Well-structured internal investigations pay off!
At the very least, necessary costs of investigations are to be paid by the employee who caused them. This was confirmed by the German Federal Labor Court (Bundesarbeitsgericht, “BAG“) a few days ago.
According to the ruling of the BAG dated April 29, 2021 (Case No.: 8 AZR 276/20), in the event of compliance violations caused by an employee, this employee must reimburse the costs incurred by a specialized law firm engaged to conduct the internal investigation. In addition to the existence of a concrete suspicion of criminal acts or breaches of duty against the employee that is ultimately confirmed by the investigation, the employer must sufficiently demonstrate the necessity of the costs incurred when asserting claims for damages.
Facts and course of proceedings
In the specific case, the BAG had to decide on a claim for damages for reimbursement of the employer’s investigation costs. The ruling was based on the following facts:
A former employee had most recently been employed as head of the central purchasing department and member of the management level and earned an annual gross income of approximately EUR 450,000. Various anonymous whistleblower reports had been filed against the employee, alleging him primerly of expense and accounting fraud. The responsible committee at the employer decided to engage an external law firm to investigate the allegations. The investigation report later submitted by the law firm confirmed the allegations and ultimately led to the termination of the employee without notice. The employee’s subsequent dismissal protection suit was unsuccessful. By way of a counterclaim, the employer sought reimbursement from the employee for the costs incurred by the investigation and sued for damages.
After the labor court initially rejected the claim for damages with reference to Section 12a (1) sentence 1 ArbGG (German Labor Court Act), the regional labor court of Baden-Württemberg (Landesarbeitsgericht Baden-Württemberg, “LAG BW“) granted the employer the right for reimbursement of the investigation costs in its ruling dated April 21, 2020 (Case No.: 19 Sa 46/19) – but limited the obligation to reimburse costs to all costs incurred up to the termination of the employee.
The employee appealed against the decision of the LAG BW, appeal was granted by the BAG.
The BAG has confirmed the view of the LAG BW that an employer is entitled to reimbursement of the costs incurred in connection with the engagement of a specialized law firm for conducting the internal investigation. Section 12a (1) sentence 1 ArbGG, which as a special labor law provision excludes not only a procedural but also a material claim for reimbursement of costs, would not contradict this.
With reference to its own jurisdiction from 2010 concerning the reimbursement of detective costs, the BAG explains that an employer can demand reimbursement from the employee for the necessary costs incurred by the action of an external law firm. As a prerequisite, the employer would have to engage the law firm to investigate the allegations on a concrete suspicion of significant misconduct by the employee, and based on that substantive serious intentional breach of contractual obligations in case of a concrete suspicion of substantial misconduct by the employee, any expenses necessary to avert imminent disadvantages shall form part of the damage to be compensated by the employee pursuant to Section 249 BGB (German Civil Code).
In this context, the obligation to pay compensation is limited to what a a reasonable, economically minded person under the circumstances would have done to eliminate the disturbance or to prevent the damage not only reasonably, but necessarily. To demonstrate this necessity, substantiated explanations are required as to which specific investigative activities based on which concrete suspicion against the employee were carried out when and to what temporal extent. This substantiated explanation was ultimately lacking in the case at issue.
Conclusion and Consequences for Internal Investigations
The BAG’s ruling is of special relevance for companies: On the one hand, the ruling clarifies that, in the event of demonstrably intentional conduct on part of an employee, the costs incurred while investigating and clarifying the misconduct must generally be borne and reimbursed by that employee. At the same time, however, the company’s demonstration of the necessity of these costs is linked to specific prerequisites.
In practice, this means that companies should continue to pay utmost attention to conduct a well-structured internal investigation. An investigation that is only rudimentarily documented, without any clearly defined investigative objectives and without a detailed comprehensible approach, increases the risk for the company concerned of having to bear the investigation costs itself. With the imminent implementation of the European directive on the Protection of Whistleblowers in Germany, more and more companies will have to deal with the lawfully and expedient handling and investigation of alleged misconduct in the near future. Especially smaller companies with less experience in investigations are well advised to consult a specialized law firm at an early stage. The principle of necessity is well known and proven there and is used as a guideline from the very beginning, for example in the development and coordination of investigation plans.
Pohlmann & Company is a law and consulting firm which is specialized, among other things, in internal investigations and has extensive, as well as international experience in this area. In the past, we have assisted many clients by developing reliable investigation plans and conducting thereof resulting investigation measures in a goal-oriented manner.