Introduction
Criminal and administrative proceedings against employees
Personal liability of management for criminal acts committed by employees

Never make promises
Refund of costs by employer
Employee's entitlement to refund
Amount of refund
Comment


Introduction

Is it lawful for an employer to bear the costs of fines and legal defence for criminal proceedings against one of its employees for illegal acts committed in the context of his or her work? Does the employee have a right to have such costs refunded? An employer may have to consider these issues if an employee oversteps legal boundaries in the company's commercial interest. The management must take great care to avoid facing criminal allegations. This update outlines the legal principles and the limits that employers must observe in this context.

Criminal and administrative proceedings against employees

There are a number of scenarios in which employees may find themselves facing criminal or administrative proceedings. For example, employees working in particularly sensitive areas (eg, sales and distribution or the procurement of information on competitors) may be tempted to overstep legal boundaries to secure a contract or obtain important information. Employees working in accounting or controlling could make errors in bookkeeping or in declaring company income. Truck drivers may exceed prescribed driving times or be involved in road accidents.

Breaches of criminal law or administrative rules may be punished by a fine. An employee who is facing criminal proceedings will normally seek legal advice, which will incur costs even if the allegations are ultimately dropped.

Personal liability of management for criminal acts committed by employees

The management must ensure that precautionary measures are in place to prevent employees from committing criminal acts. Otherwise, it may risk being held to account for breaches of the law committed by employees. Therefore, the management must take steps to ensure that it complies with its duties regarding organisation, supervision and control. Its duties of supervision also include carefully selecting, appointing and controlling supervisory personnel. Where employees commit criminal offences or administrative breaches because the management failed to meet its duties of supervision and control, the authorities may impose a fine of up to €1 million on the directors themselves under Sections 9 and 130 of the Administrative Offences Act.

The risk of liability for unlawful actions by employees can be reduced by:

  • introducing written instructions to ensure that staff are familiar with the legal requirements which they must observe in performing their work;
  • providing training on compliance-related issues; and
  • carrying out (random) checks of existing processes and, where appropriate, making improvements.

Companies should seriously consider introducing these measures; if necessary, they can be used to demonstrate that management has fully complied with its duties under Section 130 of the Administrative Offences Act at all times.

Even so, taking all the necessary precautions and complying with supervisory duties is no guarantee that an individual employee may not fall under suspicion of acting unlawfully - for example, if allegations are brought by a competitor. The legal position is often extremely complex and case law is extensive. Even experts sometimes find it hard to identify the line between what is lawful and what is not.

Never make promises

Employers should never promise that they will bear fines or legal costs for an employee in any criminal proceedings which he or she may face at some point in the future, because in so doing, the management could end up facing criminal charges itself. A promise to pay an employee's costs is effectively carte blanche, as the employee need no longer fear the financial consequences. Indeed, from a psychological point of view, knowing that the employer will foot the bill could even prompt an employee to commit a criminal act or at least encourage him or her to overstep legal boundaries. This could lead to criminal charges against the responsible individuals at the employer for aiding (Section 27 of the code) or abetting (Section 26 of the Criminal Code).

Refund of costs by employer

However, the management may also be committing a criminal act by refunding fines or defence costs retrospectively (ie, after the crime has been committed by the employee). Although paying a fine or refunding an employee's defence costs does not constitute assistance in avoiding prosecution or punishment, it can make the management liable for embezzlement and abuse of trust.(1) Companies would be ill advised to make such payments - the only exception being where an employee is legally entitled to a refund from the employer.

Employee's entitlement to refund

Even if the employer has made a prior promise that it will pay fines or legal costs, this does not give the employee a contractual legal entitlement because under Section 138(1) of the Civil Code, such a promise is contrary to public policy and hence invalid.(2)

In rare cases an employee may be entitled to compensation under Section 826 of the Civil Code if the employer instructed the employee to commit a specific breach of the law and if the employee could not be reasonably expected to refuse.

An employee may also be entitled to a refund under Sections 670 and 675 of the Civil Code. The Federal Employment Court has ruled that an employee is entitled to a refund of necessary expenses which he or she has incurred in carrying out activities associated with the job. Such expenses are attributable to the sphere of the employer and not to that of the employee because the employee was acting in the employer's interest and sphere of risk. The lawyer's costs incurred by the employee in criminal proceedings for the purpose of defence could constitute refundable expenses. In 1995 the Federal Employment Court ruled that a truck driver was entitled to a refund of the lawyers' costs for his defence in preliminary investigation proceedings on suspicion of involuntary manslaughter owing to a road accident. However, in the end the investigation proceedings were dropped pursuant to Section 170(2) of the Code of Criminal Procedure because there were insufficient grounds to suspect the driver of having committed the act.(3)

Amount of refund

The amount of the refund to which the employee is entitled is based on whether the employee bears contributory fault in causing the proceedings to be initiated: The costs are calculated as follows:

  • If the employee is deemed to have acted with slight negligence, the employer must refund all of the costs.
  • If the employee is deemed to have acted with medium negligence, the costs are split.
  • If the employee is deemed to have acted with gross negligence or intent, no refund applies.

Moreover, the refund may not exceed the fees which would be due under the Lawyers' Fees Act. An employee would be entitled to a refund of a higher agreed fee only if no other lawyer was willing to defend the employee for the statutory fees.

Comment

To avoid personal liability on the part of the management, it is important for the company to take comprehensive precautionary measures to ensure that its employees do not commit a criminal offence by establishing clear organisational structures. It must control compliance with processes, and supervisory personnel must be carefully selected and monitored. The employer should never promise beforehand that it will bear costs of legal defence or fines if an employee commits a criminal offence. Before making any such refund, the employer must consider carefully whether the employee is entitled to a refund and how much - and indeed whether payment of such a refund could itself constitute a criminal act.

For further information on this topic please contact Antje-Kathrin Uhl or Eva Schäfer-Wallberg at CMS Hasche Sigle by telephone (+49 711 9764 248), fax (+49 711 9764 96249) or email (kathrin.uhl@cms-hs.com or eva.schaefer-wallberg@cms-hs.com).

Endnotes

(1) Federal Court of Justice, November 7 1990, Case 439/90.

(2) Federal Employment Court, January 25 2001, Case 8 AZR 465/00.

(3) Federal Labour Court, March 16 1995, 8 AZR 260/94.

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