Restructuring - a view from Croatia

What does Croatian employment law require of employers when it comes to making redundancies? It is an important question if you're a business with a presence in Croatia where, just like the rest of the world, mass redundancy exercises are commonplace as businesses restructure in an effort to survive the pandemic. We will come on to the procedure shortly, but first the background.

The first case of Covid-19 in Croatia was reported in Zagreb on 25 February 2020 when a patient who had come from Italy was tested positive. On the same day, the second case related to the first one was confirmed. In March 2020, a cluster of cases were reported in numerous Croatian cities. On 18 March the first death from the virus was confirmed.

At some point in 2020, before 23 December, the Croatian parliamentary elections were due to take placed and during April there was widespread media speculation that the election would be called earlier than originally planned, due to the uncertainty created by the pandemic. As it turned out the election did go ahead on 5 July and, as The Guardian reported at the time, Croatia’s right wing governing party Croatian Democratic Union won, giving the prime minister, Andrej Plenković, a second term in office. In celebrating the victory there was a notable absence of social distancing or mask-wearing and a lot of hugging and singing during victory celebrations by the party’s politicians and supporters and that brought widespread criticism.

As for the country’s response to the Covid outbreak, in the early days Croatia had one of the world's strictest regimes for infection control and it did work very well. So, strict measures, early detection of spread routes, prompt government reaction, extensive media coverage, and citizen cooperation have been credited for successful containment of the pandemic in Croatia in 2020.

Croatia started its vaccination programme on 27 December 2020 but as Croatia Week reported, by January it had slowed down due to problems with supply of the Pfizer vaccine. The government’s plan was then, and remains, to vaccinate 70% of the population, targeting the most vulnerable groups first, as in the UK. 
Fast forwarding to May 2021, as one of the most popular summer holiday destinations, Croatia has been among the first European countries to open up its coastline and allow tourists from the European Union, European Economic Area countries, the United States and beyond. All foreign travellers are being permitted entry to Croatia as long as they hold a vaccination certificate, provide a negative COVID-19 test result or prove that they have recovered from the virus.
The lockdown has, of course, affected businesses across the country and so, to help, the government has introduced various state aid measures. So, let’s hear more about those measures from inside Croatia. Dora Gaži Kovačević is a partner at our best friend firm Wolf Theiss based in Zagreb. She is an employment law specialist at the firm. 

Dora Gaži Kovačević : “During the first lockdown in March all eyes were pointed at the government. The government has indeed acted swiftly and offered state support to all companies affected by the lockdown, particularly for those businesses that had suffered a drop of turnover of more than 20%. The state measures covered costs of basic salary and were widely used in March and in April. In May, the government imposed additional restrictions on the use of state measures that included a ban on dividend and bonus payments during 2020. This led to somewhat restricted use of such measures in May. With the businesses opening up over the summer and autumn there was no extensive state support available. This however changed in December when the partial lockdown was introduced that affected mostly hospitality and tourism industry. Such affected businesses were eligible for state support. Additional aid for work under the reduced working hours due to pandemic is also available. To sum up, state measures were vital to support affected industries and companies through these challenging times.”

Notwithstanding the Croatian government’s support for businesses many have unfortunately been forced to shut down completely, or they're restructuring in an attempt to survive resulting in mass redundancies. That is when Croatia’s collective redundancy laws kick in which we can now come on to.  Earlier in the year we were due to hold a webinar on this subject, looking at a number of countries across Europe including Croatia, but because of the pandemic we had to cancel that. Nonetheless, everyone involved was keen to adapt and the result is a series of programmes we will be releasing as HR Guides, covering each of those countries, hearing from lawyers based in each one. The theme of the webinar for all countries was to set out 5 do’s and 5 don’ts when it comes to restructurings. So, let’s hear from Dora on that. 

5 Do’s:  
Dora Gaži Kovačević: “1 – First, set the restructuring plan, team and the budget. At the outset of any restructuring exercise, it is important to collect all the data and to put together a restructuring plan that will determine the scope of the restructuring process. The restructuring plan should primarily include an analysis of the grounds for restructuring indications of the work positions that will be affected by the restructuring and information on the employees being considered for dismissal. It is also important to gather relevant information regarding the involved costs in order to put together a realistic restructuring budget. employers should be aware of the so-called Golden Rule. The higher the budget, the lower the risk of employment tribunal claims. The company should also gather the team of reliable and efficient local and global experts who will provide HR legal and tax advice during the project. 2 - Define the selection pool and the selection criteria. In order to lawfully dismiss an employee in the restructuring scenario, the employer must be able to show the existence of legal reasons for dismissal. Restructuring due to business or organisational reasons, is one of the legitimate reasons for dismissal. After identifying the work positions that are no longer required, the employer needs to identify the group of employees, the so-called selection pool, who will be affected by the restructuring based on justifiable business-related reasons.

After determining the selection pool, the employer will need to evidence that each dismissal was based on objective considerations by fairly applying specific criteria to all employees within the sexual pool. certain social criteria are set out by law which the employer must apply if it employs more than 20 employees. These are the duration of the employment contract, the employees age and family support obligations. In addition, the employer has a discretionary right to apply additional selection criteria, such as performance, experience, skills, quality of work responsiveness and punctuality. Although the employer has an autonomous right to determine which of the above criteria it will give priority, it's final decision should be based on objective criteria, and it should not be influenced by its personal opinion. To the extent possible, the employer should be capable of backing up its decision with evidence. For example, personal records. 3 – Involve the employee representatives.

Before implementation of the restructuring exercise the employer should determine if employee representatives that his workers council or trade union representatives have been nominated within the company. If so, the employer should always consult with the employee representatives prior to any dismissal, and also obtain prior approval in case of dismissal of certain categories of employees. 4 – Comply with collective redundancy requirements if applicable. The collective dismissal procedure is triggered if the employer intends to terminate the employment contracts of more than 20 employees in a period of 90 days, and at least five of such employees are terminated due to business reasons. In such a scenario, apart from the general obligation to consult the employee representatives, or obtain the prior approval, the employer needs to inform the creation authorities of the restructuring process. 5 – Consider the possibility of entering into a mutual termination agreement. Entry into the mutual termination agreement represents the safest route for the employer, as it protects the employer from possible employees claims and it should therefore be considered in any restructuring exercise.”

5 Don’ts:
Dora Gaži Kovačević: “1 – First, no hiring at the redundant positions should take place just before restructuring. It is very difficult to justify termination of certain employees while onboarding the newcomers. It should therefore be made clear to everyone in the organisation that no hiring should take place on the same or similar positions that will soon be cancelled. Employers should also especially be aware of the statutory prohibition against new employment for the same working position within six months following a termination of the employee holding that position due to business reasons. What we often see in practice is this restructuring is planned and implemented at the group level, so the next few don’t are related to properly conducting such process. 2 – Local communication and representation rules should be respected. Even if the decision on restructuring and dismissal of certain employees is made at the group level, local management board is the one authorised to make local decisions, sign documents and, if necessary, issue powers of attorney. Therefore, it is important to inform the local decision makers about the process far in advance. 3 – There should not be any breach of GDPR rules in the restructuring exercise in cross border restructurings and central management of the process, we often see that the rules on the collection, processing and transfer of personal data are neglected or even completely forgotten.

That should obviously not be the case and the employer should ensure that all procedures are in place. 4 – Gather all employee information. Complete information about the employees should be gathered. It is especially important to gather all necessary information in order to assess if there are categories of protected employees, such as particularly disabled persons or pregnant women. Such employees enjoy special protection. If the restructuring is handled at the group level. such information is sometimes not available. The companies should therefore regularly update all employees’ personal files. 5 – Tax implications of entering into the employment agreements should not be neglected. As already mentioned, although entering into mutual termination agreements is the most flexible option. There are also certain drawbacks, employers tax benefits and employees’ unemployment benefits or loss, which makes the mutual termination more expensive and less attractive to both parties. And that brings us to the end. We hope that these tips were useful. Thank you for listening.”

That was Dora Gaži Kovačević who is one of our contacts at the Zagreb branch of our best friend firm Wolf Theiss. We'll close this programme by hearing more from Dora, briefly describing the firm and the services it provides.

Dora Gaži Kovačević : “Wolf Theiss is one of the leading law firms in central Eastern South Eastern Europe. We have built our reputation on a combination of local knowledge and strong international capability. We opened our first office in Vienna 60 years ago. Our team now brings together over 340 lawyers from a diverse range of backgrounds working in offices in 13 countries throughout the region. I'm sure you know that your employees are your company's greatest asset. Having the right structures in place to protect these key relationships can really prevent problems before they arise and secure the long-term future of your business. Our regional employment team with an average of 10 years of experience in the field can help you to manage your risks associated with human resources. If you have an international business, or one with international ambitions, our 13 full-service offices have the flexible approach you need. We can advise you on international projects with the cooperation, if necessary. of our other experts in the corporate dispute resolution regulatory or tax field. We are equipped to help you navigate the whole maze of employment law. from day-to-day employment management to litigation from remuneration to restructuring, you can really rely on our services, which are customised to best help you meet your long-term business goals.”

LINKS
- Link to law firm Wolf Theiss
Wolf Theiss – Leading Lawyers in CEE/SEE