Portuguese Constitutional Court has just ruled unconstitutional the interpretation of sections 334 of Portuguese Employment Code and 481 (2) of the Companies Code in the sense that it would prevent foreign based companies that control, wholly own or have crossed share interests with a Portuguese company, to be joint and severally liable for unpaid employees’ entitlements of their Portuguese subsidiary.

In this context, it is of importance to note that according to Portuguese law any controlling company or company of the same group or company with crossed share interests can be found liable for the payment of entitlements of its subsidiary’s employees. Until now, most of the decisions from courts excluded the possibility to extend this regime to foreign based corporate shareholders.

Constitutional Court ruled now that, under a general principle of equality and non discrimination, in certain circumstances (such as the one relevant in the case at hand) and regardless of the foreign company’s law (the law of the company’s main place of administration or registered office), the connection between the foreign company’s activity in Portugal and the Portuguese jurisdiction is strong enough to justify the application of this general principle of equality and non discrimination, thus setting out that the same level of protection which is already given to Portuguese employees of companies whose shareholders are also Portuguese resident companies should be extended to employees of Portuguese companies whose shareholders may not be located in Portugal.

In the case under consideration, the foreign based company (located in Germany) had a 99% shareholding interest in the Portuguese subsidiary. A few years ago, the Portuguese subsidiary became insolvent and the employees’ entitlements were put at risk. Consequently, a legal action was filed against the German parent company claiming due payment of the outstanding employee’s entitlements based on the ground that the  limitation to the Portuguese territory derived from sections 334 of the Portuguese Employment Code and 481 (2) of the Companies Code was unconstitutional. The first instance Court ruled in favour of the existence of such unconstitutionality as claimed by the employee and such conclusion of this court has just now been confirmed by the Constitutional Court.

This is a groundbreaking decision which in practice not only provides the employees with potential new ways of obtaining the satisfaction of their employment entitlements but, furthermore, should be understood as a “heads up” for companies with subsidiaries in Portugal, or planning to set up subsidiaries in Portugal, in particular where the Portuguese entity is or shall be under control of the foreign based company.