robust structuring is crucial. This is especially true where the objective is to secure the skilled workforce and know‑how of employees from a civilian manufacturing company for the benefit of a defense contractor. In practice, works councils will typically advocate strongly for the protection of existing employment and working conditions.
- Significant business changes and employee codetermination rights: Projects of this kind will often constitute a significant change to the business within the meaning of section 111 of the German Works Constitution Act (Betriebsverfassungsgesetz – BetrVG), triggering an obligation to negotiate a reconciliation of interests and a social plan with the works council. Skills development and training measures become a key factor in maintaining the workforce’s employability.
- Regulatory requirements: In addition to the protection of trade secrets and specific access rules, monitoring and documentation requirements are becoming increasingly important. These new requirements often have a profound impact on existing employment and work agreements.
Security screening under the Security Screening Act: New challenges for companies and employees
Another (for the time being, still largely unfamiliar) hurdle is the security screening required for employees in the security and defense industries. The legal framework for this is provided by the German Security Clearance Act (Sicherheitsüberprüfungsgesetz – SÜG) and the related Security Clearance Regulation (Sicherheitsüberprüfungsverordnung). The purpose of the screening is to ensure that individuals who are to be assigned to security-sensitive positions within facilities critical to civilian life and national defense do not pose any risk to defense readiness or public safety. Companies must register with the Federal Ministry for Economic Affairs and Climate Action and appoint a sabotage protection officer. Security screening applies both to employees directly employed by the company concerned and to staff of external firms and service providers. Depending on the specific role and the sensitivity of the information or position to which the employee is to have access, the Security Screening Act provides for three levels of screening. In the security and defense industries, companies are generally required to obtain at least an extended security screening (Level 2). Individuals subject to screening, as well as people who are indirectly affected (such as spouses and civil partners), have to consent both to submitting the security declaration and to undergoing the screening itself. If security screening cannot be carried out because consent is withheld, the employee is not allowed to work in a security‑sensitive position, which ultimately raises issues ranging from reassignment to dismissal, with the option of altered conditions of employment. During ongoing employment, both updates to the information provided and periodic repeat checks at fixed intervals are required. The Federal Office for the Protection of the Constitution reviews reliability and potential security risks using numerous government registers. The procedure is free of charge for companies and concludes with an official decision on the employee’s security clearance.
Particularly for companies that have not previously manufactured military products, engaging with these requirements at an early stage and implementing the related processes in a legally robust manner is crucial to successful entry into the defense sector.
Key factors for successful transformation
Successful transformation calls for sound legal and strategic advice as well as close coordination between all stakeholders. This allows the challenges involved to be managed in a targeted and efficient manner. Against the backdrop of an increasing shift from civilian operations to military production, forward‑looking workforce planning, active involvement of employee representatives, and strict compliance with the requirements of the Security Screening Act are key to aligning legal and commercial interests and keeping risks to a minimum.
