Agent's severance pay. How is it calculated if AEC does not apply?
In cases where no Collective Bargaining Agreements apply to the agency relationship, understanding whether (and how much) severance pay is due to the agent is not at all easy.
In contrast to AECs, which provide for a precise calculation allowing the parties to quantify the severance payment, the Civil Code only provides a ceiling for the level of indemnity, without giving precise guidelines on the method of calculation
Severance pay was introduced at European level by the Directive 86/653EECthen transposed into our legal system most recently with the reform of Legislative Decree 65/1999, which amended the current text of Article 1751 of the Civil Code, which provides as follows:
"Upon termination of the relationship, the principal is obliged to pay the agent an indemnity if the following conditions are met:
- The agent has procured new customers to the principal or has appreciably developed business with existing customers;
- The principal still receives substantial advantages arising from business with such customers;
- The payment of this allowance is fairtaking into account all the circumstances of the case, in particular the commissions that the agent loses and that result from business with such customers."
The judge must therefore, in the first analysis, find on the basis of the preliminary findings, whether the agent has increased the agent's clientele and/or business and, therefore, determine what amount should be owed to the agent, judging according to equity.
In cases where no Collective Bargaining Agreements apply to the agency relationship, understanding whether (and how much) severance pay is due to the agent is not at all easy.
Contrary to the AEC, which provide for a precise calculation that allows the parties to quantify the severance payment, the Civil Code only provides for a ceiling for the level of indemnity, without providing precise guidelines on the method of calculation
- Read also: Severance Indemnity: Art. 1751 of the Civil Code and AEC compared.
The following is a brief analysis of the criteria set out in the Civil Code.
1. The agent's contribution of customers.
The termination indemnity pursuant to Article 1751 of the Civil Code is undoubtedly intended to reward the principal's activity of promoting and developing customers. For this reason, the following must be considered excluded from the scope of applicability of this rulerecruitment and coordination of agentssince the latter, although relevant and very important from an organisational point of view, is only instrumental and ancillary in nature with respect to customer enhancement.[1]
Following this reasoning, not even the mere increase in turnover by the agent can be considered sufficient to prove the acquisition of new customers or the substantial development of those already existing at the beginning of the relationship:[2] it is not sufficient for the agent to prove (cf. Burden of proof in the agency contract) the increase of its commissions over the years, if it also does not diligently indicate the new customers it has brought in. This is stated in case law:
"the request for payment of the indemnity pursuant to Article 1751 of the Civil Code cannot be granted in the event that the applicant generically acknowledge on appeal of the recurrence of the relevant prerequisites, however failing to deduct precisely the volume of business handled for each individual customeras well as to specify the business concluded, the total value of the contracts, any increase over the business concluded with the same client in the preceding year, omitting altogether to indicate which clients he personally took care of."[3]
And again:
"The agent acting pursuant to Art. 1751 of the Civil Code must first prove that he has brought new customers to the principal, or at least that he has increased the turnover of customers who, prior to the commencement of the agency relationship, were already doing business with the principal."[4]
As for the definition of 'new customer", it should be recalled that in 2016 the European Court of Justice,[5] questioned whether it was possible to recognise as such, legal entities which, prior to the granting of the agency mandate, had already established business relations with the principal, but for products different from those covered by the agency contract. In the present case, the agent had received a mandate to sell spectacle frames of different brands from those that had already been marketed by the principal; the Court was therefore asked whether the sale of such new products to existing customers could fall within the civil law definition[6] of 'new client'. The Court stated that;
"are to be regarded as new customers within the meaning of that provision, even though they already had business relations with the principal with respect to other goods, if the sale of the first goods by the agent has required to enter into specific business relationshipswhich it is for the referring court to ascertain."
2. Advantages for the principal arising from the agent's activity.
The second condition laid down in Article 1751 of the Civil Code is that "the principal still receives substantial benefits from doing business with such customers." When analysing this condition, one must certainly understand to which time period reference must be made to verify the existence or non-existence of advantages. According to the best doctrine[7] the wording of the law is quite clear and refers to the situation existing at the time of the termination of the relationship; case law, on the contrary, is not unambiguous on this point, and there is an opposite orientation, which deems it necessary to verify whether the advantages subsist and continue also in subsequent years and, in this sense, excludes the indemnity if the agent is not able to prove judicially the 'retention' of customers even after the termination of the relationship.[8]
Certainly, the agent cannot be negatively affected by the principal's personal choice to opt for transferring the company to others (for a price undoubtedly determined not only by the trade mark, but also by the goodwill, essentially consisting of the customer portfolio), unless, of course, it is established that the increase in customers was due to factors external to the agent.[9]
On the other hand, the condition must be deemed to be fulfilled if the contracts concluded by the agent are contracts of durationas the development of goodwill and the benefits to the principal, even after termination of the relationship, are in re ipsa.[10]
3. The determination of severance pay in equity.
Once the existence of the first two requirements has been ascertained, the judge will have to quantify the allowance in equity. As mentioned above, for the purposes of determining the quantumthe judge is bound to verify compliance with the requirement of equity prescribed by Art. 1751 of the Civil Code, taking into account all the circumstances of the case and in particular the commissions that the agent loses and that result from business with those customers.
It is interesting to note that, while the law clearly identifies the requirements for the agent to be granted the indemnity, for the quantification in equity, the normative reference is not exhaustive and concerns all "the circumstances of the case', identifying, by way of example only, the reference to commissions that the agent loses and that result from business with customers.[11] In this regard, case law holds that the judge must:
"have regard to all those elements that are suitable for an adequate personalisation of the quantum due to the agent"[12] e "may or may not be considered 'fair'in the sense of also compensating for the special merit of the agent emerging from the [emerging] factual circumstances."[13]
"If it does not consider it fair, in the absence of a specific regulation, it must award the agent the differential necessary to bring it back to fairness. "[14]
It is clear that equity is a principle that is difficult to apply in practice. It follows that the non-application of the AEC to the relationship certainly entails greater uncertainty as to the quantification of the severance payment, since this is ultimately left to the sensitivity of the individual judge.
It is also important to recall that the one referred to in Article 1751 of the Civil Code is a typical case of judicial equity and as such can only be criticised in the court of legitimacy from the point of view of the logic and congruity of the reasoningbut not in its amount.[15]
4. Severance pay calculated on the basis of the criteria set by the Commission.
From the above analysis, it appears that the approach of the European directive, which only provides a ceiling for the level of indemnity, without providing precise guidelines as to the method of calculation, has and continues to create great uncertainty. It is clear, therefore, that a clear and precise method, perhaps developed by national jurisprudence, would lead to greater legal certainty, with benefits for both contracting parties.
This issue was also encountered by the same European Commission in its report of 23/7/1996which, aware of this regulatory limitation, prepared a report aimed on the one hand at analysing how European case law has approached this interpretative issue and on the other hand at providing a solution to the member states.
A solution would have been found in the German model (and in particular §89b of the HGB from which the legislation was inspired), taking into account the fact that since 1953 it has provided for the payment of a surplus value allowance, which has given rise to extensive case law regarding the calculation of the latter.
The Commission report goes into detail to analyse the calculation model developed by German case law, to which reference is made in full. For what it is worth, it is important to emphasise the fact that the system developed by German case law was then used as a model for the drafting of AEC calculations and that, therefore, the same system, although very complex, is not completely alien to us.
The Commission, after having analysed the calculation method in an analytical manner, concludes by noting that the model developed by German case law can nevertheless be used as a model to be applied, as this "facilitate a more uniform interpretation of this article."
Italian jurisprudence has, in any case, very rarely followed this model (perhaps also because it was not pushed by the parties' advocates), which at the moment remains almost completely unknown; in any case, there are a number of judgments on the merits that have shared the Commission's position, which deemed it appropriate to quantify the severance indemnity on the basis of the calculation criteria established by the European Commission in its report of 23/7/1996 on the application of Article 17 of Directive 86/653/EEC. [16]
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[1] Cass. Civ. 2018 No. 25740.
[2] On this point see also Bortolotti, Distribution Contracts, p. 386 ff., 2016, Wolters Kluver.
[3] Court of Milan 26.7.2016.
[4] Court of Bari 12.2.2014.
[5] Judgment of 7.4.2016, Case C-314/14, Marchon v. Karaskiewicz
[6] To be more precise, in the definition of 'new customer', of which Article 17 of the European Directive 1986/653 on commercial agentsby Article 4, Legislative Decree No 303 of 10.9.1991, which amended Article 1751 of the Civil Code and replaced it by Article 5, Legislative Decree No 65 of 15.2.1999.
[7] Bortolotti, Distribution Contracts, p. 388.
[8] See Court of Padua 21.9.2012 where the indemnity was denied for lack of orders following the dissolution of the relationship; to the contrary Cass. Civ. 2013 no. 24776 ".Moreover, the utility for the principal is to be assessed at the time of termination of the relationship, the crystallisation of the results obtained by the agent at that time being of relevance. "
[9] Cass. Civ. 2013 no. 24776.
[10] Cass. Civ. 2013 no. 24776.
[11] See Cass. Civ. 2018 no. 21377, Cass. Civ. 2008 no. 23966.
[12] Cass. Civ. 2016 No. 486.
[13] Cass. Civ. 2014 No. 25904.
[14] Court of Appeal Florence 4.4.2012.
[15] Cass. Civ. 2018 No. 25740.
[16] Court of Pescara of 23.9.2014, with comment by Trapani in Agenti&Rappresentanti di commercio no. 2/2015; Court of Bassano del Grappa of 22.11.2008
The post-contractual covenant not to compete of the employee, self-employed person, director, partner and agent. A brief overview.
The post-contractual covenant not to compete is certainly a very delicate element in an employment relationship and one that, depending on the addressee of this obligation, has different requirements as to form and substance. The purpose of this article is to provide the reader with an overview of this institution by briefly analysing how and with what limits this bond may bind the employee, the self-employed, the administrator, the partner and the commercial agent.
- Employee
The employee's covenant not to compete is governed by Article 2125 of the Civil Code. This article expressly provides that the covenant must, on penalty of nullity:
- (a) be made in writing;
- (b) establish a constraint contained within certain limits of subject, place and time;
- (c) provide for a consideration in favour of the employee.
With reference to (a), there are no particular issues to be addressed. The pact shall̀ be undersigned (and preferably initialled on each page) by the employee. Moreover, although according to traditional case law, the non-competition agreement does not require a double signature pursuant to Art. 13.41 of the Civil Code.[1]However, it is prudently recommended that such a post-contractual undertaking be specifically approved in writing in order to avoid possible disputes, also in view of a possible change in the above-mentioned jurisprudential orientation.
As for point (b), the time limits of the post-contractual agreement are defined in the second paragraph of Art. 2125 of the Civil Code as 5 years for executives and 3 years for other cases. It should be emphasised that the terms set forth in Article 2125 of the Civil Code constitute the maximum limits for the duration of the covenant, and the payment of the compensation due to the employee must also be calibrated to the actual duration of the covenant agreed upon by the parties.
The evaluation of the adequacy of the place within which the activity is prohibited is in close connection with the object of the activity carried out by the employee and, to this end, the indication of an excessively broad space may lead to the nullity of the covenant itself. On this point, there are controversial case law precedents, with one part of the case law considering that the pact extended to the entire national territory is null and void, inasmuch as it excessively restricts the employee's possibility of re-employment.[2] Other pronouncements, on the other hand, have considered valid EU-wide covenants,[3] in that the activity had been precisely specified so as not to excessively restrict the employee's working and professional capacity.
About the quantification of remunerationcase law assumes as an assessment criterion the congruity of the same to the sacrifice borne by the worker in the individual case[4]in holding that the sum paid to the worker must be proportionate to it.[5]
Clearly, since the concept of fairness is a very abstract one, it is very difficult to apply objective criteria to it. In any event, although there is no unambiguous and objective criterion for establishing the congruity of the covenant, case law holds that a consideration in the region of 15%-35% of the gross annual remuneration may be considered congruous.[6]
Secondly, the quantum in addition to being congruous it must be predetermined and/or predeterminable. Jurisprudence has held null and void, insofar as it was indefinite, a covenant that provided in favour of the employee a tot euro for each month until the termination of the relationship, as this covenant did not allow the employee to determine ex antealready at the time the agreement was signed, a minimum amount.[7]
In order to find a solution to the problems illustrated above and in order to attempt to stipulate a non-competition agreement that is effectively valid and with a reduced possibility of being challenged, one could hypothesise to include as an indemnity recognised to the employee, a percentage sum whose value increases with the lengthening of the relationship and which is linked to the gross sums paid to the employee in the last year of the relationship or, in a more favourable case, in the twelve months following the signing of the agreement.
- Self-employed
The covenant not to compete signed by a self-employed person,[8] is regulated by Article 2596 of the Civil Code.
The limits provided for by this rule are as follows:
- must be proven in writing
- it is valid if confined to a specific area or activity;
- may not exceed a duration of five years.
As can be seen, points a), b) and c) are similar to those already discussed above, to which we refer in full.
The essential difference is that Article 2596 of the Civil Code, unlike Article 2125 of the Civil Code, does not provide for any sanction for the failure to provide for consideration in favour of those who contractually submit to competitive restraints. Therefore, the fact that the non-competition agreement does not provide for any consideration is of no relevance, being in this respect, in any event, valid, effective and unenforceable.
However, very often one encounters problems related to the incorrect classification of self-employed workers, who, due to the way they carry out their activities within a company, may not have been properly classified as employees. For these figures, the problem could arise whereby, once the relationship has ceased, they intend to bring an action before the Employment Court to ascertain the subordination of the relationship and, with it, the invalidity of the non-competition agreement, since it lacks one of the essential elements provided for by Article 2125 of the Civil Code (namely, remuneration).
In any event, it is emphasised that the provision of a paid non-competition agreement in favour of such persons could be used by them as a further element to prove the subordinate nature of the relationship.
- Company director
Like self-employed persons, the non-competition agreement signed by a director is also subject to the limits set forth in Article 2596 of the Civil Code and, therefore, there is no requirement that he be remunerated.
With reference to the director's non-competition in reporting courseit is solely regulated formerly Article 2390 of the Civil Code, for directors of joint stock companies, which provides as follows:
"[1] Directors may not be unlimited partners in competing companies, nor engage in a competing activity on their own behalf or on behalf of third parties, nor be directors or general managers in competing companies, unless authorised by the shareholders' meeting.
[2] For failure to comply with this prohibition, the administrator may be removed from office and is liable for damages."
In contrast, for limited liability companies, there is no explicit prohibition for directors to act in competition during their term of office [9]with the consequence that it is the articles of association of the company that may freely provide whether the director may or may not perform such activities.
- Partners of limited liability companies
S.r.l. partners are not required to refrain from activities that compete with the company in which they hold shares. Indeed, in the Italian system, competition is only prohibited formerly Article 2301 of the Civil Code to partners in general partnerships and general partners in limited partnerships
If a non-compete obligation is also intended for partners, it could be:
- have the partners sign a non-competition agreement;
- sign a shareholders' agreement, whereby all shareholders undertake not to engage in activities in competition with the company and whose contents are in any case those provided for in Article 2596 of the Civil Code.
It should be noted that the shareholders' agreement is also valid for a maximum of five years and must therefore be renewed upon its expiry.
- Agency contract
The agency contract expressly regulates the non-competition agreement in Article 1751-bis of the Civil Code.
This issue has already been dealt with in this blog, so please refer to the following article (The non-compete obligation in the agency contract: during and after termination of the relationship).
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[1] Traditional jurisprudence has ruled out the applicability to the non-competition agreement of the provisions relating to vexatious clauses, on the ground that Art. 2125 lays down more stringent conditions than those set forth in Art. 1341, and in view of the peremptory nature of the hypotheses contemplated in para. (2) of the latter provision (see Turin Tribunal, 8.2.1979).
[2] Trib. Monza 3.9.2004.
[3] Cass. 21.6.1995 no. 6976; Trib. Milan 22.10.2003.
[4] On this point Cassation 1998 No. 4891.
[5] Cass. Civ. 1998 no. 4891; Trib. Milan 27.1.2007.
[6] E.g., a consideration quantified in 15% of the total amount of the remunerations paid to the employee in the last two years of the relationship against a non-competition obligation of two years' duration was deemed congruous) Trib. Milan, 22.10.2003.
[7] Trib. Venezia 31.5.2014.
[8] IMPORTANT. In this category does not include the commercial agent, for which there is a separate discipline, regulated in Art. 1751-.encore, which is not subject of examination for this opinion.
[9] In fact, before the reform brought about by Legislative Decree No. 6 of 2003, Article 2475 of the Civil Code made explicit reference to Article 2390 of the Civil Code. Now the reference has been eliminated.
The obligation to register as a commercial agent.
According to well-established doctrine and case law, both Italian and of the European Court of Justice, the non-registration of an Italian commercial agent, operating in Italy, does not invalidate the agency contract.
It can be said that Italian jurisprudence arrived at this conclusion after a not short and linear path. It all started from the fact that theArticle 9 of Law No 204 of 3 May 1985expressly states that "it is prohibited for anyone who is not enrolled in the register referred to in this law to exercise the activity of agent or sales representative".
Italian jurisprudence, until the entry into force of European legislation (86/653/EEC)The Court of First Instance has inferred from the above-mentioned rule a complete ban on the exercise of the profession by non-registered agents, with the consequent nullity formerly Article 1418 of the Civil Code of the contractual relationship, on the ground that it is contrary to mandatory rules. (e.g. Cass. Civ. No. 4154 of 1992).
Following the entry into force of Directive 86/653/EEC, the Court of Bologna, in a dispute in which an unregistered agent was denied the right to receive theseverance payprovided for in Article 1751 of the Civil Code, due to the nullity of the relevant contract, submitted the following question to the Court of Justice:
"Is Directive 86/653/EEC incompatible with Articles 2 and 9 of Italian domestic law No 204 of 3 May 1985, which make the validity of agency contracts subject to the registration of commercial agents in a special register?".
The Court of Justice, in a judgment of 30.4.1998, in the case Barbara Bellone / Yokohama spa stated the following:
"Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents precludes national legislation which makes the validity of an agency contract conditional upon the commercial agent being entered in a special register".
It is noted that, although the Court did not expressly address the question of the nullity of contracts with non-registered agents, it did in fact intend to affirm the incompatibility of Article 9 of the 1985 Law with respect to the validity of the relevant contracts.
It must therefore be considered that the has direct effect, with the consequent obligation for national courts to disapply the incompatible domestic provision. The Court of Cassation on this point, now in a uniform manner, has repeatedly held
"the validity of agency contracts concluded with non-registered agents on the ground that the rule stipulating their nullity, Art. 9 Law No 204 of 1985being contrary to Community Directive No 653 of 1986, it had to be disapplied. Those principles, supported by the decision of the Court of Justice of the European Union of 30 April 1998 (in Case C-215/97 Bellone and Yokohama s.p.a.), according to which 'it is contrary to national legislation to make the validity of an agency contract conditional on the commercial agent being entered in a special register', must be confirmed, with the result that the plea must be rejected.." (among others, cf. Cass. Civ. No. 18202 of 2005).
Italian jurisprudence has therefore interpreted this rule, stating that the national court is obliged to interpret domestic laws as far as possible in the light of the wording and purpose of Directive 86/653/EEC, so as to allow application in accordance with its objectives.
On the basis of these case law guidelines, the legislator with the D. Lgs 26.03.2010, n. 59Italian law has transposed the EU directive 2006/123/ECknown as the 'Services Directive'. Among the objectives pursued by the EU directive was that of simplifying the methods of access also to the activity of commercial agent. To this end, therefore, Article 74 of Legislative Decree 59/2010 expressly provided:
- the suppressionamong others, of the role of agents and sales representatives ('RAR'), provided for in Article 2 of Law 204/1985;
- making the commencement of the commercial agent activity subject to the DIA (Dichiarazione Inizio Attività) - now SCIA (Segnalazione Certificata di Inizio Attività) - accompanied by self-certifications and certifications attesting to the possession of the requirements;
- registration of the activity of agents or sales representatives in the RI (Registro delle Imprese) if the activity is carried out in the form of a company, or in a special section of the REA (Repertoire of Economic and Administrative News).
The actual abolition of the Role became effective on 12 May 2012, following the entry into force of the implementing Ministerial Decree of 26.10.11.
As of this date, therefore, those who intend to commence the activity of commercial agency must submit to the Chamber of Commerce registry office of the province where they carry out their activity, a special SCIA, accompanied by the certifications and declarations in lieu of the law 204/1985, by filling out the 'ARC' form attached to the implementing decree.
For agency contracts that were concluded before the abolition of the register, the Italian court must therefore be deemed to disapply the legislation in force at the time, and it may be concluded that following the Bellone judgment, contracts with agents who were not registered must be considered fully valid.
Lastly, it should be noted that the obligation for agents to register (although this has been waived and no longer has any real effect) existed only for agents practising in Italy and must be excluded not only for agents residing abroad, but also for Italian agents who in fact operate and promote business abroad.