April 2015 - Luxembourg Employment News

Conclusion of a settlement agreement in the context of a dismissal with immediate effect: caution with the refund of unemployment benefits…

It is common practice that following a dismissal with immediate effect, the employer and the employee enter into a settlement agreement. 

However, if the main purpose of the settlement agreement is to simplify and to reduce the procedural costs, it is recommended to be cautious with regard to the context and the timing of the conclusion of such agreement. Indeed, within the framework of a dismissal with immediate effect, the state, in its capacity as a manager of the Employment Fund (Fond pour l’Emploi) (hereafter the “State”), is in principle party to the lawsuit in order to recover the unemployment benefits paid if the employee has claimed these by way of summary proceedings. 

Thus, unlike what employers and employees may think, once the settlement agreement has been signed, the proceedings are not terminated vis-à-vis the State.

However, which party shall be deemed to reimburse the unemployment benefits in such case?

The Labour Courts have tackled this issue and more recently the Court of Appeal (Cour d’Appel”) through two recent judgments on 5 and 26 of March 2015 (no 41268 and no 39928).

The settlement agreement: recapitulation 

Article 2044 of the Civil Code provides for the possibility to conclude a settlement agreement to end an existing or future dispute. The settlement agreement aims at finding an amicable solution satisfying both parties, on condition that there must be reciprocal concessions.

Employers and employees often opt to settle in order to (i) prevent any dispute concerning both the supposedly abusive or unlawful nature of the termination and any other type of claim, in particular pay claims, from the employee and in order to (ii) save the parties the tedious and costly proceedings with uncertain outcome for both parties. 

Once the settlement agreement has been concluded, the parties can no longer take legal action regarding the points agreed under the settlement agreement. 

Unenforceability of the settlement agreement vis-a-vis the State 

The unenforceability is defined as the inefficiency of an act towards third parties allowing them to ignore this act and its effects (Court of Appeal, 14 July 2011, no 34246).

In the aforementioned judgment of 5 March 2015, the issue was whether the legal proceedings were terminated because of the conclusion of the settlement agreement between the employee and his employer, even though the State had not been party to the agreement. In other words, was the settlement agreement enforceable vis-à-vis the State? 

In this case, the employer dismissed his employee with immediate effect. The employee filed a claim before the Labour Court to have the dismissal declared abusive. He also called the State as a party to this lawsuit in accordance with Article L.521-4 of the Labour Code.  

Considering that a dismissal with immediate effect does not allow one to receive the unemployment benefits, the employee filed a summary proceeding request with the Labour Court’s president to obtain provisional approval of the full unemployment benefits in anticipation of the definitive decision of the dispute regarding the lawfulness or the validity of his dismissal (Article L.521-4 (2) of the Labour Code). The Court approved his request.  

Meanwhile, the employee and the employer found an amicable arrangement and signed a settlement agreement in the meaning of Article 2044 of the Civil Code. 

The employee consequently requested the discontinuance of the proceedings since the signature of the settlement agreement meant that the dispute had ended. However, the State, which was not a party to the settlement agreement, objected to this as the proceedings were not terminated  with regard to the claim for reimbursement of the unemployment benefits. 

While a claimant is entitled to withdraw his legal action without the approval of the defendant (his employer) or potentially the intervening party due to the free use of his rights, this is not the case with the procedure introduced under Article L.521-4 of the Labour Code. The latter grants the State, in the context of an unfair dismissal, the right to have the principal question of the regularity of the dismissal reviewed, as the outcome of its claim for reimbursement depends on it (Court of Appeal, 21 January 2010, no 34619). 

Indeed, the conclusion of a settlement agreement between the employee and the employer shall not have a negative impact on the legitimate interests of the State; yet the party that has to reimburse the unemployment benefits is to be determined. 

Refund of the unemployment benefits by the employee

In principle, if the employee files a claim for unfair dismissal with immediate effect, the State reclaims the unemployment benefits unduly paid from the defaulting party, i.e. the employer in case of unfair dismissal and the employee in a case of lawful dismissal. 

However, if the parties conclude a settlement agreement before the Labour Courts have decided on the abusive nature of the dismissal, it is impossible to determine which party must reimburse the unemployment benefits. As a matter of fact, the arguments regarding the lawful or abusive nature of the dismissal can no longer be considered as the parties have validly declared them settled and expressly decided not to proceed to their analysis (Court of Appeal, 14 July 2011, no 32426). 

Nonetheless, regardless of this material impossibility, the State is still entitled to the reimbursement of the unemployment benefits. 

Thus, the Court of Appeal, adopting the analysis of the Court of Cassation (“Cour de Cassation”), recalled that the employee whose intention is not to be ordered to reimburse the employment benefits has a double obligation. He must not only (i) initiate proceedings against his employer to be compensated for unfair dismissal but also (ii) establish the abusive nature of the dismissal. This double obligation of the employee binds him therefore to go through his legal action for compensation. Any procedural issue preventing its realisation involves for the employee the obligation to reimburse the unemployment benefits. (Court of Cassation, 3 April 2014, no 3316). 

In the aforementioned judgment of 5 March 2015, the employee was therefore ordered to reimburse the unemployment benefits to the State for not having see his legal action through because of the conclusion of the settlement agreement with the employer.

The issue of the unemployment benefits refund in case of inadmissibility of the employee’s claim

It was previously ruled that in cases of inadmissibility of the claim, withdrawal or debarment, the employment jurisdictions will declare the plaintiff either debarred or inadmissible, respectively. However, they will order him to reimburse the unemployment benefits for failing to provide the proof of the abusive nature of the dismissal with immediate effect (Court of Appeal, 30 May 2013, no 38349).

Nevertheless, in a recent judgment of 26 March 2015, no 39928, the Court of Appel judged that in case of inadmissibility of the main claim, the State’s intervention claim can no longer be based on it, therefore the legal action of the State to be reimbursed the unemployment benefits is inadmissible. The inadmissibility judgment would not ipso facto enjoin the employee to reimburse the unemployment benefits to the State as mentioned in the previous judgments.

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As a conclusion, it is important to be aware that, if a settlement agreement is concluded within the framework of a dismissal with immediate effect, it will be valid but unenforceable towards the State. Thus, the refund of the unemployment benefits will be automatically incumbent upon the employee, and not upon the employer. The consequence of this may be to dissuade the employee from settling and encouraging him to see his legal action through, or on the other hand encouraging him to negotiate a higher settlement indemnity in order to take into account the refund of such benefits.