The Supreme Court of Lithuania recently affirmed that the courts have no competence to assess whether an employer’s decision to restructure and make staff redundant has been expedient and reasonable, owing to the fact the employer on its own decides which position is necessary and which is not.

Summary

The claimant had worked in the company as a designer-constructor. The employer made the decision to end the department of design and construction and to expand the management department. The reason for restructuring was based on the clients’ refusal to use design services, and the fact that moulds and technical information would be received directly from clients, therefore the employer had no rationale to use a design-constructer department any longer.

The employer offered to all designer-constructors, including the claimant, to be transferred to another position as a manager by assuring not lower salary. The claimant, however, refused this offer.

The employer dismissed the claimant. The claimant brought a claim before the court for unlawful dismissal.

The court of the first instance acknowledged the restructuring genuine, however found a procedural breach. The procedural issue was wrong because the claimant was dismissed before the notice of termination of employment contract had ended. The court of the first instance recognized the dismissal as unlawful, and replaced the dismissal to the end of the notice of termination of employment contract. Both parties appealed this decision. The Court of Appeal in contrary to the court of the first instance, did not find substantive justification of restructuring and redundancy. The Court of Appeal asserted that the design and construction department still existed, however the management department did not exist. After the transfer of the designer–constructors to managers, the number of employees was unaltered, and the functions of designer–constructor had not been annulled.

The employer disagreed with the Court of Appeal and lodged the cassation appeal.

Judgment

The Supreme Court of Lithuania emphasized that the restructuring can be recognized as an exceptional case to dismiss an employee as long as the employer could prove a genuine basis for redundancy.

Based on previous case law, the Supreme Court pointed out that the court does not have competence to weigh on the expedience and reasonableness of redundancy caused by economic reasons, as this is not the remit of the courts. The eeconomic and organizational decisions with respect to their activities are made by the employers, not by the courts. Therefore the employer on its own decides which position is necessary and which is not.

The Court noted that under the Labour Code of Lithuania to terminate an employment contract with an employee who is raising children until fourteen years of age, as was addressed to the claimant, would be applicable only in exceptional circumstances where the retention of employee would substantially violate the interest of employer.

The Supreme Court held that allowing the employee to stay in her job, with her services being no longer requested would actually mean such employee’s de facto downtime; consequently, this would entail the employer’s regular expenses equal to the amount of the employee’s salary. The Supreme Court found that this might have a substantially adverse effect on the employer’s pecuniary interests and that the employee dismissal process might have been started by the employer seeking to avoid such expenses. It is the employer’s economic necessity and in the employer’s direct interest to avoid unreasonable payroll expenses associated with payment of salaries to those employees whose job and deliverables become no longer needed in the changed circumstances or do not justify the employee’s staying in the job anymore. The case when the employee’s job does not contribute to the employer’s (company’s) success but worsens the employer’s financial situation instead constitutes an exceptional case in which the employer is allowed to dismiss the employee pursuant to the Labour Code in a manner determined by laws.

In view of aforementioned, the Supreme Court overturned the decision of the Court of Appeal and upheld the reasoning of the first instance of the court that the employer’s decision to restructure and make the claimant redundant was fair and reasonable.

Commentary

The foregoing decision has crystallized the key elements that must be met in order for an employer to justify an employee’s redundancy: (1) substantive justification and (2) procedural justification. Under the Supreme Court of Lithuania, substantive justification embraces only assessment as to whether the restructure was not merely a charade by which an employer used redundancy to get rid of an employee. However, the courts shall have not assessed the employer’s commercial rationale for the decision. The Supreme Court by this recent judgment clearly defines the boundaries of the courts as to what extent the court must evaluate the substantive justification for a redundancy. These limits have narrowed the considerations whether a decision was a genuine business decision. The employer, have trying to prove a genuine basis for redundancy must be able to provide evidence that the person’s job doesn't need to be done by anyone. The causes can be various, e.g. financial issues resulting in the need to downsize or realign, merging with another business, realignment of business, brand, a will to outsource certain business functions, etc. The procedural justification includes the court’s assessment whether restructuring and redundancy complies with the procedural requirements set in the laws. For example, whether an employer followed the relevant requirements to consult with the employees or their representative about the redundancy, or could have reasonably, in the circumstances, given the employee another position within the employer’s business or an associated entity, or whether they could have informed the employee before a certain time limit for redundancy, etc.

A failure to comply with the relevant procedural requirements, however, does not always mean that redundancy would be recognized unlawful as such. Employers have sometimes been tripped up by procedural issues. Notwithstanding, a procedural requirements’ breach does not impact or deny a fairness and legitimacy of redundancy as such, as far the employers prove that despite the procedural mistakes, the decision of restructuring and redundancy has been made for genuine business reasons.

Discussed judgment is significant because it clearly presents that the courts shall not be involved in the business decision-making decision of companies, as they should restrict themselves to the legal issues at hand.