Member Article

The question raised in the case was whether a previously concluded agreement on salary cuts could be set aside in the event of the employer's bankruptcy to the effect that an employee could receive salary from the Employees' Guarantee Fund as if no agreement on salary cuts had been entered into between the employer and the employee some months before the employer went bankrupt.

Several months before the bankruptcy, the employee - like the other employees in the company - had been confronted with the choice either to sign an addendum to the employment contract on a salary cut or alternatively to be dismissed.

The need for an agreement on salary cuts was due to the fact that the company at the time in question was in financial difficulties and therefore wanted to enter into these agreements with the employees in order to avoid bankruptcy. The employee chose to sign the
agreement.

On this background, the trade union claimed that maintaining the agreement on salary cuts after the bankruptcy of the employer would be in contravention of Section 36 of the Danish Contracts Act and/or would constitute false assumptions/breach of implied conditions. During the city court hearing, the employee and several colleagues had stated that they had been told by a representative of the
employer at the meeting where they were confronted with the choice between a dismissal or a salary cut that in the event of bankruptcy the agreement on salary cuts would become void and that consequently the employees would receive their "normal salary" from the Employees' Guarantee Fund.

With reference to this promise from the employer, the union claimed that the Employees' Guarantee Fund had to pay the "normal salary" and not the reduced salary fixed in the agreement on salary cuts.

However, according to the Danish High Court, the employee's claim of unenforceability of the salary cut was based on an agreement between the employee and the employer that agreed salary cuts - which were effective for the parties involved - would become void in the event of bankruptcy, and the Court found that such agreement between an employee and an employer could not be maintained against the bankruptcy estate as it would be inconsistent with the principle of equality of bankruptcy law and the statutory order of priority.

Consequently, the High Court found that the false assumptions/breach of implied conditions and/or breach
of Section 36 of the Danish Contracts Act asserted by the union did not imply that in relation to the bankruptcy estate and the Employees' Guarantee Fund the employee could claim to be placed in a position as if the salary cuts had never been agreed upon.

Moreover, the High Court agreed with the City Court that the mandatory rule set forth in Section 2 of the Danish Salaried Employees Act that a dismissal (and material changes in the employment conditions) must take place with prior notice as stipulated in the
Act does not preclude an agreement between an employer and an employee on salary cuts entering into force with immediate effect, as in the present case, without the terms of notice stipulated in Section 2 of the Act.

The judgment shows that - irrespective of the provisions set forth in the Danish Salaried Employees Act stipulating that a
dismissal and material changes of employment conditions must be notified in advance with the terms of notice set forth in the Act - it is in general possible for an employer to enter into agreements on salary cuts with the employees if the company is in financial difficulties. Such agreement will also be effective to the employees in the event of the employer's subsequent bankruptcy. This case is a test case for a number of similar cases on salary cuts agreed upon before bankruptcy.

This was established by judgment of 6 September 2012
of the Danish Eastern High Court

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