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.

Broadly speaking, under Spanish employment law dismissals must be based on disciplinary reasons or on objective reasons.

Disciplinary dismissals must be based on gross misconduct, defined as a significant and intentional breach of employment duties. This may include:

  1. Repeated and unjustified absences from work,
  2. Indiscipline and disobedience at work,
  3. Verbal or physical offences against the employer or any person rendering services in the company or their relatives residing with them,
  4. Breach of contractual good faith and abuse of trust at work,
  5. Voluntary and continued lack of normal or agreed work performance,
  6. Regular drunkenness or intoxication if it negatively affects the work performed, and
  7. Harassment due to racial or ethnic origin, religious beliefs or ideology, disability, age or sexual orientation and sexual harassment against the employer or any person rendering services in the company.

The applicable Collective Bargaining Agreement may establish additional lawful reasons for disciplinary dismissal.

Alternatively, an employee may be dismissed on objective grounds such as:

  1. Unexpected incompetence after hiring,
  2. Inability to adapt to technical changes in his / her job position,
  3. Redundancy due to economical, technical, organisational or production- related reasons.

In cases of permanent employment contracts, when the purpose of the employment is to provide services in relation to a public programme and there is a funding shortfall.

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%.

Both disciplinary and objective dismissals require certain formalities.

Disciplinary dismissals require written notification to the employee detailing:

  1. the facts and type of misconduct upon which the dismissal is based, and
  2. the effective date of termination.

The applicable Collective Bargaining Agreement may establish additional formal requirements. Likewise, there may be additional requirements depending on the type of employee affected. For instance, Spanish Law also sets forth the obligation to initiate contradictory proceedings in relation to dismissals affecting the employees’ legal representatives.

Objective dismissals include the following requirements:

  1. Delivering a written notification or dismissal letter to the employee describing in detail the objective reasons upon which the termination is based, as well as the effective date of termination of the employment contract,
  2. Granting 15 calendar days’ notice (which may be substituted by the payment of salaries in lieu),
  3. Paying the legal severance of 20 days’ salary per year of service, capped at 12 months’ salary when communicating the dismissal, and
  4. Delivering a copy of the dismissal letter to the employees’ representatives.

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’.

Disciplinary dismissal does not require any notice period.

The Law stipulates a 15-calendar-day notice period for dismissals due to objective causes. The employer may substitute this obligation by paying salaries in lieu of notice.

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).

The Works Council must be informed of every dismissal taking place in the company based on disciplinary grounds or for economical, technical, organisational or production-related reasons.

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.

The union has a right to be heard prior to the dismissal of an employee belonging to the union.

1.6 Approval of state authorities necessary

Not necessary.

Neither disciplinary dismissal nor individual objective dismissal require any approval from the state authorities.

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.

‘Collective Redundancies’ are dismissals executed by an employer for economical, technical, organisational or production-related reasons where, over a period of 90 days, the number of redundancies is:

  • At least ten in establishments (provided they employ more than 20 employees) or companies employing up to 100 workers; or
  • At least 10 % of the workforce in establishments or companies employing at least 100 but fewer than 300 workers; or
  • At least 30 in establishments or companies employing 300 workers or more.

Although under Spanish labour regulations only the company as a whole is considered in order to verify the number of redundancies implemented for the collective redundancies procedure to apply, according to some judicial precedents from the Court of Justice of the European Union the thresholds above are considered in both the company as a whole and the relevant establishment or workplace in which more than 20 employees are employed.

Spanish employment law states that a collective redundancy may also refer to the dismissal of every member of staff when the company employs more than five workers and ceases its operations due to financial, technical, organisational or production-related reasons.

The collective redundancy procedure starts with a consultation period with the employees’ representatives which may not last any longer than one month (15 days in companies with fewer than 50 employees). Although the parties are bound to negotiate in good faith, this does not entail the obligation to reach an agreement to implement the dismissals.

The Employment Authorities must also be notified about the start and result of the collective redundancy procedure.

If the parties do not reach an agreement during the consultation period, the employer may implement the dismissals. If this happens, employees are entitled to receive compensation of 20 days’ salary per year of service up to a maximum of 12 months. However, the employees have the right to challenge the dismissal before the Labour Courts.

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.

Not applicable. Disciplinary dismissals with immediate effects are similar.

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.

Disciplinary dismissals and objective dismissals may be declared unfair if the legal requirements are not met and / or the termination is not grounded on fair reasons.

Unfair dismissal entitles the employee to receive compensation or to be reinstated to his / her previous position with the retrospective payment of salaries.

On the other hand, disciplinary / objective dismissals may be declared null and void if:

  1. The dismissal breaches constitutional rights of the employee or is discriminatory; or
  2. The dismissal is not grounded on fair grounds and / or the formal requirements were not met if the dismissal affects an employee under a situation of special protection against dismissal:
    1. the dismissal takes place during pregnancy, maternity or paternity leave and child adoption, foster care, guardianship for adoption purposes, risk during pregnancy or breastfeeding, sick leaves caused by pregnancy, birth or breastfeeding, time off for breastfeeding or hospitalization of the child after birth, or an extended leave of absence to take care of a child;
    2. the dismissal affects an employee whose working time has been reduced to take care of children;
    3. the dismissal affects an employee suffering gender-based violence whose working time has been reduced or reorganised given this condition; or
    4. the dismissal affects the employees after the suspension of the employment contract due to maternity, paternity, adoption, fostering or guardianship within the nine months following the child’s birth, adoption, foster care or guardianship.

Collective redundancies are also void if the legal procedure is not followed.

The consequence of a void dismissal is the reinstatement of the employee in the company and the retrospective payment of salaries.

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 cases of justified and fair objective dismissals or collective redundancies the minimum severance pay is 20 days’ salary per year of service capped at 12 months. In addition, employees are entitled to 15 days’ notice, which can be substituted by payment of salaries in lieu.

An unfair dismissal results in a severance pay of 45 days’ salary per year of service until 12 February 2012 and 33 days’ salary per year of service from 12 February 2012 capped at 24 months’ salary or at the severance accrued as of 12 February 2012, if higher, with a cap of 42 months’ salary.

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.

During the employment it is forbidden for an employee to compete with his / her employer. Additionally, both parties may agree full dedication in exchange for monetary compensation.

A post-contractual non-compete clause may also be included in the contract. The following limitations and requirements apply:

  • The obligation may not last longer than two years for most qualified employees and six months for other workers after the termination of the employment contract.
  • The employer must have an effective industrial or commercial interest in such non-compete obligation, and
  • The employee must receive adequate economic compensation.

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. 

Not applicable.

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.

Under Spanish law, managing directors and other members of the board of directors have a commercial relationship with the company and, therefore, are beyond the scope of employment law. The table below deals with ‘senior executives’, who have a special employment relationship governed by Royal Decree 1382 / 1985 of 1 August. It should be noted that senior managers are exclusively those who exercise powers inherent to the ownership of the company, with independent authority (reporting directly to the board of directors) and full responsibility for the company’s general objectives.

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.

Disciplinary dismissals must be based on gross misconduct, defined as a significant and intentional breach of employment duties.

On the other hand, the employment contract of senior executives may be terminated by withdrawal, where no reason is required (lack of confidence).

Likewise, the contract may be terminated based on legal grounds and following the legal procedures set out in the Spanish Workers’ Statute for common employees (e.g. objective dismissal based on economical, technical, organisational and production-related grounds).

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.

Notwithstanding the type of termination, it is necessary to notify the senior executive of the employer’s decision in writing. In the event of dismissal, the employer must explain the reasons for termination and state the date on which it will take effect.

2.3 Notice period

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

No notice period is required in case of disciplinary dismissal.

In case of withdrawal, by contrast, senior executives are entitled to three months’ notice unless otherwise agreed up to six months. The employer may substitute this obligation with the payment of salary in lieu.

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 applicable.

2.7 Collective redundancies

Not applicable.

Common regulations shall apply.

2.8 Summary dismissals

No special rules apply.

Not applicable.

2.9 Consequences if requirements are not met

The removal of the director is void.

In the event of a disciplinary dismissal or withdrawal, failure to comply with the formal requirements above may lead to the dismissal being declared unfair.

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.

Disciplinary dismissal: if the dismissal is declared or acknowledged as unfair or wrongful, the senior executive is entitled to severance pay of 20 days’ salary in cash per year of service, with a maximum of 12 monthly payments, unless otherwise agreed in the employment contract.

Withdrawal: severance of seven days’ salary in cash per year of service, with a maximum of six monthly payments, unless otherwise agreed in the employment contract.

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).

  1. Non-compete clause during the term of the employment contract: Senior executives cannot enter into employment contracts with other companies unless they receive prior authorisation from their employer or by way of written agreement.
  2. Non-compete clause after termination of the employment contract: it can be agreed at any time of the relationship, or even upon termination.

A non-compete clause after termination of the employment contract can be agreed at any time of the relationship, or even upon termination.

The following limitations and requirements apply:

  • the obligation may not last longer than two years; and
  • the employer must have an effective industrial or commercial interest in such a non-compete obligation; and
  • the employee must receive adequate economic compensation in exchange for the non-compete obligation.

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.