On 13 November 2020 the Supreme Court ruled on whether agreements regarding severance packages in the event of voluntary resignation, which were entered into during a downsizing process, could be partly set aside because they were contrary to good business practices or unreasonableness (Section 36 of the Contract Act 1918). To answer this question, the Supreme Court had to decide whether the employees were entitled to an early retirement pension in such a process based on the previous employer’s promise.
The Court of Appeal ruled in favour of the employees and the employer was considered bound by the previous owner’s promise of early retirement. The Court of Appeal further concluded that this provided a basis for revising the severance package agreements so that the employees were entitled to early retirement in line with previous practice. The Supreme Court disagreed with the Court of Appeal and acquitted the employer.
The case concerned a company that was demerged and taken over by new owners. Shortly afterwards, a downsizing process was initiated. At the time of the transfer, the new owners had committed themselves to comply with the established scheme for downsizing with the previous employer for a two-year protection period. The employees were offered severance packages on the same terms as before, but the new employer had changed its practice with regard to the granting of early retirement.
The previous owners had introduced a practice that employees over the age of 57 could, if they were made redundant, apply for early retirement and in practice this was granted every time. Therefore, the employees claimed that the new owners did not follow the established scheme and had breached the obligations by which the company was bound.
In fear of being made redundant without compensation, the employees nevertheless signed the submitted severance package offer without the right to early retirement, but subsequently claimed that the agreements entered into should be revised in accordance with Section 36 of the Contract Act.
The main rule in business transfers is that new owners must adhere to the rights and obligations in employment contracts or relationships at the time that a transfer takes place. Rights and obligations that do not follow from an employment contract or relationship may in principle be changed freely by the employer under its right to manage. Changes must nevertheless be made on a justifiable basis and not involve an abuse of employers’ right to manage.
In line with previous Supreme Court decisions on changes to pension entitlements, the Supreme Court also highlighted that because this case concerned unilaterally determined pension benefits of great economic value, there was basically “a certain presumption” that the employer had not waived the right to change the scheme. To deviate from this, there must be “evidence of a certain weight” which indicates that the employees have rights that limit the right to manage.
If an oral or written promise is given by employers, this can bind the company and restrict the right to manage. Such a promise is to be regarded as a right for employees and will accompany the business as a contractual obligation in the event of a business transfer. If there is any doubt as to whether such a promise has been made, an assessment of evidence must be made, in the same way as the question of whether an agreement has been entered into. The Supreme Court highlighted that evidence that is from a time close to the event has the greatest weight in a situation where parties and witnesses subsequently express themselves differently.
The Supreme Court assessed whether the employees had received a promise that the practice of granting early retirement would be continued based on written and oral documentation. Central to the assessment was a policy document that concerned “selective early retirement in the event of redundancy”.
The document was thoroughly discussed in the meetings with the employee representatives. It was stated here that “[e]arly retirement pension (gift pension) can in special cases be granted from the age of 57” and was described as one of the “voluntary benefits the company may provide”.
The Supreme Court held that it was clear that this did not indicate that the employees had acquired a right to be granted an early retirement pension. When no written material or evidence from a time close to the event showed that the employer had promised to continue the practice of early retirement, the court looked for evidence of a clear indication that was a binding oral promise, but found no such evidence.
After a thorough review of the communication between management and the employee representatives, the Supreme Court concluded that there was no evidence that the new owners had made any binding written or oral promise to continue the practice of early retirement. The new owners had carried out a thorough change-of-ownership process and it was clear in the policy document that the early retirement scheme was optional for the employer.
The fact that the employee representatives had not protested to the wording of the policy document meant that there was no basis for placing the risk of misunderstandings on the part of the company. Thus, there was no basis for contract revision pursuant to Section 36 of the Contract Act.
The Supreme Court ruling fits into a series of decisions in which employers’ arguments have been upheld in that the right to change is retained in connection with changes to pension schemes that apply to a group of employees. The judgment also demonstrates that specific assessment must be made of whether there are “clear indications of a certain weight” in order for the right to change to be limited, and that in that case the greatest emphasis is placed on evidence close in time to the incident where the parties subsequently disagree.
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