In a recent ruling, the European Court of Justice has established that the rules of the Danish Salaried Employees Act concerning severance pay constitute unfair age discrimination. The reason is that salaried employees entitled to receive payments from a pension scheme financed by the employer are not entitled to receive severance pay. The ruling may have retroactive effects.

Section 2a (3) of the Danish Salaried Employees Act

Under section 2a (1) of the Salaried Employees Act ("the Act"), a salaried employee who is dismissed after having been continuously employed with the same company for 12, 15 or 18 years is entitled to severance pay of 1, 2 or 3 months' salary, respectively.

Under section 2a (3) of the Act, the right to severance pay lapses if the salaried employee receives retirement pension from the employer at the effective date of termination, and if the salaried employee has entered into the pension scheme before having reached the age of 50. The purpose of this provision is to compensate the employee for the transfer to new employment.

At the same time, the Act also provides that an employee is not entitled to severance pay if he is to receive state pension at the effective date of termination.

Background

The case concerned a salaried employee at the age of 63 who had been dismissed after approx. 28 years of employment. The employee was entitled to payments from a pension scheme established by the employer before the employee had reached the age of 50. However, the employee did not want to receive pension, and he therefore registered with the Employment Service.

On behalf of the employee, the Danish Society of Engineers raised a claim for severance pay according to the Act. It was the opinion of the Society that the Act was contrary to the prohibition against age discrimination appearing from the EC Directive implemented in the Non-Discrimination Act.

The employer dismissed the claim, and the Society therefore commenced legal proceedings. In this connection, questions were asked to the European Court of Justice as to whether the Act was contrary to the prohibition against discrimination due to age.

Findings

The European Court of Justice found that section 2a of the Act constitutes unequal treatment due to age because the rules affect the older employees as it is not possible to receive pension until the employee has reached a certain age.

Based on an EC Directive prohibiting discrimination due to age, the Court assessed whether the unequal treatment was objective and reasonably justified by a legitimate purpose and whether the unequal treatment was necessary in order to serve the purpose.

The Danish government stated that the rules of the Act ensure that the employer avoids paying both pension contribution and severance pay.

To this, the Court stated that the rules were to be considered objective and reasonably justified.

The Court found, however, that the rule constitutes a too extensive measure as older employees are prevented from the right to severance pay and thereby compensation in the event of new employment if they wish to continue working.

The Court therefore found that the rules of the Act concerning non-payment of severance pay were contrary to the prohibition against age discrimination.

Consequences

As a consequence of the ruling, it is no longer possible to avoid paying severance pay to employees entitled to payments from a pension scheme at the effective date of termination.

At the same time, the ruling may also have the effect that employees entitled to state pension at the effective date of termination are also entitled to severance pay.

Employees dismissed prior to the ruling, who have not received severance pay, may claim severance pay at this stage. However, in general, such claims are time-barred if they fell due more than 5 years ago.

The content of this Newsletter is not, and should not replace, legal advice.

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Finn Schwarz

Managing Partner

Suzanne de fine Parsberg

Paralegal