Supreme Court clarifies procedure for settling disputes related to activity of company managers
The Plenum of the Supreme Court of the Russian Federation adopted Ruling No.21 “On issues the courts encounter when applying legislation regulating labor of a company manager and members of a collective executive body” (the “Ruling”) on June 2, 2015.
The Ruling is aimed at clarifying the issues related to special status of the company head as a party to corporate and labor relations simultaneously, as well as to the procedure for examining disputes on making severance payments when terminating the manager’s employment agreement by decision of the owner of the company’s assets or other authorized entity.
The key provisions of the Ruling are as follows:
Discretionary powers of the company on dismissing a manager are not unlimited
It is well known that a company head can be dismissed at any time by decision of the owner of the company’s assets, or by other authorized entity, without specification of the reasons for dismissal (Clause 2 Part 1 Article 278 of the Labor Code of the Russian Federation). However, the Ruling specifies that the resolution on dismissal cannot be adopted in violation of the principles of non-abuse of rights and prohibition of discrimination in labor (Item 9 of the Ruling), which supports the position expressed earlier by the Constitutional Court of the Russian Federation (Ruling No.3-P of the Constitutional Court of the Russian Federation dated 15.03.2005).
That provided, the company’s discretionary powers to dismiss a manager are not unlimited. For instance, resolution on dismissal of a manager who showed high performance results and effective management, without specification of reasons, can be contested by the manager and can be declared unlawful.
Court is entitled to reduce the amount of severance pay or to deny it
In the absence of culpable actions, dismissal of a manager must be accompanied by payment of compensation in the amount determined in the employment agreement, but no less than three times the average monthly income or equal to such amount for managers of state companies (Article 279 of the Labor Code of the Russian Federation). The Ruling provides for the court’s right to reduce the amount of the “golden parachute” or to deny it in the event the requirements of the law are violated when establishing the terms of such payments, including the general legal principle of non-abuse of rights, as well as the legal interests of the company and other employees and entities. These rules apply when examining the claim of a manager on recovery of severance pay, as well as claims of founders/participants of a company on declaring invalid the resolutions on paying compensation to the manager (Item 11 of the Ruling).
For instance, resolution on paying compensation to the manager due to termination of his employment agreement can be declared invalid if payment of excessive compensation violates the investment interests of shareholders of the legal entity and is made without consideration of the actual economic performance of the company’s activity in the preceding period or of the purpose of this payment (Ruling No.307-ES-14-8853 of the Supreme Court of the Russian Federation dated 30.03.2015).
Court is entitled to independently establish the amount of severance pay
In the event the manager’s employment agreement does not contain a provision on payment of compensation or in the event of a dispute in respect to its amount, the amount of compensation shall be established by the court based on the designated purpose of such payment aimed at ensuring protection against negative consequences due to loss of job, but no less than three times the average monthly income.
The Ruling provides a number of criteria to be used in order for the court to establish the amount of compensation in disputable situations, such as duration of work in the capacity of manager, time remaining until the employment agreement expires, amounts which the dismissed person could have received subject to continuing work in the respective position, additional expenses which the person can incur due to termination of the employment agreement, etc. (Item 12 of the Ruling).
Failure to make severance payment is not sufficient reason for restoring employment of the manager
Subject to the grounds evidencing the unlawful nature of the employee’s dismissal, he is entitled to file a claim with the court on restoring employment (Article 391 of the Labor Code of the Russian Federation). However, failure to make a severance payment to a manager is not sufficient grounds for restoring his employment, though this does not deprive him of the right to claim compensation and interest for violating the term of its payment, as well as compensation for moral damage (Item 10 of the Ruling).
To summarize the foregoing, it should be noted that, first of all, the Ruling consolidates the approaches formed in the court practice in relation to disputes with managers. At the same time, confirmation of these approaches at the level of the Plenum of the Supreme Court of the Russian Federation undoubtedly contributes to greater stability of business relations and predictability of prospects in court disputes.
The text of the Ruling can be found here.
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