The extent of the duty of loyalty in relation to a fair summarily dismissal under Danish law and a comparison to Swedish and Finnish law

30 May 2017

Soeren Narv Pedersen, Mia Boesen

All employees are automatically obliged by the "duty of loyalty" (in Danish: "loyalitetspligten") during the employment relationship. There is no unequivocal legal definition for the duty of loyalty under Danish law, but it - obviously - involves that the employee is required to act and behave in the overall interest of the employer while he/she is employed. This among other things entails, that the employee may not speak ill about the employer in public and must oblige to the company's internal rules etc.

However, one of the main points in the duty of loyalty is the employee's obligation not to start or be involved in competing business during the employment. This is also the area where most cases arise in relation to the duty of loyalty.

The duty of loyalty is as a main rule closely connected with the employer's obligation to pay salary. Thus, the employee will be obliged by the duty of loyalty as long as the employer pays salary to him/her. Hence, this is also the case during a notice period regardless of whether the employee is required to work or put on garden leave and applies even if no restrictive covenants have been imposed.

The question is, however, whether this main rule can be deviated from when an employee is fairly summarily dismissed due to a breach of his/her obligations? i.e. whether the employee will continue to be obliged by the duty of loyalty until the expiry of the agreed notice if he/she does not receives salary during the notice period?

Danish labour law experts are divided on this matter.

One view is that if there is no duty of loyalty in this situation, the employee can breach herself/himself to a better legal position than otherwise. In other words, the employee can provoke a situation where the employer summarily dismisses him/her with the result that the employee is no longer bound by the duty of loyalty. On this basis, this group believes that the employee will continue to be bound by the duty of loyalty during the agreed notice period if he/she is fairly summarily dismissed.

On the other side, it is stated that this point of view does not have any legal basis. The only case law that, to some extent, deals with this matter – and which the first group refers to – is the judgment U1973.319/2H. According to this group the judgment, however, only deals with the question on whether a non-competition clause may be upheld when an employee is summarily dismissed and thus cannot be interpreted to also cover the more broadly duty of loyalty.

Thus, the overall view is that it will be in conflict with the principles under the law of obligations if one party is released from its duties (i.e. the employer's duty to pay salary) while to other one is not (i.e. the employee's duty to stay loyal). The absolute main rule is that when a contract is cancelled with immediate effect both parties are released from their duties under the contract. Just because one party breaches the contract - and this is the reason for the cancellation - this does not mean that the breaching party continues to be obliged by its duties after the cancellation.

Conclusion:

From Bird & Bird Denmark's point of view the latter view must most likely be concurred with, i.e. that the duty of loyalty no longer applies when the employee is fairly summarily dismissed. As this will be a clear breach of the employee's legal rights, this must require a clear legal basis which there is not at the moment and which U1973.319/2H does not provide.

This means that the employee will be fully entitled to start competing business when she/he is summarily dismissed and thus no longer receives salary from the employer. This is, however, of course unless the employee is obliged by a non-competition clause which oblige him/her after the fair summarily dismissal. Thus, the employer can just secure himself by obliging the employee by a non-competition clause.

It also means that employers always should include the fact that the loyalty obligation ceases when summarily dismissing an employee into the decision-making process.

Sweden

In Sweden, both the employer and the employee are bound by a duty of loyalty throughout the employment. As a general rule, once the employment relationship comes to an end, so does the duty of loyalty. However, (certain aspects of the) the duty of loyalty, can sometimes apply after the employment ceased, e.g. in respect of trade secrets, or if a post-employment restrictive covenant and/or a post-employment confidentiality undertaking is included in the employment agreement.

Finland

Also the Finnish employment legislation poses a duty of loyalty for both parties and for the whole lifecycle of employment. Consequently, it is also applied during the garden leave and notice period. When the employment terminates, the duty of loyalty generally no longer applies to neither of the parties, except with regard certain regulations on confidential information etc. or unless otherwise agreed e.g. on post-employment non-competition obligation. In general, there are no sanctions related to violating the duty of loyalty as such. However, the employee or the employer may be liable for covering the loss arising from dereliction of the said duty thus caused to other party.

In general, employee's duty of loyalty has been given more significance in Finland compared to employer's duty of loyalty. However, the Supreme Court of Finland has recently ruled in its decision KKO 2016:13 that the employer may also be liable for the loss caused to employee from neglecting its duty of loyalty. As a result of this ruling, the significance of employer's duty of loyalty has increased. Before this ruling, employer's duty of loyalty was seen only on more general level as a directional principle.

Authors

Mia Boesen

Junior Associate
Denmark

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