Higher Labour Court of Baden Württemberg on the time limit for issuing notice of termination in connection with compliance investigations

Compliance investigations do not suspend the period during which termination without notice must be issued. If there is a delay in gaining knowledge of the grounds for termination, there is a risk of attribution of knowledge.

It is not uncommon for compliance investigations in companies to uncover facts that can lead to dismissals. Such matters are urgent. Termination without notice (außerordentliche Kündigung) must be issued within two weeks of gaining knowledge according to section 626 (2) German Civil Code (BGB). The two-week period begins on the date on which the employer gains knowledge of the facts relevant to termination of the employment relationship. Especially with complex compliance investigations involving numerous people, it can be difficult to determine when the two-week period begins. There is often uncertainty as to when the party conducting the investigation has to inform the person entitled to issue notice.

The Higher Labour Court of Baden-Württemberg has now ruled on the question of when the two-week period begins in the context of compliance investigations and on the phenomenon of delaying knowledge (LAG BW, decision of 3 November 2021 - 10 Sa 7/21). According to the decision, ongoing compliance investigations cannot suspend the start of the two-week period. The point in time when knowledge is gained must always be determined individually for each employee concerned, even if there are a large number of employees under suspicion. If the employer delays gaining knowledge by circumventing the reporting channels, the point in time when a person not entitled to issue notice may apply, even if it is before the employer gains knowledge.

Compliance investigations against large number of employees

In an action for protection against unfair dismissal, the Higher Labour Court of Baden Württemberg ruled on the validity of termination without notice for betrayal of business and trade secrets. The termination followed a comprehensive compliance investigation involving the internal compliance department and a law firm. The investigation, which lasted about a year, targeted a total of 89 employees, 17 of whom were dismissed. Subsequently, the law firm prepared an interim report for management in which the conduct of all 89 persons was presented and legally assessed. Based on this report, notices of termination were then issued within two weeks.

The Higher Labour Court of Baden Württemberg ruled that the two-week period for issuing notice of termination under section 626 (2) German Civil Code (BGB) had not been complied with. Firstly, the two-week period did not start when the external report was provided. Secondly, the knowledge of the head of the compliance department at an earlier date had to be attributed to management.

The two-week period must be calculated individually for each employee

If compliance investigations are directed against a number of employees, this does not mean the same time limit for issuing notice of termination applies for everyone, according to the Higher Labour Court of Baden Württemberg. The beginning of the time limit and thus knowledge of the facts relevant for termination must be determined individually for each person. In detail: It is not permissible to wait until the investigations of all employees under suspicion are completed. The time limit under section 626 (2) German Civil Code (BGB) applies to each individual employment relationship and cannot be extended by the employer due to extensive investigations. In the present case, this meant that for the claimant the two-week period began before all of the 89 persons concerned were investigated. The Higher Labour Court of Baden Württemberg found it particularly critical that the external interim report, the handing over of which was supposed to constitute management gaining knowledge, referred to all 89 persons, although conduct relevant to termination had only been ascertained for 17 of these individuals.

No extension of the investigation period due to compliance investigations

The two-week time limit under section 626 (2) German Civil Code (BGB) is a standardised statutory limitation and is intended to protect the employee. An employee must be able to rely on the fact that the employer must make a decision within a short period of time as to whether or not notice of termination will be issued due to misconduct. According to the Higher Labour Court of Baden Württemberg, this period was not extended due to the fact that the employee should have expected that there would be extensive compliance investigations. If a company has a compliance department, it should be clear that cases of corruption will be dealt with comprehensively. Nevertheless, this does not mean that an employee had to expect longer investigations than if only the human resources department were involved.

Irrespective of the party conducting the investigation, the question is how long an investigation should be allowed to go on. In the context of section 626 (2) German Civil Code (BGB), the focus is on the objective of the investigation under labour law, which is defined as follows according to case law of the German Federal Labour Court (BAG) (BAG, decision of 27 February 2020 - 2 AZR 570/19):

"The objective of the investigation under labour law is sufficiently complete knowledge of the relevant facts, i.e. not examined in every detail, to be able to decide on continuation of the specific employment relationship."

In this regard, the Higher Labour Court of Baden Württemberg stated that knowledge of initial information that suggests conduct relevant to termination was not yet sufficient. The case would differ if the initial information already indicated good cause for termination. However, in this situation, the employer was free to conduct further investigations and, in particular, to hear the person concerned if they wanted to obtain reliable and sufficiently complete knowledge of the relevant facts and evidence as a basis for their decision. In this case, the beginning of the time limit is suspended for the period during which the employer carries out investigations with the required urgency based on the circumstances. However, it is also clear that it should not be permissible to investigate every last detail.

Tactical investigative considerations only taken into account in exceptional cases - even if acts were of criminal nature

The Higher Labour Court of Baden Württemberg makes it clear that it is necessary to distinguish between the objective of the investigation under labour law, which is decisive for section 626 (2) BGB, and considerations of investigative tactics, general preventative measures or damage reduction. It is not possible to delay issuing notice of termination to an employee on the grounds that otherwise further evidence or statements of other employees would be endangered. These are abstract risks which do not justify deviating from the time limit.

Even if the misconduct was of a criminal nature, like the allegation of betrayal of secrets in the present case, tactical investigative considerations were only to be taken into account in rare cases when calculating the time limit. The Higher Labour Court of Baden Württemberg confirmed the case law of the Federal Labour Court (BAG), according to which it is permissible to await the outcome of investigations by the public prosecutor before issuing termination (BAG, decision of 17 March 2005 - 2 AZR 245/04). However, this only applies if the employer does not otherwise obtain comprehensive and reliable knowledge of the facts regarding termination. For this reason, the employer cannot await the results of investigations by the public prosecutor's office if it is conducting its own investigations. By conducting its own investigations the employer shows that it does not want to wait for the results of the public prosecutor's investigation.

If internal investigations are carried out, using an external law firm if necessary, it is ultimately only possible for the two-week period to be suspended for tactical reasons related to the investigation in exceptional cases. There have to be specific indications which make it likely that the further investigation of the objective of the investigation under labour law will be endangered. Even then, any delay would have to be as brief as possible. Especially if there is a large number of employees under suspicion, the Higher Labour Court of Baden Württemberg suggests making groups of employees to whom termination is issued successively. It is not permissible to delay terminating an employee with the intention of first investigating the "entire network of compliance violations", i.e. the misconduct of all suspected employees, unless there was demonstrably an inseparable link between the breaches of duty.

Attribution in the event of lack of knowledge due to organisational negligence

In principle, when the two-week period under section 626 (2) German Civil Code (BGB) begins, depends on the knowledge of a person entitled to give notice. In the case of legal entities, this is usually the legal representatives and such persons to whom the right of termination has been assigned. In exceptional cases, however, the employer must, according to the established case law of the Federal Labour Court (BAG), also accept in good faith the knowledge of a person not entitled to terminate the employment relationship (BAG, decision of 27 February 2020 - 2 AZR 570/19). In the present case, the Higher Labour Court based its decision on the knowledge of the head of the compliance department (who was not entitled to terminate the employment relationship); and management had to accept that the knowledge of the head of the compliance department was attributable to it. This was the result of organisational negligence on part of management, which had failed to keep itself regularly informed of the state of the investigations. The prerequisite for attribution is first of all that

"these persons must hold a prominent position and function in the company or the administration and must actually and legally be in a position to clarify the facts so comprehensively that with their report the person entitled to terminate the employment relationship can make a considered decision (on termination) without further enquiries."

In addition, the person entitled to terminate employment had to have acquired the knowledge with a delay due to organisational negligence. The Higher Labour Court of Baden Württemberg affirmed such organisational negligence. Accordingly, it is not sufficient if management is only informed when something is found that is highly critical and/or if the original purpose of the investigation develops in a different direction. Because in this case, the decision on the timing of the report would no longer be in the hands of management, but in those of the investigators. It was the management's supervisory duty to either be briefed periodically without cause or whenever

"breaches of duty by individual employees are clearly recognisable and can be separated from the overall compliance investigation and consequently also from breaches of duty by other employees."

Dancing on the tightrope: between investigative objectives and observing time limits

The decision by the Higher Labour Court of Baden Württemberg shows the complex situation in which employers regularly find themselves when compliance violations come to light. On the one hand, the compliance must be upheld and any suspicion of legal violations must be comprehensively clarified. Compliance investigations cannot solely serve the purpose of labour law measures. On the basis of management's duty of care, measures that are generally preventative and reduce damage must also be pursued. On the other hand, companies are exposed to the "ticking clock" of section 626 (2) German Civil Code (BGB), which can lead to investigations possibly having to be interrupted and, in particular, disclosed even before they have been properly investigated. The Higher Labour Court of Baden Württemberg acknowledges the complexity of this situation. However, the ruling lacks practical proposals for solutions, so that there is still uncertainty. It remains to be seen whether the Federal Labour Court will provide more guidance – the appeal has been admitted.

Recommendation for clear structuring of processes

To keep the risk of a time limit expiring as low as possible, it is advisable to divide employees into subgroups (e.g. according to conduct or department) if there are a large number of employees under suspicion. The facts relevant to termination should then be assessed separately for each group. If there is such a close link between individual persons that the breaches of duty only become apparent when viewed together, it may be justified to issue notices of termination successively.

Clear reporting rules should also be established. It is advisable to clearly link notifying the persons entitled to issue termination to when breaches of duty relevant to termination are identified.

Establishing a compliance department and a compliance management system ensure that compliance investigations are effective and structured. Organisational deficits can also be prevented in this manner, as the Higher Labour Court of Baden Württemberg expressly emphasises in its decision.