At EU level, this matter is stipulated by Council Directive 2001/23/EC 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 undertakings or businesses.

1. Scope

The Directive applies to any transfer of an undertaking, business, or part of an undertaking or business, to another employer, as a result of a legal transfer or merger.

The Directive covers public and private undertakings engaged in economic activities, whether operating for gain or not, with the exception of seagoing vessels.

However, the Directive does not apply to the transfer of administrative functions between public administrative authorities, or in case of an administrative reorganization of public administrative authorities.

2. Definitions

The Court of Justice of the European Union clarified the notion of “transfer” covered by the Directive as follows:

  • “Undertaking” shall be understood as an economic entity, namely an organized group of persons and elements allowing the exercise of an economic activity which pursues a specific objective;
  • “Transfer” shall be related to any entity which is organized in a stable manner;
  • The decisive criteria for establishing the actual existence of a transfer is to determine whether the economic entity that was transferred has retained its identity, a matter which results from continuing its ordinary activities or from its effective takeover;
  • The Directive is applicable in all circumstances of change in the context of contractual relationships of the individual or of the legal entity that is responsible for the economic entity’s operations and undertakes the obligations of an employer in relation to the entity’s employees.

Transfer of an undertaking, for the purposes of this Directive, refers to the transfer of an entity that retains its identity as an organized group of resources which has the objective of pursuing an economic activity, whether that activity is central or auxiliary.

The provisions of the Directive do not apply to transfers of undertakings between a transferor and a transferee located in different Member States.

Moreover, the provisions of the Directive apply to any transfer between two companies belonging to the same group, which have the same owners, the same management, the same registered offices and which conduct the same activities.

The transfer of an undertaking as a specific operation of labor law can coexist with the transfer of assets stipulated by the tax legislation. The two concepts are distinct in scope, and the existence of transfer of an undertaking for the purposes of labor law does not automatically lead to the existence of a transfer of assets for the purposes of tax law and vice versa.

Also, the Court of Justice of the European Union has repeatedly ruled that the transfer of ownership of property is not a prerequisite for applying the rules of undertaking transfers.

There are situations where the transfer of an undertaking can exist in the absence of an explicit agreement, such as where an undertaking that has entrusted a service to another undertaking decides not to renew the agreement and to provide the services itself, or where a public legal entity that is acting under the provisions of administrative law undertakes activities of public interest previously carried out for local interests by a private legal entity.

Also, there are situations where the transfer of undertakings exists in the absence of any agreement between the parties, as a result of an administrative decision – for example, the takeover by the undertaking of an activity of public interest which is provided by another undertaking, following the procedure for awarding a public service agreement, as well as the conclusion of a public service agreement following award procedures conducted by a person of public law, even if there is no direct contractual link between the undertaking that was awarded the agreement and the one performing the previous public service.

For the purposes of this Directive, “transferor” shall mean any individual or legal entity that, by reason of a transfer, ceases to be the employer in respect of the undertaking, business or part of the undertaking or business.

“Transferee” shall mean any individual or legal entity that, by reason of a transfer, becomes the employer in respect of the undertaking, business or part of the undertaking or business.

“Employees’ representatives” and related expressions shall mean the representatives of the employees provided for by the laws or practices of the Member States.

“Employee” shall mean any person who, in the Member State concerned, is protected as an employee under national employment law.

3. Maintaining the identity of the economic entity

In order for the Directive to be applicable, the transfer must concern an economic entity which, after it is taken over by the transferee, retains its identity. To determine whether such an entity retains its identity, all the characteristics of the transaction in question are considered, such as:

  • the type of undertaking or business concerned;
  • whether tangible elements, such as buildings and movable assets, are transferred;
  • the value of the intangible assets at the time of transfer;
  • whether or not the majority of staff was taken over by the new employer;
  • whether or not the clients were transferred;
  • the degree of similarity between activities exercised before and after the transfer.

At the same time, identity emerges from a plurality of items that cannot be dissociated, including: staff that constitutes the transferred entity, its management bodies, work organization, methods of operation.

Th principle constantly reiterated by the Court of Justice of the European Union in cases of transfer of undertakings is that the overall situation should always be considered, and no element can be analyzed in isolation. However, there will most likely be variations in interpretation of the notion of identity, interpretation that will be left to the discretion of the judge who faces the circumstances of the case.

4. Effects of the transfer of undertakings

A. Effects on individual labor relations

The transferor’s rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer are automatically transferred to the transferee, by law.

Also, Member States may require that, after the date of transfer, the transferor and the transferee be jointly and severally liable in respect of obligations which arose before the date of the transfer from a contract of employment or an employment relationship existing on the date of the transfer. In the absence of such a requirement, the transferee is also responsible for obligations prior to the transfer.

The transfer of undertakings shall not constitute grounds for dismissal of employees affected by the transfer of economic activity. However, dismissals that may take place for economic, technical or organizational reasons entailing changes in the workforce are not prohibited.

If the contract of employment or the employment relationship is terminated because the transfer involves a substantial change in working conditions to the detriment of the employee, then the employer shall be regarded as having been responsible for termination of the contract of employment or of the employment relationship.

The Directive stipulates that workers’ rights to old-age, invalidity or survivors‘ benefits under supplementary company or intercompany pension schemes, outside the statutory social security schemes in Member States, are not maintained unless the Member States adopt provisions in this respect. However, Member States will adopt any necessary measures to protect the interests of employees and of persons no longer employed in the transferor’s business at the time of transfer, benefits that have been earned or are in the process of being earned under supplementary schemes.

B. Effects on collective labor relations

The transferee has to comply with the provisions of the collective bargaining agreement applicable on the transfer date, until termination or expiry thereof or until another collective agreement enters into force or is applied. As mutually agreed on between the transferor and employees’ representatives, the provisions of the collective bargaining agreement valid on the transfer date can be renegotiated, no sooner than one year from the transfer date.

Where, following the transfer, the undertaking, business or part thereof does not maintain its autonomy and the collective bargaining agreement applicable to the transferee is more favorable, the more favorable collective agreement will be applied for the transferred employees.

If the undertaking, business or part of the undertaking or business preserves its autonomy, the status and function of the representatives or of the representation of the employees affected by the transfer shall be preserved on the same terms and subject to the same conditions as before the transfer by virtue of any law, regulation, administrative provision or agreement, provided that the conditions required for the constitution of employees‘ representation are met. If the conditions required for the constitution of employees‘ representation are not met, the transferred employees shall choose their representatives under the law.

If the term of office for the representatives of the employees affected by the transfer expires as a result of the transfer, such representatives shall continue to benefit from protection as provided by the laws, regulations, administrative provisions or practice of the Member States.

C. The obligation to inform and consult

The transferor and the transferee shall inform the representatives of their respective employees affected by the transfer or, if they are not organized or appointed, shall inform the staff members concerned, at least 30 days before the date of transfer, with respect to:

  • the date or proposed date of the transfer;
  • the reasons for the transfer;
  • any legal, economic and social implications of the transfer for the employees;
  • any measures envisaged in relation to the employees.

The transferee must offer such information to the representatives of its employees in a timely manner, and in any event before the employees are directly affected by the transfer as regards their employment and working conditions.

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