Transfer of Undertakings
1. Economic reality and legal structure
With the implementation of the internal market as the basis of the European Community, cross-border activity has not only increased in the area of movement of goods but also and especially in the area of freedom of establishment and free movement of capital and payments. Economic development has led to changes of company structures at the domestic and Community level resulting, inter alia, from transfers of undertakings, businesses and parts of undertakings and businesses. Terms such as joint venture, private equity and cross-border mergers (see on this Dir 2005/56), to name but a few, illustrate to what extent there has been an economic revolution in the last few decades.
In the event of a transfer of undertaking, employees were confronted with the problem that the previous employer, who then no longer had a business and no longer employed any employees, could dismiss them on operational grounds (§ 1 Kündigungsschutzgesetz; ss 94, 98(4) (a) Employment Rights Act 1996; Art L-1233-3 Code du travail). Those employees could not demand of the buyer, with whom the employees have no contractual relationship, to be hired, either. It is for this reason that France laid down provisions as early as 1928 concerning transfers of undertakings (Ex Art L-122-12 al. 2 Code du travail) and Germany introduced its § 613a Bürgerliches Gesetzbuch (BGB) in 1972. In the United Kingdom, however, there were no statutory provisions regulating transfers of undertakings; and legal relationships were not transferred because at common law the transfer of any business resulted in the termination of any existing contract.
An increase of mergers and acquisitions was also perceived at the European level in the 1970s, leading to the adoption of Dir 77/187 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of businesses on 14 December 1977. The directive was amended by Dir 98/50 of 29 June 1998 incorporating comments made by the ECJ on the interpretation of the original directive into the legal text. In addition, the legal position of employee representatives was strengthened and stricter notification duties were put in place. The original Dir 77/187 and the amending Dir 98/50 were promulgated on 12 March 2001 as the new Dir 2001/23 (European labour law). Directive 2001/23 not only aims to protect the individual employee, but also guarantees that collectively agreed working conditions are retained. Liability risks are also to be distributed fairly between the transferor and transferee. The central aim of Dir 2001/23 is nevertheless the protection of employees which is made clear by the third recital of the directive and by Art 8 which stipulates that provisions more favourable to the employee may be retained.
2. Implementation in the Member States
The German provision of § 613a BGB has been amended repeatedly to comply with European requirements. The first amendment transposed Dir 77/187. It was not until 2002, thereby exceeding the transposition deadline, that § 613a (5) BGB was included to lay down the employers’ notification duties. Furthermore, in order to transpose Dir 98/50, § 21a Betriebsverfassungsgesetz was created which prescribed the transitional mandate of the works council. The employee’s right to object to the transfer of the employment relationship was stipulated in § 613a(6) BGB thereby exceeding the requirements of Dir 2001/23. France implemented the directive in L-1224-1 ff Code du travail. The United Kingdom adopted the Transfer of Undertakings (Protection of Employment) Regulations 1981 which were amended in 2006. The measures of the individual Member States implementing the directive are available at <http://eur-lex.europa.eu>. The case law of the ECJ continues to serve as a great source of inspiration on questions relating to transfers of undertakings, most recently in Klarenberg (ECJ Case C-466/07 – Klarenberg, nyr).
3. Transfer of undertaking
Under Art 1(1)(a) of Dir 2001/23 the provisions of the directive apply to a transfer of undertaking, business or part of an undertaking or business to another employer as a result of a legal transfer or merger. Pursuant to Art 1(1)(b) of Dir 2001/23/ EC there is a transfer where there is a transfer of an economic entity which retains its identity, meaning an organized grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary. These terms require further elaboration.
a) Undertaking, part of an undertaking, business and part of a business
The directive was extended to include parts of an undertaking by the amending Dir 98/50. The ECJ does not distinguish between these terms, but groups them all under the definition of Art 1(1)(b). A more extended definition would not make sense as ‘part of an undertaking’ is the smallest entity and is contained in the other terms. Part of an undertaking must be an organizationally independent entity that pursues at a minimum a partial objective of its own within the main objective of the business. The objective need not be different from the objective of the main business, but it must have a partial identity of its own. An ancillary function, such as a company canteen, will suffice (ECJ Case C-209/91 – Watson Rask  ECR I-5755). The economic activity must be carried out in a stable way and must not be limited to performing one specific employment contract. Under Art 1(1)(c) the entity is not only economic when it is operating with a view to profits. The economic nature is only then precluded when it exclusively involves the exercise of public authority. If it is not exercising public authority, then it is an economic entity even when the transferred service was contracted out by a public body, such as a municipality.
b) Retaining identity
The question of whether identity has been retained is central. To assess this, one must take all notable circumstances characterizing the transaction into account, as the ECJ pointed out in Spijkers (ECJ Case C-24/85 – Spijkers  ECR 1119), specifically mentioning seven criteria: (i) the type of undertaking or business; (ii) the transfer of tangible assets; (iii) the transfer of intangible assets; (iv) whether the majority of its employees are taken over; (v) the transfer of customers; (vi) the degree of similarity between the activities; and (vii) the period for which those activities were suspended. None of the aforementioned criteria are necessary and none are sufficient criteria on their own for the term ‘transfer of undertaking’. The decisive element is whether a functional organization is taken over essentially unchanged. If, however, a new work structure is established, then the identity is not retained, even if the business activity is continued in the same way. Mere succession with respect to function does not constitute a transfer of a business according to the ECJ in Ayse Süzen (ECJ Case C-13/95 – Ayse Süzen  ECR I- 1259; see also ECJ Case C-463/09 – CLECE  ECR I-0000). On the other hand, recent ECJ case law (ECJ Case C-466/07 – Klarenberg, nyr) has shown that identity can be retained even when an organizational entity is completely dissolved.
The degree of importance to be attached to the seven criteria is dependent on the individual circumstances of the case at hand. With respect to the type of undertaking or business it is crucial to distinguish between asset reliant undertakings (ie those with significant tangible and intangible assets) and labour intensive undertakings (ie those without significant tangible and intangible assets). Tangible assets include all physical assets such as the buildings, the machines, the furnishings or the fleet of vehicles. They do not need to be transferred for independent commercial use, ie when the transferee does not obtain an additional benefit from them. This can neither be derived from the wording of Dir 2001/23 nor from its objectives, which are to ensure the protection of workers where there is a change of undertaking or business (see ECJ Case C-232/04 – Güney-Görres  ECR I-11237).
In Christel Schmidt (ECJ Case C-392/92 – Christel Schmidt  ECR I‑1311) the ECJ held that taking over the workforce can suffice to establish a transfer, particularly in the case of labour intensive undertakings. Since the decision in Ayse Süzen, however, it is clear that a mere transfer of responsibilities does not constitute a transfer of undertaking. Rather, in labour intensive undertakings the taking over of the workforce is key as no significant tangible assets are transferred (see recently ECJ Case C-463/09 – CLECE  ECR I-0000).
Transfer of customer base can also indicate a transfer of undertaking. This will be the case when customer files, dealerships or exclusive supply agreements are taken over.
It is questionable whether the degree of similarity between the activities can in any way be an indication of a transfer of undertaking. Considering that mere succession as to function will not suffice but, on the other hand, that the transfer of tangible and intangible assets, workforce or customer base will usually represent a similarity of activities, this criterion is of limited value. The period for which an activity is suspended distinguishes the continuation of a business from the closure of a business. A general period cannot be determined as it depends on the activity in question, whether the new proprietor can still profit from the previous business, or whether it has already been liquidated. The key element here will be whether the businesses’ customer ties remain.
c) Transfer to a new employer
The transfer to a new employer of a business presupposes a change of the legal entity. The employer is the person who henceforth is responsible for carrying on the business and who incurs the obligations of an employer towards employees of the undertaking, regardless of the question of ownership. In the case of a company it is not enough for the partners to change or the legal structure to be changed according to the jurisprudence of the German Federal Labour Court. This opinion is convincing as in the event of a transformation the employer remains in place as a legal entity and a change of partners does not affect the legal person. This is confirmed by Art 1(1)(a) of Dir 2001/23 which includes mergers—the merging legal entities cease to exist.
d) Legal transfer or merger
The term legal transfer is construed widely. The only exception is the transfer by universal succession, ie the succession to the entire estate by virtue of the law of succession or by virtue of corporate transformations. Direct legal relations are not required. Even a unilateral decision by a public authority constitutes a legal transfer according to the ECJ in the matter of Redmond Stichting (ECJ Case C‑29/91 – Redmond Stichting  ECR I-03189). This conclusion cannot be based on the wording of Dir 2001/23: the German, French, Dutch and Italian versions refer to transfers resulting from a contract (vertragliche Übertragung, cession conventionnelle, overdracht krachtens overeenkomst and cessione contrattuale) whereas the English and Danish language versions indicate a much wider scope (legal transfer and overdragelse). The purposive approach to its meaning adopted by the ECJ is therefore justified considering that from the employee’s point of view it makes no difference for what reason the undertaking has changed hands. The definition of mergers in Art 3(1) of Dir 78/855 is binding for the interpretation of Dir 2001/23. The newly formed company takes over the legal position by virtue of universal succession at any rate. According to the 12th recital of Dir 2005/56 it is submitted that the same is true for cross-border mergers.
e) Transfers of undertakings in insolvency
Art 5(1) of Dir 2001/23 specifically states that the Member States need not lay down provisions where the transferor is the subject of bankruptcy proceedings or ‘any analogous insolvency proceedings which have been instituted to liquidate the assets of the transferor’. The legal consequences stipulated in Arts 3, 4 of Dir 2001/23 in fact do more harm than good because the dismissal protection extended to the employees could arguably frighten off prospective purchasers. Nevertheless, Art 5(1) expressly allows the Member States to extend the scope of the provisions on transfers of undertakings to cases of insolvency. In German law, by virtue of an argumentum e contrario from § 128(2) Insolvenzordnung, it follows that § 613a BGB applies without limit to insolvency of the transferor. In the United Kingdom the Transfer of Undertakings (Protection of Employment) Regulations 2006 apply to insolvency as long as insolvency proceedings have not been instituted with a view to liquidating the assets of the transferor, see Reg 8(6) of the Transfer of Undertakings (Protection of Employment) Regulations 2006.
4. Legal consequences for the individual employment relationship
A transfer of undertaking produces legal consequences on many levels. Exceptions are stipulated for insolvency in Art 5(2) of Dir 2001/23. The most important effects for employee protection are those concerning individual rights.
a) Succession to rights and obligations
Pursuant to Art 3(1)1 of Dir 2001/23, the transferor’s rights and obligations arising from an employment relationship existing on the date of a transfer shall be transferred to the transferee. The relevant employee must belong to the transferred part of the undertaking according to the ECJ in Ny Mølle Kro (ECJ Case C-287/86 – Ny Mølle Kro  ECR 5465). It is not sufficient that a person employed in the department not transferred carries out work for the transferred part of the business. The term ‘employment relationship’ is based on the national definition of employee. Under German law this has the result that members of a company body and freelance workers are not protected by § 613a BGB. However, under Art 2(1)(d) of Dir 2001/23 part-time workers, fixed-term workers and temporary workers may not be excluded.
b) Prohibition of dismissal
Dismissal on grounds of the transfer of undertaking is prohibited for the transferor as well as for the transferee. It is, however, permitted to dismiss employees for economic, technical or organizational reasons, even if these result from the transfer. However, the transfer may not be the prevailing reason for the dismissal. There is typically an infringement if the dismissal takes effect around the time of the transfer and the employees are taken on again by the transferee.
c) The employee’s right to object and to be informed
Art 7(6) of Dir 2001/23 stipulates a duty to inform the employees only in the event that the undertaking has no employee representatives. The German provision of § 613a(5) BGB, going beyond the requirements of the directive, prescribes a notification duty in any case. This is permissible in view of the ‘most favourable provision’ principle of Art 8 of Dir 2001/23. British legislation has set out a duty to inform in Regs 13 and 14 of the Transfer of Undertakings (Protection of Employment) Regulations 2006, whereby the employee representatives are to be informed in a timely manner (Reg 13(2)). Representatives are usually trade union representatives (Reg 13(3)(a)), failing that, employee representatives appointed or elected by the affected employees (Reg 13(3)(b)(i)) or, failing that also, employee representatives elected by any affected employees in an election satisfying the requirements of Reg 14(1) (Reg 13(3)(b)(ii)). In France the comité d’entreprise is to be informed of any changes in the organization of the undertaking pursuant to L-2323-19 Code du travail. This includes the transfer of undertakings.
§ 613a(6) BGB sets out the employee’s right to object to the employment relationship being transferred to the new employer and is in conformity with European law. As a result of the objection, the employee remains in the employ of the transferor but risks being dismissed for operational reasons if the transferor is unable to keep him on.
5. Legal consequences at the collective level
Transfers of undertakings not only affect the individual employment relationships but collective agreements as well. Accordingly, Dir 2001/23 also contains provisions with regard to collective agreements.
a) Continuance in force of collective agreements
Article 3(3) of Dir 2001/23 stipulates that the transferee shall continue to observe working conditions agreed in any collective agreement for at least one year. German law recognizes two mechanisms which lead to a continuance in force. First and foremost, there is a continuing normative effect which follows from the general rules. On a subsidiary level, collective arrangements are transformed into the contract of employment pursuant to § 613a(1)2-4 BGB. This meets the requirements of Art 3(3) of the directive which sets out that the collective agreements must be observed on the same terms without specifying a particular legal structure. The protection for the employee is afforded regardless of the structure.
A works agreement continues to be effective if the business identity with respect to employee rights is retained. Under the prevailing view of German literature, internal obligations continue to apply only if they at the same time frame the content of the employment relationship. Thus, in principle, operational norms or norms concerning employment conditions laid down by the works council or those norms about the joint establishment are not covered. Regarding this limited transformation, concerns persist with a view to EC law. Although Art 3(3)1 merely speaks about ‘terms and conditions agreed in any collective agreement’, thus covering only those norms which frame the content of the employment relationship, Art 3(3)1 does not limit its application to the individual employment relationship but suggests a broad comprehension relating to all provisions of the relationship between employee and employer. It is immaterial whether those provisions concretely concern the individual employee or the work force as a whole. This also follows from the comparison of the less restrictive versions of the directive in other languages: in the English version the wording is ‘terms and conditions’ and in the French conditions de travail. Ultimately, the aim of the directive is to preserve the level of collective rights protection, which militates against a strict interpretation. The effect of the transformation is that the collective norms are frozen at the stage of the transfer of the undertaking. The transformed norms may not be amended for a year under Art 3(3)2 of Dir 2001/23, unless the collective agreement expires or is replaced by a new collective agreement.
b) Preservation of the legal status and function of the employee’s representation
Pursuant to Art 6(1)1 the legal status and function of the employee’s representation must be preserved on the same terms when the undertaking continues to be autonomous and the necessary conditions for the constitution of the employee’s representation are fulfilled. The ‘representatives of employees’ are defined according to the laws or common practices of the Member States in Art 2(1)(c). These provisions have gained significance in particular through Dir 2002/14 concerning informing and consulting employees at the domestic level and Dir 2001/86 concerning the involvement of employees in the Societas Europaea (SE) (European Company (Societas Europaea)). The latter has provided for codetermination to be introduced to the bodies of the SE within the European Union.
In Germany, employee representation includes works councils and representative committees of executive employees, sea workers committees as well as representation of young employees and apprentices. The employee representatives protected in France are set out in L-2414-1 Code du travail. The United Kingdom abandoned its ‘single channel’ model of employee representation where representation was restricted to trade unions. The Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 1995 now provide for other forms of employee representation.
Art 6(1)2 of Dir 2001/23 stipulates that the preservation of employee representatives does not preclude a reappointment or reconstitution thereof. Should an undertaking lose its autonomy, ie is completely swallowed by another undertaking or part of an undertaking, Art 6(1)1 of Dir 2001/23 affords no protection. Under Art 6(1)4 of Dir 2001/23, the Member States must ensure that the employees transferred who were represented before the transfer continue to be properly represented during the transition period before an employee representative can be appointed. The German legislature implemented this by virtue of § 21a Betriebsverfassungsgesetz. Pursuant to Art 6(2) of Dir 2001/23 the representatives shall continue to enjoy the protection provided by the laws, regulations, administrative provisions or practice of the Member States if the term of office of the representatives of the employees affected by the transfer expires as a result of the transfer.
c) Informing and consulting the employee representatives
Art 7 of Dir 2001/23 obligates the transferor and the transferee to inform and consult the employee representatives. Just as in the case of collective redundancy, Dir 2002/14 provides comprehensive, institutional protection here. Without employee representation the obligations would come to nothing which is why Dir 2002/14 forces their establishment. In 1994, the ECJ had already ruled that it followed from Art 6(1) Dir 77/187 that the Member States were obliged to designate employee representation (ECJ Case C-382/92 – Commission v United Kingdom and Northern Ireland  ECR I-2435).
6. Further liability of the transferor
Albeit not imperative under Union law but expressly allowed in Art 3(1)2 of Dir 2001/23, the German provision of § 613a(2), (3) BGB sets out further joint and several liability of the transferor for obligations passed onto the transferee to the extent that they arose before the transfer and became due within a year. The idea underlying this liability is that the transferor has received returns for the undertaking, which were generated by the workforce. As a result the employee obtains an additional debtor.
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