Introduction
In case 2013:48, the Supreme Court set a precedent regarding the protection of directors against dismissal. The Supreme Court ruled that the company had legal basis to give notice to a director whose position was eliminated as a result of a cooperation procedure and the director had refused to accept the lower management position offered as an alternative. The Supreme Court states in the reasoning of the judgment that there are often special financial and other benefits attached to the independent and responsible positions of directors. In return, employers may demand special commitment and loyalty from persons in directors’ positions.
Background
The director in question had worked for the company for several years. The company was a part of a group of companies, and in spring 2007 all director contracts within the group were revised. The initiative to harmonize the contracts came from the group management and hence was not in the hands of the company’s management. The director in question refused to accept the new contract whereas all the other directors signed their new, revised contracts.
In fall 2007 the company started re-organizing its functions and, consequently, it began a cooperation procedure. The director’s position was eliminated as a result of the cooperation procedure, and the director refused to accept a lower management position offered as an alternative – even though he was offered a contract with better terms compared to other directors in similar position. This reorganization of the employer’s operations was carried out at the company level and was unrelated to the revision of contracts in the group level. The director’s contract was terminated on financial and production-related grounds. In accordance with the director’s contract, he received severance pay corresponding to twelve months of his base salary.
The director sued the company claiming that his termination had been based on grounds related to his person, rather than on the financial and production-related grounds, and was not pursuant to the provisions of the Employment Contracts Act. He claimed that the amount of work offered had not diminished and that there had been no proper and weighty reasons for termination of his contract. The director argued that the reason behind the cooperation procedure and the termination of his contract was his refusal to accept essential impairments to his director contract. In addition to what had been already paid in pursuant to the termination, he claimed twenty-four months’ salary in damages. He also insisted that while calculating the monthly salary, his bonus payments and employee stock options should be taken into account.
Decisions
The District Court of Helsinki sided with the director, ruling that there had been no financial or production-related grounds for termination. The district court shared the director’s view that the sole purpose for the cooperation procedure in the company had been to eliminate this particular position and cast the director aside. Not finding that there had been proper and weighty reasons for the termination, the district court ruled that the termination violated the Employment Contracts Act and ordered the company to pay compensation equal to fifteen months’ salary (including bonus payments and employee stock options).
The court of appeal took a different perspective. It ruled that there actually had been financial and production-related grounds for termination and highlighted the right of the company’s management to make decisions on production changes under their authority to run the business. However, the court also stated that, in this case, there had been no proper and weighty reasons for the termination. Given the short period of time between the director’s refusal to sign the new contract and the termination of his contract the court considered it likely that the actual reason for termination had to do with the director’s refusal. The court decided that the employer had not presented sufficient evidence to show that it had adhered to the Employment Contracts Act and held that eight months’ salary (including bonus payments and employee stock options) was reasonable compensation.
In contrast to the lower courts, the Supreme Court sided with the company and nullified the lower courts’ orders to pay compensation. With regard to the harmonization of director contracts, the Court said that it was a justified action intended to promote equal treatment inside the group of companies. The Supreme Court considered it significant that all other directors had been willing to sign the new contract. With respect to the cooperation procedure and the reorganization, the Court stated that a company has the right to decide on the form and character of its operations and is allowed to reorganize its functions, even if doing so leads to a diminishment of work, as long as the requirements set out in the Employment Contracts Act are met. In this case, the Supreme Court found no proof that the reorganization of the employer’s operations had been artificial. In the Court’s opinion, the company had fulfilled its obligation to offer work by offering the director a lower management position on considerably better conditions than were usually offered for positions of the same level.
Furthermore the Supreme Court said that it is likely that, at least for some parts, there have been a connection between the director’s refusal to sign and the company’s decision based on which the director has lost his position as a director during the re-organizing process, but this connection wouldn’t change the legitimacy of termination. Hence, the significance of this resolution comes down to the Supreme Court’s statement on the special loyalty expected from those in managing positions. According to the Court, a person who works in a managing position is obligated to contribute to reformation and improvement the company’s operations in cooperation with its higher management. In return for that obligation, directors are entitled to bonuses and other benefits attached to their position. Failing to contribute can negatively impact a director’s position and weaken the employer’s trust in him/her. This means that although it is presumed that the Employment Contracts Act applies to directors, the distinctive features of the director’s position must be taken in consideration when interpreting and applying the protection against dismissal of directors. In this case, it meant that the director could not have assumed that his refusal would be without consequence when he as a director refused to further the group management’s endeavors.