In most European countries, employees have minimum rights to compensation on redundancy (or “dismissal on economic grounds”). These may be fixed by legislation or collective bargaining agreements. It is also common for minimum rights to be enhanced by social plans and other agreements negotiated with employee representatives. The starting points for employers when determining individual redundancy compensation are usually any statutory provisions and any contractual enhancements or applicable formulae. Employees will regard these as a minimum benchmark. Calculating payments in accordance with these provisions is relatively straightforward. The more challenging question for employers is what level of redundancy compensation they should pay in practice, particularly in individual redundancy situations, and to what extent they are expected to improve on minimum entitlements. We ask our European panel what the trends are in redundancy payment levels in their countries and in what direction these are moving.
Redundancy pay for white-collar employees in Belgium is based on payment in lieu of their notice period which, as a minimum, is three months' pay per five years of service. A number of formulae have been devised to guide parties on out-of-court settlements for white-collar employees. The most widely-used is the Claeys formula which, based on a statistical analysis of case law, is used to estimate how many months' notice an employer should give. For white-collar employees earning less than EUR 28,580 per annum, the statutory minimum period of notice applies (of three months per period of five years' seniority). For employees earning more than EUR 28,580 per annum, a "reasonable" notice period (or payment in lieu) must be given. This is often calculated based on the Claeys formula. The Claeys formula is not compulsory and a white-collar employee could still contest the length of the notice period before the court. Most courts follow the formula, but some don't and none go beyond its result. The application of the formula has generally reduced redundancy pay levels for white-collar employees (i.e. because courts are awarding shorter notice periods). Blue-collar workers have statutory minimum notice rights which may be enhanced by collective agreements. As is the case for white-collar workers, redundancy pay is based on payment in lieu of their notice period (unless the employer chooses to give notice). Also, for blue-collar workers the dismissal requires a legitimate reason, otherwise there is the risk of a successful unfair dismissal claim (for which the maximum award would be 6 months’ salary).
In France, there are minimum redundancy payments on an economic dismissal for employees with more than two years’ service: 2/10 of a month’s salary per year of service for up to 10 years’ service; and an additional 2/15 of a month’s salary per year of service after 10 years. These minimum payments are frequently topped up by company agreements. Collective bargaining agreements specify different methods of calculating redundancy pay. The level of pay depends on the sector. In the banking or steel sectors, for example, the termination indemnity could reach 24 months' salary. Overall, the trend in redundancy pay levels is stable. Payments will usually range between six and 24 months' salary, with senior executives likely to get between 12 and 18 months' salary. Sometimes employers try to pay less money but offer a very good outplacement facility. In an individual dismissal situation, employers will tend to negotiate a settlement agreement. Severance is less easily challenged in a collective dismissal situation.
There is no legal entitlement to redundancy pay in Germany. This is purely a matter for negotiation. Redundancy payments are normally between half a month's salary and one month's salary per year of service. The level of pay depends on the sector. The financial services sector, for example, might pay more than one month's salary per year of service while the construction industry often pays below half a month's salary per year of service. The risks in a potential dismissal lawsuit also influence the amount of severance. Commonly, the employer pays more if the risk is high. For senior executives, outplacement is often provided additionally. There is a trend upwards in redundancy pay because the unemployment rate is still rather high, and German social security rules have changed to the disadvantage of the employee.
In the case of dismissal on economic grounds (whether it is an individual or a collective dismissal) in Italy, employees are entitled to both a severance payment (trattamento di fine rapporto or “TFR”) and notice or payment in lieu. TFR is a payment that is due upon termination of employment regardless of the reasons for which it happens. It accrues during service year by year and is based on a formula of salary paid in each year of service divided by 13.5. The result is then set aside in the financial statement of the employer and is paid upon termination of the employment. The duration of notice is set by the Collective Bargaining Agreement governing the employment and varies according to the category of the employee and the length of service (maximum notice could be up to 12 months for a very senior executive). In addition to basic salary, other payments are included in the calculation of TFR such as bonuses and benefits-in-kind. However, employees will often push for additional redundancy pay by threatening to challenge the dismissal, and the system is very much in their favour. It is not uncommon for those who are dismissed without strong cause to receive between 12 and 24 months' remuneration. Employers prefer not to litigate and are keen to show that an employee has resigned rather than been dismissed. The TFR is subject to a voluntary opt-out – workers can choose whether it is assigned to a supplementary private fund or kept in the company and paid at the end of their employment relationship. But if they do not choose, the default position is that the TFR is effectively treated as a supplementary pension contribution rather than a severance payment.
In Luxembourg, employees with 5 or more years’ service have minimum entitlements to redundancy pay. For white-collar workers, these payments range from 1 month’s pay to 12 months’ pay (depending on length of service) and for blue-collar workers, they range from 1 month’s pay to 3 months’ pay (again depending on length of service). If the Bill on the single status, which aims to remove the white-collar/blue-collar divide, is passed all workers will be entitled to the same redundancy pay as "former" white-collar workers as from 1 January 2009. Small employers have the option of giving an extended period of notice in lieu of a severance payment. There is no “going rate” for enhanced redundancy pay. Whether employers are prepared to pay more than the minimum will often depend on the risk of litigation. Collective bargaining agreements in the banking and insurance sectors already contain special provisions for redundancy pay, so employers in those sectors are usually reluctant to pay extra.
In the Netherlands, redundancy entitles employees to one month’s pay for each year of service up to age 40, one and a half month’s pay for each year between ages 40 and 50 and two months’ pay for each year above the age of 50. Wealthier sectors, such as the financial services sector, pay more than most, for example, 1.5 times the Cantonal Court Formula (CCF). Other sectors tend to pay half the CCF. The trend in these payment levels is likely to remain stable for the foreseeable future, although there had been a debate in Parliament recently about adjusting the system of redundancy. This was, however, without result. If redundancy is negotiated with a trade union, it is possible to agree payments lower than the CCF, particularly if the business is at risk.
Under the Spanish Workers' Statute, minimum redundancy pay is 20 days' salary per year of service with a limit of 12 months' salary plus 30 days' notice. In practice, however, employers tend to pay the compensation available in the case of unfair dismissal (45 days' salary per year of service with the limit of 42 months' salary). This is because the difficulty of proving acceptable grounds for redundancy to the satisfaction of a Spanish labour court. From a tax point of view, statutory severance is generally exempted from withholding tax.
Employees with 2 or more years’ service in the UK are entitled to a statutory minimum redundancy payment based on a formula: 1.5 weeks’ pay per year of service over age 41; 1 week’s pay per year from age 22 to 40; and 0.5 week’s pay per year from age 18 to 21. This is subject to a maximum of 20 years’ service and maximum weekly pay of £330. UK employers commonly improve on minimum statutory redundancy payments, mainly by increasing the number of weeks’ pay per year of service, or simply by making additional lump sum payments. The level of redundancy compensation depends on the employer's sector. In some sectors, such as financial services, employers offer generous packages and four weeks' pay per year of service is quite common. In other sectors, such as manufacturing, the trend is to pay redundancy compensation closer to the statutory minimum entitlement. The general increase in employee remuneration is pushing up the amounts being paid. Genuine redundancy payments – whether statutory or paid pursuant to a redundancy policy – qualify for a £30,000 income tax exemption, and are also exempt from national insurance contributions. Redundancy packages are often structured to take advantage of this exemption. However, the exemption is not available for elements of the package which are otherwise taxable, such as contractual payments in lieu of notice.
Whilst it is clearly common practice across Europe for employers to make enhanced payments for individual redundancy, the level of payments varies very much according to country, sector, business, employee group and past practice. There is no "going rate" as such. There is also no consistent upwards or downwards trend in the level of payments. In France, Italy, Luxembourg, the Netherlands and Spain, the level of payments has remained stable, although redundancy payments in these countries are typically very generous. In Germany, there is an upwards trend in redundancy pay due to adverse changes in social security rules for employees. In Belgium, the application of the Claeys formula has generally reduced redundancy pay levels for white-collar employees. In the UK, the level of payments also remains stable, although the fact that employees are becoming more expensive means that higher amounts are being paid. The economic sector is one factor that appears to influence levels of redundancy pay in many countries. For example, employers in the financial services sector tend to pay generously, while those in the manufacturing sector pay closer to the minimum entitlement. In all countries, it is important to enter into a settlement agreement with employees to ensure that any payment is accepted in full and final settlement of any employment claims.
Employers may consider using restrictive covenants to protect their business interests from competitive activities by ex-employees. These can take the form of non-competition, non-solicitation (that is, of customers or key employees) or non-dealing provisions. Protection against disclosure or misuse of confidential information is also important. Employees may be subject to limited confidentiality obligations under common or civil law, but employers will often look to bolster these by including express confidentiality provisions. Although national laws take a different approach to regulating restrictive covenants, the starting point is similar in most EU countries. Restrictions should only be included if they are necessary to protect a legitimate business interest of the employer and if they are reasonable as to scope, duration and geographical area. Careful drafting, so that they are individually tailored, is key. Non-competition clauses in employment contracts, which seek to prevent ex-employees from competing with their former employers for a specified period, are a difficult area of law in many EU countries. We ask our European panel whether it is desirable for employers to use these clauses for senior commercial personnel and whether they have any disadvantages.
Non-competition clauses are very difficult to enforce in Belgium. If an individual does not comply with a clause, it can be difficult to prove a breach. These clauses are useful as a margin of negotiation. It is necessary to pay senior commercial personnel (but not senior sales representatives) to accept a non-competition clause in which case payment is a lump sum indemnity equal to 50 % of the employee's remuneration. In principle (and except for employees working in a company operating internationally), a non-competition clause must be geographically limited to places where the employee is liable to compete within Belgian territory, and must be of a limited duration not exceeding 12 months. There is a 15-day period after termination within which the employer may renounce the clause.
In France, non-competition clauses are not as common as they used to be. Employers should think twice about whether to include them. There are very strict rules governing enforceability and, in order for them to be valid, it is necessary to pay financial compensation to the employee. Non-competition clauses generate an increasing amount of litigation, and the courts are becoming more reluctant to accept them. They do not normally exceed a two-year limit, but most clauses are limited to one year or less.
Non-competition clauses are important in Germany, but there is a tendency for employers to use them more frequently than can be strictly justified. Employers need to consider whether it is really advisable to have clauses for all senior management as this can be very expensive. Non-competition clauses are only valid if the employee receives compensation of at least 50% of his or her total remuneration (including average bonuses and benefits-in-kind). In addition, it is often difficult to prove damages because this requires a causal link between the ex-employee’s activities and damage to the business.
In Italy, non-competition clauses are common for senior staff and give employers some negotiation strength. However, they are costly because it is necessary to pay for them. Fair compensation is required by the law and must be paid to the employee for agreeing to enter into and comply with the covenant. The amount of compensation will vary according to the length, scope and geographical coverage of the covenant. Non-competition clauses can also be difficult to enforce. A non-competition obligation can last up to five years after termination of the employment relationship in the case of executives and up to three years in other cases.
Non-competition clauses may not in any circumstances extend outside Luxembourg. Therefore, as Luxembourg is a small country, they are not effective if an employer is seeking to restrict an ex-employee from most competitive activity. It is advisable to put non-competition clauses in agreements entered into after the employment ends (i.e. rather than in employment contracts). Generally, there is no requirement for payment of financial compensation and a non-competition clause must not exceed 12 months in duration.
In the Netherlands, non-competition clauses should be included in contracts of senior employees or employees holding positions in which they can obtain information and experience that could cause damage if they join a competitor. However, these clauses do generate litigation. Our practice sees 20 cases a year, of which one third will end up in court. A one-year non-competition clause would normally be acceptable. Proposals for a new law to impose stricter conditions on the use of non-competition clauses, including a requirement for payment of financial compensation, have been abandoned.
Due to the cost implications of non-competition clauses in Spain, these should only be included if there is a real need for them to protect the employer's interest. “Adequate” compensation is required for the acceptance of the clause, but this is not defined by law. Employers must either agree up front that a certain percentage of the salary is attributable to the non-competition clause or agree to pay compensation for it on termination of the contract. A payment equivalent to 50 – 80% of basic salary is likely to be considered as fair compensation on termination of the contract, depending on the scope, duration and geographical coverage of the restriction. Non-competition clauses must not exceed two years in duration for senior executives or technical personnel or six months in duration for other employees. Once in place, non-competition clauses can not be unilaterally waived by the employer.
Non-competition clauses are used by some companies in the UK, but they are increasingly difficult to enforce. They must be individually tailored and go no further than is reasonably necessary to protect the employer's legitimate business interests, otherwise they will be void. In some sectors, non-competition clauses are tied to deferred compensation arrangements to encourage employees to comply with them. Given the enforcement difficulties involved with non-competition clauses, an employer may wish to put an employee on garden leave instead, as this can often achieve the same objectives. A non-compete period of up to 6 months may be justifiable depending on the circumstances, though the Court of Appeal recently upheld a 12-month clause. A non-competition clause must give credit for any garden leave period served.
Employers need to consider on a case-by-case basis whether to include non-competition clauses in the employment contracts of senior commercial personnel, rather than include these in contracts as a matter of course. In continental Europe, non-competition clauses can be expensive. In most countries, an employee must be paid to accept such a provision, and the payment will be linked to the employee’s remuneration (which is likely to be high in the case of senior personnel). For cost reasons, employers may therefore want to limit these to key employees. National laws stipulate many requirements for the conclusion of non-competition clauses and their actual enforceability. The courts take a strict view. To be enforceable, it is essential for non-competition clauses to be carefully drafted and to be no wider in scope, duration and geographical coverage, than is necessary to protect the employer's interests. Litigation over non-competition clauses is increasingly common. A great deal of evidence is required to prove breach of non-competition obligations. If an employer wishes to claim damages against the ex-employee, they will have to prove that the business has incurred damage - which can be difficult. These factors need to be balanced against the business interests which employers can seek to protect with non-competition clauses. In some sectors, these clauses are essential to enable employers to protect confidential information and other business interests from damage by departing employees. Otherwise the employees would in principle be free, at the end of their employment, to enter the employment of a competitor or to set up a competing business themselves. A carefully drafted clause places the employer in a much stronger position and will usually have some deterrent effect in practice. In continental Europe, one consequence of paying for non-competition clauses is that an employer can often impose a longer period of restriction than would be acceptable in the UK.
Collective bargaining plays a key role in industrial relations systems across the EU. In many countries, multi-employer collective bargaining at sector level has been influential in determining the terms and conditions of employment for most of the post-war period. However, a number of factors are threatening to erode trade union bargaining power, including falling trade union membership. Although there has been a widespread decline in trade union membership across Europe generally, this is particularly marked in Eastern European countries. We ask our European panel how important a role sectoral collective bargaining currently plays in their country and whether there are any signs that this is breaking down or being undermined by other levels of bargaining.
There are three levels of collective bargaining negotiation in Belgium: national (or inter-sectoral), sectoral and company-level bargaining. Agreements concluded at each level fit into a hierarchy, so that terms agreed at higher level can only be improved upon for employees, but not worsened, at lower level. The cornerstone is made up of national and sectoral bargaining. This is one of the key elements of union power. National and sectoral agreements bind employers who are not members of signatory organisations (unless employment contracts contain clauses negating these agreements). There is no sign that sectoral collective bargaining is breaking down. There have been attempts by employers to push bargaining down to company level, thereby threatening trade union power. There is also a desire by Flemish employers and trade unions to regionalise collective bargaining, including bargaining on wages and working conditions - a move opposed by trade unions. This would result in different agreements in the Flemish and Wallonian markets as well as greater influence by employers' organisations.
Collective bargaining takes place at national, sectoral and company level in Spain. In principle, only trade unions can conclude collective bargaining agreements. All employees are covered by a sectoral agreement as soon as it is recognised as legally valid and extended by the government to a particular sector. This includes those whose employers are not members of signatory organisations. Most private sector employees are covered by sectoral agreements. There is no sign that sectoral collective bargaining is breaking down. Both sectoral and company-level bargaining are conducted in parallel. Neither level is obviously dominant. The main issue for negotiation at both levels is pay, and bargaining is also increasingly influenced by legislation requiring negotiations in areas such as restructuring and equal opportunities. It is widely acknowledged that there is a need for reform of the collective bargaining system, but this is unlikely to happen in the near future.
Collective bargaining is conducted at sectoral and company level, though the German system is often regarded as a rather centralised system dominated by association-level agreements (i.e. those negotiated between employers' associations and trade unions) at sectoral level. Collective agreements are binding for all employees who are members of signatory trade unions and for all companies who are members of the signatory employers' associations or who concluded the agreements themselves. Although sectoral collective bargaining continues to be important, there are signs that this is breaking down. It is becoming more common for employers to negotiate company-level agreements. These may be independent of the sectoral agreement, or based on the sectoral agreement where it has clauses allowing the parties to derogate from its terms at company level in certain circumstances (for example, where a business has financial difficulties), even if this results in less-favourable terms for employees. Furthermore, sectoral agreements are under pressure from the employees' side. There is a trend towards relatively small specialists' trade unions (e.g. unions of train drivers, pilots and doctors) with a high level of negotiation power, due to the positions of their members, forcing the conclusion of very good collective bargaining agreements for their specialist clientele.
In Italy, there is a two-tier bargaining structure, conducted at sectoral and company level. Sectoral agreements negotiated between employers' associations and trade unions set minimum wage levels and standards on work organisation, but also set framework rules on the timing, topics and items of company-level bargaining. This means that there is considerable scope for the parties to negotiate at company level and adapt agreements to their local situation. Although there is no sign that sectoral collective bargaining is breaking down, there is a trend towards more company bargaining. There have also been calls for reforms of the collective bargaining system. Employers' federations favour further decentralisation and flexibility.
In Luxembourg, collective bargaining takes place mainly at company level, and also at sectoral level. Industry agreements only apply to companies in the signatory employers' federations, but can be extended by the government to employers in the entire sector. Certain sectors such as banking and insurance have their own industry agreements.
Collective bargaining takes place mainly at sectoral level in the Netherlands. Most of the Dutch workforce (84%) are covered by sectoral agreements. These agreements are legally binding on members of signatory organisations and can also be extended by the government to employers throughout the sector on request of the parties. There is no sign of a breakdown in sectoral collective bargaining, though there has been an increase in company-level bargaining. Many large companies have negotiated their own agreements. It is also common for sectoral agreements to set framework rules and allow detailed provisions to be negotiated at company level. Trade unions, particularly the larger ones, continue to be very powerful in the Netherlands. However, trade union membership is declining (24%) and their membership getting older. It is unlikely that works councils would ever assume the bargaining role, since they are not sufficiently independent.
There are three levels of collective bargaining negotiation in Spain: national (or inter-sectoral), sectoral and company-level bargaining, but the structure of bargaining is complex and overlapping. Sectoral agreements are binding in relation to all employees in the area they cover, provided they are signed by the representative trade unions. A large proportion of private sector employees are covered by sectoral agreements. There is no sign that sectoral collective bargaining is breaking down. Sectoral, provincial and national agreements are common. Some sectoral agreements, such as those in the construction, banking and chemical industries, apply nationally, whereas others, such as those in the commerce, transport of goods and passengers, and bakery industries, apply provincially. However, it is increasingly common to have difficulties allocating certain activities within the scope of existing sectoral agreements. Many collective bargaining agreements contain an indexation clause.
Bargaining is very decentralised in the UK, with most occurring at company or workplace level. There is still sectoral bargaining in some industries, such as motor vehicle retail and repair and electrical contracting, but during the 1980s there was a clear move to bargaining at local level and a number of employer federations broke up or ceased to be involved in collective bargaining. Sectoral agreements are more common in the public sector. Employers have shown no appetite for a return to sector-level bargaining, and the Government seems unlikely to implement any change in policy in this area in the foreseeable future.
In almost all countries, sectoral collective bargaining continues to play an important role. Its status varies. In some countries, such as Germany, Italy and the Netherlands, it is the main form of bargaining. In other countries, such as France and Luxembourg, it co-exists with company-level bargaining. An exception is the UK, where sectoral bargaining largely disappeared in the 1980's. The way in which sectoral bargaining interacts with other levels of bargaining also differs across countries. In Belgium, for example, national agreements set a framework for sectoral bargaining. In Italy, sectoral agreements set a framework for company bargaining. In some other countries, there is no direct or clear connection between different bargaining levels. Although there are generally no signs of a breakdown in sectoral bargaining, there is a trend towards more company bargaining. It remains to be seen whether this might eventually undermine the role of sectoral bargaining. Sectoral agreements in countries such as Germany, Italy and the Netherlands have widened the scope for additional bargaining at company level. In Germany, clauses allowing parties to derogate from sectoral agreements in certain circumstances (for example, financial hardship) mean that it is more common for sectoral agreement terms to be re-negotiated at company level. Apart from this, company agreements offer more flexibility at local level and are therefore an attractive option for employers. © Allen & Overy LLP 2008
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