When employers give notice: a ticklish dilemma

Berlin, Febuary 2014 – “Here in Germany we would seem at present to be living in the best of all realistically possible work worlds, one in which the employee enjoys adequate protection and, if dismissed, is protected financially, whilst allowing businesses to remain sufficiently flexible in times of crisis.” This is the conclusion which Dr. Ferdinand Rüchardt, member of Ecovis’ executive board, comes to on the basis of Ecovis’ latest survey, a legal barometer covering all matters surrounding the sensitive topic of dismissal notices issued by employers. “However, it must be said that the impending dearth of suitably qualified manpower, one result of current demographic developments, is an important contributory factor to the comparatively relaxed atmosphere in our country at the moment”, Dr. Ferdinand Rüchardt adds.  

Ecovis offices in 22 countries participated in this survey. In most of them there are one or more snags on the labour market which are detrimental to both employers and employees, as the survey shows. On the one hand, only 27% of the Ecovis offices participating declared that it is relatively easy to dismiss employees in their countries. On the other hand, in half of the countries surveyed, as the individual offices admit, employees who have been dismissed will find it really difficult to find a new job, particularly in southern and eastern Europe, but also in Japan, too. Half of those participating in the survey criticized the fact that employees do not receive sufficient public support after dismissal, be it in financial terms or in the form of skills development courses and assistance with finding a new job. In all the countries surveyed, there are laws governing the dismissal of employees, that is true, and in the majority (77%) there is an obligatory unemployment insurance scheme for all or most employees. “However,” continues Dr. Rüchardt, “the crucial differences are to be found in the detailed provisions, in legal practice and in the scope of the unemployment benefits.”

To cite one striking example: in almost all the countries surveyed (86%), employees who have been dismissed are entitled to file for continued employment. It depends greatly on relative case law and the conventions applying in each country as to whether employers really consider this right a serious impediment and how expensive the termination of employment will be for them ultimately.

There are only six countries where, as a general rule, employees who have been dismissed file for continued employment, these being Romania, Russia, Serbia, Slovenia, Spain and the Czech Republic. In other words: elsewhere it is often customary for employers and employees to reach an extrajudicial agreement on suitable compensation. In return employees abstain from contesting the termination. There are only four countries (Austria, Malaysia, Serbia and Vietnam) where employees may remain in employment if the case comes before a court and they win it. In Greece, Lithuania and Poland, employers are at a clear advantage; here the courts usually dismiss suits filed by employees against their dismissal.

Compensation is the preferred solution
On most occasions, legal action ends with one of the following solutions:

• The court pronounces the verdict that the employee should continue to be employed, but they do not return to their jobs, instead reaching an agreement with their employers about compensation. This is common practice in six of the 22 countries surveyed. “In China employees file suit against dismissal in case they cannot reach agreement with their employers, hoping to be awarded compensation, because it is not very difficult for them to find a new job as long as they have enough working skills,” says Yi Wang, partner in Ecovis’ offices in Shanghai.
• The court proposes a manner of settling the dispute, including the amount of compensation, which is accepted by both parties. This is often the case in seven of the countries surveyed.
• Upon conclusion of legal action, employers and employees agree voluntarily on compensation and the employee who has been dismissed withdraws his or her claim. This is often the case in half the countries surveyed.

In Latvia and Vietnam, all three solutions are common; in Austria, the two first versions are preferred, in three other countries (Germany, India and Spain) the latter two. In the Czech Republic, the proceedings terminate either with a compensation settlement after the court verdict, or both parties negotiate a compromise beforehand in order to avoid legal proceedings with an uncertain outcome.

“In Romania,”, says Monica Jantea, a lawyer and partner in Ecovis’ Bukarest office, “the courts often rule in favour of continued employment and oblige the employer to pay compensation.” She further comments, “This is why the employer prefers to come to an agreement out of court if employees dispute their dismissal.”

In Slovenia, the courts often pass verdicts in favour of the employee dismissed. “This means that employers are obliged not only to continue to pay wages and salaries up to the date of dismissal, but also to the date the verdict is passed, including interest on arrears,” says Christoph Geymayer, general manager of the Ecovis office in Ljubljana, the capital of Slovenia. “In many cases there is a clause in the collective agreement stipulating that employees are entitled to payment of an additional penalty to compensate for the unlawful termination of employment contracts. This is why businesses in Slovenia prefer to reach a voluntary agreement to avoid having to go to court.”

Where dangers lurk
In Serbia employers can dismiss employees practically without notice, because the general period of notice is only five working days, which is extremely short. “In this case, however, the law provides for compensation of up to 36 months’ salary being paid, the period being decided upon by the court,” says Alexander Samonig, a partner in Ecovis’ offices in Belgrade. Under certain circumstances, the period of notice may extend to several months, depending on the reason for dismissal.

Employers in Britain  may give notice of dismissal at any time and for any reason. However, except in cases of grave misconduct or infringement of the employment contract by the employee, the statutory period of notice must be observed, which ranges from one week in the first year of employment to twelve weeks after 12 or more years. “Additional compensation payment may be due if this dismissal is deemed unfair because no admissible grounds can be shown or rules governing fair procedure have been breached,” says Darryl Evans, specialist in industrial relations law at the offices of Ecovis’ partner in London, Boodle Hatfield LLP.

As in Great Britain, employers in Japan can choose between complying with the statutory period of notice (30 days in all cases) or dismissing employees without notice but continuing to pay them their salary for the same period. However, the legal hurdles in Japan are considerably higher. “Under Japanese industrial relations law, notice of dismissal violates the law and is therefore null and void if no reasonable grounds for the dismissal can be produced, and said dismissal is inappropriate and without societal acceptance,” states Kazuhiko Chiba, partner at Ecovis’ offices in Tokyo. “For this reason the inclusion of detailed disciplinary regulations in the company code of practice is recommended as a preventative measure.”

Markus Bodem, a lawyer and partner of Ecovis in Berlin, comments further: “In Germany and many other countries in Europe, the legal position is comparable to that of Japan, where the legality of dismissals is concerned. For this reason it is advisable to adopt a binding disciplinary code within companies here too.”

It is interesting to note that, of the countries surveyed, Germany has the longest statutory periods for contractual notice of dismissal of employees by employers. These range from four weeks to the end of the month in the first two years of employment to up to seven months after 20 years in the company.

Dismissal in critical situations
Mass redundancies are only permissible under certain circumstances in most countries, i. e. only if specific conditions are fulfilled and specific procedures complied with. In most cases mass redundancies are permissible if a company or business is in financial difficulties or such difficulties are impending. In all the countries surveyed except for Greece there are consultation rights of the unions and employees’ representation bodies to be observed. “In Uruguay, although there are no laws that oblige companies to consult or make agreements with trade unions before dismissals, in fact in certain type of activities trade unions are very strong and companies have to reach certain agreements with them”, says Marcelo Caiafa, a partner in Ecovis’ Montevideo office. In 15 countries, including Great Britain, the employer is required to present a redundancy programme or negotiate with the work council or unions to decide on which employees are to be made redundant and to determine the criteria for the respective amount of compensation to be awarded.

By contrast, employees may be dismissed more easily than under normal circumstances in almost every country (82%) if a business is so stricken financially that it has filed for bankruptcy.

Short-time allowances instead of dismissal
There are only five countries in which employees also receive financial assistance from the statutory unemployment insurance scheme in cases where a company has run into financial problems as a result of an economic downturn or a slump in sales and has therefore applied for the workers to work short time in order to reduce labour costs. “Short time” means that the company temporarily reduces working hours for their entire work force, in some cases down to zero, in order to get them through a lean spell. In these countries (Germany, Austria, Spain, Uruguay and Switzerland) the unemployment insurance scheme then pays those employees who are on short time partial compensation for loss of earnings.

In Germany the short-time allowance is generally paid for no more than six months. However, during the economic crisis which followed the bankruptcy of Lehman Brothers, the maximum length of entitlement in 2010 was raised to 18 months and for applications in 2011 to 12 months. “This was of great help to the workers and their families, but also to businesses too, for they were thus able to retain their skilled staff and be up and running in no time when the economy recovered,” says Marcus Bodem, partner in Ecovis’ Berlin office.

In Portugal the social security system pays part of the monthly wages temporarily under certain conditions. In China financial assistance is decided upon case by case. For example, the local authorities may reduce temporarily the social insurance contributions paid by employers and employees. In Romania the state can grant a tax moratorium to businesses which have run into financial difficulties during a recession.

Sufficient flexibility in difficult times?
It all boils down to the following question. Are the general conditions taken as a whole such that businesses retain sufficient flexibility to make changes in their labour policy in periods of economic crisis and/or to regain a position of competitiveness quickly once it has passed? “The situation could be better”, say Ecovis’ representatives in half the countries surveyed, and in one third they deem conditions “too inflexible”.

There are many different reasons for the predominantly critical overall assessment. In one third of the countries surveyed, the Ecovis partners find the cost of dismissal prohibitively high. “In Portugal”, says Johannes Rückert, partner in Ecovis’ offices in Lisbon, “small and medium-sized enterprises can hardly afford to give notice of dismissal because of the compensation to be paid, and legal costs. Another stumbling block is the complexity, the lack of clarity, and the constant amendments made to labour laws.”

In neighbouring Spain, says Jörg Hörauf, partner in Ecovis’ offices in Barcelona, “The high amounts of compensation are the problem. This is detering businesses from taking on new labour just when we are in the middle of a crisis. It’s a vicious circle.” Even if a business makes workers redundant for financial reasons, reasons which are recognised by the courts, the equivalent of 20 days’ wages is due for every year of employment.  In all other cases the standard compensation is 45 days per year of employment. He adds, “For this reason the employer often meets the dismissed employee on an amount somewhere in the middle.”

Piotr Prus, a lawyer and partner at Ecovis’ offices in Poland’s capital, Warsaw, sees the situation there critically. “Our problem is our complicated labour laws and contradictory verdicts. Add to this the high cost of labour due to taxation and social security contributions which lead to businesses resorting to an increasing extent to concluding service contracts with one man businesses rather than employment agreements.”

In Australia, Scott Hogan-Smith, associate in Ecovis’ offices in Sydney, sees the statutory influence of the trade unions as an impediment to flexibility. Even in Austria, which, according to the survey, is the only country besides China where an employee who has been dismissed can easily find a new job, there is only point to criticize, according to Martin Grill, partner in Ecovis’ offices in Vienna, that being “excessive protection against dismissal.”

Marcus Bodem, a lawyer in Berlin, and his Swiss colleague, Karolina Slama, who is a lawyer with weber schaub & partner ag, an Ecovis affiliate in Zurich, are the only ones to pronounce themselves “generally satisfied”. Karolina Slama explains the reason for her opinion. “In contrast to many other European countries, in Switzerland we have the principle of freedom of dismissal. Besides this, no right to continued employment exists. Moreover, union influence is weaker and the rate of unemployment lower.”

Germany is experiencing the highest number of persons in work and the lowest unemployment rate for years. Marcus Bodem attributes this not least to the extension of the period allowed for short-time compensation during the crisis. “The greatest challenge which businesses now face is to find sufficient numbers of skilled workers, given our ageing population.”