Unlawful Dismissal: Navigating the Employer’s Risky Road Ahead

15
June 2023

Senior Associate: Jelena Đukanović

In a dynamic labor market, unlawful dismissal of employees can have far-reaching implications on a company’s operations, both legally and reputation-wise. Every serious company takes into account compliance with regulations and wants to protect its business from unnecessary risks. However, employers often do not consider the risks and consequences that a 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. It’s too late to consider all aspects of the termination procedure when an employee initiates a lawsuit, which is why employers need to understand what unlawful termination entails and why the procedure must be properly carried out.

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.

The importance of properly conducting the termination procedure is reflected in the data on the number of active labor disputes. Only for the year 2022, in the area of Belgrade, there were as many as 12,528 active labor disputes before the First Basic Court[1], that number is a bit smaller when we talk about the Second Basic Court – 1,640[2], while in the Third Basic Court, the number of unresolved labor disputes at the beginning of 2023 amounted to 2,564[3]. If we were to compare the number of labor disputes from 2019, which were conducted before the First Basic Court, which leads to this type of dispute, it can be seen that this number has increased by as many as 2,801 new disputes. Therefore, we are only looking into the territory of Belgrade here, and that number is dramatically higher if we take into account the territory of the entire Serbia.

Employees are no longer afraid to stand up to employers, and more frequently than before, they submit lawsuits to protect their rights. On the other hand, employers are making mistakes more frequently, which leads to the loss of labor disputes. These numbers tell us that the termination procedure is very demanding, and the smallest mistake can lead to the annulment of the termination and the legal consequences that the annulment brings with it.

Consequences of Unlawful Termination – What Employers Need to Know

The process of terminating an employee is very complex and requires a series of steps that employers must take. If they miss any of them, they risk annulment of the termination which can lead to multiple consequences.

According to the Employment 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 new 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 creation of significant expenses.

After determining the illegality of the termination, 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 also leads 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:

  • 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 is meant 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.

The only mitigating circumstance for the employer would be if the employee gets re-employed before the end of the process, thus the amount of damage compensation for lost wages would be reduced by the amount of wages earned with another employer. However, in these cases, employees often work “under the table”, so it is difficult to trace the wages that the employee earned with another employer and apply any potential reduction.

2. What Is the Amount of Damages When an Employee Does Not Request to Return to Work?

  • If an employee does not request to return to work but requests compensation for damages, the employer will still be obliged to pay large sums of money plus 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 returning to work. However, it does not exclude the possibility for the employee to also claim 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

    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?

Yes, the employee will have the right 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). 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. Compensation for Damages in the Case That an Employee Requests to Return to Work, but It Is Not Possible?

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, making it 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 36 monthly salaries of the employee.

Of course, in addition to this, the previously mentioned possibilities of the employee seeking 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 requested 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 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, 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. Given that an employee acquires the right to annual leave after a full month of work with the employer, any unused leave will have to be compensated by the employer.

7. Possible Monetary Penalties for Employers

The Labor Law prescribes the possibility of imposing monetary fines and misdemeanor liability for employers who 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. Therefore, the fact that the employee has filed a lawsuit for illegal termination of the employment contract does not affect the amount of the monetary fine. In this case, in addition to damages, compensation for the amount of lost earnings, taxes, and contributions, and court and attorney fees, employers would be obliged to pay monetary penalties 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. Therefore, 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.Dakle, iako na prvi pogled deluje kao da je poslodavčeva jedina briga isplata naknade zarade zaposlenom, ne treba zaboraviti da sudski postupci sa sobom nose velike troškove koje će poslodavac, kao strana koja je izgubila spor, morati da nadoknadi u dvostrukom iznosu.

Therefore, it is necessary to consult with your legal advisors in time, who will be your best allies in the proper procedure of implementing dismissals.

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 a particular 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 often 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, consider concluding an NDA with your employees.

How to Avoid Potential Compensation for Unlawful Dismissal?

While the Labor Law provides a wide range of grounds for termination, such as lack of work results, lack of necessary knowledge and skills, 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 and termination procedures. Also, in the event of potential litigation, they will strengthen the employer’s position.

Even if internal regulations and rules are thoroughly well written, an appropriate legal procedure must be implemented. If the slightest formal mistake is made, it can lead to compensation for damages due to unlawful dismissal and numerous consequences that we have previously mentioned.

[1] https://prvi.os.sud.rs/files/Izve%C4%85taj%20o%20radu%20suda%2001.01.-31.12.2022.pdf

[2] https://drugi.os.sud.rs/files/2022%20%D0%94%D0%98%D0%88%D0%90%D0%93%D0%A0%D0%90%D0%9C%D0%98.pdf

[3] https://www.treci.os.sud.rs/files/%D0%9F%D1%80%D0%BE%D0%B3%D1%80%D0%B0%D0%BC%20%D1%80%D0%B5%D1%88%D0%B0%D0%B2%D0%B0%D1%9A%D0%B0%202023.%20%20-%20%D0%B0%D0%BF%D0%BB%D0%B8%D0%BA%D0%B0%D1%86%D0%B8%D1%98%D0%B0.pdf

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