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Transferring an undertaking in the EU: current issues

By Prof. Robert von Steinau-Steinrück and Stephan Sura

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Back when Latin was the lingua franca, they already knew this fact: Those who point out the differences do better. And they were right, as you will see in this article.

Acquiring an undertaking, a business or parts of one doesn’t just happen within the scope of an M&A. Other, sometimes even bigger, challenges occur when employment relationships have to be transferred to a new owner, including challenges that involve multiple contractual circumstances: In Germany, for example, protective legislation for employees plays a major role, and the allocation of responsibility toward employees is established between the acquisition parties. Due to the complexity of the matter and the fact that the main applicable legal provisions are not always comprehensible, a flood of decisions have been issued by German labor courts (Arbeitsgerichte) over the last few years. This has helped concretize what has been missing in the codified law. A selection of the most recent decisions is presented below.

Basics

The transfer of an undertaking or a business (Betriebsübergang) is the transfer of an operation through contractual agreement. According to settled case law by the Federal Labor Court (Bundesarbeitsgericht, BAG), the transfer of an undertaking implies the transference of ownership of a “long-term economic unit” from the perspective of a cumulative evaluation (see, e.g., BAG decision from April 17, 2003, ref. no. 8 in the Ausländerzentralregister, AZR 253/02). Regarding the employment situation, Section 613a of the German Civil Code (Bürgerliches Gesetzbuch, BGB) – largely based on EU directives, this is the key legal provision in German employment law for the transfer of undertakings – states that the acquirer enters into the rights and obligations arising from the employment relationships in existence at the time of transfer. For this reason, the transference of an undertaking does not lead to the end of individual employment relationships; rather, those within the transferred unit are conveyed as a whole to the acquirer. In a pure share deal, the company’s identity is preserved and the acquirer takes over the target with all of its rights and obligations by law or by contract. No special protective legislation for employees is necessary in this case because the employment relationships remain unchanged. Accordingly, Section 613a of the BGB applies mainly to an asset deal if the sale of a business or a part of it is involved as well as to transformations of undertakings under the Transformation Act (Umwandlungsgesetz, UmwG): mergers, split-ups, transfers of assets and changes to the corporate form.

Nevertheless, the provision only applies to employees with regular employment contracts and not to managing directors or members of the management board. In addition, former employees and retirees who still have claims under a company pension plan are excluded as they longer have an employment relationship.

Employment contents

The legal protection aims to secure the existing employment conditions for affected employees so, with exception of the contractual partner, their employment situations remain unchanged. For this reason, employment contracts, including all their current contents, are carried over to the transferee of the operation, and it is neither required nor possible to demand that new individual agreements be signed.

Should works agreements or collective bargaining agreements involving the previous employer affect individual employment contracts and no substitute agreements have been established with the acquirer, the contents of the former applicable collective agreement are transformed into provisions within the individual employment contracts with the new employer. In this situation, the provisions cannot be changed to the disadvantage of employee for one full year (Section 613a [1] 2 of the BGB). In addition, changing these provisions during the first year of the new employment relationship is only possible when the original collective agreement ends and the acquirer and the employee mutually agree on the application of another collective agreement that is not already applicable by corresponding memberships.

In general, a potential seller’s membership in an employers’ association is a strictly personal matter and is not automatically transferred in the course of the transaction. If, however, a collective bargaining agreement with similar provisions is already in force with the acquirer, it can, under certain conditions, collectively replace the previous agreement with the seller. If the business as a whole is transferred and retains its identity, previously concluded works agreements will remain in force.

Continuance of employment relationships

Dismissals connected with the transfer of the undertaking are prohibited and thus invalid according to Section 613a (4) 1 of the BGB. A dismissal is deemed to be due to the transfer of the undertaking if the transaction was the motive for the dismissal. However, a dismissal can be valid for other reasons in connection with a transfer: for example, on operational grounds if the former employer closes the entire business because of the disposal of the undertaking. Drawing a distinction can be difficult in individual cases.

Either the former or the new owner of the undertaking (as codebtors to the employees) is, according to Section 613a [5] of the BGB, obligated to inform affected employees in advance and in writing about the contents and the effect of the transfer on their employment. In particular, this information must contain the point in time of the transfer, the reason(s), the individual consequences for the addressed employee and the right of objection to the transfer; the employees must be put into the position of being able to assess what the change of employer will mean for them personally.

Within one month after being duly informed, they have the right to object to the transfer of their employment relationship (Section 613a [6] BGB), even if it has been terminated. Reasons for the objection must not be presented. As the general result, the employment relationship with the previous employer remains in effect. If the information is incomplete, the right to object can persist even after the transaction is complete and only be forfeit under certain circumstances, e.g., when the employee was duly informed through other sources and the employment relationship has already been transferred without any disadvantages to him or her.

Impact on the employee representative bodies

The complete transfer of an undertaking generally has no effect on the works council as a governing body or on its members as they will remain in their positions in the acquirer’s business as well. If the situation involves a pure transfer of the whole business, the works council also does not have any codetermination rights. A transfer of business in and of itself does not constitute an operational change within the meaning of Section 111 of the Works Constitution Act (Betriebsverfassungsgesetz, BetrVG) and thus is not subject to codetermination. However, if the transaction is accompanied by an operational change, for example through the split-up or the merger of businesses due to the sale of a part of the undertaking, codetermination rights, such as to negotiate a conciliation of interest and a social plan, may exist.

Current jurisdictional issues

With its decision from November 19, 2015, the BAG confirmed the objection to the transfer of the employment relationship is only valid toward the seller or the acquirer of the concrete transfer of undertaking (ref. no. 8 of the AZR 773/14). Section 613a (6) of the BGB does not include an unlimited right to objection against every potential transfer of the employment relationship in the past. The “former” employer in this context is always the seller in the ongoing transaction; a valid objection to previous transfers would have only been possible towards the participating parties of these transactions. This jurisdiction is extremely relevant for “chains” of transfers of undertakings and potential incomplete information towards the employees within the chain as it restricts the right to objection if any misacting party at least provided the basic information, which means informing about the acquirer and the point of time of the transfer.

Furthermore, the BAG (decision from May 5, 2015, ref. no. 1 of the AZR 763/13) has mainly confirmed a settled case law for the continued applicability of works agreements for central works agreements on a company level. The provisions of a central works agreement are transformed into separate works agreements when the transactions are individually established as long as there are no existing provisions through a central works agreement at the company itself. Here, individual employment contract provisions are not transformed, which means that changes are possible in accordance with the local works council even before the one-year period ends according to Section 613a (1) 2 of the BGB.

Finally, several higher labor courts substantiated the necessary change in employer for an actual transfer of undertaking: No real change in the proprietor is given through a contractual leading agreement between the owner and another party, at least when this is not open to the public (decision of the Higher Labor Court of Berlin-Brandenburg from May 11, 2016, ref. no. 15 Sa 108/16). The Higher Labor Court of Baden-Württemberg even distinguished the “essential and comprehensive outside perspective” from the sheer (and potentially incorrect) role as the employer before (decision from March 9, 2015, ref. no. 4 Sa 19/15). For the transfer of an undertaking and thus for the applicability of its legal provisions, an external impact is always mandatory. This external issue is neither given by the bare change of partners while the employing stage stays the same (Higher Labor Court of Düsseldorf, decision from August 10, 2015, ref. no. 9 Sa 421/15).

Outlook

The law of transfers of undertakings is a highly dynamic issue that produces distinguishing cases every day. This will continue in 2017 due to the upcoming decision by the European Court of Justice on the effect of reference clauses in individual employment contracts when the acquirer didn’t participate in the negotiations on the respective collective bargaining agreement (ref. no. C-680/15 , C-681/15). On the domestic field, the same goes for the highly expected judgment by the Federal Constitutional Court (Bundesverfassungsgericht , BVerfG) on the constitutionality of the Act of Collective Bargaining Unity (Tarifeinheitsgesetz). Introduced in 2015, this act states the exclusive applicability of the collective bargaining agreement that represents the majority of members of workers unions in the establishment (inter alia ref. no. 1 BvR 1571/15). This decision will also have a broad impact on transactions, for example when majorities change through a transfer of undertaking or with respect to the destiny of minor collective bargaining agreements.

robert.steinrueck@luther-lawfirm.com

stephan.sura@luther-lawfirm.com