U.S. employers accustomed to American-style employment at will face a significant challenge when dismissing an overseas employee who enjoys generous protections under employee-friendly foreign legal regimes. Before pulling the trigger on a dismissal abroad, an employer needs to understand and comply with a number of specific dismissal obligations under foreign law.
A U.S.-based multinational that needs to dismiss a worker abroad often first must determine how much the layoff will cost. Laws in most countries impose rules on no-cause firings that force companies to pay some sort of severance pay. How much it costs to dismiss a given employee abroad often depends on the person’s final pay rate and length of service, and no-cause termination pay outside the U.S. tends to be highest where pay rates are highest. Severance costs are most expensive when the targeted staff member is long-tenured and highly compensated; these costs are cheapest when the employee is short-tenured and low-paid. But there are exceptions: A few high-wage countries, including Singapore and Switzerland, impose relatively light statutory severance pay obligations. And occasionally, a short-tenured, low-paid overseas worker makes out an expensive dismissal claim under a theory such as “moral harassment.”
When calculating the total cost of any termination, along with factoring in mandatory severance payments, add up accrued debts the business already owes the exiting individual. Local law dictates what these debts are, how they accrue and when an employer must pay them. Besides a paycheck through the final workday, these debts may include earned commissions and vested/accrued benefits, including vacation pay, retirement commitments, pro rata annual bonuses, pro rata “13th month salary” and pro rata profit-sharing pay. Some organizations also owe posttermination compensation under their own equity plans and restrictive covenants.
Individual dismissal mandates under foreign law tend to fall into three broad categories: dismissal procedures, pretermination notice and severance-pay/wrongful-termination awards.
Many (but by no means all) overseas jurisdictions in effect outlaw the direct “Donald Trump” approach to a dismissal—“You're fired!”—and require instead that employers take affirmative steps before letting someone go. Companies tend to view these steps as cumbersome technicalities, but the reason countries impose them is to give workers (or their representatives or local government) a chance to save their job. There are two types of dismissal-procedure mandates: procedures with employees and procedures with government agencies and courts.
Procedures with employees: Many countries’ employment-dismissal laws require that an employer, before deciding to fire someone, take certain pretermination procedural steps with the targeted employee or with his or her representative or bargaining agent. In many nations these steps are straightforward and simple.
For example, the Czech Republic and Nicaragua simply require that dismissals be communicated in writing. But elsewhere, mandated individual dismissal procedures can be complex and time-consuming. In France mandatory prefiring procedures begin with a company’s sending a letter in French, via registered mail, to the targeted employee, summoning the individual to a meeting. This is followed by more notices, meetings, waiting periods, internal appeals and papers (also sent by registered mail). Chad and other Francophone African countries impose looser versions of these French-style requirements. Perhaps unexpectedly, even the common-law U.K. requires that businesses adopt in-house multistep dismissal procedures. While U.K. employers have some flexibility in laying out in-house procedures for firing employees, these procedures must conform to a mandated template. Employee-consultation procedures are used in countries such as Indonesia, which requires companies to hold a negotiation session with an employee who’s slated to be fired. And in many nations, labor law mandates that, where a union or works council represents employees, employers must inform, consult or bargain with local representatives over possible terminations.
Procedures with government agencies and courts: Some countries impose “lifetime employment” models that, in theory, prevent organizations from dismissing individual staff without good cause or economic necessity and that require a government agency or court to approve each firing. The government overseer, of course, tends to focus on whether the employer has good cause or economic necessity. If a worker is fired in Japan, Korea or Germany and sues the business, the employer must be able to establish good cause in court or the employee wins his or her job back. These countries do not even mandate statutory severance pay because a wrongly fired worker wins reinstatement plus back pay.
Lifetime-employment countries aside, the government role in ratifying employment dismissals tends to be greater for collective terminations, though some jurisdictions require government approval even for individual firings. In Indonesia, for example, the local Industrial Relations Court must approve a dismissal; a similar doctrine applies in Iraq. In India, at worksites with 100 or more “workmen” (low-wage workers), a government agency must approve most individual no-cause firings. In Nicaragua the Ministry of Labor must approve, in advance, for-cause dismissals and economic-necessity dismissals—but not no-cause dismissals. In the Netherlands, since World War II, individual terminations were illegal unless a court or government labor agency had specifically authorized them in advance, but in 2013 this mandate was downgraded from a government-approval requirement to a government notification and consultation procedure. Governments from Colombia and Venezuela to China and the Philippines can block individual firings deemed inappropriate.
Many countries require employers to give workers notice before firing them—meaning that terminations are not to be of the “clean out your desk” variety. Indeed, some legal systems believe in the preseparation notice so completely that they impose a reciprocal notice obligation on resigning employees, amounting almost to a temporary form of indentured servitude. Most countries let an employer pay out mandatory dismissal notice in lieu, but in places like Switzerland, businesses have no choice but to let a dismissed individual work out notice terms. Some nations do not let employers pay out pretermination notice unless the worker previously consented (in his or her employment agreement) to this arrangement.
Pretermination notice obligations: How much pretermination notice an employer must give depends both on the jurisdiction and on employee-specific factors like the service period and contractual notice provision. Mandatory predismissal notice periods can run from a few days to several years. Most legal systems require only a week’s to a few months’ notice. For example, in Mexico statutory notice runs one month, in South Africa it runs up to four weeks, in the U.K. it runs one week per year of service for up to 12 weeks, in Brazil it runs from 30 to 90 days, and in France it runs from 14 days to six months.
But a handful of long-notice nations mandate predismissal notice of many months or even several years—so much notice that employers almost universally pay it out instead. In these countries, notice periods tend to be unliquidated, hard to calculate and subject to complex formulas or variations like short statutory notice plus long common law or, in Canada’s case, “reasonable” notice plus contractual notice. Local law in long-notice countries tends not to impose any actual severance pay—the long notice itself (again, almost always paid out in lieu) takes the place of it. But there are exceptions, such as Ontario, which requires both long notice and liquidated statutory severance pay.
Severance Pay and Wrongful-Termination Awards
The most expensive part of dismissing an employee overseas usually is the severance pay or a money judgment for wrongful termination. Four types of severance or separation pay obligations exist around the world, with a given country often having more than one. First and simplest is liquidated severance pay, a fixed or readily ascertainable statutory severance pay due. Second and more complex is unliquidated severance pay: essentially, an unfixed cause of action for wrongful termination (in England called “unfair dismissal”). The third type allows a fired individual to bring additional severance claims disputing the fairness of a firing, such as due process/discrimination/“moral harassment” claims (in England called wrongful dismissal). The fourth type is employment contract and employer policy claims.
Liquidated severance pay awards. A liquidated severance pay system imposes a fixed or readily calculable severance pay obligation on an organization that discharges an employee without cause. Employers can calculate these obligations using formulas based on a worker’s final pay rate and length of service. Material disputes over the amount of severance pay owed are rare because the sums are liquidated. For example, Arab countries require employers to pay liquidated end-of-service gratuities based on tenure and final pay rate. In some countries these are due even if an employee quits.
Brazil funnels severance pay through a government-mandated system of bank-administered individual employee unemployment compensation accounts called “FGTS.” As severance pay, an employer owes 40 percent (paid to the employee) plus 10 percent (paid to the government) of the principal of the employee’s FGTS account. Each FGTS account holds 8 percent of that employee’s life-to-date earnings with that employer plus past interest. So liquidated severance pay in Brazil tends to equal 4 percent to 5 percent of a worker’s life-to-date earnings with an employer.
In Greece, liquidated severance pay depends on whether the employer gives statutory notice: Greek employees with one to four years’ tenure get two months’ pay without notice or one month’s pay plus notice. Someone with more than 24 years’ tenure gets two years’ pay with notice and one year’s pay without notice. Everyone else gets something in between.
In Mexico, liquidated severance pay is three months’ pay plus 20 days’ pay per year of service plus the lesser of an additional 12 days’ actual pay or 12 days’ pay at minimum wage, per year of service.
In Spain, for employees hired before February 2012, statutory liquidated severance pay is 45 days’ pay per year of service, capped at 42 months’ pay. For those hired after February 2012, it is 33 days per year, capped at 24 months.
Unliquidated severance pay awards (wrongful-termination claims): A multinational company that carries out an overseas no-cause firing is quick to ask how much severance pay will be due, as if severance pay everywhere were liquidated and ascertainable using a defined formula—it is not. England, France, South Africa and other places impose no fixed or liquidated severance pay obligation (or they impose only de minimus ones). Rather, for severance pay, these countries offer a dismissed employee an unliquidated cause of action for wrongful termination. A local court or labor tribunal awards a severance “indemnity” for a successful claim. Thus, an employer seeking to fire someone without good cause will not know in advance precisely how much severance indemnity that employee may win in court. In the U.K. these awards are subject to a statutory cap (which rises annually and is soon capped at one year’s pay), but employers there do not know how much a prevailing worker may win up to the cap. In France wrongful-dismissal awards range from a minimum of three months’ pay to a cap of 24 months’ pay.
Due process, discrimination and ‘moral harassment’ awards: Many countries let a fired individual sue an ex-employer for additional dismissal damages (and often reinstatement) if the employee characterizes the termination process as illegal, unfair, discriminatory or harassing. Nations including Indonesia, Italy, Japan, New Zealand, Peru, South Africa and the U.K. recognize this type of claim. And moral-harassment claims in the dismissal context are increasingly common in Brazil, Venezuela and elsewhere.
These causes of action are conceptually distinct from a company’s basic obligation to pay regular severance—they seek an extra award (and sometimes a reinstatement order) on the separate ground that, in firing the worker, the employer resorted to unfair or illegal tactics or had an illegal motive. Where local law imposes specific dismissal procedures, these “firing due process” claims include allegations that the way the organization executed the termination breached those procedures.
This means, then, that an employee who wins one of these claims gets more than the jurisdiction’s basic severance pay award. Remedies for these claims may include a greater uncapped money judgment and reinstatement. This extra separation pay is allowed because a prevailing employee has proved that his or her employer committed a separate wrong beyond the wrongful termination itself. In a highly publicized May 2010 labor arbitration case in Toronto, a unionized worker won 500,000 Canadian dollars for a bad-faith firing. Among other examples, a Swedish court will award punitive damages if it determines that a dismissal was procedurally unfair, and a South African court that finds a dismissal “automatically unfair” may raise the cap on a basic severance/dismissal award from 12 months’ pay to 24 months’ pay. The U.K. caps unliquidated severance pay awards but removes this cap for due process/procedural wrongful-dismissal claims. France, meanwhile, assesses a penalty of an extra month’s salary for certain infractions of its complex dismissal procedures.
Employment contract/policy awards: The final type of separation payment that an organization might owe to someone it fires abroad is dismissal liability under an employer’s own individual or collective employment contracts and policies or noncompete agreements. This obligation, of course, grows not out of local law but out of an employer’s (or its bargaining agent’s) own commitments. In some countries employment agreements commonly impose termination-pay provisions. In Canada individual employment contracts typically contain liquidated notice pay provisions. In Italy industrywide collective agreements impose extra liabilities for both individual dismissals and reductions in force. And many U.S.-based multinationals have issued their own international severance pay policies or else have undertaken in-house severance pay commitments in their benefit plans, equity plans, expatriate programs, or previous merger and acquisition agreements.
Donald C. Dowling is a partner in the New York office of White & Case.
Republished with permission. © 2013 White & Case. All rights reserved.
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