8 dicembre 2021 Kerstin Wilhelm BusinessCrimeLinks

Passing the buck: Employer can claim reimbursement from employee for necessary internal investigation costs by external law firms

The German Federal Labour Court (Bundesarbeitsgericht – “BAG”) decided this year (on 29 April 2021, docket no. 8 AZR 276/20) that an employer can claim reimbursement from an employee for necessary internal investigation costs incurred by a specialist law firm arising from the suspicion of misconduct by the employee.

Employer sued employee for internal investigation costs arising from misconduct suspicions

The former employee was head of the central purchasing department of a company. Over the course of three years, he (among other things) invited people to meals at the employer’s expense without official reason, made inaccurate claims for expenses, incurred costs for private travel and hotels, and went to FC Bayern Munich Champions League matches with external parties. The employer subsequently received anonymous reports regarding compliance violations and improper conduct towards female employees of a “purchasing manager” (i.e. the former employee). The employer’s Independent Allegation Management Committee considered the allegations and then engaged a specialist law firm to conduct an internal investigation.

Based on the law firm’s investigation report, the employer terminated the employment relationship on the basis of a breach of the ban on bribes, the charging of private expenses and multiple expense fraud by the employee. During the dismissal protection action (Kündigungsschutzklage) by the employee, the employer counter-claimed, in addition to other damages claims, for reimbursement of the costs of the investigation undertaken by the specialist law firm.

BAG: Although not available in the instant case, reimbursement is generally possible

The first instance Labour Court dismissed the employer’s claim for reimbursement of the investigation costs. On appeal, the Regional Labour Court ordered the employee to pay these investigation costs, limited to the amount incurred until the notice of termination of employment. However, the subsequent appeal by the employee to the BAG was successful. In its judgment, the BAG set out the requirements for a reimbursement claim (which is not prevented by the special German labour law cost compensation provision, sec. 12a Labour Court Act, which provides that legal counsel costs cannot be reimbursed):

  • The employer engages a specialist law firm based on a then-existing concrete (high probability) suspicion of a substantial misconduct (which would allow a notice of termination).
  • It is established that the employee has in fact intentionally breached his contractual obligations.
  • The investigative measures taken are those that a reasonable, economically-minded employer would have taken and considered not only expedient, but also necessary in order to eliminate disruption or prevent damage to the business.
  • The reimbursement of costs that are higher than would have been incurred had the employer conducted its own investigations is only permissible if the employer could not reasonably have conducted its own investigations.

In the instant case, the employer had not shown that the incurred costs were necessary. It had not clearly shown what specific activities had been carried out when, and why these had given rise to a strong suspicion of wrongdoing by the employee.

Employers should consider potential reimbursement from the outset of an investigation

After a number of decisions by the BAG on the reimbursement of costs for private investigators, the BAG for the first time ruled on the internal investigation costs of specialist law firms. Despite the dismissal of this case, the decision sets out important standards for the conditions under which employers can claim repayment from their employees. The key takeaway for companies from the BAG’s decision is that they need to consider the above requirements for reimbursement before deciding to commission such an investigation, to determine its scope and to document its course and results. Employers should analyse on a case-by-case basis:

  • whether they would reasonably be able to conduct the investigation themselves;
  • if not, whether at the time a law firm is engaged, the concrete suspicion of a substantial misconduct exists (and would be a sufficient reason for a notice of termination if proven);
  • the necessary scope of the investigation; and
  • which investigative measure taken by the law firm corresponds to which suspicion.

Together with their legal advisers, employers should then take care to document each specific investigative measure, its content, point in time, duration and specific purpose or relation to a concrete suspicion. The case at hand displays that a retrospective reconstruction of all these circumstances is difficult and could hinder a successful reimbursement claim.

While the threshold for substantiation is high, the general thrust of the decision is welcome news for companies, especially since it has become increasingly important for companies to conduct internal investigations into wrongdoing by employees in order to reduce potential administrative fines against the company itself.