New penalty system for unlawful dismissal

The 2012 Labour Code introduced significant changes concerning the compensation to be paid by employers in the event of unlawful dismissal. Since the new rules apply to all unlawful dismissal cases commenced after the entry into force of the new Labour Code (ie, after July 1 2012), it has taken some time for these cases to be processed, and thus also for the potential pitfalls of the new regulations to be identified and conclusions to be drawn.

As part of this process, on March 31 2014 the Administrative and Labour College of the Supreme Court issued an opinion addressing the most important questions relating to the penalties for unlawful dismissal.

Under the previous Labour Code, in case of unlawful dismissal and upon the employee's request, the employer was obliged to reinstate the employee to his or her original position. If this was impossible due to various circumstances (which was the situation in most cases), the employer was obliged to pay:

  • lump-sum compensation amounting to between two and 12 months' average salary; and
  • full compensation for the damages suffered by the employee (including lost wages) from the date of termination.

The previous Labour Code stipulated that if a legal dispute arose, the date of termination correlated to the date on which the court ruling declaring the dismissal unlawful became binding. As such, employers were forced to bear the risk of lengthy and delayed court procedures.

As the previous regime put an unreasonably high burden on employers, the new Labour Code has introduced a new penalty regime for unlawful dismissal.

According to the new Labour Code, in case of unlawful dismissal and upon the employee's request, the employer must pay compensation for the damages that the employee has incurred. Compensation for lost wages or lost income may not exceed an amount equal to 12 months' absence rate.(1) This new rule has two significant consequences:

  • Compensation now relates only to the actual damage caused by the dismissal; and
  • Damages arising from lost income are capped at an amount equal to 12 months' absence rate.

Alternatively, employees may claim lump-sum compensation amounting to the absence rate due for their notice period instead of compensation for damages. In such case the employee need not prove damages suffered as a result of the dismissal. Such a claim could considerably simplify court procedures, although the amount of compensation that can be awarded to the employee is significantly lower.

Damages caused by unlawful dismissal

One consequence of the new penalty system is that – aside from the unlawful nature of the dismissal (the employer must still prove the lawfulness of the dismissal) – the employee must prove the exact damages suffered and their extent. In other words, the fact that the dismissal was unlawful does not automatically trigger the employer's duty to pay full compensation for damages. Thus, the court must decide on the individual damages claims submitted by the employee and evaluate them separately, in accordance with the general rules pertaining to damage claims.

What type of damages typically arise in cases of dismissal? The most important is lost income or potentially lost social security and other benefits. Extra costs incurred as a result of unlawful dismissal may also be considered as damages; moral damages may also arise.

The law stipulates certain damages for which the employer may not be held liable, including:

  • damages that were reasonably unpredictable at the time of dismissal (eg, the employee was unable to find a new job for several years, leading to damage to his or her health); and
  • damages that could have been prevented or avoided by the employee.

With respect to the prevention of damages, the court usually expects employees to search actively for a new job following dismissal. If the employee finds a new job, but the remuneration is lower, the difference may be claimed from the previous employer as damages (ie, lost income).

Lost income – calculation, amount and enforcement

The amount of lost income is capped at an amount equal to 12 months' absence rate. The law's indication of 12 months often leads to confusion; this rule does not mean that the employee is entitled to the absence rate for a period of 12 months following dismissal. Rather, this amount serves as a cap up to which the amount of actual damages incurred may be claimed from the previous employer.

The opinion issued by the Administrative and Labour College of the Supreme Court also suggests that if the employee wishes to make damages claims for lost income, it is advisable first to establish the amount of the cap (ie, the amount equal to 12 months' absence rate) before examining and deciding on the individual claims.

According to the Labour Code, for the purposes of determining lost income, the cash value of other regular benefits to which the employee was entitled (on the basis of the employment relationship) shall be taken into account in addition to lost salary. This means that under the correct interpretation of the legal provisions, claims pertaining to all types of lost income (eg, bonuses and fringe benefits) may be enforced within the aforementioned cap.

Another consequence of this new system is that if the employee finds a new job at a lower salary after the unlawful termination, it is possible that the amount of damages suffered by the employee (ie, lost income) may reach the aforementioned cap only after a relatively long period, especially if the salary difference between the two jobs is minimal.

In such case, the employee may have further damages claims after the court verdict has been issued, as the amount of the cap will not have been reached on the verdict's issuance date. The fact that the courts may award compensation only for damages that have already occurred – not for future damages – makes this scenario even more probable.

Most practitioners consider that in such cases, employees may enforce their additional damages claims in a subsequent court case – even if, formally speaking, doing so could violate the concept of res judicata, which does not allow the same party to initiate legal proceedings to enforce claims arising from the same legal relationship.

Until a comprehensive new regulation on such situations is developed, employers that have dismissed employees unlawfully within the past three years (the period of prescription) cannot be certain that they will not face further claims made by their employees, even if litigation between them has already concluded.

For further information on this topic please contact Dániel Gera at Schoenherr Rechtsanwälte by telephone (+36 1 345 87 78) or email (d.gera@schoenherr.eu). The Schoenherr Rechtsanwälte website can be accessed at www.schoenherr.eu.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.