Termination for breach of duty and poor performance

Introduction
Termination for breach of contractual duty
Termination for poor performance
Comment


Introduction

The Latin proverb "do, ut des" ("I give, so you give") applies to employment relationships (as it does to all contractual relationships) – the employee provides services in exchange for payment. The performance of services and the payment of salary therefore constitute primary contractual duties.

It should therefore be clear that a contract can be terminated in cases of imbalance such as the non-performance or poor performance of an employee. However, while in situations where an employee has not been paid it is usually easy to terminate the contract, German labour law renders it difficult for an employer to terminate successfully the contract of a so-called 'poor performer'. Given that an employee is bound only to provide his or her labour, rather than to achieve a particular outcome, the question of what can be considered 'poor performance' arises.

This problem arises only where the Protection Against Dismissal Act applies – that is, where the employer regularly employs more than 10 employees and the concrete employment relationship has lasted for more than six months. In these cases, in order to be legally effective, a termination must be 'socially justified' pursuant to Section I of the act. Social justification can be based on certain specific reasons. For example, social justification can be related to the conduct of the employee which involves a breach of his or her contractual (primary or secondary) duty.

Although by underperforming an employee breaches his or her primary contractual duty – generally considered to be social justification for termination – the labour courts generally make it very difficult to terminate the employment relationship on this basis. Therefore, many German companies cite other reasons to justify termination, often citing either the misconduct of the employee or urgent operational requirements.

Termination for breach of contractual duty

Of course, the primary contractual duty to perform the services agreed upon by the parties can be breached not only by poor performance, but also by non-performance. Non-performance occurs where the employee persistently refuses to work – for example, by repeatedly opposing the employer's instructions, by pretending to be incapacitated or by frequently being late.

Termination of the employment relationship can be justified only where the employee refuses to improve his or her behaviour. Therefore, a legally effective termination generally requires the employee to have previously been warned that his or her employment contract will be terminated for any further breaches of the corresponding contractual duty. Thus, when warning the employee, the employer must describe his or her misbehaviour precisely in order to allow the employee to change his or her behaviour accordingly. Neither the form of the warning nor the number of previous warnings is regulated by law. Although an oral warning should be sufficient, employers would be well advised to give a written warning to be used as evidence were the need to arise. Moreover, in cases of less severe breaches of contractual duty, the employee should issue several warnings, each after the passing of a certain period of time; three such warnings should suffice.

The breach of secondary duties may strain the employment relationship in the same way as would a breach of primary duties. Such duties need not be explicitly expressed in the contract. For example, it is self-evident that an employee must not insult or threaten his or her employer, or commit acts of violence or crimes against his or her colleagues or the employer's customers or business partners. For termination to be legally effective in such circumstances, the breach of duty need not be proven. Where it is alleged that the employee has committed a crime (eg, theft of the employer's property), the employer will usually choose to base the termination on grounds of suspicion only. Pursuant to German law, such termination is legally effective where:

• based on objective facts, strong suspicions of the crime exist;
• the suspicion itself might destroy mutual trust – a fundamental element of the employment relationship; and
• the employer has made all reasonable efforts to clarify the facts and has conducted a hearing to hear the employee's arguments.

The relevant case law on termination for breach of duties consists of decisions made on a case-by-case basis and must therefore be treated cautiously with regard to precedential impact. In all cases the labour courts must attempt to balance the interests of the parties and therefore the outcome cannot be predicted.

Termination for poor performance

In order to ascertain whether an employee is performing poorly, comparison with the level of performance to which the employee is contractually obliged is called for. In most cases, the quality and quantity of performance are not (precisely) described in the employment contract, but rather determined by the employer's exertion of directive authority. Moreover, the employee owes only his or her labour and is not obliged to achieve a certain outcome.

Pursuant to a Federal Labour Court ruling, the employee "must do what he is supposed to do, and do it as well as he can". The weakness of this definition is that it is difficult for an employer to determine whether an employee has the ability to work more efficiently. Moreover, the fact that an employee's performance is below average need not imply that he or she is deliberately failing to tap his or her full potential. Within any comparison group, it is inevitable that one member will have the poorest performance. Furthermore, all such judgments are relative, since in a group of high performers even an efficient employee's performance may be below average. The court is aware of these problems and applies so-called 'graded burden of proof' principles:

• The employer must present objective facts which indicate that the employee has performed significantly below the average performance. Pursuant to the Federal Labour Court, this negative deviation from the average performance must be long term and the employee concerned must have achieved less than one-third of the average performance within the comparison group. This requirement appears to be easily measurable in relation to jobs which require only minimal education or training (eg, piece workers), where the relevant quantity of work is measurable. However, where more complex services are involved and the quality of the work is decisive (eg, executive consultants, engineers and creative talent), demonstrating such a level of underperformance is almost impossible. Such cases lack a reliable basis for comparing employees. The employer may also face practical difficulties when determining the composition of the relevant comparison group, which should consist of employees who perform the same or at least similar tasks and are similarly experienced.
• The onus is on the employee to dispute the value of the employer's figures and to provide details in support of his or her position. Possible justifications for poor performance include illness and insufficient training. The employee might also challenge the composition of the comparison group by stating that its members have greater experience.

Poor performance may result either from the employee's unwillingness to perform or from his or her personal inability to perform efficiently. Depending on the cause of the poor performance, the social justification of a termination is based on specific reasons relating to the conduct or character of the employee. Termination based on an employee's character will be justified only where the contractual relationship has been disturbed so severely and enduringly as to render its continuation unacceptable for the employer.

Naturally, an employee may be both unwilling and unable to perform well. However, the distinction between unwillingness and inability is also crucial in relation to the requirement to warn the employee before giving notice of termination. Whereas in the case of the employee's personal inability to work more efficiently, such a warning letter is not required (since it cannot affect the employee's performance), such a warning letter is indispensable in cases in which the employee is merely unwilling to perform efficiently. Employers should always choose the safer path and give a warning as a precaution.

However, where there is a possibility to remedy to an employee's poor performance, the application of the ultima ratio (last option) doctrine renders a termination legally ineffective: rather, the employer is obliged to choose the most moderate of several available measures. If a vacant position exists for which the employee meets or might meet the lower requirements and he or she can be relocated pursuant to his or her employment contract, the employer must make use of its directive authority accordingly. However, where such a relocation is excluded, the employer might be obliged to give notice of dismissal with the option of altered conditions of employment, if there is a chance of a remedy concerning another vacant position or a position which can be rendered vacant by making use of this directive authority.

Even where all these requirements are met, the employee's interests in the preservation of the employment relationship might prevail over the interests of the employer in terminating an underperforming employee; the application of the ultima ratio doctrine usually decides the outcome of labour lawsuits, but is incalculable. One criterion is the undisturbed course of the contractual relationship. In this context, the fact that an employee has worked with the firm for several years without having been criticised for poor performance might become relevant.

Comment

In light of the difficulty in effectively terminating an employment contract on grounds of poor performance, in general, employers would be well advised, where possible, to terminate for other reasons pertaining to the conduct of the employee or for urgent operational requirements.

It is often impossible to prove that an employee has performed sufficiently poorly to justify termination, unless the employee's work results are measured in terms of quantity rather than quality. In certain white-collar industries it is unlikely to be possible to provide sufficient objective facts to substantiate poor performance. However, one possible strategy for employers might be to set precise and achievable targets to make work results more measurable and comparable, although formulating targets for this purpose may prove to be particularly challenging.

For further information on this topic please contact Marion Bernhardt, Bjoern Gaul, Reiner Kurschat or Bernd Roock at CMS Hasche Sigle by telephone (+49 30 20360 1406), fax (+49 30 20360 2000) or email (marion.bernhardt@cms-hs.com, bjoern.gaul@cms-hs.com, reiner.kurschat@cms-hs.com or bernd.roock@cms-hs.com).