Termination of employment contracts is a delicate topic in labor relations, especially due to the socio-economic consequences that can arise from the untying of the parties, in particular with regards to the effects on the employee. This matter is not exhausted at the national doctrine level and is likely to be further developed under the Labor Law.

In spite of the complexity and delicacy of the subject, the dynamics of working life makes the approach to this reality inevitable, especially in times of crisis in which many enterprises have been forced to readjust themselves to remain on the market, either through the restructuring of the means of production and its activities, or by reducing operating costs, including the reduction of salary costs. However, there are situations in which, despite the completion of a financial reengineering, the "death" of the company (employer) becomes inevitable, obliging the same to cease its activities and/or dissolve, in extreme cases.

The Law No. 23/2007 of 1 August (hereinafter "Labor Law" or "LT") establishes the possibility of termination of employment contracts due to the death of the employer, where the employer is a sole trader, unless the successors continue the business¹. This is an objective acknowledgment of the impossibility of maintaining contractual relationships when the beneficiary of the work can no longer benefit from it due to death.

However, although employers as legal entities can be extinguished, and consequently become absolutely and definitively impossible to receive work provided by the employee, the applicability of the figure of forfeiture does not seem to have, in the light of the LT, the same treatment when it comes to extinction of the employer as a legal entity.

The LT recognizes the impossibility to circumvent termination of the employment relationships when establishing in its Article 124 the various forms of termination of employment contracts, among which, the expiry, the agreement to terminate, denunciation and termination by either of the parties based on just cause.

However, there are some reservations about the applicability of the expiry of employment contracts originated by the extinction of the employer as a legal entity, by making the termination contingent to verification of the inability to deliver work or death of the individual² employer which might be associated to an extensive interpretation of the principle of the right to employment and job stability³ and the consequences that may arise from the assumption of the modality of expiry, especially, with regards to the payment of compensation for the termination of the employment relationships.

What regime must, in the meantime, be applicable to employment contracts valid at the date of termination of the company's activities or otherwise extinction of the legal entity?

Practice shows that termination of employment contracts should follow the rules set out in Article 130 of the LT (rescission of the contract on the initiative of the employer, with prior notice) in situations where the company goes through structural, technological or market related reasons, and that it is essential to the competitiveness, economic restructuring or the administrative or productive reorganization or, objectively, when intended to close an establishment.

However, strictly speaking, Article 130 of LT applies to situations in which the company remains in business, ceasing only the contracts related to job posts made redundant, under structural, technology and market reasons, which entails the need for an economic recovery, administrative or productive reorganization of the company, which results in an excess of job posts. It is a termination of employment contracts at the initiative of the employer with just cause, which must be proven by the employer, and not necessarily a situation of impossibility of obtaining work which may result in the termination of employment contracts (employer extinction).

The doctrine teaches that expiry may operate, among others, due to the absolute and definite supervening impossibility of carrying out the work⁴, which may occur in cases of closure of the company's activities or termination of the legal person.

At the level of comparative law, the Portuguese Labor Code establishes as one of the causes for the expiration of employment contracts the supervening, absolute and definitive impossibility of the employee delivering his work or of the employer receiving it,⁵ in a clear reference to objective situations of incapacity to deliver, on the one hand, and to receive the provision of work, on the other hand. This last situation results from the extinction of the employer, which is reinforced in article 346, that is under the heading "Death of the employer, extinction of a legal person or closure of the company" provides, in number 2, for the possibility of expiry of employment contracts by extinction of the legal person, if there is no transfer of the company or establishment.⁶

The grounds set out in Article 130 of the LT to justify the termination of employment contracts following the closure of the establishment may be questioned, as it does not formally correspond to the most appropriate procedure and result in the workers concerned.

It is therefore appropriate to reflect on the inclusion in the LT, as grounds for the expiry of employment contracts, the termination of the company's activities or extinction of the legal person, without, however, calling into question the right to compensation of workers as prime creditors with regard to remuneration.

As an example of the regime established in article 130 of the LT, the legal regime for the expiry of employment contracts due the extinction of the company should indicate the formalities, compensation system and procedures to be followed for the execution of this type of termination of employment contracts, which will contribute to greater certainty and legal certainty in the business environment.

¹Article 125, paragraph 1, line c) of Law no. 23/2007, of August 1 (Labour Law)
²Article 125(1)(b)
³Article 4 of the Labor Law
⁴Fernandes, Antonio Monteiro (2004) - Labor Law, 12th Edition, Almedina - Coimbra, page 527
⁵Article 343 (paragraph B) of the Portuguese Labor Code
⁶Article 346 (2) of the Portuguese Labor Code

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