Nullity of the agreement pursuant to which a senior manager waived his right to receive compensation upon the unilateral termination of the employment contract by the Company

Written on 5 Nov 2014

The judgment passed by the Supreme Court on 22 April 2014 deems null and void the clause of a senior executive employment contract pursuant to which a senior manager excluded any compensation in the event of unilateral termination by the Company.

Through the resolution dated 22 April 2014, the Supreme Court deems null and void an agreement reached under a senior manager employment contract pursuant to which the senior manager agreed to waive the compensation payable upon the unilateral termination of the employment by the Company.

Royal Decree 1382/1985 regulates the special employment relationship of senior management personnel. Unlike common employment legislation, this special regulation grants to the will of the contracting parties a wide margin of autonomy and, therefore, to the agreements reached by the company and the senior manager to regulate their relationship.

One of the most remarkable features of this regulation is that it sets out the employer’s faculty to unilaterally withdraw from the employment contract without the need of giving fair cause for termination. For this event of withdrawal, Royal Decree 1382/1985 establishes that the senior manager will be entitled to receive the compensation agreed in his employment contract and, only in the absence of such agreement, a compensation equal to 7 days of salary per year of service, with a maximum of 6 monthly payments.

According to a literal interpretation of the rule, it was not uncommon that in the exercise of the parties’ free will, the parties expressly agree to exclude any compensation in the event of unilateral withdrawal by the company. Given the existence of an express agreement between the parties, it was understood that the subsidiary compensation foreseen by the law would not be applicable.

However, the Supreme Court has ruled that the agreement excluding the compensation is contrary to the law and, therefore, must be deemed to be null and void. According to the Supreme Court’s arguments, Royal Decree 1382/1985 grants the senior manager the unconditional right to receive compensation if the contract is unilaterally terminated by the Company. In other words, the Supreme Court considers that, in the absence of an agreement between the parties, the compensation legally established is not subsidiary; on the contrary, it constitutes a mandatory and non-waivable minimum that the parties can neither exclude nor limit.

The nullity of these clauses entails their ineffectiveness and thus, the applicability of the statutory compensation established by the Royal Decree 1382/1985.