Director dismissed for fraudulent conduct of a subordinate

This case, in which the managing director of a company was dismissed because he was insufficiently alert to the behaviour of his deputy director, plays on the interface between corporate law and labour law. The Amsterdam Subdistrict Court upheld the request for dismissal of a director (Group CFO) of a large shipping company. The ground for dismissal was serious culpability of the director, because of his failure to take action against fraud of his immediate subordinate.

What were the facts

In October 2020, the employer found out that the deputy director, subordinate to the director in question, had committed forgery by placing a signature of an employee of the accountancy firm that usually audits the annual accounts. However, the audit firm had not yet approved the annual accounts in question. Further investigation revealed that the deputy director had embezzled a total of €2.5 million.

Following these events, the employer commissioned a forensic investigation. The investigation showed that the director was not aware of the deputy director's fraud. However, the investigation did show that the director had allowed himself to be fêted by the deputy director without being paid for it. On three occasions he had flown to the Grand Prix in Abu Dhabi in a private jet at the deputy director's expense, resulting in exorbitant costs (overnight stays in the hotel or on a private yacht cost €7,500 to €10,000 per night and the trip by private jet amounted to approximately €20,000 per flight).

Reason for dismissal/What does the judge think?

The employer accused the director of allowing a subordinate to entertain him structurally, especially because he was acting in violation of the applicable Code of Conduct (and what it says about bribery). According to the employer, the director should have known better, especially considering his role model position as CFO. He had given the deputy director free rein and had insufficiently investigated the financial affairs of the deputy director, while there was certainly reason to do so - because the spending behaviour of the deputy director is not in proportion to his salary.

The Subdistrict Court followed this argument and ruled that the managing director should have realised that the deputy director might expect reciprocity, was eager for the managing director to keep him out of the wind, did not check up on him or did so less, or gave him free rein in other ways. The director should have asked questions and investigated further. Also, according to the Subdistrict Court, it seems that the director did not exercise the normal alertness towards his subordinate due to the favours of the deputy director. All this means that the director, in view of the applicable Code of Conduct and his training and experience, should have known better. Because the director allowed himself to be fêted for several years and the employer suffered damage to its reputation as a result of his actions, the director can be seriously blamed. According to the subdistrict court, all of this leads to the conclusion that the employer cannot reasonably be required to allow the employment contract to continue. The subdistrict court dissolved the director's employment contract on the grounds of 'culpable acts or omissions'.

Financial Consequences

As the dismissal was deemed not only culpable, but seriously so, no transitional allowance was awarded. The director had requested equitable remuneration, but this was rejected because the employer had reasonable grounds for dismissal and the employee had acted in a seriously culpable manner. The subdistrict court did establish that the director was still entitled to directors' fees for 2020 and for ten months of 2021 (together still € 738,393.33 gross). The director's employment contract stipulated that a variable bonus could be granted on the basis of, among other things, performance and performance. The employer argued in vain that the allocation was discretionary. The Subdistrict Court found that in the years 2017, 2018 and 2019 an identical amount of director's fee was paid each time, and that it did not appear that the employer allowed the performance and functioning of the director or the company results to be a determining factor in this. The Subdistrict Court therefore concluded that the annual director's fee had become a fixed part of the salary of the director and that he was therefore rightly entitled to its subsequent payment.

In sum

On the basis of this judgment, it follows that a director/administrator, given his/her (exemplary) position and responsibilities, must be very attentive to the actions of his/her subordinates. In this case, it was also considered important that the director had allowed himself to be fêted and, based on that, should have seen reason to investigate the deputy director's expenditure pattern. This ultimately led to dismissal, despite the fact that the investigation had shown that the director was not aware of the fraud of his subordinate. Questions about this topic or any other corporate or labour law topic? SPEE lawyers & mediation would be pleased to help.

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