Is the Declaration of Bankruptcy a Mandatory Requirement to Terminate an Employment Contract due to a Reduction in Work Volume or Profit?
The Labor Proclamation No. 1165/2019 provides conditions under which an employer may terminate a worker’s employment contract with prior notice. Article 28(3) of the Proclamation, specifically, stipulates that those grounds attributable to the organizational or operational requirements of an undertaking constitute good causes for the termination of an employment contract with prior notice. As such, the fall in demand for the products or services of the employer resulting in a reduction in the volume of work or profit of the undertaking may be a good cause for termination of a contract of employment.
This would mean that a reduction in the amount of work or a decrease in the project’s profitability may cause an employer to lawfully terminate an employment contract.
The employer needs to prove that it sustained the conditions specified in this provision. There were some instances where courts required the employer to declare bankruptcy in order to prove that its profit had decreased. However, the profit of an employer may decrease without becoming insolvent.
On February 1, 2023, the Federal Supreme Court Cassation Bench decided that the lower court’s rulings on the legality of using a bankruptcy declaration as the only justification to end an employment contract had a fundamental error of law. Subsequently, the Cassation Bench, under File Number 23572, ordered to rectify the error by arguing that, in accordance with Article 28(3)(b) of the Labor Proclamation, an employer may terminate an employment contract with prior notice in cases where there exists a decline in the demand from customers for the employer’s goods or services resulting in a reduction in the amount of work or a decline in the project’s profitability. Declaration of bankruptcy to prove such occurrences is not mandatory, per the Cassation Bench’s decision.
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