Germany: Breaches of duty - who bears the investigation costs?

Any employer is likely to be familiar with similar scenarios. If an employer becomes aware of circumstances that lead to the suspicion of a significant breach of duties by an employee, the employer must promptly initiate investigations in order to clarify the circumstances behind the matter as detailed as possible. This is mandatory for all consequences under German labour law, in particular with regard to termination of employment. Employers often engage external third parties to carry out the necessary investigation of the suspected facts. Depending on the individual case, this can result in horrendous investigation costs, which must initially be covered by the employer. If the investigation confirms the suspicious facts, many employers legitimately ask themselves whether they can demand reimbursement of the investigation costs from the employee concerned. The BAG's clear answer to this is: Yes, provided that the investigation costs have been "necessary".

Prompt investigation of the facts as a requirement for legal effectiveness

If there is a suspected breach of an employee's duties under the employment contract, the employer is required to clarify the facts of the case as soon as possible. To this end, the employer must take all reasonable efforts. Depending on the extent of the matter in question, it may be necessary for the employer to involve an external third party - for example, an external lawyer - for further investigation.

The employer must proceed with its investigation with reasonable rapidity. Thus, pursuant to Clause 626 (2) sentence 1 of the German Civil Code (BGB), the notice of termination for cause must be given within a period of two weeks after the circumstances justifying the termination have become known by the employer. Even if this two-week period does not begin to run until the investigation of the facts has been completed in general (cf. BAG of 27.1.1972 - 2 AZR 157/71, NJW 1972, 1486), employers must nevertheless keep an eye on their schedule.

Decision of the BAG

In its decision of 29 April 2021, the BAG has now dealt in detail with the investigation costs incurred by the employer due to the activities of an external third party. In this regard, the BAG decided that the employer can, in principle, demand reimbursement of the necessary investigation costs from the employee concerned (decision of 29 April 2021, ref.: 8 AZR 276/20, previously only available in the German press release).

After the defendant in the BAG's case had received several anonymous suspicious reports regarding possible compliance violations by the plaintiff, the committee responsible at the defendant decided to conduct an investigation with the involvement of a law firm specialised in conducting compliance investigations. The investigation report of the law firm commissioned revealed, among other things, that the plaintiff had invited persons to dinner at the defendant's expense without official cause and had charged the defendant for travel expenses for trips he had taken to Champions League matches of FC Bayern München. The plaintiff had received the tickets for the matches at the request of business partners of the defendant. The law firm invoiced the defendant a total of EUR 209,679.68 for their services, based on an hourly fee of EUR 350.00.

The defendant thereupon terminated the employment relationship with the plaintiff without notice, alternatively with regular notice, due to violations of the so-called bribery ban, billing of private expenses to the defendant's account and multiple expense fraud. The plaintiff brought an action for protection against dismissal against the termination, which was dismissed with final effect.

In a counterclaim (Widerklage), the defendant claimed compensation from the plaintiff for the investigation costs charged to him by the law firm. The defendant argued that the plaintiff had to reimburse the costs according to the principles established by the BAG for the reimbursement of detective costs in comparable cases. Among other things, the plaintiff claimed that the defendant had not demonstrated the necessity of the costs.

After the Labour Court had rejected the claim, the Regional Labour Court granted the claim for damages in the amount of EUR 66,500.00. In his appeal to the BAG, the plaintiff sought the complete dismissal of the counterclaim.

The plaintiff's appeal was successful. However, the defendant's claim for damages in the present case only failed due to the defendant's inability to demonstrate the necessity of the lawyer's fees.

The BAG fundamentally stated that an employer can demand compensation from the employee for the necessary costs incurred through the intervention of a specialised law firm if the employer has commissioned the law firm to conduct investigations against the employee on the occasion of a specific suspicion of a significant misconduct on the employee's side and the employee is convicted of a significant breach of contractual obligations. If there is a specific suspicion of significant misconduct on the employee's side, the expenses of the injured party necessary to avert imminent disadvantages are also part of the damage to be compensated under Clause 249 BGB. The compensation limit is determined by what a reasonable, economically-minded person would have done in view of the individual facts of the case to remedy the violation or to prevent the damage, not only as expedient, but as necessary. In this case, however, the employer had to provide a substantiated argumentation as to which and when concrete activities or investigations had been carried out  and to what extent in terms of time.

Implications for practice

The BAG's decision is to be welcomed. Employers are often faced with horrendous investigation costs in view of necessary clarification of the facts based on employees' conduct in breach of duty. The preceding facts show that costs in the six-digit range can be incurred. If the facts initially suspected are proven on the basis of the investigations carried out, it seems only appropriate to make the employee liable for the investigation costs. In this case, the investigation costs are caused by the employee's conduct in breach of duty within the employment relationship. The employee's liability for damages requires that 

• there is a specific suspicion of a serious breach of duty by the employee;
• the employee is actually convicted of the serious breach of duty; and
• the costs of the investigation had been necessary.

Accordingly, costs for investigations that could not fully verify the facts of the case and were only sufficient for a so-called dismissal on suspicion (Verdachtskündigung) cannot constitute a claim for damages on the employee's part.

In addition, the employee's obligation to carry investigation costs and pay damages is limited. On the one hand, in view of the duty to mitigate damages existing in German civil law, the employer will be required to keep an eye on the costs and to limit them to the extent necessary (cf. Clause 254 BGB). Investigation costs of horrendous scope are therefore only likely to be necessary in the case of significant breaches of duty by the employee, such as in the case of criminal offences committed by the employee of a significant extent. However, it is not necessary that the employer always chooses the most cost-effective investigator. Depending on the facts of the case, the engagement of an (usually cost-intensive) expert may also be necessary and appropriate. In addition, the employer can generally only demand reimbursement of the costs incurred during the investigation prior to the notice of termination. According to section 12a of the German Labour Court Act (ArbGG), the employer must generally meet any additional costs of legal advice for a subsequent court case.

If a termination was preceded by necessary investigations of the facts by external third parties, it must therefore always be examined if the corresponding investigation costs can be claimed in the termination protection proceedings. In addition, the employer is, of course, also free to claim damages from the employee by way of a lawsuit outside of the dismissal protection proceedings. In order to prepare for a corresponding claim for damages, the employer should document from the very beginning when exactly which investigations were carried out by an external party in order to be able to meet the burden of proof required by the BAG for the necessity of the costs in the event of a dispute.

It remains to be seen which costs the BAG will recognise as "necessary" investigation costs in the future. It is possible that the BAG's decision of 29 April 2021, which is only available in a press release so far, may already provide some indications in this regard. As soon as the full text of the decision is published, any changes will be reported here.