CMS Expert Guide to employment termination law and legislation

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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.

Notice may be given without providing any reason (‘Kündigungsfreiheit’).

Both employer and employee may end the employment relationship without providing reason or cause.

However, a dismissal must not be abusive (wrongful or unlawful dismissal). Subject to certain exceptions, such a notice is unlawful where issued:

  • due to an inherent personal quality of the other party (skin colour, nationality, sexuality); or
  • because the other party exercises a constitutional right; or
  • solely in order to prevent claims under the employment relationship from accruing to the other party; or
  • because the other party asserts claims under the employment relationship in good faith; or
  • because the other party is performing military service or a non-voluntary legal obligation; or
  • because the employee is or is not a member of an employees’ organisation or because he carries out trade union activities in a lawful manner; or
  • while the employee is an elected employee representative on the works council and the employer cannot cite just cause to terminate his employment; or
  • in the context of mass redundancies ordered by the employer if the consultation process is not observed.

In any of the above circumstances, the notice remains valid,  but the party abusively giving notice may be obliged by the court to pay an indemnity of up to six months' salary.

The employer may not terminate the employment relationship during the following periods, and notice given during these periods is void:

  • while the other party is performing Swiss compulsory military service, and during the four weeks preceding and following the service if the service lasts for more than 11 days; or
  • while the employee, through no fault of his own, is (partially) prevented from working due to illness or accident, for up to 30 days in the first year of service, 90 days between the second and fifth years of service, or 180 days thereafter; or
  • during the pregnancy of an employee, and for 16 weeks following the birth.

1.2 Form

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

There is no specific requirement. Notice of termination may be communicated verbally or by other means. For evidentiary purposes, it is strongly recommended that notice be issued in writing.

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.

The statutory notice periods include: one month in the first year of service; two months between the second and ninth year of service; and three months thereafter.

The notice period may vary depending on the written individual or collective employment contract. however, the notice period may be reduced to less than one month only by collective employment contract and only for the first year of service. The notice period must be the same for both parties.

The parties may agree on a probationary period of up to three months with a notice period of seven days.

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.

Except for mass dismissals, there is no statutory requirement to involve a works council.

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 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.

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 statutory provisions regarding mass dismissals apply where the employer – within a time period of 30 days – gives notice for reasons unrelated to any particular employee and affecting:

  1. at least ten employees at a business normally employing between 21 and 99 employees; or
  2. at least 10% of the employees at a business normally employing between 100 and 300 employees; or
  3. at least 30 employees at a business normally employing more than 300 employees.

The provisions governing mass redundancies do not apply in the event that business operations have ceased by court order or mass redundancies have occurred due to bankruptcy or a composition agreement with assignment of assets.

Prior to giving notice, the employer must consult the employee’s representative body or the employees, and at the same time notify the cantonal labour office in writing of the planned mass dismissal. these bodies have consultation rights only. Neither the employees nor the cantonal office are able to block a mass dismissal.

The employer is obliged to enter into social-plan negotiations if it (i) usually employs at least 250 employees and (ii) intends to terminate at least 30 employees within 30 days for reasons that are unrelated to an individual employee. Notices given over a longer period but based on the same operational decision must be added together.

The employer negotiates:

  • with the employee associations that are party to the collective employment contract if a party to this collective employment contract;
  • with the organisation representing the employees; or
  • directly with the employees if they have no representive organisation.

An arbitral tribunal will establish a social plan by way of an arbitral award if such negotiations fail.

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.

Both the employer and employee may terminate the employment relationship with immediate effect at any time for cause.

The requirements for termination for cause are high. There must be a severe breach of contract and – except for very serious cases (e.g. theft) – a clear warning must be given, which is then ignored by the other party. The notice must be issued within two to three days of the party becoming aware of the serious breach allowing termination for cause.

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).

In case of ordinary dismissals:

  • in case of unfair dismissal, the notice remains valid, but the party abusively giving notice may be obliged by the court to pay an indemnity of up to six months' salary.
  • The employer must not terminate the employment relationship during certain protected periods, as mentioned above under ‘Reasons for dismissal’. any notice given during these periods is void. If any of these circumstances apply after notice has been given, the notice remains valid but is extended accordingly.

Where a termination is made with immediate effect for cause but the requirements are not met (e.g. no serious breach, no or insufficient warning, late notice), the employee is entitled to the salary for the period until his contract expires or would have been ordinarily terminated. In addition, the court may require the employer to pay an indemnity of up to six months' salary.

In a case of mass dismissal, a notice of termination given without or before completion of the consultation process is deemed abusive. The notice of termination remains valid, but the employer is obliged to pay an indemnity to the employee of a sum fixed by the court not exceeding two months' salary.

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

Employees are entitled to a severance payment if they are over 50 years old and with 20 or more years service. If there is no contractual severance payment, an amount equal to between two and eight months' salary will be awarded by the court. However, the employer’s contributions to the employee’s pension fund over the entire period of service may be deducted from the severance payment. As a result, mandatory severance payments are rare.

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.

The parties to an employment agreement may agree on post-termination restrictive covenants prohibiting competitive activity by the former employee. Such covenants are subject to a number of requirements and restrictions, including the following:

  1. A post-termination restriction on competition is only valid and enforceable if it is limited to a specific activity, a reasonable geographic area, and a reasonable period of time (i.e. maximum three years, unless there are exceptional reasons for a longer period).
  2. In addition, a non-competition restriction is only enforceable in those cases where the employee has had access to the employer’s customers or to manufacturing or business secrets during the term of the employment, and the use of such knowledge could significantly damage the employer.
  3. The non-competition restriction has to be agreed upon in writing.
  4. The restriction does not apply if the employer terminates the employment relationship without the employee having given him good cause to do so, or if the employee terminates it for good cause attributable to the employer.
  5. Where an employee infringing the restriction is liable to pay a contractual penalty, the employee may exempt himself from the prohibition by paying the penalty. however, he remains liable in damages for any further damage. Only where expressly agreed upon in writing, the employer may insist that the employee continue to observe the non-competition restriction in addition to seeking the agreed contractual penalty and any further damages.

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.

In general, the managing director is an employee of the company. In certain situations, and subject to the prohibition of circumventing employment law, the managing director might be a self-employed person who has entered into a service agreement with the company.

The following comments relate to situations whereby the managing director is an employee of the company.

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.

Notice may be given without providing any reason (‘Kündigungsfreiheit’).

Both the employer and the managing director may end the employment relationship without providing reason or cause.

However, a dismissal must not be abusive (wrongful or unlawful dismissal). Subject to certain exceptions, such a notice is unlawful where issued in particular:

  • due to an inherent personal quality of the other party (skin colour, nationality, sexuality); or
  • because the other party exercises a constitutional right; or
  • solely in order to prevent claims under the employment relationship from accruing to the other party; or
  • because the other party asserts claims under the employment relationship in good faith; or
  • because the other party is performing military service or a non-voluntary legal obligation; or
  • in the context of mass redundancies by the employer if the consultation process is not observed.

In any of the above circumstances, the notice remains valid, but the party abusively giving notice may be obliged by the court to pay an indemnity of up to six months’ salary.

The employer may not terminate the employment relationship during the following periods, and notice given during these periods is void:

  • while the other party is performing Swiss compulsory military service, and during the four weeks preceding and following the service if the service lasts for more than 11 days; or
  • while the managing director, through no fault of his own, is (partially) prevented from working due to illness or accident, for up to 30 days in the first year of service, 90 days in the second to fifth years of service, or 180 days thereafter; or
  • during the pregnancy of a managing director, and for 16 weeks following the birth.

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).

There is no specific requirement. Notice of termination may be given verbally or by other means. For evidentiary purposes, it is strongly recommended that any notice be issued in writing.

The provisions set forth by Swiss Company Law must also be taken into account for managing directors. For example, in a company limited by shares (‘Aktiengesellschaft’), the appointment and dismissal of persons entrusted with managing and representing the company is part of the non-transferable and inalienable duties of the board of directors.

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.

The statutory notice periods include: one month in the first year of service; two months between the second and ninth year of service; and three months thereafter.

The notice period may vary depending on the written individual or collective employment contract. often employers and managing directors agree on longer notice periods in their employment agreements than the default rule foreseen by law. The notice period must be the same for both parties. 

The parties may agree on a probationary period of up to three months with a notice period of seven days.

2.4 Involvement of works council

No involvement.

Except for mass dismissals, there is no statutory requirement to involve a works council.

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 necessary.

2.7 Collective redundancies

Not applicable.

The statutory provisions regarding mass dismissals apply where the employer – within a time period of 30 days – gives notice for reasons unrelated to an individual employee (including a managing director) and affecting (numbers include employees and managing directors):

  1. at least ten employees at a business normally employing between 21 and 99 employees; or
  2. at least 10% of the employees at a business normally employing between 100 and 300 employees; or
  3. at least 30 employees at a business normally employing more than 300 employees.

The provisions governing mass redundancies do not apply in the event business operations have ceased by court order or mass redundancies have occurred due to bankruptcy or a composition agreement with assignment of assets.

Prior to giving notice, the employer must consult the employee’s representative body or the employees, and at the same time notify the cantonal labour office in writing of the planned mass dismissal. These bodies have consultation rights only. Neither the employees nor the cantonal office can block a mass dismissal.

The employer is obliged to enter into social-plan negotiations if it (i) usually employs at least 250 employees (including managing directors) and (ii) intends to terminate at least 30 employees (including managing directors) within 30 days for reasons that are unrelated to an individual employee. Notices given over a longer period but based on the same operational decision must be added together.

The employer negotiates:

  • with the employee associations that are party to the collective employment contract if a party to this collective employment contract;
  • with the organisation representing the employees; or
  • directly with the employees if they have no representative organisation.

An arbitral tribunal will establish a social plan by way of an arbitral award if such negotiations fail.

2.8 Summary dismissals

Not applicable.

Both the employer and the managing director may terminate the employment relationship with immediate effect at any time for cause.

The requirements for a termination for cause are high. There must be a severe breach of contract and – except for very serious cases (e.g. theft) – a clear warning must be given, which is then ignored by the other party. The notice must be issued within two to three days of the party becoming aware of the serious breach allowing termination for cause.

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.

In case of ordinary dismissals:

  • in case of unfair dismissal, the notice remains valid, but the party abusively giving notice may be obliged by the court to pay an indemnity of up to six months salary.
  • The employer must not terminate the employment relationship during certain protected periods, as mentioned above under ‘Reasons for dismissal’. any notice given during these periods is void. If any of these circumstances apply after notice has been given, the notice remains valid but is extended accordingly.

Where a termination is made with immediate effect for cause but the requirements are not met (e.g. no serious breach, no or insufficient warning, late notice), the managing director is entitled to the salary for the period until his contract expires or could have been ordinarily terminated. In addition, the court may require the employer to pay an indemnity of up to six months salary.

In a case of mass dismissal, a notice of termination given without or before completion of the consultation process is deemed abusive. The notice of termination remains valid, but the employer is obliged to pay an indemnity to the managing director of a sum fixed by the court not exceeding two months salary.

2.10 Severance pay

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

Managing directors are entitled to a severance payment if they are over 50 years old and with 20 or more years service. If there is no contractual severance payment, an amount equal to between two and eight months salary will be awarded by the court. However, the employer’s contributions to the managing director’s pension fund over the entire period of service may be deducted from the severance payment. As a result, mandatory severance payments are rare.

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.

The parties to an employment agreement may agree on post-termination restrictive covenants prohibiting competitive activity by the former managing director. Such covenants are subject to a number of requirements and restrictions, including the following.

  1. A post-termination restriction on competition is only valid and enforceable if it is limited to a specific activity, a reasonable geographic area, and a reasonable period of time (i.e. maximum three years, unless there are exceptional reasons for a longer period).
  2. In addition, a non-competition restriction is only enforceable in those cases where the managing director has had access to the employer’s customers or to manufacturing or business secrets during the term of the employment, and the use of such knowledge could significantly damage the employer.
  3. The non-competition restriction has to be agreed upon in writing.
  4. The restriction does not apply if the employer terminates the employment relationship without the managing director having given him any good cause to do so, or if the managing director terminates it for good cause attributable to the employer.
  5. Where a managing director infringing the restriction is liable to pay a contractual penalty, the managing director may exempt himself from the prohibition by paying the penalty. however, he remains liable for any further damage. Only where expressly agreed upon in writing, the employer may insist that the managing director continue to observe the non-competition restriction in addition to seeking the agreed contractual penalty and any further damages.

2.12 Miscellaneous

Not applicable.

Not applicable.