Finland: Supreme Court Takes A Stand On Validity Of An Agreement Terminating An Employment Contract

Introduction

In the decision 2012:40, the Supreme Court of Finland considered whether an agreement regarding termination of an employment contract was legally valid. This summary is written on basis of the Supreme Court's decision. The decision related to a case in which the employer terminated the employment of two employees following a cooperation procedure. Very shortly thereafter, the employer and the employees made an agreement stating the fact of and grounds for termination. The agreement also stated that the employees had no duty to work during the notice period and that the parties had no claims against each other arising out of the employment relationship. The Supreme Court found that the parties had agreed that grounds for terminating the employment contract existed at the time of termination and conclusion of the agreement. The Supreme Court also concluded that the employees' acceptance of the grounds for the termination was neither contrary to the mandatory provisions of the Finnish Employment Contracts Act nor invalid on any other ground.

Background

The employer company ("Company") commenced a cooperation procedure in January 2008. After the cooperation procedure, the Company gave notice of termination to several of its employees working in different locations. Employees A and B, working at the Company's factory in Lieksa, were given a notice of termination for financial or production-related reasons or for reasons arising from reorganization of the employer's operations on 17 March 2008. Their notice period was scheduled to end on 17 September 2008. However, on 28 March 2008, the Company and employees A and B signed an agreement entitled "Agreement on receivables based on the employment relationship and other receivables". The agreement noted that the termination was carried out on 17 March 2008 and listed the grounds for it. In addition, the agreement included provisions stipulating that (i) A and B were not obliged to work during the notice period; (ii) the Company was not obligated to offer work to A and B, pursuant to Section 6 of Chapter 6 of the Finnish Employment Contracts Act; and (iii) the parties had no other claims against each other arising out of the employment relationship.

Also relevant is the fact that in November 2007, at its Joensuu location, the Company hired an employee until further notice and another employee for a fixed period. The employment agreement made for a fixed period was continued until further notice in February 2008.

The parties' claims

After the agreement referred to above was concluded, employees A and B took legal action against the Company, claiming compensation for unlawful termination of their employment contracts. The employees claimed that the work had not diminished, as specified in Section 3 of Chapter 7 of the Finnish Employment Contracts Act, because the Company employed, either before the termination or thereafter, a new employee to perform similar duties. They also claimed that they had made the agreement during the notice period, when they were not yet aware of the coming need for additional labour or regularization of new employees. In their opinion, the agreement did not prevent them from claiming compensation for groundless termination because employees cannot waive their right to compensation in advance.

The Company requested dismissal of the actions. Its main arguments were that (i) the agreement was entered into on A and B's initiative; (ii) A and B were aware of the new employees; (iii) A and B benefited from the agreement because they had not been obliged to work during the notice period even though the Company was paying their salary during that period; (iv) the Company had not breached the Employment Contracts Act because its operating conditions changed after the new employee's employment had been continued until further notice; (v) the Company determined the termination order of the employees to be terminated and B had shorter working history than others; and (vi) the Company did not breach the Employment Contracts Act in relation to A because they had agreed on the matter.

Decisions of the lower courts

The District Court dismissed the actions. The District Court considered that from the wording of the agreement it could be concluded that A and B had accepted the grounds for the termination of their employment contracts. The court also considered A and B to have waived their right to claim compensation for groundless termination. However, the District Court concluded that the provision included in the agreement whereby A and B had agreed that the Company would not be obligated to offer them work pursuant to Section 6 of Chapter 6 of the Employment Contracts Act, could not be considered to bind the employees on basis of the Employment Contracts Act and a viewpoint adopted by the Supreme Court in its previous decision (2007:69). The invalidity of this provision, however, did not render the whole agreement invalid. The employees had not demanded compensation on the basis of the Company breaching this obligation.

The Court of Appeal upheld the decision of the District Court.

The Decision of the Supreme Court

The Supreme Court considered that the first question was whether the employees had accepted the grounds for the terminations. If the answer to this question was affirmative, then the second question would be whether this kind of acceptance binds the employees generally and, lastly, whether the acceptance binds the employees in the circumstances at hand.

Regarding the employees' acceptance of the grounds for termination, the Supreme Court pointed out that the agreement did not include an express acceptance of the grounds. Since employees are commonly in the weaker position in this kind of contractual relationship, the lack of an express acceptance can be considered to support the view that the grounds for the terminations had not been accepted. The agreement had, however, been made about two months after the commencement of the cooperation procedure, and the agreement had been concluded on A and B's initiative after the employment contracts of A and B were terminated. A and B had also discussed the content of the agreement with a shop steward. The Supreme Court concluded that, under these circumstances, there were grounds for interpreting the agreement to read that employees A and B had accepted the existence of grounds for their termination at the time of concluding the agreement.

Pursuant to Section 6 of Chapter 13 of the Employment Contracts Act, any agreement reducing the rights of and benefits due to employees under the Act shall be void unless otherwise provided in the Act. This means, among other things, that agreements between an employer and an employee moderating the grounds for terminating an employment contract to be complied with by the employer or provisions reducing an employee's right to compensation for groundless termination are void. However, the peremptory nature of Section 6 is generally considered to apply to agreements made at the same time as the employment contract or during the employment relationship. Agreements made after the conclusion of the employment relationship are evaluated on the basis of general contractual rules and principles. When the question is about an agreement made in connection with the termination or during the notice period, the validity of the agreement and its effects must be evaluated provision by provision, specifically taking into account that certain obligations binding the employer continue during and even after the notice period (Supreme Court 2007:69).

In this case, the agreement concerned accepting the existence of the grounds for the termination after the employees' employment contracts were terminated. The employees had accepted that, at the time of the termination and concluding the agreement, the available work had diminished substantially and permanently for financial or production-related reasons or for reasons arising from reorganization of the employer's operations. Their point of view was, therefore, that legal grounds for termination existed at that time. Thus, the question was not, for instance, about an undertaking made for the future. The employees' actions were also based on the circumstances before and at the time of entering into the agreement and not the circumstances at the conclusion of the notice period. Therefore, the Supreme Court held that the undertaking did not breach the mandatory provisions of the Employment Contracts Act and was not void. The legal validity of the acceptance must therefore be assessed on the basis of general contractual rules and principles. The Supreme Court did not consider the acceptance given by the employees to be invalid or unreasonable on that basis. The Supreme Court did not amend the decision of the Court of Appeal.

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