At first glance, the provisions of the Labor Code for the closure of a part of the enterprise are very clear: in these cases, the employer is entitled to terminate the relevant employment agreements with a notice, after having taken into consideration of the rules for selection and protection against dismissal.
This ground for termination of an employment agreement appears to be a question, resolved controversially in the court practice. The problems occur because of the variety of cases of cessation of activities and/or reorganization of employer’s structures, on one hand, and similarity of the closure of part of the enterprise with staff-cuts, on the other hand.
It is equally difficult to judge not only whether a part of the enterprise is closed but also whether and how an employee selection should be made in a given case. Particularly acute was the need to harmonize the court practice in the case of closing offices (centers) of credit institutions in the same and/or different settlements.
Under such a case of closure of a bank office the Supreme Court of Cassation (SCC), by Ruling dated September 30, 2019, proposed to the General Assembly of the Civic Department of the SCC to issue an interpretative decision. By Order dated December 17, 2019, the Chairman of the SCC an interpretative case No. 5 of 2019 was initiated on the following issues:
- When a closure of a part of the enterprise, internal reorganization and staff-cuts are at hand, and
- What is the legal meaning of these three forms as a ground for termination of labour agreement for the law, the employer’s obligation to make selection respectively, when an activity is ceased and when the same activity is still carried out in the same or in another settlement.
So, what does the mandatory practice of the SCC tell us so far regarding the closure of a part of the enterprise?
- When closure of a part of the enterprise is at hand?
Closure of a part of the enterprise is at hand when the activity of the same ceases in the future completely. The activity of one of its separate units is terminated, so that the necessity of carrying out the respective activity is eliminated, which requires the dismissal of the employees who carried out this activity.
- Closure of a part of the enterprise and reorganization
Closure of a part of the enterprise is different from the cases of internal organizational restructuring of the enterprise, necessitating merger, acquisition, transformation, change of the name of its separate units. In these cases, the activity is still carried out, though in other organizational forms. The closure of a part of the enterprise requires the permanent cessation of a certain activity carried out by a separate unit of the respective enterprise in such a way that the activity will not be maintained in the future. Restructuring or reorganization regardless of its form does not mean termination of the same activity.
Closure of a part of the enterprise is not at hand, but only an internal reorganization in the cases when the activity is still carried out by another separate unit or is distributed between several such units. Therefore, there is no closure of a part of the enterprise in cases where one or more financial centers of a particular bank are being closed and at the same time a new one is being open to which all activities carried out by the closed ones go, as well as if only part of the activities goes to the new center and the rest to other structures of the bank. The formal closure of a part of the enterprise will not mean the cease of the activity of the part, if this activity is in some way is still carried out by other structures and the need for the respective employees has not been eliminated.
- Differentiation of separate units
The court practice accepts that a part of an enterprise is its separate, relatively independent unit. The specification of criteria for identity and relative autonomy is a major reason for assessing both whether a part of an enterprise is closed and whether the selection is compulsory and which employees the latter shall include. The problem gets bigger when the very structure of the employer is complex and involves many separate units in several settlements – the case with banks and their centers/offices in the settlements. Additional difficulties appear in situations in which centers are closed at the same time and a new one is opened and some activities are ceased and others are transferred to the new center and/or old centers of the enterprise of the employer.
The organizational-managerial characteristic is considered in some court decisions as the main one so to assume that relative independence is at hand. The unit should be a separate and relatively independent organizational one in the overall structure and organization of the enterprise and should have relatively independent leadership in the management structure of the enterprise. Additional criteria for differentiation are territorial (in terms of settlement, region, area of activity), financial and economic (in terms of having one’s own income or a separate expense account) and functional (in terms of performing a relatively separate activity from the general activity of the enterprise).
However, other court decisions have found that the employer is entitled to optimize production processes and seek opportunities to close duplicate units which cover the main activity. It is a matter of employer discretion to decide which unit to close and which one to keep. The possibility for termination of employment agreements due to the closure of part of the enterprise is recognized in cases where another unit of the enterprise continues carrying out of an activity identical to the ceased one in the closed unit. These court decisions are more flexible in their discretion through simultaneous consideration of the management and organizational distinctiveness, activities and territorial scope.
Some court decisions determine the territorial characteristic as such of primary importance and add additional ones to it. A separate structure in the employer’s enterprise is not only a territorially separated unit or a unit that is separated financially and economically, but also any unit that is separate in the organizational and management structure of the enterprise – an independent organizational unit in the overall structure and organization of the enterprise. Such ones are not only the branch of the company or its division, but also any departments, workshops, centers, offices.
Court decisions accept that the banking office (financial center, etc.) has all the characteristics of a separate unit and that a bank may have several such separate units on the territory of a single settlement. Upon cease of the activity from one of the offices and its complete closure as part of the structure of the bank’s enterprise, its employees are subject to dismissal on that ground.
- Closure of a part of the enterprise and staff-cuts
The employer may have to choose whether to apply the closure of a part of the enterprise or staff-cuts as a ground for termination of an employment agreement. The two grounds are part of the same point 2, par. 1 of Article 328 of the Labour Code. According to one view, these are two separate and unconnected, different and incompatible grounds for unilateral termination of the employment agreement, which is why the dismissal order should indicate which of the two grounds is applied. If this is not specified, the order is unlawful and is subject to revocation. According to another view, if, at the time the order was served, the employee was aware of the legal ground for the termination of the employment agreement, the order could not be revoked as unlawful merely because of a lack of specification which of the two proposed provisions of Art. 328, par. 1, item 2 of the Labor Code is applied.
Part of the court practice accepts that the two grounds are always alternative and can never be interchangeable. There is always one of the two, and it follows from the facts to be proved.
Another part, however, accepts that if the conditions for the closure of a part of the enterprise are met, the employer may apply this ground or apply the ground of staff-cuts. There is no legal prohibition for an employer to dismiss an employee on both grounds, since they are separate and independent of each other. The two grounds are not mutually exclusive. Closure of an office can result in staff-cuts. The employer may cut the staff because of the closure of a part of the enterprise, but the employer may also close a part of the enterprise and at the same time cut the staff with respect to the non-closed part. The occurrence of either or both grounds entitles the employer to terminate the employment agreement, and provision of evidence about the ground is made within the procedure for appeal of the dismissal. The right to the protection of the employee is not considered breached as he has the opportunity to dispute the occurrence of both grounds according to the specific requirements for each one. The employer may indicate more than one ground for termination of the employment agreement, as long as they do not contradict each other. And in some decisions it is argued that even if they contradict themselves, dismissal would be unlawful only if none of the grounds existed.
- Shall the employer make a selection among employees?
In most court decisions it is accepted that selection should be made not within the enterprise as a whole, but among employees within the separate structure in which the staff-cuts take place. Selection is not compulsory when a separate unit is closed or all positions in it are cut. The employer is not obliged to make a selection of employees holding similar positions / with identical or different names / in different structural units, in different settlements. The employer cannot unilaterally change the place of work. Even for that reason alone, selection cannot include employees who work in different settlements. The criteria here for assessing the unit’s distinctiveness include the territorial, organizational, managerial, financial and economic criteria. There is a distinction not only with regard to a branch of a company or its division, but also with respect to separate departments, workshops, offices.
The closure of a part of the enterprise requires definitive cessation of an activity carried out by a separate unit of the enterprise concerned in such a way that such activity will not be maintained in the future. Upon actual closure of a part of the enterprise, selection is not possible because there are no remained employees to be included. In such a case, the employer may (but is not obliged) not dismiss the employees in the part of the enterprise whose activity is closed but other employees who work in other branches of the enterprise whose activity is retained. This applies both to separate units in the same settlement and to those in different settlements. It is the employer’s right, not his duty, to make the selection upon closing an office as part of the employer-credit institution.
A different opinion could be met in other decisions. According to them, the employer is obliged to make a selection upon closure of a separate structural unit, if in the remaining structural units of the enterprise /in the same settlement/ there are positions for the same or insignificantly different job functions. There is no obligation for the employer to make selection only in cases where structural units or job positions are located in different settlements.
According to a third group of decisions the employer shall make a selection upon closure of the separate structural unit if in the remaining units of the enterprise in the same settlement there are job positions for the same or insignificantly different job functions. Further to a decision of the SCC if a bank branch represents a separate structural unit because of its organizational-management characteristic within the overall bank’s structure, upon cutting of one or more (but not all) identical or similar job positions in that bank branch, the employer is obliged to make a selection between all employees occupying same or similar posts. The obligation in this case is valid even within employees in different settlements. Although the decision refers to staff-cuts, the distinctiveness of the unit is justified here through the organizational and management structure and the nature of the job functions within the branch as an overall structure in the country.
It is evident that the termination of employment agreements due to the closure of a part of the enterprise and the selection are subject to controversial court practice. The forthcoming adoption of an interpretative decision is expected to bring clarity to the business and employees who will then be able to legally exercise their rights and protect their interests.