2012/13: Clarification of “closure of section” in relation to collective redundancy (PT)

Summary

An employee of a multinational group that experienced a downturn and carried out a collective redundancy, challenged the lawfulness of his redundancy. He claimed the grounds used by the employer were false because the section in which he used to work had not been closed down. The Supreme Court found the redundancy to have been lawful.

Facts

The case concerns a company, part of a multinational group, which was engaged in the business of manufacturing and marketing thread, kits, fabric, zippers and other sewing accessories for both domestic and commercial purposes and one of its employees. The decision provides no further identification of the parties.

Following a reorganisation in 2004 the company basically consisted of two departments: Industrial and Crafts. The plaintiff was employed in a sub-department of Industrial called the Warehouse and Industrial Logistics Section. 
On 26 October 20051, the employer communicated to the employee its decision to dismiss him as part of a collective redundancy involving the closure of the Warehouse and Industrial Logistics Section with effect from 31 October 2005. The collective redundancy process had begun on 21 September 2005 and was to include 12 workers and so reducing labour costs by € 119,0002. Eleven of these entered into a termination agreement with the employer to revoke their labour contracts.

In May 2006 the plaintiff (the 12th of the redundant staff), who did not sign a termination agreement, brought an action to contest the collective redundancy, claiming that the grounds used by the employer were false because the section where he used to work had not in fact been closed down. He claimed reinstatement, payment of just over € 3,000 for loss of salary up until January 2005, about € 385 for every month after January 2005 and € 15,000 by way of personal damages.

In Portugal an individual dismissal is only possible for a “just cause”, such as gross misconduct or a serious breach of contractual duties rendering maintenance of the employment relationship impossible. The concept of just cause is rooted in the Portuguese Constitution, which provides that employees shall enjoy job security, and which prohibits dismissals without just cause or with political or ideological motives. The courts are strict when applying the concept of just cause. In the event a court finds that an employee has been dismissed without just cause, i.e. illegally, it will order the employer, at the employee’s choice, either (i) to reinstate the employee, to pay him full salary for the period between the dismissal and the final court decision and, where appropriate, to pay damages or (ii) to pay the employee a substantial indemnification. The fact that the employee has this choice gives him or her a strong negotiating position.

A collective redundancy is, as a rule, easier for the employer to carry out than an individual dismissal. A collective redundancy is where, in an organisation employing less than 50 employees, two or more employees are dismissed on objective grounds within a three-month period. In organisations employing 50 or more employees, a collective redundancy is where five or more employees are dismissed on objective grounds within a three-month period. A collective redundancy does not need to be based on difficult economic conditions: it may be justified by any reorganisation. The procedure for a collective redundancy is as per Directive 98/59 and therefore involves three stages: (i) notification, (ii) consultation and (iii) decision and notice. The Directive was transposed into Portuguese law in 1999.

In the court case, the plaintiff argued that the ground for his dismissal was false, since the Warehouse and Industrial Logistics Section, where he had worked, had not closed but had been transferred to the Crafts Section. The employee argued that a section cannot be considered closed if the work it does, or at least some of it, continues to be done elsewhere. Moreover, he argued that the Warehouse and Industrial Logistics Section was part of the Industrial department. It existed as a unit within that department, and the employee argued that whether it was given a distinct identity was not important. What mattered was that the work was being carried out within the section as a whole. In this case, work that used to be done in the Warehouse and Industrial Logistics Section was transferred to the Crafts Section. In other words, either these two sections merged Ð which the employee felt unlikely - or the work of the Warehouse and Industrial Logistics Section was transferred to the Crafts Section.

Thus, the employee considered that the Warehouse and Industrial Logistics Section was never actually shut down, and that the grounds for the collective redundancy were therefore false. The Crafts Section was later closed down in 2009 (and this is when the employee claims that the Warehouse and Industrial Logistics Section was also shut down), therefore the employee considered that the decision to organise a collective redundancy back in 2005 was based on false grounds. And given that there were no grounds to sustain the collective redundancy, it must be considered unlawful.

The employer explained that, following the redundancies in 2005, orders placed in Portugal were input into a computer system and forwarded to a central warehouse in Germany, which then produced and/or supplied the products to customers via a specialist transportation company. This attempt to centralise orders in Germany was a way of rationalising costs. Work relating to the central warehouse in Germany was no longer necessary. This meant that the Craft Section was never understaffed during or following the process.
Both the Vila Nova de Gaia Court (1st instance) and the Porto Court of Appeal had ruled that the grounds used by the employer were valid and that the collective redundancy was carried out in compliance with legal requirements.

Judgment

According to the procedural rules on appeals, both the special rules of the Labour Procedural Code and the general ones of the Civil Procedural Code, the parties were entitled to have the case considered by three courts. This rule has since been amended to the effect that where the second instance court confirms the decision of the first instance court (even on different grounds) there is no further right of appeal.

Since no procedural or quantitative issues arose, the Supreme Court considered the authenticity and objectivity of the grounds given by the employer.

The Supreme Court noted that the collective redundancy regime set forth in the Labour Code describes the “possible compromise between the constitutional provisions concerning job security (Article 53 of the Portuguese Constitution) and the management and viability of a company’s crisis”. Thus, both constitutional provisions related to job security and the management and viability of company crisis (in a broad sense) were taken into account by the legislator when setting forth the collective redundancy regime and it is therefore a compromise between those two elements. In terms of company crisis, collective redundancy is often a way for companies to overcome difficulties as it can encourage them to undertake resizing and restructuring measures.

The Supreme Court confirmed that both the procedural and quantitative legal requirements for a collective redundancy had been fulfilled. As to the grounds for the employer’s decision, the Supreme Court’s view was that if the decision was not clearly erroneous, it should be respected. It therefore held that the evolving situation motivating the employer’s decision was evidence of the decision’s authenticity. There was a clear cause and effect relationship between the need to close the Warehouse and Industrial Logistics Section and the decision to reduce staff by means of a collective redundancy.

Following the collective redundancy the Warehouse and Industrial Logistics Section was indeed closed. The work that had been done there became partially unnecessary (as regards those products coming from the central warehouse in Germany), and the remaining tasks were carried out by the Crafts Section (without the need to take on more staff).

Thus, the Supreme Court considered that the redundancy grounds were genuine and there was a causal link between those grounds and the employment terminations. This was sufficient for the collective redundancy to be considered lawful. 

Commentary

Article 1(1) of Council Directive 98/59/EC, of 20 July 1998 defines collective redundancies as “dismissals effected by an employer for one or more reasons not related to the individual workers concerned”. The Directive was intended to harmonise Member States’ legal frameworks on the procedure and practical arrangements for collective redundancies in order to ensure greater protection for workers in the event of collective redundancy.

According to the Directive, an employer contemplating a collective redundancy must hold consultations with employee representatives with a view to reaching an agreement. These consultations must, at a minimum, cover ways and means of avoiding collective redundancies or reducing the number of workers affected, and of mitigating the consequences by the use of accompanying social measures aimed at redeploying or retraining redundant workers.

The Directive was transposed into Portuguese law by Law No. 99/2003, of 27 August, which approved the Portuguese Labour Code. The Labour Code was later amended by Law No. 7/2009, of 12 February.

The Portuguese labour regime is laid down in eight extensive articles of the Portuguese Labour Code. Article 359(1) of the Portuguese Labour Code (Article 397(1) in the previous version of the Code) defines collective redundancy as the termination of employment contracts by the employer operated simultaneously or successively within a three-month period, covering at least two or five employees (depending on the size of the company) and based on specific grounds. The process takes about three months, and it involves three stages: (i) notification; (ii) consultation; and (iii) decision and notice.

According to Portuguese law, the grounds for collective redundancy are (i) the closure of one or more sections or equivalent structures or (ii) the reduction of the number of employees needed, as determined by market, structural and/or technological reasons.

Market reasons refer to situations where there is a reduction in the company’s activity because of a foreseeable decrease in demand for its goods or services or where there is no possibility of placing such goods or services on the market. Structural reasons are related to economical and financial imbalance, changes in activity, organisational restructuring or the replacement of major products.  Technological reasons refer to changes in techniques or production procedures, for example, the automation of production.
It is important to underline that the Directive only states that redundancy can be carried out “for one or more reasons not related to individual workers” but provides no further details about grounds. It makes no difference which grounds are used. For example, the employer may use a combination of closure of a unit and market, structural or technological reasons. Equally, one ground is sufficient for the rules for collective redundancy to be applied. 
As Portuguese law further delimits the circumstances in which the collective redundancy can take place by specifying the reasons that can lead to it, including the closure of units, our view is that it is harder to carry out a collective redundancy in Portugal than it would be purely under the rules contained in the Directive.

What makes this judgment noteworthy is the clarification it gives of what constitutes the closure of a section or equivalent structure. This is especially important as, in times of economic and financial turmoil, employers might feel tempted to resort to collective redundancy without sufficient grounds to do so.

The decision clearly points to a broad view of what can constitute grounds for a collective redundancy: the term “not clearly erroneous” used by the Supreme Court remains undefined and leaves room for plenty of activity within the grey area - if not outright employer abuse. Practitioners representing employers may now be able to rely on broadly-defined grounds for collective redundancy to support restructuring decisions. And as the obstacles to collective redundancies are reduced, it will become easier to carry them out, with ever less legal risk.

Comments from other jurisdictions

Germany (Paul Schreiner): The German legal situation is quite different, although almost the same outcome would have probably been reached in this case.

In any establishment with 10 or more employees the Unfair Dismissal Protection Act applies, unless the employee whose employment is intended to be terminated was only on board for less than 6 months. The Unfair Dismissal Protection Act requires the employer to have substantive grounds for any termination, such as reasons relating to the person (e.g. illness), behaviour (misconduct) or operational reasons. If the employer claims that a certain employee cannot be employed anymore due to operational reasons, it has to show that there has been a decision by the employer to reorganise production, which led to a decrease in the required workforce. Such grounds can be found, inter alia, in a reduced volume of production, a productivity gain or the aggregation of the employee’s work.

If the dismissal is challenged by the employee, a court can evaluate whether or not the grounds advanced by the employer actually exist. In the case at hand, therefore, a German court would have checked if, in reality, the tasks the employee performed before the decision of the employer had ceased to exist.

Assuming that the employer can show a valid reason for termination, in a next step it would need to perform the social selection among the employees. The social selection however addresses all employees employed in a certain establishment. It is not clear in the case at hand whether or not the crafts department constituted a separate establishment. Assuming that this was the case, no further social selection would have had to be made. Assuming the opposite, a social selection would have had to be made amongst those employees who worked in comparable positions. In such social selection, inter alia, the length of service, the age and the employee’s number of dependents have to be taken into account.

Given the fact that the establishment was at least partly closed, the employer would have had to conclude a compromise of interest and social plan (which usually includes redundancy payments) with the works council. This process usually also includes the negotiations with the works council regarding the collective dismissal in question. In addition to this procedure, the employer would have had to notify the unemployment agency of the fact that a significant number of employees would lose their jobs.

<sup>Footnotes

1. The collective redundancy procedures started on 21 September 2005, but the decision to dismiss the plaintiff was communicated on 26 October 2005.
2. The labour costs’ reduction also took into account the plaintiff’s dismissal, i.e. - following the dismissal of the plaintiff and of the other 11 employees, there was a reduction of € 119.000 related to personnel costs charged to the Industrial area.</sup>

Subject: Dismissals, Collective redundancies

Parties: not known

Court: Supreme Court of Justice 

Date: 6 December 2011

Case number: 414/06.2TTVNG.P1.S1

Internet publication: www.dgsi.pt/jstj.nsf