1 December 2016 - The bigger they are, the harder they fall

Dismissal of managing directors under the Dutch Work and Security Act (WWZ) .

The WWZ is not just relevant to ‘ordinary’ employees. The position of managing directors with employment contracts has likewise changed as a result of this new Act. To what extent, though? A recent case before the Rotterdam District Court shows the pitfalls and possibilities for both shareholders and managing directors.

Is this practice so different now under the WWZ?

The case which I will talk about here involved a managing director who, his employer believed, was not performing well. For several years in a row, financial targets had not been met, and the director had not come up with a plan to turn things around. The organisation had high employee turnover, with the director pursuing a policy of buying people out instead of coaching and training them. The employer also felt that the director set his own priorities and did not sufficiently take into account the corporate group’s instructions and procedures. About a year earlier, all of this had prompted the employer’s works council to express concern about the director’s leadership.

“I’m not a managing director”

After an extraordinary meeting of shareholders was convened to discuss dismissing the managing director, he was terminated by the shareholder (the parent company in Spain), subject to the applicable notice period. The director refused to go along with this. He brought an action in the district court, in which he alleged – briefly stated – that there was no reasonable ground to dismiss him and that, moreover, he was not a managing director. The issue which the director raised regarding his status as a managing director was very interesting. If the director had not been appointed as a managing director (pursuant to the company’s articles of association) and was thus a director in title only, the employer could not have terminated the employment contract through a shareholders’ resolution. In that instance, the normal termination proceedings would have had to have been conducted before the sub‑district court, which in any event would have bought the director several months’ time (and income). Yet, as the shareholder and the director had signed the registration form with the chamber of commerce listing the director as a managing director, and the director had actually acted as a managing director, too, the district court brushed aside this argument.Defence: three grounds for dismissalIn its defence, the employer claimed that the director was not performing satisfactorily, the employment relationship had become strained, and the employment contract could be terminated based on ‘other circumstances’ – in employment-law jargon, the ‘catch-all ground’ (set out in Article 7:669(h) of the Dutch Civil Code).But this ‘catch-all ground’, wasn’t it intended for specific circumstances, such as long-term imprisonment and illegal workers? Surely, the intention was not to have it encompass cases which did not justify dismissal based on unsatisfactory performance or a strained employment relationship?Indeed, the ‘catch-all ground’ should not in principle be viewed as the ‘if all else fails’ option. Still, in formulating the WWZ, the legislature had noted that the catch-all ground could be used for situations in which there was a difference of opinion with a manager about the policy to be followed. The court (of course) would be the one, however, to determine whether such a situation was in fact present.

No improvement plan, yet the employment contract ends, anyway

The district court held in this case that unsatisfactory performance was not an issue, as an improvement plan had not been implemented. The employment relationship had not become strained, either, in the district court’s view. Ultimately, however, the court did accept the employer’s reasoning and ruled that there was a difference of opinion about how the director was performing his job. That was enough to have the termination fall under the ‘catch-all ground’.

Limited compensation

The director, whose gross monthly salary (including allowances, bonuses and so forth) totalled nearly EUR 10,000, left the company with a gross transitional payment of more than EUR 66,000. This was but a fraction of his claim for more than EUR 250,000 gross, which he thought he was entitled to, since, according to him, the employer had engaged in ‘seriously culpable conduct’. That wasn’t so, the court said. Another blow for the director was that his non-competition clause was upheld, forcing him to look for another position outside the industry.

Tips► Although it is advisable to submit a written appointment decision to demonstrate that an employee is a managing director under the company’s articles of association (thus halting any further discussion about the director’s status), this can also be proved in other ways. In this case, a registration form with the chamber of commerce, signed on the shareholder’s and the employee’s behalf, was decisive, in addition to the fact that the employee had actually acted as a managing director.

► While a managing director can in principle be dismissed on account of a ‘difference of opinion’, this difference of opinion must also be shown and explained under the WWZ. Hence, there needs to be something of a file. If not, the main risk is that a higher severance payment will have to be made. There has not yet been any case law dealing with such a situation.

► Under the WWZ, multiple disputed matters may be resolved in a single action. For example, the case discussed above related not only to the amount of the severance payment, but also to a release from the non-competition clause.

► There is less reason under the WWZ to agree on a ‘golden parachute’ (that is, a contractual severance payment), because the rules concerning transitional payments apply to managing directors as well. All the same, the transitional payment will, of course, usually