In the dynamic labor market, unlawful dismissal of employees can have far-reaching consequences for a company’s operations, both legally and reputation-wise. Every serious company considers compliance with regulations and wants to protect its business from unnecessary risks. However, employers often fail to consider the risks and consequences that termination of employment carries with it. Given that employers are unaware of all potential problems that may arise, they approach this procedure lightly, without a developed strategy and plan. Although dismissal by the employer is permitted and, in many cases, entirely justified, certain conditions must be met for that dismissal to be lawful. Otherwise, the employer can bear serious consequences of unlawful dismissal. Employers need to understand the implications of unlawful dismissal and why it is important for the procedure to be properly conducted because it is too late to consider all aspects of the dismissal procedure when the employee has already initiated legal action.
When Is a Dismissal Unlawful?
Unlawful termination of an employment contract represents the interruption of business cooperation between the employer and the employee in which:
• there was no legal basis for the termination of the employment contract
and/or
• the legal procedure for termination was not respected.
What Do You Need to Know as an Employer on Consequences of Unlawful Termination?
Since the procedure for terminating an employee is very complex, employers are required to take a series of steps. If one of the necessary steps is missed, there is a risk of annulment of the termination, which can lead to multiple consequences.
According to the Labor Law, unlawful termination can result in:
- Reinstating the employee to work, if they demand it
- Compensation for the damage in the form of lost wages for the employee
- Compensation for damages in the amount of 6 salaries if the employer did not respect the procedure of termination
- Compensation for damages in the amount of 18 salaries if the employee does not wish to return to work
- Compensation for damages in the amount of 36 monthly salaries if the court finds that the employment relationship ceased without a legal basis, but the employer proves that the continuation of the employment relationship is not possible
- Payment of taxes and contributions for compulsory social insurance
- Compensation for unutilized annual leave
- Payment of statutory default interest on the awarded amount of damage compensation
- Legal costs (including lawyer fees and court charges)
- Misdemeanor liability and monetary penalties
- Damage to the company’s reputation.
An employee can in a single procedure request both the annulment of the termination of the employment contract and reinstatement to work, along with compensation for damages due to unlawful termination. However, due to an unlawful termination, the employee can also initiate multiple legal proceedings against the employer. In the initial proceedings, they can only request the court to determine the unlawfulness of the termination. Once the court determines that the termination was unlawful, the employee can in a subsequent procedure seek compensation for damages due to unlawful termination.
In this situation, the employer finds themselves in a very undesirable position. In addition to potential damages, they may have to pay, multiple proceedings also mean more court and attorney costs, especially considering that practice has shown that these proceedings can last for several years, contributing to the accumulation of significant expenses.
In the event that the termination is found to be, the employer will be obligated, at the request of the employee, to return them to a position that corresponds to the type and level of their professional qualifications, which may also lead to disruptions in the organization of the company itself.
1. The Employee Requested to Be Reinstated – What Is the Amount of Damages They Are Entitled To?
If the employee has initiated a dispute for the annulment of the termination of the employment contract and requested to be reinstated, if it is determined that the employee’s employment has ended without a legal basis, the court will order the employer to return the employee to work and to pay the following as damages due to unlawful termination:
- Lost wages and
- Applicable taxes and contributions for mandatory social security for the period during which the employee did not work.
Damages in the Form of Lost Wages Are Determined as Follows:
- the amount of lost wages includes applicable taxes and contributions following the law;
- the amount of lost wages does not include meal allowances during work, leave bonuses, rewards, and other income based on contributions to the business success of the employer;
Damages in the Form of Lost Wages Are Paid as Follows:
- employee is paid in the amount of lost wages, which is reduced by the amount of taxes and contributions calculated based on wages following the law;
- taxes and mandatory social security contributions for the period in which the employee did not work are calculated and paid into the Social Insurance Funds
By wages, it means the wage that the employee earned in the month preceding the dismissal, and taxes and mandatory social security contributions are calculated on the established monthly amount of lost wages.
If the employee is re-employed until the end of the procedure, it can be a mitigating circumstance for the employer, because the amount of compensation for lost earnings would be reduced by the amount of earned earnings at another employer.
2. An Employee Does Not Request to Return to Work – What Is the Amount of Damages in That Case?
If an employee does not request to return to work but requests compensation for damages, the employer will still not be spared the obligation to pay large sums of money, as well as the costs of litigation in case of unlawful dismissal. The court will require the employer to pay compensation for damages due to unlawful dismissal in the amount of up to 18 monthly wages.
The number of monthly wages awarded is determined depending on:
- Time spent in employment with the employer
- Age of the employee
- Number of dependents
It is important to emphasize that this compensation has the purpose of eliminating the consequences of an unlawful dismissal and represents a kind of substitute for the obligation to return the employee to work. However, it does not exclude the possibility for the employee to also exercise the right to compensation for lost wages.
Thus, in this case, the employee would have the right to:
- Compensation for damages in the amount of up to 18 salaries
- Compensation for damages in the form of lost wages for the period in which they did not work
- Reimbursement of the amounts of taxes and contributions
Thus, compensation for damages in the form of lost wages represents damage that the employee can always claim when an unlawful dismissal is determined.
3. What Happens if the Employee Gets Another Job After Being Dismissed?
Will the employee, in case of employment at another workplace, have the right to compensation due to unlawful dismissal?
Although employment at another workplace would be a mitigating circumstance for the employer, the employee will be entitled to compensation for lost wages if the salary they earn from the new employer is lower than what they would have earned from their former employer. The total damages for unlawful dismissal will be reduced by the amount of income the employee earned from employment after termination of the employment relationship.
EXAMPLE A:
Person A earns a salary of 100,000.00 dinars from their employer. After being dismissed, they find employment with another employer where they earn a salary of 60,000.00 dinars. Person A will be entitled to damages amounting to 40,000.00 dinars monthly from the moment of dismissal until the payment (judgment). Therefore, in this case, the employer’s obligation to pay damages is reduced by the amount of RSD 60,000.00 per month compared to the situation when the employee would be completely unemployed. Also, the employee will have the right to demand payment of taxes and contributions on the said difference, statutory default interest, as well as the right to submit a request to return to their previous job with the former employer.
However, as already highlighted, this rule applies only if the employee was registered in the Social Insurance Funds. Any unreported work remains under the radar, so even if the employee earned more than 100,000 dinars at the new employer, the former employer would have difficulty proving this, and would be obliged to compensate the full amount of lost wages.
4. Employee Requests to Return to Work, but It Is Not Possible – How is the Amount of Damages Determined in That Case?
A common situation in practice is when a court determines the termination to be unlawful, but some circumstances suggest that the continuation of the employment relationship and the return of the employee to work at the former employer are not possible, such as:
- Permanently disrupted relationships between the employee and the employer that occurred during the trial or before the disputed termination;
- Organizational changes in the employer result in the employee’s position being eliminated, and there is no possibility of transferring to another position in line with their qualifications;
- When mental or other illnesses occur in the employee, it is impossible for the employee to return to work.
In this case, instead of damages due to unlawful termination, the court may oblige the employer to compensate the employee in cash, without returning to work. The compensation, in this case, is quite high and can amount to as much as up to 36 monthly salaries of the employee.
Of course, in addition to all of this, the previously mentioned rights of the employee to seek compensation for lost wages with statutory default interest and payment of taxes and contributions still apply.
5. Procedural Errors by the Employer – Is the Termination Still Unlawful?
What happens if the employer had a valid reason to terminate an employee but did not comply with the legal termination procedure?
If the employee requests to return to work, the court will reject the request and the employee will be awarded compensation for unlawful termination up to 6 monthly salaries.
This is a case of formal negligence by the employer. In this situation, despite an obvious justified reason for termination, the employer may have to pay the employee compensation for unlawful termination.
EXAMPLE 1:
An employee does not respect work discipline and arrives at the workplace visibly intoxicated, absolutely incapable of any work. Although such behavior represents a justified reason for termination, can the employer simply immediately issue a termination of the employment contract with immediate effect?
Unfortunately, they cannot. Before issuing a termination of the employment contract due to violation of work obligations or discipline, the employer must warn the employee in writing about the existence of reasons for termination and give them at least 8 days to respond to the warning.
EXAMPLE 2:
An employee committed a breach of work discipline and the employer issued a decision on termination of the employment contract. Before that, the employer had provided a warning to the employee, and the last step was to formally issue the decision. However, the employer did not properly formulate the enacting clause or the reasoning of the decision, and they failed to state the specific legal and contractual provisions violated by the employee, so the decision does not contain all the necessary elements. Although the termination is justified, the decision may still be annulled.
These are just some examples of potential mistakes by employers. Even though it seems that the employer has a full right to terminate an employee’s employment contract, the termination procedure must be carefully conducted and fully respected, from issuing the decision and other necessary documentation to properly delivering all acts to the employee following the law.
6. What if the Employee Hasn’t Used Their Annual Leave?
Another consequence of dismissal is compensation to the employee for unused annual leave. Namely, if the employee’s employment has ended and they haven’t fully or partially used their annual leave, the employer is obliged to pay them monetary compensation instead of taking the leave. Compensation is determined in the amount of the average wage over the previous 12 months and is paid proportionally to the number of unused vacation days. An employee acquires the right to a proportionate part of annual leave already after a full month of work for the employer. Therefore, the employer will be obliged to compensate damages for unused annual leave to all employees for whom he did not provide adequate compensation.
7. Possible Monetary Penalties for Employers
The Labor Law prescribes the possibility of imposing monetary fines and misdemeanor liability for employers in case they act contrary to legal regulations.
The amount of the monetary fine imposed on the employer is determined regardless of whether the litigation process has been initiated by the employee or not. In other words, in the event that the employee filed a lawsuit due to illegal termination of the employment contract, the employer would be obliged to pay monetary fines in addition to compensation for damages, compensation for the number of lost wages, taxes, and contributions, court and attorney’s fees, due to the existence of misdemeanor liability.
The fines imposed in this procedure can be extremely high, so if an employer terminates an employment contract contrary to the provisions of the Law, they can be penalized with a monetary fine from 800,000.00 RSD to up to 2,000,000.00 RSD.
8. Are the Costs of the Court Proceedings and Interest Higher Than the Amount of Damage Compensation?
If the defendant (in this case, the employer) loses the lawsuit, they are obligated to pay the statutory default interest from the moment of the damage occurrence, which in this case means from the moment of the illegal termination of the employment contract. The interest is accrued for each month in which the employee was supposed to receive a salary, up until the payout (which typically coincides with the date of the judgment).
The employer’s position is further complicated by the fact that court proceedings often last unreasonably long, sometimes even several years. During this time, the employer needs to compensate for their lawyer’s fees, while interest is continuously accrued on the amount of unpaid wages.
Additionally, according to the Civil Procedure Law, the party that loses the lawsuit is obligated to fully compensate the other party for the costs, as well as the amount of court fees.
All these additional costs at the end of the court process can reach a sum that exceeds the amount of the main claim that the employee is seeking in the lawsuit.
So, although at first glance it may seem that the employer’s only concern is the payment of salary compensation to the employee, it should not be forgotten that court proceedings entail significant costs that the employer, as the losing party, will have to reimburse double. In this regard, it is important to note that the law and the courts almost always look favorably upon employees, as they are in a subordinate position compared to the employer.
9. Reputational Risk
Given that employee turnover is much higher today, and situations, where an employee spends their entire working life with one employer, are becoming relics of the past, a company’s reputation is essential in attracting employees, especially in the IT sector.
A court ruling determining that a company unlawfully terminated an employee creates a negative image of the employer and conveys an impression of an unreliable company that does not care about its employees’ rights. On the other hand, start-up companies, which are already faced with limited resources and the need to meet investor expectations, carry an even bigger risk.
Amid a significant crisis in the IT industry, there is a mass layoff of employees, raising the question – have all terminations been carried out following the law?
Although compensation to an employee can be quantified monetarily, the magnitude of the damage caused by tarnishing a company’s reputation is often incalculable. This type of damage has long-term consequences for the company’s operations and can even be crucial for the company’s survival.
Of course, a company’s reputation can be tarnished not only as a result of lawsuits but also due to significant dissatisfaction among former employees who often have a habit of making false claims. To prevent former employees from spreading negative comments about your company, concluding an NDA with your employees is necessary.
How to Avoid Potential Compensation for Unlawful Dismissal?
While the Labor Law provides a wide range of grounds for termination, such as lack of necessary knowledge and skills, lack of work results, and various types of breach of work duties and work discipline, that’s not the end. Namely, employers can provide other reasons for the termination of employment within the limits permitted by the law, of which they are often not aware.
These internal documents should detail the termination procedure and provide a solid foundation for lawful termination.
Also, they would strengthen the employer’s position in the dispute later, in case of possible court proceedings. Even if internal regulations and rules are thoroughly well written, an appropriate legal procedure must be implemented. If even the slightest formal mistake is made, it can lead to a claim for compensation for damages due to unlawful dismissal and numerous consequences that we have previously mentioned.
Additionally, it is advisable to consider alternative solutions to termination of the employment contract before engaging in any termination procedure and to strategically approach each specific case to minimize all negative consequences of unlawful termination.
