Wrongful compliance system can seriously backfire for German companies

11 July 2013

Roland Falder

Introduction

A new decision of the Federal Labour Court has highlighted the risks of wrongful compliance system for German companies. Compliance is a major issue for many German companies not least since the spectacular Siemens case, where an illegal funds were used to bribe foreign officials and business partners in order to acquire new business. Therefore many German companies, especially those with international connections, have introduced a compliance system to cope with risks associated with wrongful deeds of employees.

Among the risks for companies related to non-compliance are penalty payments, the skimming of profits, damage claims of shareholders and business partners, internal and external examinations, the removal from public procurement lists and a serious damage to the companies´ reputation in the business world.

Compliance policy alone not sufficient

A recent decision of the Federal Labour Court has highlighted that the mere introduction of a compliance system is not sufficient.

The background of the case was the dismissal of an employee, who was charged with a serious failure to comply with the existing compliance system of the company. The employee in question had – against an express stipulation of the compliance policy – created expense documents, which served as the basis for payments of EUR 23, 700.00 in cash to unknown recipients. After an internal revision found out the employee was dismissed. Subsequently the employee challenged his termination in the Labour Court and argued that his superiors were aware of his action and did not step in to stop him.

The Federal Labour Court in its decision first of all stated, that bribery (as supposed to have happened in this case), generally it is a valid reason for dismissal for good cause (with immediate effect). It did – however – further state, that an evaluation of interests must be conducted, in which a major issue is, whether the employer initiated or tolerated the non-compliance of the employee (despite the fact, that the behavior of the employee was expressly forbidden by the policy). Therefore the Federal Labour Court held the dismissal invalid.

Closing remark

The decision of the Federal Labour Court clearly shows, that it is not sufficient just to have an existing compliance policy, but that such policy must be clearly worded, made known to all employees and most importantly enacted by the employer by clearly ordering superiors to observe the policy in their daily dealings with employees.

In case a policy is not strictly followed in company practice it will not only not be possible to dismiss employees in case of misconduct, but it may also have all other negative consequences mentioned before (such as penalties (e. g. by the US SEC) and reputation damages).