TERMINATION OF AN EMPLOYMENT CONTRACT
Employees as well as employers can terminate an employment contract of indefinite duration at any time by serving notice or by paying a severance indemnity in lieu of notice.
An employer may give notice to or dismiss an employee on any grounds, as long as the grounds are not prohibited by law (eg, discrimination). No reason for the dismissal or administrative or legal approval is needed. This gives employers a high degree of flexibility. Equally this flexibility comes at a price in a continental European context.
The procedure to be followed when dismissing an employee is as follows:
Giving notice means to duly inform the other party of the beginning and duration of a period at the expiration of which the contract will come to an end.
During the notice period, the employment contract continues to be in force. This means that the employee may perform the same job as before. Furthermore, the employee may leave from work to find alternative employment (0.5 days per week, and in the last six months of the notice period 2 x 0.5 days per week).
Under Belgian law, a contract clause that would allow an employer to decide unilaterally to put the employee on garden leave during the notice period is void and totally unenforceable.
Notice of termination is valid only if given in writing and in the appropriate language (ie, Dutch, French or German) depending on the location of the workplace to which the employee is assigned. It must specify the beginning and the duration of the notice period. The statement must be sent by registered mail (taking effect only on the third working day following the day of the notification's mailing) or be communicated by writ of a process server.
For white-collar employees, the notice period starts running on the first day of the month following the month during which the notice takes effect.
Severance indemnity in lieu of notice
The employment contract can be immediately terminated upon payment of a sum corresponding to the remuneration the other party would have received if the notice period would have been respected.
Severance indemnities in lieu of notice are computed on all contractual and statutory benefits, as well as on the employee's fringe benefits.
No formalities apply in case of termination with the payment of severance pay, and without a notice period to be performed. However, for reasons of proof it is advisable to confirm the immediate termination in writing (eg, by registered mail). The termination of the employment relationship is immediately effective.
Mixed solution: notice and indemnity
The employer and the employee can also opt for a mixed solution and have the employee serve only part of the notice period, following which an indemnity in lieu of notice is paid, which corresponds to what the employee would have earned during the unperformed part of the notice period.
The length of the notice period and amount of the severance indemnity in lieu of notice depends in the first place on the employee's annual gross remuneration.
Annual gross remuneration <€28,580
When the annual gross remuneration does not exceed €28,580 (as of 1 January 2009 the amount will be raised to €29,729) at the moment notice is given, the notice period is three months for every five-year period of "seniority" (the "legal minimum") that has started to run. If the employee is employed for five years and one day, the notice period is six months.
Annual gross remuneration >€28,580
If the annual gross remuneration exceeds €28,580 when notice is given, the notice period and amount of any severance indemnity in lieu of notice must be mutually agreed between the employer and the employee, at the earliest when notice is given. In the absence of any such agreement, the notice period is fixed by the Labour Court.
The notice given by the employer may not, however, be shorter than the result of the ‘legal minimum' rule mentioned above.
In practice, Labour Courts grant much longer notice periods. The criteria taken into account by the courts to calculate the length of the notice period, is the time required for the employee, at the time notice is given, to find equivalent employment. The employee's seniority, age, function and remuneration are considered and all this in accordance with the circumstances of the case at hand. Furthermore, both the employer's and the employee's interests need to be taken into account.
The law itself gives no guidance on how to assess the notice period. Privately developed calculation formulae try to predict the outcome of potential court cases. The most commonly used of these is the Claeys formula.
Annual gross remuneration >€57,162
When the annual gross remuneration exceeds €57,162 (as of 1 January 2009, the amount will be raised to €59,460) at the moment notice is given, the employer and the employee may agree on the notice period that the employer needs to respect in case the latter wants to terminate the employment contract, provided that:
the agreement (drafted in the appropriate language) on the notice period to be respected is entered into prior to the employee actually taking on the job;
the notice period equals at least the above-mentioned "legal minimum" rule; and,
the entry into service took place after 1 April 1994 at the earliest.
It is thus possible to contractually agree on a much higher package than what a court would ordinarily grant. This legal provision therefore allows to build in ‘golden parachutes' in the employment contracts of high level executives. For certain categories of such executives the legislature currently intends to make an end to this (see below).
THE CLAEYS FORMULA
A fast calculation of the notice period
The Claeys Formula calculates fast and easily the length of the notice period. It gives the average outcome in court cases. It is in reality a statistical reproduction of the judgments from the Belgian jurisdictions.
The latest version of the Claeys Formula (2008) is based on 2,591 relevant judgments from all over the country, pronounced between mid-2003 and mid-2007.
The 2008 formula
The 2008 formula reads as follows:
0.87 x seniority + 0.06 x age +0.036 x remuneration/1000 - 1.43
The result of the formula gives the length of the notice period, expressed in months.
For the first time since the conception of the Claeys formula in 1974, a specific formula has been developed for employees with an annual remuneration suprassing €120,000. The effect of the remuneration seems to reduce significantly once the annual remuneration reaches the limit of €120,000 per annum. Therefore, in the formula for employees with an annual remuneration higher than €120,000, the remuneration element is given less weight in the overall result and is calculated thus:
0.87 x seniority + 0.06 x age +0.028 x remuneration/1000 - 1.43
Elements of the Claeys formula
When the formula was conceived, analysis of the case law pointed out three key factors used by courts and tribunals to determine the length of the notice period: the seniority, the age and the remuneration.
These three elements became the three variables of the Claeys formula.
"Seniority", expressed in years and months, is the period an employee is in the service of the same employer without interruption. For consecutive employment contracts without interruption, the original date of entry into service therefore applies.
Companies belonging to the same group are considered the "same employer" for calculating the employee's seniority.
The age, expressed in years and months, is the age of the employee at the moment of the dismissal.
Apart from basic salary, the yearly remuneration, expressed in thousands of euros, includes all variable salary and other benefits in kind.
THE END OF GOLDEN PARACHUTES?
Following the recent financial crisis and public consternation when learning that senior executives of financial institutions were asked to leave their job receiving high severance payments, the Belgian government decided to propose a legal limitation on such golden parachutes. The proposal awaits discussion in Parliament.
Under the proposal, the termination compensation for senior executives would be limited to an amount which the executive received during the 12 months preceding the termination (the "yearly compensation"). If the executive was professionally active for 20 years or more the cap is set at 18 months. The termination compensation can in any case not exceed what the executive would have received for the remainder of his original mandate.
These limitations only apply to the termination compensation for (i) executive directors (ie, members of the board of directors who are also members of the management committee or entrusted with the daily management of the company or who are in another way professionally active in the company, with a management agreement or employment contract), (ii) members of the management committee, and (iii) managing directors or general managers (entrusted with the daily management) of companies listed in Belgium. The possibility is foreseen for the government to extend these restrictions to senior executives of Belgian companies listed on foreign stock exchanges. Considering that there are fewer than 200 Belgian listed companies, the scope of the proposal as it presently is, will be rather limited. Ironically, with Fortis, a Belgian listed company, being sold by Belgium to BNP Paribas, a French listed company, these limitations would not even apply to the company though the dismissal of the Fortis executives started the whole debate. The debate indeed started when news broke that the CFO of Fortis was given a termination compensation of €4 million.
The limitations apply regardless of who takes the initiative for the termination and how the termination takes place (thus early termination as well as the expiration of the duration of the mandate or of the contract with a fixed duration).
The yearly compensation of the executive on the basis of which the termination compensation will be determined, includes all payments, compensations and advantages, of whatever nature, which the executive received, directly or indirectly, in the 12 months preceding the termination. Variable compensation is excluded (ie, compensation granted depending on, for example, the achievements of the executive, his or her productivity, the results of the company or the group) as well as repayment of actual costs incurred by the executive in the performance of his or her mandate. The calculation basis is therefore different from the one used for the application of the Claeys formula.
The termination compensation will include all compensation which the executive receives in light of the termination, including, among others, (additional) payments in individual and collective pension schemes and compensation for invoking a non-competition clause.
If this proposal becomes law all statutory, contractual and other provisions conflicting with this law will have to be disregarded.
The proposal would not explicitly modify the Act on Contract of Employment. This Act, however, as indicated before, protects high level workers by prohibiting them to enter into contractual arrangements that would grant them severance pay below the level of three months per five years of seniority. There was no ceiling on the level of severance pay, only a statutory minimum.
The new proposal would completely change this philosophy resulting in a substantial reduction of the potential severance packages of high-level workers.
Since it could be feared that the approval of the proposal may also lead to a discussion on the limitation of severance packages in general, it might be that the proposal never becomes a law at all.
While a limitation of severance packages may in principal be positive for employers, it should not become an impediment to attracting talented individuals from other countries.