Company hires law firm to conduct internal investigation
This case concerns the former head of a company’s central purchasing department. After the company had received whistleblowing reports regarding alleged compliance violations by this employee, the company hired a law firm to conduct an internal investigation. The investigation related to this employee and several others and involved costs of approx. EUR 210,000, based on an hourly legal fee of EUR 350. The investigation was able to confirm the initial suspicions of expense and accounting fraud by the defendant. The company terminated the defendant's employment and sought damages from him for the costs of the investigation.
Judgment on recoverability of internal investigation costs from employee
The Federal Labour Law Court (Bundesarbeitsgericht), Germany’s highest court for employment law matters, confirmed the appeal court’s position that an employer may, in principle, recover internal investigation costs from an employee who has been proven guilty of serious misconduct. However, the court subjected any such claim to various prerequisites:
- a concrete suspicion of serious misconduct by the relevant employee as the trigger of the internal investigation. In contrast, suspicions against the employee that only arise in the course of an internal investigation do not justify any recourse for costs of the investigation that have already been incurred prior to that point in time;
- proof of an intentional and serious breach of a significant employment-related contractual duty, or even criminal behaviour, by the relevant employee;
- necessity and general reasonableness of the investigation, especially with regard to its scope and costs and the need to involve an external law firm (eg lack of adequate internal resources);
- the investigation must be aimed at remedying compliance violations or preventing further damage;
- reimbursement claim will be limited to costs that are incurred before the employee's dismissal; and
- ability to demonstrate reasons for initiating the investigation and to attribute certain investigative acts to specific suspicious facts.
In the case at hand, the court took the view that the company had not adequately shown the necessity of the investigation costs. The court held that the company failed to demonstrate when and on which basis the investigative measures had been carried out. In particular, the court stated that the company had not been able to attribute certain investigative measures to specific suspicions. The court also found that a precise distinction between the costs of fact-finding measures and legal advice was missing.
Impact of decision
- This decision will likely lead to additional documentation both at the outset and during internal investigations in Germany. A company can only expect to recover investigation costs if all of the above mentioned points are properly documented. However, the decision does not set out what exactly has to be documented and how detailed such documentation must be; the court’s guidance is rather broad.
- While there was a clear suspicion against a specific employee in the court’s case, we often see cases where the initial suspicion is not necessarily already focused on a certain individual. The decision suggests that recourse will only be possible in relation to costs incurred after the suspicion is focused on a certain individual. Hence, the company would be well advised to document what measures were taken following the initial suspicion and what then led the investigation to focus on a certain employee.
- Also, it is often difficult in practice to establish conclusive proof of the wrongdoing of a specific individual that meets the evidentiary requirements of court proceedings. At the same time, the company might not even have an interest in continuing the investigation once the company established the relevant facts to take remedial actions necessary to prevent the relevant misconduct from occurring again.
- Furthermore, the court appeared to limit recoverable expenses to those up to the point where the company terminated the employment relationship. Therefore, the decision could be interpreted in such a way that an employee may evade a recourse claim by resigning before the investigation establishes the necessary proof. From our point of view, this does not seem convincing. The termination of the employment relationship does not necessarily affect the need for the company to establish the facts necessary to strengthen the compliance framework.
Companies doing business in Germany should keep in mind the requirements for potentially recovering costs from their employees when planning and carrying out internal investigations. Carefully documenting the suspicious facts, the purpose of the investigation and the reasons for retaining an external law firm, as well as the timing and nature of the individual investigative measures, will strengthen a potential reimbursement claim. Such documentation will have to be suitable for use in court proceedings relating to an unfair dismissal claim filed by the employee.
Companies also have to consider the timing of a dismissal. There will be a certain tension between the statutory two-week deadline for terminating an employee for cause and the Federal Labour Law Court’s view that reimbursement claims are limited to those costs incurred prior to the employee's dismissal. It is therefore essential to plan and conduct internal investigations with specialised legal teams that combine know-how of investigations with employment law and civil liability expertise.
1 29 April 2021 (case no. 8 AZR 276/20)