Severance payment in case of unfair dismissal: Calculation of profit obtained with stock options
The Labour Chamber of the Spanish Supreme Court determined early this decade that the profit obtained from the exercise of stock options should be considered as part of an employee’s remuneration for the services provided in the company and, therefore, that it should be taken into account when calculating the severance package in cases of unfair dismissal. However, the regional Superior Courts of Justice have had given no firm direction on exactly what part of this profit should be included as part of the remuneration of the 12 months prior to the dismissal, and have come up with several different formulae, some of which are extremely sophisticated.
In this Labour Chamber case, and for the first time, our Supreme Court has had the opportunity to establish a definitive criteria. It has declared that the profit obtained (i.e. the difference between the share’s market value at the time when the option is exercised and the price paid by the employee) must be distributed proportionally for the period between when the stock option was granted and when it is exercised by the employee, which is, effectively, the period of service that is being remunerated by the company.
Effect on employers
This ruling brings legal certainty when calculating severance packages and avoids the latest practice of grossing up the remuneration when the employee envisages that the relationship may be terminated shortly.
Judgment of the Labour Chamber of the Supreme Court of 3 June 2008
Directors’ remuneration: Companies may remunerate members of governing bodies through a senior executive employment contract
Pursuant to Spanish commercial legislation, members of the governing bodies of a company can only be remunerated for the services provided in their role when the company’s articles of association expressly allow for it. As a result, to avoid amending the bylaws, companies offer their directors senior executive agreements to grant them compensation for duties performed as a member of a governing body.
In this Labour Chamber case the Supreme Court determined, once again, that the remuneration agreed in a senior executive employment contract is only valid if the duties and functions assigned to such director exceed those pertaining to directors, which did not occur in the case concerned.
Notwithstanding the above, to the extent that the company only had two different partners (the director and another person), and the senior executive’s remuneration had been agreed for several years in the General Meeting, the remuneration had been tacitly accepted as normal.
As a result, the Supreme Court decided that the other shareholder’s claim that director’s remuneration shall be declared null and void goes against the principle of good faith and, therefore, that the provisions contained in commercial legislation cannot apply in the present case.
Effect on employers
In view of the Civil Chamber and the Labour Chamber’s latest rulings on similar cases, it seems that companies with a sole, or very few, shareholder/s may remunerate their directors through a senior executive employment without the need to amend their articles of association, since it is understood that such remuneration is accepted by the owners of the company and does not contravene any of their rights.
Judgment of the Labour Chamber of the Supreme Court of 29 May 2008
Unfair dismissal: The Company condemned in the appeal, which was not condemned in the first instance, shall pay salaries accrued during the judicial proceedings
The Statute of Workers establishes that if an employer does not deposit the severance package for unfair dismissal with 48 hours of the employment terminating, and such dismissal is then declared unfair by the labour courts, the employee will be entitled to the salaries accrued until the “ruling that declares the unfairness of the dismissal” is notified to him/her (unless the company opts to reinstate the employee in his/her former position).
In this Supreme Court case, the employee filed a claim for unfair dismissal against two companies. One of them was ruled against in the first instance. However, the labour court’s decision was appealed and the regional Superior Court found in favour of that Company and instead ruled against the other company for unfair dismissal. The Company was ordered to pay the employee salary accrued from the date of the dismissal until the second ruling was notified to him. The Supreme Court ratified this decision but established that the legal provision whereby the Administration must pay for those salaries that exceed 60 days (as compensation for the damages such a delay has caused to the employer finally ruled against) applied.
Effect on employers
The 60 days run from the date the claim is filed by the dismissed employee and do not take into account any delays caused by the parties. Consequently, if an employer is ruled against for the first time in the second instance, it will almost surely end up paying more than 60 days of salary.
Judgement of the Supreme Court of 26 February 2008