Termination of an Employment Contract Due to Reorganization

In this article, I will attempt to present the first ground (Article 37.1.a) for the termination of an employment contract, specifically: economic circumstances, technological, or organizational changes that make the reduction of the workforce necessary;

First and foremost, before we move directly to the grounds for terminating an employment relationship and their list, it is essential to consider that the Organic Law of Georgia, the Labor Code of Georgia (hereinafter briefly referred to as the Labor Code), is an organic law. An organic law, unlike an ordinary law, stands hierarchically higher and at the same time carries greater legitimacy (its adoption/amendment requires more votes in the parliament than an ordinary law). Moreover, the requirements of most norms in the Labor Code are of a mandatory (imperative) rather than a dispositive nature. (The difference between the two is merely that in the case of a dispositive norm, the parties may agree on a rule different from the norm, whereas in the case of a mandatory norm, any other agreement/expressed will is considered void, regardless of whether it is the result of the expressed will of both parties). It is precisely this mandatory requirement that is implemented in Article 37.3.a of the Labor Code, namely: "It is inadmissible to terminate an employment contract: a) on any ground other than the grounds provided for in paragraph 1 of this article";

This article is itself blanket in nature and points directly to the first paragraph of Article 37, where 14 grounds for the termination of an employment contract are listed. In total, the grounds for terminating an employment contract consist of 14 factual circumstances that allow an employer to terminate the employment contract. It is inadmissible to terminate an employment contract on any ground other than these 14 grounds. In the event that an employer uses a different ground, this expression of will is void from the outset.
a) Economic circumstances, technological or organizational changes that make the reduction of the workforce necessary;
This article consists of two parts that are necessary for the condition to arise where the employer has the right to terminate the employment relationship. Specifically, the following must be present:
Economic circumstances, technological, or organizational changes;
As a result of the above, it must be necessary to reduce the workforce.
The most interesting aspect accompanying this article is that the first element may exist independently, but the first element alone is not sufficient to "justify" the termination of the employment contract;
Regarding the interpretation of economic circumstances, technological changes, and organizational changes: economic circumstances are more related to external factors faced by the employer/entrepreneur (be it a legal entity or a natural person). That is, independent of the entrepreneur's will, an impact of such a nature must occur in the existing market that forces them to dismiss an employee in order to continue their operational activities. As for technological changes, this stems from the will of the employer themselves and is directly related to the market economy, i.e., the modernization of the enterprise's activities;

Organizational conditions, on the other hand, relate to the staffing table. (Terminating an employment contract without establishing the compatibility of the employee's qualifications and skills with the new staff units and without examining other relevant circumstances does not satisfy the criteria of objectivity. At the same time, it must be taken into account that establishing the employee's compatibility with the new position is the duty of the employer and not the employee. Furthermore, the employer must ensure this check; that is, they must exercise their right to terminate the employment relationship in such a way that there is no possibility of preserving the employment contract). The Supreme Court explained in one case: "Since reorganization is not a formal ground for terminating a contract with a worker, ongoing structural and organizational changes in the organization must not become a legal basis for making an unjustified decision that directly contradicts the rights of employees. Upon dismissing an employee from their workplace, even if the preconditions provided by subparagraph 'a' of the first part of Article 37 of the LC are met, there must exist a reasonable ground for dismissal. The Cassation Court has explained in numerous cases that the basis for dismissing employees cannot be just any reorganization carried out in the enterprise, but only one accompanied by a reduction in staff or the establishment of such functions for the positions provided by the new staffing table that substantially differ from the functions established for the corresponding positions prior to the reorganization" (see SCG No. as-665-636-2016, 9.12.2016);

The Administrative Cases Chamber of the Supreme Court of Georgia goes even further (as a court bearing an inquisitorial nature that balances the power vertical against arbitrariness) and explains: The Chamber highlighted the circumstance that the procedure of reorganization is frequently used to actually abuse rights and dismiss officials unacceptable to the management: "The vicious, illegal practice of so-called liquidation and reorganization as a means to dismiss public servants further exposes the most acute problem of the public service. A newly appointed official-manager 'cannot work' within the existing structure of the organization and begins their activity with organizational-structural changes. In reality, in most cases, these are pseudo-changes and mean altering the name of this or that structural unit, the purpose of which is the dismissal of undesirable public servants and the appointment of desired individuals";

True, these opinions concern processes developing in the public service, but private-law relations frequently reflect the rules of conduct of state institutions existing in the country. Thus, the vigilant attitude of the court and a detailed study-evaluation of every reorganization or structural transformation represent a kind of prevention of the violation of labor rights. In the event of dismissal conditioned by reorganization or other economic circumstances, attention may be focused on whether there is a possibility of employing the person in another workplace. The reason for initiating a reorganization may be excessive creditor indebtedness. Proving these circumstances falls within the burden of proof of the defendant. It is their obligation to prove that reorganization with staff reduction was economically inevitable (in one case, to confirm this circumstance, the employer presented a certificate of indebtedness to the court, but failed to prove what economic effect the reorganization brought; i.e., whether the wage fund decreased due to staff reduction, whether the reorganization was justified from an economic point of view, etc.);

The employer's demand for competitive human resources, taking into account the dynamic nature of employment relations and the daily growing demands in the labor market, is completely natural. An entrepreneurial decision related to the training-retraining and hiring of highly qualified personnel is subject to the legal control of the court. However, the goals and aspirations of the enterprise's management must also be considered in order to reasonably, fairly, and legally evaluate the substantiation of the enterprise's decision, including on the basis of economic requirements, regarding the termination of the contract with the employee:
On the one hand, judicial control in the event of an enterprise's reorganization can reach the point where the court must absolutely see an objective causal link between:
a) The existing reality in which the employer found themselves (what challenge the enterprise/entrepreneur/activity faced, what was the fact that forced the entrepreneur to act; moreover, I use precisely the word "coercion/compulsion" rather than a mere fact, because compulsion means the challenge must be of such a degree that "answering it" is necessary, because otherwise, with proper management, the enterprise or activity expands rather than the opposite);
b) The employer's action (what actions the employer took based on the existing reality to answer that reality, and whether they implemented all those necessary preconditions to ensure the preservation of the workplace. The case may even reach the point where the court demands that the list of actions taken by the employer be supported by evidence: i.e., how the employer responded to the challenge, what measures they took to, on the one hand, develop/preserve the existing situation. In some cases, the court also examines the employer's choice directed at the employee themselves; namely, whether they evaluated the employee(s) individually, considered their work experience, the already existing quality of work performance, why they gave preference to one employee and not another. At the same time, in my opinion, it is also essential to consider the precondition here: how capable the employee themselves will be (given their age, family conditions, etc.) to find a new workplace despite the challenge);
c) The resulting outcome (the employer must respond to the existing reality with their action, and if this action, according to external objective evaluation criteria, fails to preserve the employee's workplace);

Going further, even the existing reality in which the employer found themselves must cause the employer's action itself. That is, the employer should only do this in two cases (the challenge itself can be divided into two parts):
First: This can be a necessary and unconditional step taken towards maintaining the existing activity if the activity or enterprise faces a challenge that requires action from it to preserve the activity itself. Because in the conditions of a market economy, the enterprise/activity and its unhindered growth condition the increase in competition supported by the State itself, which in turn ensures both the creation and preservation of jobs;
Second: This might be the modernization of existing human resources, which should be the employer's desire to move to another activity. But even in such a case, this second challenge-condition imposes a higher burden of proof on the employer; meaning, the employer must answer why they made such a decision;
In practice, when examining this article, the court has to maneuver (i.e., act in such a way that protecting the right of one does not violate the right of the other). Specifically, in one case the Supreme Court explained that: "Courts must reason very carefully and prudently within the framework of judicial control over the business decision and entrepreneurial policy of a specific enterprise, in order to facilitate the obligation established by Article 26 of the Constitution—the development of free enterprise and competition. However, this by no means implies encouraging the baseless, objectively unfounded dismissal of an employee from work, thereby disregarding the labor right to employment guaranteed by the Constitution and the LC";

The court sometimes may go even further and point out that: "The company's entrepreneurial decision, as well as the substantiation of the decision regarding the necessity to change the internal organizational structure and create a new position instead of the old one, cannot be restricted by the strictest frameworks of judicial control. The court must respect the management prerogative of the company and must not evaluate the economic or managerial expediency of the decision by which the contract is terminated. Accordingly, the court cannot evaluate what necessity caused the structure change and whether the new structure leads to management optimization. The Cassation Court explains that under conditions where free enterprise and competition are developing rapidly, the implementation of organizational changes depends on the employer's will and belongs to their discretionary authority. The court only investigates whether there is a causal link between the organizational changes and the employee's dismissal";

Despite all the above, each individual case always represents a subject of examination, and accordingly, each case requires detailed explanation;