CMS Expert Guide to employment termination law and legislation

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1. Dismissal of employees

1.1 Reasons for dismissal

A claim for unfair dismissal can be made if the reason for dismissal was not one of a number of ‘fair reasons’ (e.g. conduct, capability, "some other substantial reason", statutory ban or redundancy).

Most employees need a particular length of service to bring a claim for unfair dismissal. At present this is two years’ service. However, all employees can bring a claim for unfair dismissal if the reason for dismissal is deemed to make the dismissal automatically unfair (e.g. for whistleblowing or for family reasons such as dismissals for reasons connected to pregnancy, parental leave, or requests for flexible working).

Even if the dismissal is deemed to be for a fair reason, to avoid a successful claim for unfair dismissal the employer must still follow a fair procedure and act reasonably in dismissing the employee.

If the reason for the dismissal involves discrimination against the employee (because of a protected characteristic such as sex, race, age or disability), employees may make a discrimination claim irrespective of their length of service.

Employees with two years of service have the right to request a written statement of reasons for dismissal. Employers must provide the statement within 14 days of the request.

Irrespective of length of service, employees dismissed during pregnancy or statutory maternity or adoption leave are automatically entitled to a written statement of reasons for dismissal without having to request it.

An employment agreement can be terminated by the employer and the employee can be dismissed in two different ways: with cause, when the employee has committed one of the breaches specified in the labour laws, or without cause, when the employee is dismissed at the employer’s discretion, due to redundancy or other reasons that do not necessarily need to be specified.

The difference between dismissal with cause and without cause lies in the severance payments that the employer must make to the employee upon dismissal (see below).

The labour legislation determines that an employee can be dismissed with cause for the following reasons:

  1. dishonesty;
  2. sexual harassment or inappropriate behaviour;
  3. the employee competes with the employer’s line of business or carries out other business prejudicial to the employee’s work, on his / her own or through third parties, without the permission of the employer;
  4. the criminal conviction of the employee, resulting in the employee being incarcerated and not able to attend work;
  5. poor performance;
  6. frequent drunkenness or drunkenness at work;
  7. disclosure of company secrets;
  8. insubordination or indiscipline;
  9. the employee abandons his work;
  10. insult, defamation or slander, or physical offence, carried out at work against any person, except in legitimate self-defence or in defence of a third party;
  11. insult, defamation or slander, or physical offence, carried out at work against the employer or superior, except in legitimate self-defence or in defence of a third party;
  12. frequent gambling;
  13. losing the professional qualification necessary to perform work due to the employee’s fault; and
  14. being involved in actions contrary to the national security, as duly evidenced through an administrative proceeding

The following employees have the right to stability, and cannot be dismissed without cause from their employment:

  1. pregnant employees cannot be dismissed without cause from the date the pregnancy is confirmed until five months after giving birth to the child;
  2. an employee who suffers an accident at work and is prevented from attending work for at least 15 days cannot be dismissed without cause for a period of one year, counted from the date the employee returns to work; and
  3. an employee elected president of the internal commission for accident prevention cannot be dismissed without cause from the date he registers to run for the position until one year after the end of his / her tenure.

In addition to dismissal of the employee with cause or without cause, the employer and the employee can amicably agree to terminate the employment agreement. In such a case, lower severance payments are due (see below).

1.2 Form

Employees may be dismissed orally or in writing. In misconduct and capability dismissals the ACAS Code of Practice states that the employee should be invited to attend a meeting to explain their version of events. A letter should then be sent to confirm the reason for the dismissal and the date of dismissal in writing to avoid any dispute over the effective date of termination. A right of appeal should be offered. Failure by the employer to follow the Code of Practice does not give an employee a remedy for breach. However in the event that an unfair dismissal claim is successful and there has been non-compliance with the Code the tribunal has the power to increase the award of compensation by up to 25%.

The employer must notify the employee of the dismissal in writing. In addition, the parties must execute a term of termination, and the employer must register the dismissal in the employee’s employment booklet and inform the competent authorities.

1.3 Notice period

There is a statutory minimum notice period of between one and 12 weeks, dependent on length of service.

The contract of employment can provide for a longer notice period. Failure by the employer to comply with the contractual notice period can result in a claim for ‘wrongful dismissal’.

Except in cases of termination with cause, where no prior notice is required, or if a longer notice period is stipulated in the employment agreement, employees must be notified of the dismissal at least 30 days in advance.

In addition to the 30-day notice period, the employee must receive payment in lieu of an additional “notice period” equivalent to the salary for three days per year of employment up to a maximum of 90 days. If no dismissal notice or less than a 30-day notice is given, the employer is obliged to pay the employee the salary that would otherwise be due for the full 30-day
notice period.

1.4 Involvement of works council

No general legal requirement for involvement, but staff forums may be involved in the case of collective redundancies (see below).

Not necessary.

1.5 Involvement of a union

No involvement normally other than in the case of collective redundancies (see below) or if the employee exercises their right to be accompanied by an appropriate trade union representative to a disciplinary meeting.

No involvement normally, other than in the case of a program of collective voluntary dismissal (see below).

1.6 Approval of state authorities necessary

Not necessary.

Not necessary.

1.7 Collective redundancies

If 20 or more employees are proposed to be made redundant at one "establishment" within a period of 90 days or less, consultation with employee representatives (who may be trade union representatives) must begin at least 30 days (or 45 days if 100 or more employees are to be made redundant) before the first dismissal takes effect.

Additionally, employers are obliged to notify the Secretary of State (for Business Innovation and Skills) where they are proposing to dismiss as redundant 20 or more employees within a 90-day period.

The Secretary of State must receive notification at least 30 days (or 45 days if 100 or more employees are to be made redundant) before the first dismissal takes effect.

A copy of the notification must also be provided for the employee representatives.

There is no requirement in Brazil for any specific measure to be taken in case of collective redundancies. However, the employer may elect to agree with the employees’ union to a programme of collective voluntary dismissal. Under such a programme, the employer can be authorised to make reduced severance payments for employees who voluntarily choose to adhere to it. From the employer’s perspective, the programme allows the employer to pay less than it would otherwise pay to employees who are dismissed without cause. For employees, the programme can be beneficial as they may be able to receive some indemnification that they would otherwise not have be entitled to had they decided to terminate their employment agreement themselves.

1.8 Summary dismissals

Summary dismissal (dismissal without notice) is only lawful where the employee has committed a breach of contract that is sufficiently serious to entitle the employer to treat the employment contract as terminated with immediate effect. A typical example is where the employee has committed gross misconduct.

Summary dismissals (dismissals without notice) are only permitted for dismissals with cause. For dismissal without cause, a 30-day prior notice is generally required (see above). However, the employer may elect to provide financial compensation for the prior notice period. In this case, the employer has to pay to the employee the salary the employee would have earned during the 30-day prior notice, and the employee is not required to work during this period.

1.9 Consequences if requirements are not met

The employee may have various claims, such as an unfair dismissal claim where the primary remedy is financial compensation. However, there is also scope for the claimant to request reinstatement or re-engagement, and in very limited circumstances (e.g whistleblowing) the claimant can request interim relief, and if the tribunal grants this, then an employer must continue paying the claimant's wages until the date of the substantive hearing. Most employment-related claims in the UK are made in employment tribunals.

The employee may have various claims against the employer related to his dismissal. For example, in case of dismissal for cause, the employee may have a claim for unfair dismissal and require payment of the severance dues that would have been payable for a dismissal without cause. In case of a dismissal without cause, the employee may have a claim with respect to the severance payments received, or other employment-related rights accrued during the employment term which were not paid.

Employment claims are made before specialised labour courts in Brazil.

1.10 Severance pay

The employment contract may provide for the employer to make a payment in lieu of notice, for example, equal to the salary that the employee would have earned during the notice period. If this is not provided for in the contract, the parties can agree for such a payment to be made, for example, as ‘damages’ for breach of contract.

If an employee with two years’ continuous service has been made redundant, they will be entitled to a statutory redundancy payment. The amount is calculated according to a statutory formula based on the employee’s age, length of service and weekly pay (capped at GBP 538 as at April 2020), up to a maximum of GBP 16,140 (as at April 2020). The employment contract may provide for an enhanced redundancy payment.

If the employee has been unfairly dismissed, and brings a successful claim in an employment tribunal they may be able to claim a ‘basic award’ calculated according to the same formula as the statutory redundancy payment (but employees cannot usually recover both a statutory redundancy payment and a basic award), and a ‘compensatory award’ which is capped at the lower of one year’s salary and GBP 88,519(as at April 2020). If an order for reinstatement or re-engagement is made there is scope for this cap to be lifted.

Employees who argue that they were dismissed for making a protected disclosure (whistleblowing) are not restricted by the statutory cap referred to above.

Similarly, the statutory cap does not apply where the dismissal was related to a prohibited ground under the Equality Act 2010. In these scenarios the potential awards can be significant.

In case of dismissal for cause, no severance pay is due to the employee.

In such cases the employer must only make payments related to rights the employee accrued during the employment period, which can include pro-rata payment for accrued holiday entitlements (1 / 12 of the employee’s holiday pay for each month of the incomplete holiday accrual period at the time of dismissal (such holiday pay being, in full, equivalent to one monthly salary plus an additional 1 / 3 of monthly salary), proportional 13th salary (1 / 12 of one monthly salary for each month worked in the then current calendar year), as well as double payment for any overdue holiday periods (i. e., holiday periods not enjoyed by the employee within 12 months of the employee acquiring the right to enjoy such holiday period).

If the employee is dismissed without cause, the employer must pay to the employee, in addition to the payment of accrued rights and as a penalty for unfair dismissal, an amount equal to 40 % of that which the employer has deposited into the employee’s severance compensation fund (“FGTS”) during his / her employment. In addition, the employer must pay a further 10 % of the amount deposited into the FGTS to the government. Every month, employers are required to deposit 8 % of the employee’s monthly salary into his / her FGTS account, which is managed by the Federal Savings Bank on behalf of the employee. Thus, this penalty will depend on the length of employment and on the amount of the employee’s monthly salary.

If the dismissal is amicably agreed to between the employee and the employer, the employer will have to pay half of (a) the financial compensation for prior notice, if the parties agree that the prior notice will be financially compensated for instead of the employee actually working during such period, and (b) the penalty equivalent to 40 % of the amount the employer has deposited into the employee’s FGTS (i. e., 20 % of the amount deposited into the FGTS).

All other termination payments, such as amounts due in respect of accrued rights, should be fully paid.

In cases of fixed term employment contracts where there is no provision allowing the parties to terminate the agreement early without cause and the employer opts for early termination without cause, the employer must pay the employee half of the amount the employee would otherwise have been entitled to receive during the remainder of the agreement term.

1.11 Non-competition clauses

Restrictive covenants will be void for unlawful restraint of trade and so are unenforceable unless they protect the legitimate business interests of the employer and go no further than is necessary to provide that protection, in terms of activity, duration and geographical area. However they are widely used in senior level contracts. It is always recommended to take advice on tailoring such a clause for each individual employee and to ensure that when employees are promoted or their role changes that the restrictions are suitably updated.

The law does not deal with the validity of non-compete clauses. Currently, the validity of such clauses is still being debated at the labour courts. On the one hand, some courts understand that non-compete clauses breach the constitutional rights of all persons to carry out any work, profession or activity of their own choosing, provided the professional qualifications are met. On the other hand, other decisions have confirmed the validity of non-compete clauses, provided some restrictions are included, such as:

  1. the non-compete clause shall be reasonably limited in time and to a certain geographic area;
  2. the restriction shall be related to the activities the performed during his / her employment, and it shall be necessary and reasonable to protect a relevant interest of the employer;
  3. the employee shall be entitled to receive financial compensation if he / she is restricted from work due to the non-compete provision; and
  4. the non-compete clause shall be agreed on at the outset of the employment.

1.12 Miscellaneous

Employers may wish to avoid a potential dispute over a termination of employment by obtaining a waiver of rights from an employee in consideration for a termination payment. In the UK this agreement is referred to as a settlement agreement and there are a number of statutory formalities to include before such an agreement is enforceable in respect of statutory rights, including the requirement that the individual takes independent advice on the terms of the agreement. There are also risks attached to making an offer to an employee to enter into a settlement agreement and therefore legal advice should be taken before doing so. In addition, in 2019 the UK Government announced legislation on the use of non-disclosure agreements in discrimination cases which was expected to come into force in 2020, however given the pandemic, this has been delayed and no new time frame has been given. The UK statutory equality body, the Equality and Human Rights Commission issued guidance on this subject in October 2019 setting out good practice for employers to consider. 

The above rules and guidelines apply to private employment agreements. Public officials and public employees are generally subject to a specific employment regime which, among other things, provides for employee stability, meaning that they cannot be dismissed without cause after a probation period.

2. Dismissal of managing directors

In the United Kingdom (UK), the rights and obligations of a ‘director’ are the same whether they are for a ‘managing director’ or any other type of director. However, not all directors are employees. ‘Managing directors’, for example, are employees of the company, but ‘non-executive directors’ are not employees. Normal practice is for a managing director to have a service agreement supplementing their statutory and common law obligations as a director. Often a managing director's employment contract will require them to resign any directorships when their employment terminates, so that their directorship and employment terminate simultaneously. It Is therefore often simpler (and preferable) to remove a managing director by dismissing them from their employment, and then requiring them to resign their directorship. Please see the section "Employees: United Kingdom" for information on the relevant issues when taking that approach, as well as the "Miscellaneous" section below.

This table only covers removal of the director from office as a director and does not cover termination of any contract of employment or other employment issues.

In Brazil, the rights and obligations of a ‘director’ are the same whether they are for a ‘managing director’ or any other type of director. Although this is not the normal practice, a director may also be an employee of the company. If that is the case, the relationship between the company and the director will be subject to labour laws, as well as to the legal / statutory rules applicable to the appointment / dismissal and duties / responsibilities of directors. This table only covers the removal of managing directors from their positions as director, and does not cover termination of any contract of employment or other employment issues.

2.1 Reasons for dismissal

The company may remove the director for any reason, unless the articles of association of the company or any other agreement between the director and the company provide otherwise. There is however a statutory procedure that the shareholders of any UK company can use to remove a director (see below). This procedure will apply regardless of any agreement between the company and the director, or any provision of the company's articles.

A managing director may be dismissed at any time for any reason, unless the articles of association or bylaws of the company provide otherwise.

2.2 Form

The Companies Act 2006 gives shareholders a mandatory right to remove a director by ‘ordinary resolution’ (i.e. a simple majority of the shareholders attending and voting) at a meeting notwithstanding any other agreement between the director and the company. The resolution will be of no effect if passed in writing instead of at a meeting. At least one of the shareholders must give at least 28 clear days’ notice in writing before the meeting of an intention to move the resolution at the meeting. On receiving that notice, the company must forward the notice of the resolution to the director concerned and call a general meeting of the company to vote on the resolution. The director has the right to be heard at the meeting and to make written representations. 

The company's articles of association or shareholders' agreement may contain provisions that make it difficult in practice to remove a director or provide that they can be reinstated. The company's articles of association and shareholders' agreements should therefore be checked before considering taking this route. 

A company's articles of association may set out additional (and usually less complex or time-consuming) bases on which a director can be removed. For example, the 'Model Articles' under the Companies Act 2006 set out circumstances that trigger the automatic removal of a director, including that they are prohibited from being a director by law or a bankruptcy order is made against them. Some companies' articles of association also allow the directors to remove another director by majority vote, for example. The articles of a company should be reviewed for any such procedures if removal of a director is contemplated.

The dismissal of the managing director will require the resolution of the shareholders or board of directors of the company, as applicable, which shall be recorded in a written document, such as the minutes of a shareholders’ / board of directors’ meeting, or an amendment to the articles of incorporation. In order for the dismissal to be effective before third parties, such minutes or amendment must be registered at the Companies’ Registry and, in the case of a corporation, published in local newspaper.

If the company is incorporated as a limited liability company (“limitada”), the removal of the directors is subject to the following voting thresholds, depending on (i) whether the elected director is also a shareholder or not, and (ii) whether the director was appointed in the articles of association or in a separate document, such as the minutes of a shareholders’ meeting:

  1. if the director was appointed in a separate document, whether also a shareholder or not, the removal will require the decision of a majority of the capital holders;
  2. if the director is also a shareholder appointed in the articles of association, the removal will require the approval of 2 / 3 of the capital holders, unless the articles of association provides differently; and
  3. if the director is not a shareholder, but was appointed in the articles of association, the removal will require the approval of 3 / 4 of the capital holders.

If the company is incorporated as a corporation, the managing director can be appointed either by the shareholders or by the board of directors (if any), as determined in the bylaws of the company. If managing directors and other executive officers are appointed by the board, their removal normally requires the approval of a majority of the board, unless the bylaws provide for a different threshold. If appointment is made by the shareholders, removal usually requires the approval of the holders of a majority of the company’s share capital, unless the bylaws stipulate a higher threshold.

2.3 Notice period

Removal as a director is immediate unless otherwise specified in the articles of association of the company.

Removal as a director is immediate unless otherwise specified in the articles of association, bylaws of the company, or the shareholders’ / board of directors’ resolution

2.4 Involvement of works council

No involvement.

No involvement.

2.5 Involvement of a union

No involvement.

No involvement.

2.6 Approval of state authorities necessary

Not necessary.

Not necessary.

2.7 Collective redundancies

Not applicable.

Not applicable.

2.8 Summary dismissals

No special rules apply.

No special rules apply.

2.9 Consequences if requirements are not met

The removal of the director is void.

The removal of the director is void.

2.10 Severance pay

The director may be entitled to a payment under the terms of any service contract (for example a payment in lieu of notice), or as an employee under statute (for example a statutory redundancy payment). Sections 215 to 222 of the Companies Act 2006 contains special rules relating to compensation given to a director for their loss of office. Such compensation requires shareholder approval, except for certain payments that are made in good faith such as payments made in discharge of a legal obligation, or to settle a claim arising from loss of office or termination of employment.

Not applicable.

2.11 Non-competition clauses

Restrictive covenants may be included in any service agreement. However, they will be void for unlawful restraint of trade and therefore unenforceable unless they protect the legitimate business interests of the employer and go no further than necessary to provide that protection in terms of the activities covered, duration and geographical area.

The director may also be subject to post-termination restrictions contained in other agreements such as a shareholder agreement, or (depending on the reward structure) share plans such as LTIPs (Long Term Incentive Plans).

If the managing director is also an employee, a non-competition clause could be agreed upon in the employment agreement. The law does not deal with the validity of non-compete clauses, and the validity of such clauses is currently being debated at the labour courts. On the one hand, some courts understand that non-compete clauses breach the constitutional right of all persons to carry out any work, profession or activity of their own choosing, provided the professional qualifications are met. On the other hand, other decisions have confirmed the validity of non-compete clauses, provided some restrictions are included, such as:

  1. the non-compete shall be reasonably limited in time and to a certain geographic area;
  2. the restriction shall be related to the activities the employee performed during his employment, and it shall be necessary and reasonable to protect a relevant interest of the employer;
  3. the employee shall be entitled to receive financial compensation if he is restricted from work due to the non-compete provision; and
  4. the non-compete clause shall be agreed on at the outset of the employment.

If the managing director is not an employee, and the non-compete  clause has been established in a corporate document (bylaws, minutes   of shareholders’ or board of directors’ meeting), courts are normally more inclined to uphold its application. However, the court would here evaluate specific aspects of the relation and assess whether, despite the director not being an employee, the non-competition clause could diminish the managing director’s employment capacity.

2.12 Miscellaneous

Regulated and listed companies should also be mindful of any obligations they may have under their regulatory rules and/or the rules applicable to their market listing. These rules are likely to limit the terms on which such companies can reimburse a director in connection with their removal from office or employment and can also subject a company to reporting obligations.

Not applicable.