NEWS FROM THE COURTS Immediate dismissal of a managing director

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1 NO. 9 DECEMBER 2004 EDITORIAL OFFICE: Advokat Karin Svensén LEGALLY RESPONSIBLE: Advokat Magnus Wallander Stockholm 2004 CONTACT PERSONS: Advokat Magnus Wallander, Stockholm Advokat Henric Diefke, Göteborg Advokat Madeleine Rydberger, Malmö Dr. Christian Bloth, Rechtsanwalt, Frankfurt NEWS FROM THE COURTS Immediate dismissal of a managing director A company (A) performed an immediate dismissal of its managing director upon discovering that he had withheld important information from the prospective buyers in connection with company B s acquisition of company A. Company A had considerable financial problems. The managing director of Company A had withheld detailed information regarding, inter alia, problems with deliveries and suppliers as well as incompatibility between the company s budget and the financial outcome. At the acquisition of Company A, Company B had performed a so called due diligence, i.e. an investigation of Company A s legal and financial obligations. The role of the managing director in a due diligence process is to provide all requested particulars and to ensure that any questions posed by the prospective buyers are answered. It was established that, even though the managing director had withheld information, he had not withheld information that Company B had requested. The court found that the managing director of Company A did not have a more far-reaching duty to provide information than what is commonly the case in a due diligence process. For example, there could have been an extended information duty if the managing director had given an undertaking to Company B to provide all relevant information. A managing director does not normally fall within the scope of the Employment Protection Act. The issue of whether the employer has the right to terminate a managing director s employment contract (i.e. immediately dismiss him or her to use the terminology of the Employment Protection Act) is therefore considered according to general principles of contract law on the right of a party to terminate a contract valid until further notice at a breach of contract. From these principles, it follows that an employment contract may be terminated in case of material breach of contract on the part of the employee. A managing director in a limited liability company holds a position of trust. From this follows a far-reaching obligation of loyalty to the company. When considering whether an act or omission by the managing director is negligent with regard to these obligations, consideration shall be given to the directions or instructions provided to the managing director by the board of the company (AD 1997 no 3). According to the Labour Court, the managing director had not breached his duty of loyalty by omitting to give more particulars to the prospective buyers. A prospective buyer of a company ought to ensure that the managing directors receive explicit instructions from the board of the company, by which he is employed. These instructions should impose an obligation upon the managing director to provide the prospective buyers with all information which may be of importance when considering the purchase regardless of whether this information is specifically requested or not. In practice the board will most likely want to be informed of what information the managing director provides to the buyers (AD 2004 no 90). Contact person: Karin Svensén, ksv@msa.se NEWS FROM THE LEGISLATOR Sabbatical year The government has adopted rules whereby a sabbatical year (a free year ) will be available nationwide from 1 January So far the free year has only been on trial in a few municipalities, but the rules will now apply all over Sweden. A total of 12,000 free year positions will be available. page 1

2 The free year means that an employee may take time off from his employment for a period of time that can be anything from three months to up to one year long. During this absence, an unemployed person who is registered as a job applicant at the employment agency is instead employed by the employer as a substitute for the absent employee. The person who is free will receive compensation, activity support, corresponding to 85% of the unemployment benefit. The purpose of the free year is mainly to give employees opportunities to engage in recreational activities, to undertake further training or other personal development and for the unemployed people to strengthen their position in the labour market with a temporary job. A condition for granting a free year is that the employee and the employer enter into an agreement regarding the time off and that the employee has been employed with the employer for the past two years. The employer must also employ an unemployed person as a substitute from the employment agency. The employment agency s role in the choice of a substitute has been strengthened and long-term unemployed people, disabled people or immigrants should primarily be eligible for the temporary positions. However, it is ultimately the employer s decision as to who should stand in for their absent employee. Contact person: Advokat Emma Hamilton Kjellström, eha@msa.se The employer s responsibility for sick pay As from 1 January 2005, new rules on sick pay will apply. These rules stipulate that the employers shall pay 15 per cent of the sick pay for employees who are reported sick on a full-time basis. The obligation of the employers does not apply to employees who are reported sick on a part-time basis. The sick pay period has been shortened to two weeks, and the level of sick pay will be 80 per cent of the employee s income. The government expenditure for sick pay has increased from 13,9 to 44,6 billion Swedish kronor between 1997 and The aim of the new rules is to encourage the employers to take measures in order to reduce long-term sickness. The new rules contain certain high-risk protection for employers who have employees with several long-term sick periods. Contact person: Karin Svensén, ksv@msa.se NEWS The Labour Court to be or not to be? The European Court in Strasbourg ruled on 26 October this year that the composition of members of the Labour Court is not in contravention of Article 6 of the European Convention on the right to a fair and public hearing before an independent and impartial court. The background to the ruling of the European Court is an action brought by Kurt Kellerman AB (the Company ) in the Labour Court against the Industrial Labour Union regarding alleged unlawful strike actions. The Company, which was not a member of an employer organisation, had been put under a blockade by the Industrial Labour Union since the Company did not want to enter into a collective bargaining agreement. The Labour Court found that the action, i.e. the blockade, had not been unlawful. The Company claimed in the European Court that its right to a fair hearing before an independent and impartial court had been prevented since a majority of the members of the Labour Court were appointed by employer and employee organisations, both of which have a vested interest in entering into collective bargaining agreements in the Swedish labour market. In this case, the member appointed by the Confederation of Swedish Enterprise had voted against the majority in the Labour Court. The European Court was therefore of the opinion that it was not possible to come to the conclusion that all members appointed by employer and employee organisations had a common interest in the outcome of the case. In addition, the members of the Court had no vested interest in the case which could be compared with Langborger vs Sweden (which concerned the Housing Court of Appeal), where the organisation in question also had an obvious economic interest. Finally the European Court was of the opinion that the fact that the Company was not a member of an employer organisation and as a result had no representative in the Court could not automatically be considered a breach of Article 6 of the European Convention. If this would be the case it would mean that the composition of the Labour Court could be questioned in all cases where a party is not a member of an employer or employee organisation. Two of the members of the European Court were of the opinion that there was a violation of Article 6 of the European Convention. Contact person: Advokat Johan Wisenborn, e- mail jwb@msa.se page 2

3 Some comments on the two-month rule with reference to the bribery accusations within the Swedish Alcohol Retailing Monopoly The daily press has informed that the Salaried Employees Union HTF (Tjänstemannaförbundet HTF) will fight against the Swedish Alcohol Retailing Monopoly with regard to notices of termination given to store managers accused of bribery. One of HTF s principal objections is that the events, on which the terminations are based, have lapsed under the so called two-month rule, a circumstance on which the parties seem to disagree. The question is what will happen when applying the two-month rule. The two-month rule on notices of termination is found in Section 7 paragraph 4 of the Employment Protection Act, and the rule on dismissals in Section 18 paragraph 2 of the same Act. The sections provide that dismissals must not be effected based solely on facts that have been known to the employer for more than two months. The two-month period is determined from the time when the employee was informed under Section 30 of the Employment Protection Act or, if the employee was not informed under this section, then from the time of notice. The two-month rule does not strictly prohibit references to events that took place more than two months ago. However, the employer is not allowed to refer solely to events beyond the two month limit. In the event of similar repeated offences, or where the offences occurred more than two months before, these circumstances could be vital to the validity of a notice of termination. (AD 1990 no 18). From what time does the time limit start to run? A vital fact is the circumstances upon which the notice of termination is based. As can be seen from the Labour Court s practice, if an employee denies the action that led to the potential termination, it may be justified that the employer refrains from giving the notice to the employee (AD 1980 no 102). If a crime is suspected, as within the Alcohol Retailing Monopoly, and an advance penal judgement cannot be predicted, the principal rule is that the twomonth period commences when the judgement of the crime by the court becomes final (AD 1976 no 51 and AD 2004 no 9). Under such circumstances, the reason for the employer s notice of termination could have significant importance. If the reason given for the notice is that the employee has been convicted of a serious crime and not of the actual incident, there could be an even stronger reason to wait for the final judgement before notifying the employer, provided of course that the facts of the case are not already known, i.e. when the employee has admitted the crime (AD 2004 No 9). It should be noted that there are two exceptions to the two-month rule. Firstly, when the delay is due to the fact that the employee has requested or agreed to postpone the notice, the two-month rule must not be applied. Secondly, the rule does not apply in the event of extraordinary reasons. As stated in the explanatory notes to the legislation, the concept extraordinary reasons should be interpreted narrowly. The reason for this exception is to avoid offensive situations, for example when the employee has committed a very serious crime. It is yet to be determined by the Labour Court as to whether bribery is to be regarded as a very serious crime in this context. Contact person: Jur.kand. Johan Swahn, jsw@msa.se The authority of the Work Environment Authority The final responsibility for ensuring a good workplace rests with the employer. The Work Environment Authority (WEA) however monitors that the employer is fulfilling its obligations. The WEA recently issued a prohibition to the 7-Eleven stores in Stockholm with opening hours between 11 p.m. and 6 a.m. In brief the prohibition means that the stores must be closed at night unless the working environment is improved. In this case, the decision of the WEA mainly referred to the psychosocial working environment, and the terms presented required that the shops must have a closed cash handling system and a double night staffing or a night counter. The WEA also chose to direct the prohibition to the franchisers of the 7-Eleven stores. The prohibitions were combined with a significant fine. The WEA is thus the supervisory authority of working environment issues. In order to be able to perform its duties, the WEA is legally entitled to have access to all information and all documents of the employer that the Authority finds necessary. The WEA is also entitled to monitor the working environment by carrying out inspections of the work place. The objective of the access and the inspections is to attain an overall view of the working environment. This means that the physical and mental, as well as the social working environment, will be monitored. In exceptional cases inspections may be page 3

4 performed of only a certain part of the working environment, i.e. of a certain type of machine. The WEA is legally entitled to carry out inspections without informing the employer in advance (although this is unusual). Should the WEA discover faults or defects during inspections, these must be reported in writing (in the form of an inspection memorandum) to the employer who is requested to implement measures which should be taken to eliminate the faults and defects. However, the inspection memorandum is only a request to remedy and not a decision. As the memorandum is not a decision, it cannot be appealed. However, it is important to be aware of the fact that when an employer does not observe the WEA s request under the inspection memorandum, he runs the risk of receiving a prohibition or being subject to an injunction. A decision on prohibition or an injunction may entail a fine that will be imposed should the employer breach the prohibition or the injunction. Furthermore, an employer who breaches an injunction or a prohibition may be sentenced to a fine or imprisonment. A decision on injunction or prohibition may be appealed in Court. To summarise, the employer is primarily responsible for the working environment, but in many cases it is possible for the WEA to affect the employer s actions in this field. Contact person: Advokat Hedvig Wallander, e- mail hew@msa.se The EC directive on age discrimination The purpose of the directive 2000/78/EC dated 27 November 2000 on the introduction of a general framework for equal treatment is to fight discrimination in the workplace due to religion or conviction, disability, sexual orientation or age. Sweden has already incorporated various laws on prohibition against discrimination in the workplace (ethnic discrimination, discrimination of people with disabilities and discrimination on grounds of sexual orientation). The provisions in the EC directive relating to age discrimination however have yet to be implemented. Sweden (as one of three countries) was granted an additional three years to implement the directive regarding age discrimination. The discrimination committee at the Justice Department working with this matter must finish its report not later than 1 July 2005 but will most likely be granted an extension. However, there is nothing to indicate that Sweden will not be able to implement the provisions on time by 2 December Incorporation of the directive will result in several amendments to Swedish legislation. For example the Employment Protection Act must be amended since employees over the age of 67 can at present be dismissed without the employer stating particular reasons. Under Article 6, Member States may discriminate on grounds of age if it can be justified by a legitimate objective regarding special employment policy, labour market and vocational training objectives. Under the directive, difference in treatment should not constitute discrimination if age is a genuine and determining vocational requirement due to the nature of the vocational activities or the context in which they are carried out, provided that the objective is legitimate and the requirement is proportionate. Contact person: Rechtsanwältin Kerstin Kamp- Wigforss, kka@msa.se Introduction of a dress code An employer may decide to introduce a dress code at the workplace. Such decision cannot be legally questioned, provided that the decision lies within the scope of mandatory legislation, applicable collective bargaining agreements and generally accepted practice in the labour market. If an employer is bound by a collective bargaining agreement, a decision regarding introduction of a dress code will in some cases have to be preceded by negotiations in accordance with the Co-determination at Work Act. Prohibiting an employee from wearing for example religious clothes instead of the work clothes prescribed by the employer may constitute discrimination. However, there may be situations where an employer has a right to prohibit certain clothing after balancing the interests of the employer and the employee. There may be conditions in the labour market which are of such importance for health and safety that individual integrity must give in. However, a dress code should be made flexible and permit deviations based on religious conviction; a uniform can for example be combined with a turban or veil instead of other specific headgear. An employee s obligation to respect the instructions from a superior is considered an implied term of the employment contract. As a result, refusal to comply with a dress code may constitute a breach of the employment contract and as may therefore, eventually, lead to dismissal (provided that there are reasonable grounds for the dismissal of the individual employee). The page 4

5 employer must have analysed whether it is possible to assign the employee to other duties. Generally, fairly strong arguments are required if grounds for a dismissal for personal reasons are to be accepted, and in practice it is difficult to imagine that a dismissal based on a contravention of the dress code could be upheld in a court of law. A balance must be made between the employer s interest in enforcing the dress code and the employee s personal integrity. In most cases, such a balance of interests is likely to go against the employer, since his interest in enforcing a dress code would have to give in to the employee s interest in a continued employment. Case law regarding the introduction of a dress code at the workplace is scarce and the cases which have been tried are fairly old. Contact Details: STOCKHOLM Magnus Wallander Phone mw@msa.se GÖTEBORG Henric Diefke Phone die@msa.se MALMÖ Madeleine Rydberger Phone mry@msa.se FRANKFURT Christian Bloth Phone cbl@msa.se Contact person: Jur.kand. Jenny Welander, jew@msa.se THE EMPLOYMENT LAW PRACTICE GROUP OF MANNHEIMER SWARTLING WISHES YOU A HAPPY NEW YEAR page 5