Company leaders such as CEOs are expressly excluded from the scope of the Employment Protection Act. Therefore, the parties to a CEO's employment agreement must agree its terms. However, the reasonability and validity of the agreed terms and conditions may be assessed or determined by the Swedish courts.
Given the lack of applicable law in this area, the parties to a CEO's employment agreement must agree on the terms relating to both active employment and termination (by either party). This article focuses on agreed notice periods for CEOs following a recent interim decision by the Labour Court (Case AD 2019 Nr 12).
When employment agreements fall outside the scope of the Employment Protection Act – as CEO employment agreements generally do – and provided that a lawsuit is initiated, the agreed terms and conditions will be assessed by the courts with regard to (among other things) their validity, fairness and reasonability. This assessment is conducted in accordance with the principles set out in the Contracts Act. If a court finds a condition to be (for example) unfair against either party, it could be modified or even set aside.(1)
Swedish case law commonly accepts that a company must offer a CEO at least six months' notice before terminating their employment. This commonly accepted principle reflects earlier Labour Court case law. For example, in AD 1991 86, the parties had not agreed a specific notice period and the CEO had been employed for only a few months when the company terminated his employment. The CEO's union sued the company and claimed (among other things) that the CEO had been entitled to a six-month notice period. In its judgment, the Labour Court stated that "it should be unusual with shorter periods of notice than six months for CEO's" (referring to Case AD 1989 Nr 133). Hence, the court found that the CEO had been entitled to a fair notice period of six months regardless of the fact that the parties had not agreed a notice period.
However, Swedish case law also recognises that companies have a legitimate interest in being able to terminate a CEO's employment at any time and that company boards are entitled to remove a CEO in whom they have lost confidence. If terminated by their company, CEOs normally leave their position immediately but keep their salary and benefits during the notice period. Hence, CEO notice periods are considered to be periods of financial protection rather than employment protection.(2)
In February 2019 the Labour Court decided a case concerning a CEO's right to immediately leave their position without a notice period. The question as to why a CEO would want to refrain from financial protection may be answered by the fact that CEOs, like other employees, are still formally employed during notice periods and therefore have the same company loyalty that existed before notice was given. Therefore, under Swedish employment law, CEOs cannot engage in any business activities with competitors during a notice period.
In this case, the CEO had terminated his employment without agreeing a notice period with his employer. The CEO claimed that he did not have to observe any notice period and could engage in business activities with competitors (which he did even while the court was making its decision).
The Labour Court acknowledged that given a lack of express agreement between the parties in such cases, CEOs and managers should observe fair notice periods and consider that their employer may need to adapt to their intention to leave. Further, employers may have a legitimate interest in the CEO refraining from disloyal behaviour (eg, engaging in business activities with competitors) for a limited period.(3)
Referring to an earlier decision concerning CEO's entitlement to notice periods, the court held that six months' notice was fair under the circumstances of this case. Hence, legal grounds had prohibited the CEO from engaging in any business activities with competitors from the date on which notice had been given and six months thereafter (the notice period).
Labour Court case law, including the interim decision of February 2019, shows how important it is for companies and managers to agree the conditions relating to either party's termination of employment agreements, including notice periods, to protect their interests. Parties should share a mutual interest in negotiating these terms in advance and with fair conditions, not only for predictability's sake, but also to avoid future court interference.
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.