CMS Expert Guide to employment termination law and legislation

Global comparison

1. Dismissal of employees

1.1 Reasons for dismissal

The reasons for regular termination as set out in the Labour Act are as follows:

  • if the need for work ceases to exist for economic, technical or organisational reasons (‘notice due to business reasons’); or
  • the employee is incapable of fulfilling his employment-related duties due to certain personal characteristics or qualifications (‘notice due to personal reasons’); or
  • the employee intentionally breaches a contractual obligation (‘notice due to misconduct’); or
  • if the employee did not satisfy the employer’s requirements during the probationary period.

According to the Constitution, the law offers employees protection against unfair dismissal. This protection not only encompasses union members or any given class of workers, but all those who work at least four hours a day and have exceeded the probationary period. These employees may not be dismissed without fair reasons, as expressly provided for by law. If the reason for dismissal is not one of a number of ‘fair reasons’ included in the law, an employee has the right to choose one of the following alternatives:

  • Bring a claim against the employer for reinstatement; or
  • Bring a claim against the employer to receive compensation due to unfair dismissal.

The following are considered fair reasons, as provided for by law, that allow employers to dismiss employees:

i. Reasons related to capability:

  • The employee loses his physical or mental faculties or becomes suddenly incompetent in a manner detrimental to his job performance; the employee performs poorly compared to the average performance of other personnel and the employee; or the employee unjustifiably refuses to undergo a medical examination related to the performance of duties.
  • Court conviction for an intentional crime.
  • Disability.

ii. Reasons related to major faults or misconduct that are specifically provided for in the law:

  • Failure to comply with duties.
  • Decline in performance.
  • Misappropriation or attempted misappropriation of the goods or services of the employer.
  • Disclosure of confidential information or provision of false information that may be detrimental to the employer.
  • Unfair competition.
  • Attendance in the workplace under the influence of alcohol or drugs.
  • Committing violence, severe indiscipline, or intentional damage to the employer’s goods.
  • Unjustified absences of more than three consecutive days or five non-consecutive days and repeated delays.

Nevertheless, according to Peruvian law, the first three months of services constitute an employee’s probationary period. During this time, the employee is not legally protected against dismissal and therefore may be dismissed by the employer without invoking any reason or complying with any formality. 

The law authorises parties to establish a probationary period of a maximum of six months for qualified employees or persons of trust who work closely with senior staff and have access to the company’s confidential information. In these cases, the term of the probationary period in the contract must reflect the requirement for training, adjustment requirements or the position’s level of responsibility.   

1.2 Form

Written form, including reasons for termination. Decision is to be delivered to the employee.

Formalities to be observed in cases of fair dismissal include the following:

  1. Dismissal due to lack of capability: The employer must send a prior written notice of dismissal to the employee stating the reason for dismissal and must grant 30 calendar days for the employee to reply. At the end of this period, the employer can proceed with  the dismissal if the employee was unable to sufficiently defend his actions or lack thereof.
  2. Dismissal related to major faults or misconduct: The employer must send a prior written notice of dismissal stating the reason for dismissal and attaching all the evidence supporting it. The employee has six calendar days to issue the reply. At the end of this period, the employer can proceed with the dismissal if the employee was unable to sufficiently defend his actions or lack thereof.

1.3 Notice period

Regular termination: notice period ranges from two weeks to three months, dependent on the employee’s length of service with the same employer.

The three-month period is extended by an additional two weeks / one month for 50 / 55-year-old employees who have 20 or more years’ continuous service with the same employer.

Extraordinary termination (summary dismissal): no notice period. Termination during probationary period: notice period of at least seven days.

Termination by employee: notice period cannot be longer than one month if the employee has a good reason.

If the employment is terminated because the employee  breaches his contractual obligations, notice periods are halved.

  1. Dismissal due to lack of capability: prior notice of 30 calendar days’ 
  2. Dismissal related to major faults or misconduct: prior notice of six calendar days.  

In both cases, it is necessary to follow the procedure detailed in point 1.2.

1.4 Involvement of works council

The works council must be informed of the employer’s intention to dismiss. The works council‘s consent is required for dismissal of the following employees:

  • members of the works council; and
  • candidates running for works council positions and members of the election committee for a period of three months following the announcement of the results of the election to the works council; and
  • employee representatives in a body of the employer; and
  • employees with diminished ability to work and employees in immediate danger of physical disability; and
  • employees over 60 years of age.

No legal requirement for involvement.

1.5 Involvement of a union

If there is no works council, consent is given by the union commissioner (the union representative employed with the respective employer). The union‘s consent is required for the dismissal of a union commissioner during their period of office and for six months thereafter.

No legal requirement for involvement.

1.6 Approval of state authorities necessary

If the works council or union commissioner do not consent, consent can be substituted by a judicial or an arbitral decision.

Not necessary other than in the case of collective redundancies (see below).

1.7 Collective redundancies

Employer who expects to terminate at least 20 employees, five of which due to business related reasons, all within a 90-days’ period, is obliged  to duly consult the works council / union commissioner in order to possibly reach an agreement to save the employees and / or limit the number of terminations. The employer is obliged to provide the works council / union commissioner with written information concerning the reasons for termination, total number of employees, number, professions and positions of employees who are supposed to be terminated, election criteria for such employees, amounts and way of calculating their severance payments and measures undertaken to prevent such terminations. Employer is obligated to consider and explain all possibilities and suggestions that may lead to avoidance of terminations. Also, the Croatian Employment Agency needs to be informed about the previously mentioned points and consultations with the works council / union commissioner.

The employer can terminate employment contracts without paying compensation for dismissal for reasons of force majeure or for economic, technological, structural or similar reasons, which then make the dismissals necessary. In this case, the employer must obtain the prior authorisation of the Labour Ministry, based on an expert report prepared by an independent auditor supporting the need for the dismissals. In practice, there have been few cases in which the Ministry of Labour authorised a company to make its employees collectively redundant.  

Legally, the parties may negotiate and reach an agreement to terminate the employment contracts of the personnel included in the measure before the Ministry of Labour issues its opinion. In these cases, if the employees are affiliated with a union, then the union’s participation in the negotiations is mandatory.  

In the case of the dissolution and liquidation of a company, or if it is declared bankrupt by a competent authority, authorisation from the Ministry of Labour is not required and five days’ prior notice shall suffice.

1.8 Summary dismissals

Summary termination (summary dismissal) is defined as termination without notice, and is only lawful where there has been: 

  1. a serious breach of employment obligations, or
  2. the employment relationship between the parties is no longer possible for another important reason (there are, therefore, two possible reasons: (i) breach of employment obligations; or (ii) another important fact; in either case, the employment relationship must not be possible any longer).

The employee is to be dismissed within 15 days of the day of becoming aware of the fact / reason for dismissal.

Summary dismissal (dismissal without notice) is only lawful when the employee has committed a breach of contract that is sufficiently serious for the employer to terminate the employment contract with immediate effect. Although the law regulates this kind of dismissal, it is recommended that the regular dismissal proceeding be used.

1.9 Consequences if requirements are not met

If it is decided the dismissal is illegal, the employee is to be reinstated. Reinstatement is possible even before the end of the court procedure to determine the legality of the dismissal if the employee so requests. If the parties do not wish to continue with their employment relationship, the court shall at the employee‘s request determine:

  1. the date of termination of the employment contract; and
  2. compensation for damages, which ranges from three to eight times the employee’s average monthly salary over the previous three months (depending on the employee’s age, length of contract and obligations in relation to supporting family members or other dependants as defined by family law).

If a fair reason is not given or the legal formalities are not complied with, the employee may alternatively claim:

  • Reinstatement of position, which can only be claimed by employees who do not occupy leading positions (management positions) and/or were not in positions of trust (employees who work in close contact with senior staff and who have access to the company’s confidential information). Workers in management or trust positions are only entitled to claim compensation for dismissal if they are unfairly dismissed.
  • Compensation for unfair dismissal, which is equivalent to: (i) for employees hired for an indefinite period of time, one and a half monthly salaries for each year of service, with a maximum of 12 salaries; and (ii) for employees hired for a fixed term, one and a half monthly salaries for each month that remains until the end of their contract, with a maximum of 12 salaries.

In addition to the compensation for arbitrary dismissal provided by law, the judges have recently been admitting claims for compensation for damages arising from the dismissal. Such compensation is generally made up of the concepts of emergent damages, loss of profits and moral damages, the amount of which must be determined by the court. Additionally, the judges have established the right of dismissed workers to demand a new concept called “punitive damages”, the amount of which equals the amount that the worker stopped contributing to the pension system during the time he was laid off.

As we mentioned above, unfair dismissal does not release the employer from a claim for moral damages in addition to the compensation for unfair dismissal to be paid to the employee. Although legally an employee only has the right to claim compensation for unfair dismissal as compensation for the termination of employment, recent case law criteria provides compensation for moral damages, emergent damages, loss of profits and "punitive damages" to employees who are subject to unfair dismissal where there is evidence of malicious conduct by the employer. 

In addition to the compensation for arbitrary dismissal provided by law, judges are recently admitting claims for compensation for damages arising from dismissal. Such compensation is generally based on the concepts of emergent damages, loss of profits and moral damages, the amount of which must be determined by the Court. Additionally, judges have established the right of fired workers to demand a new concept called “punitive damages”, the amount of which equals the amount that the worker stopped contributing to the pension system during the time he was laid off.

1.10 Severance pay

An employee with an open-ended contract who has two years’ continuous service with the same employer (and is not being dismissed due to an intentional breach of contractual obligation) is entitled to a severance payment. The statutory minimum severance payment is calculated by multiplying one-third of the average monthly salary in the preceding three months by the number of years’ continuous service with that employer. The severance payment is capped at six times the average monthly salary, unless otherwise provided for by law, by-law, collective agreement or work contract

Compensation for unfair dismissal:

  1. For employees hired for an indefinite period (provided they have passed the trial period) compensation is equal to one and a half monthly salaries for each full year of service with a maximum of 12 salaries. Fractions of the year are computed proportionally.
  2. For employees hired for a fixed term (provided they have passed the trial period), compensation is equal to one and a half monthly salaries for each month that remains until the end of their contract, with a maximum of 12 salaries. Fractions of the month are computed proportionally.

1.11 Non-competition clauses

Post-contractual non-competition clauses must last no longer than two years from the date of termination of the contract. The employer is obliged to pay compensation (at least one-half of the average monthly salary paid in the last three months of employment). The covenant will not be valid if the employee is a minor or if the employee‘s salary amounts to less than the average national salary.

The non-competition clause does not apply if: (i) the employee terminates the contract without notice period (extraordinary termination) and does not state that he does agree that the clause applies; or (ii) if the employee is dismissed without a justified reason, unless the employer undertakes to pay the prescribed remuneration for the duration of the clause.

During the employment contract term, an employee is forbidden to compete with the employer in its line of business (this is considered a major fault). After the employment contract is terminated, there is no regulation in this regard. However, a post-contractual non-compete clause can be included, which must be for a set period of time and the employee must receive adequate economic compensation for this.

1.12 Miscellaneous

Not applicable.

Not applicable.

2. Dismissal of managing directors

It should be noted that the title ‘managing director’ is not recognised under the Croatian Companies Act or other relevant applicable legislation. The Croatian Companies Act recognises only a ‘director’, who is authorised to represent the company and obliged to be registered as a member of the management board with the respective commercial court.

A managing director need not to have an employment agreement with the company, or any other type of agreement, in order to be able to represent the company.

Where a managing director has a  managing / service agreement  which falls under the regulation of Croatian obligatory law, only the provisions of the managing / service agreement apply. If aspects of the relationship are not dealt with in the managing / service agreement, the relevant provisions of the Croatian Obligations Act will apply.

Where a managing director does not have any employment or managing / service agreement with the company, he shall be treated as a member of the management board only.

The table below sets out the position under Croatian law with respect to the managing directors of a limited liability company, with and without service agreements.

2.1 Reasons for dismissal

No special reasons required (unless otherwise specified within the statute of the company or the contract itself).

Where the managing director has a service agreement, the provisions of that service agreement (and consequently the Croatian Obligations Act) will apply.

If the managing director is a member of the management board according to the statute of the company (and not only appointed by resolution of the shareholders), the company statute may set out that revocation is only possible for special reasons.

In Peru, directors do not qualify as employees, so they can be removed from their position without observing any legal formalities, except as provided for in the company’s bylaws. However, if a director is also in charge of the management of the company, he is considered an employee and in this case the legal provisions regarding the dismissal of employees must be observed.

Managers and managing directors who have passed the probationary period can be dismissed (i) for fair reasons, in which case it is necessary to follow the dismissal formalities applicable to all employees in general or (ii) via a vote of no-confidence (without invoking a fair reason), in which case the person in question has the right to receive compensation for unfair dismissal.  

Regarding the dismissal of managers, the following should be taken into account: 

  • If the employee was hired from the beginning as a trusted employee or to occupy a position classified as an executive one (someone who works in direct contact with managers and who has access to confidential information belonging to the company) and is dismissed without fair reason, they will be entitled to receive compensation for unfair dismissal. 
  • If the manager was initially hired to fill a non-executive position or position of trust, attains a management position and is then dismissed without fair reason, the person has the right to choose whether to claim reinstatement in the last position not qualified as an executive or trust position, or to receive compensation for unfair dismissal. 

Despite the provisions in law, the Supreme Court recently established jurisprudential criteria for the rights of management or trusted employees upon dismissal via a vote of no confidence that differs from the Law:

  • For those employees who directly entered into an executive position or position of trust, the compensation payment for arbitrary dismissal does not need to be paid if their employer terminates the employment relationship via a vote of confidence. 
  • For employees who initially began their employment in a position in which they performed common or ordinary functions, and subsequently acceded to an executive position or a position of trust, they are entitled to receive compensation for arbitrary dismissal if (i) their employer prevents them from taking up their former position after the withdrawal of confidence; or (ii) if the employee himself decides not to take up his former position again.

It is important to point out that these criteria do not formally constitute binding precedents of mandatory application. However, in practice they are applied to judicial instances. This should be taken into consideration when negotiating the termination of employment agreements. 

It is also important to bear in mind that a few months ago the Government published a draft supreme decree to modify the regulations of the Law on Labor Productivity and Competitiveness, in which, among other things, the right to compensation for arbitrary dismissal corresponds to any employee dismissed without justification, including management and trust workers. If this regulation is approved, judges would be forced to apply it.

2.2 Form

Valid shareholders’ resolution on revocation of appointment as member  of the management board. Registration of this revocation with the court registry. Termination of the service agreement in the same form in which the agreement has been signed (Obligations Act provisions shall apply).

If the manager or managing director is dismissed with fair reason, formalities for the dismissal of any employee must be observed. However, if the employee is dismissed via a vote of no confidence (i.e. without fair reason), the dismissal can be carried out immediately without notice.

2.3 Notice period

According to the Croatian Companies Act, the appointment of a director of the company can be revoked at any time without notice (for no special reason). Some restrictions (not strictly defined) can be set out within the statute of the company.

If the director has a service agreement, the notice period will be as set out in the service agreement.

i. The notice periods for dismissals for fair reasons are as follows: 

  • Dismissal due to lack of capability: notice of 30 calendar days.
  • Reasons related to major faults or misconduct: notice of six calendar days.

In both cases, it is necessary to follow the dismissal procedure provided for employees in general. 

ii. Dismissal due to withdrawal of trust (dismissal without fair reason): no notice.

The following is the legal dismissal procedure provided for employees in general that is applicable for managers:

According to the Constitution, the law offers an employee protection against unfair dismissal, as long as the employee has exceeded the probationary period. These employees may not be dismissed without fair reasons, as expressly provided for by law. If the reason for dismissal is not one of a number of ‘fair reasons’ included in the law, the employee has the right to bring a claim against the employer to receive compensation due to unfair dismissal.

The following are considered fair reasons, as provided for by law, that allow employers to dismiss employees:

iii. Reasons related to capability:

  • The employee loses his physical or mental faculties or becomes suddenly incompetent in a manner detrimental to job performance; the employee performs poorly compared to the average performance of other personnel and the employee; or the unjustified refusal of the employee to undergo a medical examination related to the performance of duties.
  • Court conviction for an intentional crime.
  • Disability.

iv. Reasons related to major faults or misconduct that are specifically provided for in the law:

  • Failure to comply with duties.
  • Decline in performance.
  • Misappropriation or attempted misappropriation of the goods or services of the employer.
  • Disclosure of confidential information or provision of false information that may be detrimental to the employer.
  • Unfair competition.
  • Attendance at the workplace under the influence of alcohol or drugs.
  • Committing violence, severe indiscipline, or intentional damage to the employer’s goods.
  • Unjustified absences of more than three consecutive days or five non-consecutive days and repeated delays.

Nevertheless, according to Peruvian law, the first three months of services constitute the employee’s probationary period. During this time, the employee is not legally protected against dismissal and therefore may be dismissed by the employer without invoking any reason or complying with any formality. 

The law authorises the parties to establish a probationary period of more than three months for managers or directors, whose probationary period can reach up to a maximum of one year.   

2.4 Involvement of works council

No involvement.

Not applicable.

2.5 Involvement of a union

No involvement.

No involvement.

2.6 Approval of state authorities necessary

Respective commercial court brings a resolution on registration of the resolution in the court registry. The court’s resolution and registration are declaratory.

Not required.

2.7 Collective redundancies

Not applicable.

Not applicable.

2.8 Summary dismissals

Not applicable.

Not applicable.

2.9 Consequences if requirements are not met

If there is no valid shareholder resolution, the revocation will be invalid and the court will refuse to register it in the court registry. Where the managing director has a service agreement, he could claim:

  1. compensation for damages; or
  2. fulfilment of contractual obligations in accordance with the provisions of the Croatian Obligations Act.

If fair reason is not invoked or the legal formalities for a fair dismissal are not complied with, the manager or managing director has the right to receive payment of compensation for unfair dismissal.  

The manager can demand reinstatement only if he previously held a position that was not qualified as an executive position or a position of trust, provided he is reinstated to the last unqualified position he occupied.  

With regard to unfair dismissal, it must be taken into account that this method of dismissal does not release the employer from a claim to compensation for moral damages, in addition to the compensation for unfair dismissal to be paid to the manager. Although the employee only has the legal right to compensation for unfair dismissal as compensation for termination of the employment contract, recent case law has provided for payment of compensation for moral damages to employees who are subject to unfair dismissal when there is evidence of malicious conduct by the employer.

2.10 Severance pay

Severance pay may be specified in the managing director’s service agreement (this is usually a large sum).

The compensation for withdrawal of trust (dismissal without fair reason) amounts to: 

  1. For employees hired for an indefinite period (provided they have passed the trial period), compensation is equal to one and a half monthly salaries for each full year of service with a maximum of 12 salaries. Fractions of the year are computed proportionally. 
  2. For employees hired for a fixed term (provided they have passed the trial period), compensation is equal to one and a half monthly salaries for each month that is missing so that the contract expires with a maximum of 12 salaries. Fractions of the month are computed proportionally.

In addition to the compensation for arbitrary dismissal provided by law, judges are recently admitting claims for compensation for damages arising from dismissal. Such compensation is generally based on the concepts of emergent damages, loss of profits and moral damages, the amount of which must be determined by the Court. Additionally, judges have recently established the right of fired employees to demand “punitive damages”, the amount of which equals the amount that the employee stopped contributing to the pension system during the time he was laid off.

2.11 Non-competition clauses

The managing director, as a member of the management board, is prohibited from doing the following without the approval of the supervisory board (or the shareholders, if the company does not have a supervisory board):

  1. being a member of the supervisory board or management board of another company with the same business activities; or
  2. performing business activities equal to those of the company for his or somebody else’s account; or
  3. using the company’s premises for performing business for his own or somebody else’s profit. The company is entitled to compensation for any damage caused.

During the employment contract term, it is forbidden for an employee to compete with the employer in their line of business (this is considered a major fault). After the employment contract is terminated, there is no regulation in this regard. However, a post-contractual non-compete clause can be included, which must be for a set period of time and the employee must also receive adequate economic compensation.

2.12 Miscellaneous

Not applicable.

Not applicable.