A unanimous Supreme Court has ruled that an employer's termination of an employee under a pre-agreed severance pay clause - entered into in exchange for the employee waiving their termination rights - is neither a dismissal under the Working Environment Act nor an individual administrative decision under the Public Administration Act. The judgment provides important legal clarifications on the use of such clauses for senior executives.
This is the case
A municipal chief executive was required to step down from her position in exchange for severance pay pursuant to section 15-16, second paragraph, of the Working Environment Act, and subsequently brought a claim for compensation. This provision is frequently used in employment agreements with senior executives, whereby the executive waives the statutory protections against dismissal under the Working Environment Act in return for a severance pay clause. In the present case, six months' severance pay had been agreed.
The central question before the court was what obligations apply to an employer that chooses to terminate an employment relationship by invoking a severance pay clause under section 15-16 of the Working Environment Act.
The court's clarifications
A central finding of the judgment is that the termination of an employment relationship against severance pay is not to be regarded as a dismissal under the Working Environment Act, nor as an individual administrative decision within the meaning of section 2, second paragraph, of the Public Administration Act.
An employer's decision to require an executive to step down represents an alternative mechanism for ending the employment relationship, one that carries a financial cost in the form of the severance payment. The employer is not obliged to provide reasons for the decision or to comply with the procedural requirements applicable to dismissals.
This is of particular significance for public sector employers: the Public Administration Act's requirements of investigation and written reasoning do not apply. It would furthermore be inconsistent with the purpose of severance pay arrangements for such a decision to be subjected to the procedural rules of the Public Administration Act. An interpretation to that effect would increase the risk of disputes as to the validity of the decision and would undermine the very purpose of permitting termination of employment against severance pay.
The employer is nonetheless subject to certain minimum procedural requirements. The content of those requirements must, however, be calibrated to reflect the employer's discretion and the particular considerations that section 15-16, second paragraph, of the Working Environment Act is designed to protect, so as not to disturb the balance inherent in the contractual arrangement. The critical question is whether the decision appears arbitrary or grounded in irrelevant considerations, and thereby constitutes an abuse of the employer's managerial prerogative. The threshold for setting aside such a decision will be a high one.
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