Carrying out investigations to determine violations of compliance rules can cause considerable costs for companies. In a recent decision, the German Federal Labor Court (BAG, 29.4.2021 – ref. 8 AZR 276/20) has now clarified the circumstances in which an employee must bear the costs of investigations in connection with allegations of breach of compliance rules by that employee.

Compliance violations by the employee

The plaintiff, a former employee of the defendant company at management level, had, among other things, invited people to dinner and attended several Champions League football matches at the expense of the defendant without official agreement. As an executive, he had an annual gross salary of € 450,000. After the employer received several anonymous reports about possible compliance violations, the employer instructed a law firm to investigate. After the law firm submitted the investigation report, the employer terminated the employment relationship without notice, alternatively with due cause, due to a violation of the ban on accepting bribes, billing of private expenses at the expense of the defendant and multiple expense fraud.

Action for protection against dismissal unsuccessful

The plaintiff filed an action against the dismissal, which was dismissed. However, the employer incurred a bill of € 209,678.69 and so issued a counterclaim for reimbursement of the costs of the investigation charged by the law firm, arguing that the plaintiff had to reimburse these costs in accordance with the principles established by the Federal Labor Court for the reimbursement of investigatory costs. The Labor Court rejected the claim, but the Baden-Württemberg Higher Labor Court awarded the employer € 66,500 to be reimbursed by the plaintiff. It held that the employer could demand reimbursement of the costs that it had incurred as a result of the work of the law firm up until the notice of termination of employment was issued.

Costs reimbursable in principle

The plaintiff employee appealed against this award and was successful. The court held that an employer can in principle demand that the employee reimburse the necessary costs incurred by the work of a specialized law firm, provided that the law firm was instructed to investigate the employee on the basis of a concrete suspicion of significant misconduct and the employee is convicted of a serious intentional breach of contractual obligations. Where there is a concrete suspicion of substantial misconduct on the part of the employee, the expenses of the injured party necessary to avert disadvantage to the defendant can also be part of the damage to be compensated pursuant to Section 249 of the German Civil Code. The limit of the obligation to compensate is determined by what a reasonable, economically-minded person would have done, not only as expedient but as necessary according to the circumstances of the case to eliminate the disruption or to prevent the damage. The provision of Section 12a (1) sentence 1 German Labour Court Law by which the opposing party’s legal fees are not reimbursed in the first instance does not apply in such a case. However, notwithstanding the fact that reimbursement can be sought, in the present case, the defendant employer had not sufficiently demonstrated that the costs it claimed were necessary. As a result, the employee could not be obliged to reimburse the costs.

Conclusion

This decision has now clarified that investigation costs incurred by legal firms can be reimbursed if there is a concrete suspicion of a crime. However, the employer must provide sufficient evidence as to which specific activities or investigations were carried out by the instructed law firm as a result of the concrete suspicion against the plaintiff.

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