HR legal

Swedish Labor Court imposes a 6 months notice for a CEO who terminated his employment

29 March 2019

The Swedish Labor Court recently ruled in favor of an accounting firm, in which the VD (Swedish CEO) was prohibited from competing during the notice period, under penalty of SEK 500,000 in case of violations. In the ruling, the court held that 6 months could be imposed against the VD as a reasonable minimum notice period in the absence of any agreed notice period between the parties.

The VD had founded the accounting firm together with a partner. Each owned 50 percent respectively. The VD was initially terminated with 6 months termination notice by his fellow co-owner. The VD did not accept this and subsequently terminated his own employment with effect immediately. The former VD had within those 6 months started a new accounting firm.

The dispute in the case was therefore in absence of an agreement regarding termination, what would constitute a reasonable minimum notice of termination for a VD who terminates his employment. Secondly, the Labor Court considered, if the VD was subject to a duty of loyalty and an obligation not to compete during the notice period.

The Labor Court’s ruling

The Labor Court reiterates in its ruling that 6 months constitutes a reasonable notice of termination for a VD. This is in line with court practice with respect to terminations by the company. And where the parties have made no agreement regarding notice of termination. In this case, where the termination with immediate effect was initiated by the VD, the Labor Court found that the 6 months’ notice could equally be imposed as a reasonable minimum notice, in absent of any agreement between the parties.

The Labor Court explains that the reason for its ruling is that a company needs reasonable time to adjust to changes such as losing a key person of a company. Companies also need reasonable notice due to its reasonable interest in protection against competitive activities, protection of confidentiality, etc.

Having found that the VD was subject to a 6 months’ notice of termination, the Labor Court reiterated that the VD was subject to his duty of loyalty during the notice period. This included the duty not to compete. The VD would therefore be in material breach of his duty of loyalty if he was to engage in competing activities during the notice, under circumstances which would be considered disloyal to the company.

Under these circumstances, the Labor Court concluded that by starting a new accounting firm, the former VD was found in breach of his duty of loyalty. Therefore, the court prohibited the VD to engage in any further competitive activities during his notice period, being 6 months, under penalty of SEK 500,000 for any further violations.

IUNO’s opinion

Companies should remember, that when hiring a VD, many employment laws do not automatically apply, and so it is important to ensure a clear agreement between the parties. The case is interesting in this light, as it shows that the lack of a clear agreement is not only a problem for the company, but also for the VD. Because the Court is willing to introduce restrictions which have not been agreed, also on the VD, based on reasonableness.

IUNO recommends that companies who are in the process of hiring a VD, both ensures that the VD is correctly classified as such, and ensures that the contract is drafted in line with the legal requirements and according to current best practices.

Companies who are separating with its VD should be mindful of the VD’s duties of loyalties during the notice period, as an important tool to protect the business during such a transition.

The VD had founded the accounting firm together with a partner. Each owned 50 percent respectively. The VD was initially terminated with 6 months termination notice by his fellow co-owner. The VD did not accept this and subsequently terminated his own employment with effect immediately. The former VD had within those 6 months started a new accounting firm.

The dispute in the case was therefore in absence of an agreement regarding termination, what would constitute a reasonable minimum notice of termination for a VD who terminates his employment. Secondly, the Labor Court considered, if the VD was subject to a duty of loyalty and an obligation not to compete during the notice period.

The Labor Court’s ruling

The Labor Court reiterates in its ruling that 6 months constitutes a reasonable notice of termination for a VD. This is in line with court practice with respect to terminations by the company. And where the parties have made no agreement regarding notice of termination. In this case, where the termination with immediate effect was initiated by the VD, the Labor Court found that the 6 months’ notice could equally be imposed as a reasonable minimum notice, in absent of any agreement between the parties.

The Labor Court explains that the reason for its ruling is that a company needs reasonable time to adjust to changes such as losing a key person of a company. Companies also need reasonable notice due to its reasonable interest in protection against competitive activities, protection of confidentiality, etc.

Having found that the VD was subject to a 6 months’ notice of termination, the Labor Court reiterated that the VD was subject to his duty of loyalty during the notice period. This included the duty not to compete. The VD would therefore be in material breach of his duty of loyalty if he was to engage in competing activities during the notice, under circumstances which would be considered disloyal to the company.

Under these circumstances, the Labor Court concluded that by starting a new accounting firm, the former VD was found in breach of his duty of loyalty. Therefore, the court prohibited the VD to engage in any further competitive activities during his notice period, being 6 months, under penalty of SEK 500,000 for any further violations.

IUNO’s opinion

Companies should remember, that when hiring a VD, many employment laws do not automatically apply, and so it is important to ensure a clear agreement between the parties. The case is interesting in this light, as it shows that the lack of a clear agreement is not only a problem for the company, but also for the VD. Because the Court is willing to introduce restrictions which have not been agreed, also on the VD, based on reasonableness.

IUNO recommends that companies who are in the process of hiring a VD, both ensures that the VD is correctly classified as such, and ensures that the contract is drafted in line with the legal requirements and according to current best practices.

Companies who are separating with its VD should be mindful of the VD’s duties of loyalties during the notice period, as an important tool to protect the business during such a transition.

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Anders

Etgen Reitz

Partner

Shirin

Sharifi

Associate

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