The latest developments in employment relations in Latvia
Amendments to the Commercial Act
On 1 June 2023, amendments to the Commercial Act came into effect that require a greater involvement of employees in a cross-border reorganisation of companies. The amendments allow for an opportunity for employee representatives (or employees themselves) to review and provide their opinion on a reorganisation agreement (draft) as well as the cross-border prospectus.
The reorganisation agreement1 shall describe the consequences of the reorganisation for employees. An invitation to employee representatives or employees to provide their opinion on the reorganisation agreement (draft) must be attached to the application to the Register of Enterprises on commencement of the reorganisation. The invitation should state the deadline and venue for provisions of the opinion – no later than five business days before the shareholders pass a decision on the reorganisation.
Availability of the reorganisation agreement must be ensured at least one month before the contemplated shareholder meeting regarding the reorganisation. If the opinion of employee representatives or employees on the agreement is received the management board shall promptly communicate it to the shareholders of the company ensuring a possibility for them to review it.
The cross-border prospectus shall include a separate section for employees specifying the impact of the reorganisation on the employment relationship. It shall also include information about measures of protection of employment and crucial changes in the employment conditions, inter alia, change of the place where the work is performed and the registered address of the company. The employee representatives or employees must be provided with continuous free electronic access to the prospectus for at least six weeks until the date of the meeting of shareholders with the reorganisation on its agenda, and until the effective date of the reorganisation.
At least two weeks before the day when the meeting of shareholders is scheduled to pass a decision on the reorganisation, the employee representatives or employees may provide an opinion in writing about the information contained in the prospectus. The management board shall promptly ensure availability of such opinion for the shareholders.
Amendments are2 to introduce the requirements of Directive. 2019/2121. The amendment are available here.
Amendments to the Immigration Act
On 1 July 2023, amendments to the Immigration Act related to transposition of the requirements of EU Directives came into effect. The EU Blue Card will now be issued for a period of up to two years instead of the previous five years.
Holders of the EU Blue Card will have a right to enter Latvia not only based on employee secondment but also to carry out various economic activities for the benefit of an employer and in the employer’s interests, without the need to obtain a separate right to employment.
Holders of the European Blue Card will have the possibility ensured to return back to Latvia, if the validity period of the European Blue Card has expired while staying in another EU Member State. The European Blue Cards issued by all EU Member States (not only the Schengen area countries) will be a sufficient document for crossing borders.
From 1 July 2023, applicants for the European Blue Card entering from other EU Member States will subsequently have a right to commence employment within 30 days after a submission of the application for the European Blue Card in the Republic of Latvia. Furthermore, the amendments stipulate that an extension of the period for decision-making regarding issuance of the European Blue Card will not exceed three months from the date of receipt of the application. Until now, the general decision-making periods were applied as established in the Administrative Procedure Act; therefore, allowing for the possibility to extend the decision-making period up to four months or one year.
Part of the amendments are aimed at protection of the holders of the European Blue Card in case of incapacity to work, unemployment or violations by an employer ensuring that in such cases the European Blue Card is not annulled right away and the right to seek a new job and stay in the Republic of Latvia is ensured.
These amendments are aimed at introducing the requirements of Directive No 2021/1883/EU. The amendments are available here.
Differences in Status for Members of the Management Board and Employees
In many countries, not only are members of the management board (directors) registered with the commercial registry offices, but also certain officials who ensure running of the company (such as Chief Executive Officer, Chief Financial Officer, Managing Director etc.) . Therefore, these officials have a special legal status in comparison with employees. The legal framework in Latvia does not provide for such a registration of officials. The officials do not have an autonomous legal status stipulated by the law or any special rights and obligations.
In Latvia, the routine management of a business company (private limited (SIA) or public limited (AS) company) is ensured by a management board (board of directors), whereas monitoring of the performance of the management board is entrusted to a supervisory board (in case of a SIA – a supervisory board is not required). Any other person who has a position with the company – managing director, director (CEO) – are employees, unless such person is appointed to the management board. It is not unusual that this nuance goes unnoticed or is disregarded by the companies which have parent companies in a foreign country and, according to the rules of procedure of such parent companies, the officials are to be registered with commercial registry offices. Therefore, we would like to draw your attention to the most crucial differences in the status of a board member and an employee (managing director, chief executive officer etc.).
| Member of the Management Board | Employee – Managing Director, Chief Executive Officer |
| Carries out duties on the basis of the authority granted by shareholders; conclusion of a contract is not mandatory; a management authorisation agreement may be concluded. | Caries out duties on the basis of an employment agreement. Conclusion of the employment agreement in writing is mandatory. |
| Carries out the daily management of the company in accordance with provisions of the Commercial Act. | Carries out the official duties set out in the agreement / job description in accordance with provisions of the Labour Act. |
| Members of the management board are jointly and severally liable for damages.
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An employee is responsible only for damaging the current property of the employer, while is not liable for the loss of anticipated profit, unless his or her actions are taken with malicious intent (in bad faith), or beyond the performance of the contracted work. |
| A member of the management board is entitled to reimbursement which corresponds to the scope of his or her duties and the financial status of the company. | An employee has a right to receive a salary which shall not be less than the minimum established in the country for a full-time job. |
| A member of the management board is entitled to paid time off (PTO); however, duration of vacation is matter of agreement with the company. | An employee is eligible to a vacation of at least four weeks. |
| A member of the management board has a burden of proof that he or she has acted as an honest and diligent manager. | The burden of proof lies on the employer, with rare exemptions. |
| A prescription period of claims is five years from the date when the losses have been incurred. | A prescription period of claims is two years, unless the law provides for even a shorter period of time. |
| A member of the management board can be recalled by a decision of a shareholder (SIA), or, if there is serious cause – by a decision of the supervisory board (AS). | The employment relationship may be terminated only under the procedure and in cases set out in the Labour Act. |
| A member of the management board does not have a right to claim restoration to the position in a court. | An employee has as right to bring an action in court for restoration to the position, if the employment relationship has been terminated in absence of lawful grounds. |
Case Law of the Supreme Court
The case law of the Supreme Court provides crucial interpretations of issues concerning employment relationships. We would like to draw your attention to two judgments which resolve issues that are often ambiguous or insufficiently analysed in the case law.
The non-competition obligation after termination of the employment relationship and the confirmation of previously agreed losses (judgment of the Department of Civil Cases of the Senate of the Supreme Court of 30 March 2023 in case No SKC – 3/2023)
The dispute is between a former employer and a former employee about compliance with the concluded noncompetition and confidentiality agreement. The agreement prescribed that in case of a breach of the agreement the employee shall pay damages to the employee calculating the damages incurred according to a preestablished formula – the monthly compensation set out in the noncompetition agreement multiplied by the number of remaining months between the time when the breach was established until the end of the non-competition period. Namely, the agreement provided for a pre-established mechanism for estimation of liquidated damages. Since liquidated damages are allowed in many jurisdictions, it is not clear for clients whether such can be prescribed by contracts, including those which govern the employment relationship.
To this end the Supreme Court has explained that contractual relationships are subject to the requirement of the law to establish not only the breach of the contract itself but also existence of the damages (losses), and a causal relationship between them and unlawful actions of the breaching party (the preconditions or grounds for indemnification of losses). Consequently, the Latvian law does not allow for the institution of liquidated damages. Parties cannot agree that in case of a breach of a contract a specific amount of damages is to be paid without a duty to prove the grounds for indemnification of losses (damages) as set out in the Civil Act.
Therefore, contracts governed by the Latvian law cannot provide for liquidated damages. If the parties wish to contract an amount of funds payable for a default on obligations which is not limited to the amount of damages resulting from the default on the contract, such parties can agree on a contractual penalty. In the context of employment, one should keep in mind that the contractual penalty cannot be contracted during the employment relationship (disciplinary sanctions or an option of terminating the employment are intended for that). The contractual penalty can be stipulated only with regard to obligations that continue after the end of the employment relationship – such as noncompetition or confidentiality obligation.
Right of a person who held a position of both employee and a member of the management concurrently to a vacation (judgment of the Department of Civil Cases of the Senate of the Supreme Court of 22 March 2023 in case No SKC- 86/2023)
Regarding the difference in status for employees and members of the management board, it is worthwhile to mention a recent judgment of the Supreme Court where the issue of different rights of employees and board members to a vacation is analysed. The Supreme Court explained that in accordance with paragraph five of Article 149 of the Labour Act the right to receive compensation for unused annual leave is attributable to employees, and not members of the management board. Consequently, a member of the management board may not refer to a limitation of rights (to use the annual leave) where he or she himself can arrange for the organisation of the time for performance of duties and the time off. The status of a management board member precludes the need to inform oneself on their rights. According to the explanation given by the Supreme Court, members of the management board should not have unused vacations accrued at all, because they are assumed to know themselves how such should be used (see also the judgment of the Supreme Court in case No SKC–437/2008 regarding the right of the member of the management board to a time off (paid time off / PTO)).
The foregoing does not deprive the company and a member of the management board to agree that the board member receives compensation for unused annual leave (if due to objective reasons it could not be used) upon termination of the legal relationship between them. Such agreements are used rather seldom though.
Worth noting is a comment of the Supreme Court about a situation where one person holds a status of a member of the management board and an employee simultaneously. It notes that it should be evaluated whether such person is really in a relationship of subordination to have the status of the employee. The Supreme Court explained that a simultaneous status of a member of the management board and a shareholder, if the latter holds at least half of the shares, precludes any reasonable doubt about the person having a relationship of subordination. This means that, even though formally the person held the position of an employee too, such person cannot have the status of employee attributed to him or her.
1 Pursuant to Articles 376 and 338 of the Commercial Act.
2 These amendments shall have no impact on the rights and obligations arising out of Articles 117-121 governing the transfer of undertaking and applicable provisions of employee participation.
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