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Federal Labour Court: He who has suffered damage – the financial burden of compliance investigations by external third parties

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ADVANT Beiten
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Judgment of the Federal Labour Court of 29 April 2021 in Case No. 8 AZR 276/20

Grave compliance infringements can justify the termination of an employment relationship. When the grounds for termination only come to light during a compliance investigation by an external third party, the employee whose employment has been terminated will also bear the costs of the investigation where there was a specific suspicion of wrongdoing, and the investigatory measures were necessary for his termination.

Facts of the case

The employer and employee brought a dispute before the BAG concerning a claim for damages for the repayment of the costs of an investigation in connection with allegations of expense account misuse and the submission of false claims. The employee was a member of the management board of his former employer (annual gross salary of approximately EUR 450,000.00). After the company received several anonymous tips about alleged compliance infringements, the company decided to launch an investigation to clarify the allegations and mandated a specialist law firm to perform the compliance investigation. The law firm charged approx. EUR 200,000.00 for the report of their investigation. The company terminated the employee’s employment without notice. The employee fought the dismissal in court and lost. As part of a counterclaim, the company claimed the reimbursement of the investigation costs from the employee. At first instance, the employer failed in its claim, however, the Regional Labour Court (LAG) ordered that the former employee pay EUR 66,500.00. According to the LAG, the costs of the investigation were to be borne by the employee at least until the letter of termination was issued. The employee appealed.

The judgment

The BAG denied the claim for damages. Indeed, an employer can claim the reimbursement of costs arising due to the necessary involvement of a law firm when said firm is mandated to look into a specific suspicion of significant wrongdoing and the employee is found guilty of a serious, intentional breach of duty. In the view of the BAG, where there is a specific suspicion of significant misconduct by the employer, the necessary expenses incurred by the injured party to avert impending detriment is part of the damages to be compensated. However, the right to compensation is not without limits: compensation claims are only possible where they relate to measures that a reasonable, commercially-minded person would consider appropriate in the circumstances and either necessary to eliminate the problem or to avoid further damage. In the case in question, the company could not demonstrate that the costs claimed were necessary for the termination of the employment agreement. The claim for reimbursement failed due to the company’s failure to provide sufficient evidence.

Consequences for practice

The BAG remains true to its case law and recognises the possibility, in principle, to claim compensation and agrees with the LAG on the basis for such a claim: the lower Court referred to the judgment of the BAG of 28 October 2010 in Case 8 AZR 547/09 (reimbursement of detective costs) and affirmed the right to claim reimbursement, in principle. In that case, the BAG held that an employee had to reimburse the employer for the costs of a detective who had been engaged by the employer to investigate a breach of duties under the employment contract. The employer in that case had mandated a detective with surveillance of the employee in light of a specific suspicion and the employee was subsequently found to have committed a deliberate breach of his duties.

Practical tip

None of this helped the company in the present case. It simply was not able to show which specific activities were performed or investigations carried out, when they were performed and to what extent they were performed due to a specific suspicion against the former employee. The need for “no stone to remain unturned” and to ensure “every corner of the company is checked” in a compliance investigation by an external third party, is understandable from the point of view of those keen to clean up the issue. However, this tabula rasa approach does not really help when one thinks about the end of the process and later wants to take recourse against the convicted employee. Claims for damages can only be prepared when there is a specific suspicion of serious misconduct and when the necessary investigative measures can be attributed to the facts supporting the termination of employment.

Author: Martin Biebl

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