An introduction to European employment law for Korean companies

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1 Acquisitions issues to expect Employing staff in Europe An introduction to European employment law for Korean companies For Korean companies encountering the European employment law system for the first time, a number of its features will be familiar. However, the unique way in which law has developed across Europe means that although there are common themes, the implementation of laws varies from country to country and, therefore, specialist advice and guidance is often needed. The implementation of EU law varies from country to country There are 28 countries in Europe that are member states of the European Union (EU). As a condition of EU membership, each European member state must implement the employment legislation passed by the European Parliament. However, each member state has a degree of flexibility on how it chooses to implement EU legislation, and that means, inevitably, differences have arisen in the employment law framework in each member state. In addition, differences in implementation and approach are apparent between countries that have been EU member states for a number of years and those that have recently joined (with the former typically having a more sophisticated approach to employment legislation and employee protection). Those differences mean companies operating in Europe can find the employment law landscape a challenging one. Recently, key European countries have implemented changes to their employment laws in response to the economic downturn and in an effort to remove bureaucracy and stimulate business. While generally being employer friendly, these changes mean that even companies that are familiar with the European employment law regime may find it difficult to keep up to date with the latest developments. As a starting point, companies operating in Korea will find the continental European system of employee representation through trade unions similar to the structure that exists in Korea. Likewise, the legislation governing minimum pay and maximum working hours, the wideranging protection against discrimination and the process requirements to be followed when laying off staff and when acquiring employees in connection with an asset sale. However, there are other aspects of European employment law that are very different from the Korean model, which may give rise to some unexpected hurdles or obligations. This guide gives an overview of some of the key aspects of employment law that Korean companies may encounter when acquiring European businesses or when employing staff in Europe. Freshfields Bruckhaus Deringer LLP 1

2 Acquisitions issues to expect Collective consultation Employee works councils and trade unions, which represent collectively the views of employees, are a common feature across much of Europe. Trade unions are independent, external organisations representing employees within a certain industry or business sector. Works councils, meanwhile, are internal employee representative bodies usually made up of elected employees. EWCs must be consulted on matters that have transnational significance Confidentiality obligations to which employee representatives are subject vary between European jurisdictions Works councils have the right to give advice or opinions with respect to significant management decisions proposed by a company. They may also have the right of approval in relation to certain proposed decisions regarding employment benefits and working conditions. In addition to local (ie country-specific) works councils, many companies operating in Europe also recognise European Works Councils, or EWCs. EWCs must be consulted on matters that have transnational significance, such as headcount reductions or transactions that affect employees in more than one EU member state. The significance of EWCs, local works councils and trade unions in Europe in the context of a potential acquisition lies in the fact that consultation must often be carried out by the seller with those bodies before acquisition documentation being signed. Their involvement can in some circumstances delay or block transactions. In the Netherlands, for example, if a works council exists, it must be consulted and asked to give an opinion before any contracts or letters of intent are entered into. If the works council advises against the proposed transaction, then a one-month waiting period must be observed before the transaction can proceed. During that period, the works council could lodge an appeal in court, claiming that the employer s decision to proceed with the transaction is unreasonable. A finding in the works council s favour by the court could block the transaction. The interplay of EWC and local works council or union consultation processes must be handled carefully to make sure relevant obligations are observed and timings are met. It is typical for consultation with the EWC to be handled first with local consultation processes following, but local laws in some European countries may require an alternative approach to be adopted. This is an issue that must be considered early in any transactional process. In the early stages of an acquisition, companies particularly listed companies with obligations to formally announce price sensitive information will often be concerned about confidentiality and may therefore be reluctant to share information with employee representatives, particularly where transaction documentation is yet to be signed. Confidentiality is not generally regarded as a sufficient justification to enable a company to avoid sharing information with a works council or trade union in order to comply with the relevant legal obligations. The confidentiality obligations to which employee representatives are subject (once information has been shared) vary between European jurisdictions. In some countries employee representatives are subject to stringent confidentiality requirements but in others, the existence of confidentiality obligations (and the enforcement of any obligations) is limited. There is often an assumption that information, once shared with employee representatives, will soon find its way into wider circulation. This is a challenge often faced by companies contemplating transactions in Europe, and a particular issue for listed companies undertaking large transactions. 2 An introduction to European employment law for Korean clients, February 2014

3 Because of the potential impact on transaction timetables (or even the ability of the transaction to proceed), the jurisdictions where works council consultation obligations are regarded as most significant are France and the Netherlands. In addition to potential delays, non-compliance with consultation obligations in France can lead to personal criminal liability for a company s directors. In other jurisdictions, although consultation with employee representatives may be required, the penalties for non-compliance are usually only financial and criminal liability is not common. Employees are protected from dismissal in connection with a transfer to a new employer Pension schemes can be a significant issue There are a number of practical options that can be considered by investors to deal with consultation obligations. One possible route is for the buyer to make an irrevocable offer to buy the relevant company, which is not accepted by the seller until consultation has been completed. We advise regularly on these sorts of structures and on their enforceability. Automatic transfer of employees Another feature that is common across Europe (and which is similar to a certain extent in Korea) is the automatic legal transfer of employees when a business is sold. Employees who are employed within a transferring business will automatically become employees of the entity acquiring that business and liabilities in relation to those employees will transfer to the buyer. In Korea, employees of the transferring business have a right to transfer with their working terms and conditions and liabilities, although they cannot be forced to transfer. Following the transfer of their employment, employees terms and conditions are protected, which can make it difficult to harmonise the incoming employees terms with those of the existing workforce. While in Korea a disadvantageous change to employees terms and conditions can be implemented if the majority union or a majority of employees consent, in Europe it would be typical to need the consent of each individual employee. In some cases, even individual consent will not be sufficient and an employee who consents to a detrimental change in his terms and conditions following a transfer (perhaps in return for another, more favourable, change elsewhere in his contract) could later cherry pick his terms ie retain the benefit of the favourable change but argue that the detrimental change is void. This is a particular difficulty in the UK. In addition, employees are protected from dismissal in connection with a transfer to a new employer. Although it is possible to take advantage of the synergies created by business acquisitions, care must be taken that any dismissals are implemented fairly and do not target only the incoming workforce. Pension schemes In the UK, in particular, pension schemes can be a significant issue. Defined benefit pension schemes, although declining in popularity, are still operated by a number of companies in the UK. Like in Korea, these schemes guarantee employees a certain level of pension on retirement. They are expensive to run and carry a high level of funding risk. The actuarial bases used to value the assets and liabilities of defined benefit pension schemes mean that these schemes often have significant deficits (running into many tens or hundreds of millions of pounds) and the acquisition of a company with a defined benefit pension scheme is often seen as unattractive. Under the legislation governing these schemes, significant deficits can be triggered on transactions (where, for example, a target company is leaving the seller group s wider pension scheme) this is a big issue for due diligence on transactions involving UK companies. In addition to the potential financial implications of acquiring a company with a defined benefit pension scheme (or with a history of participation in such a scheme), the potential involvement of the UK Pensions Regulator and pension scheme trustees, who are responsible for ensuring the security of members benefits, can affect on the timing of transactions. Defined benefit pension schemes are also present in countries such as the Netherlands and, to a lesser extent, Spain. Significant costs may arise if purchasers are required to set up replacement defined benefit pension arrangements for employees. Freshfields Bruckhaus Deringer LLP 3

4 Share schemes Companies in Europe often provide access to share award schemes or option schemes as part of their employee incentive arrangements, enabling employees to acquire shares in their employing company or a parent company. This is particularly the case where the parent company is US based. Share options or awards may not be available to the whole employee population, but may be reserved just for senior management. They can be a valuable and important part of the remuneration package for key employees. Countries in Europe do not operate an employment at will system Buyers must consider the consequences of acquiring businesses with a history of employee participation in share plans. The leaver provisions applicable to employees on their exit from seller group share plans must be understood, and there may be tax consequences associated with employees participation in such plans. In addition, the buyer may be obliged (either contractually, or from an employee relations perspective) to replicate schemes following completion of a transaction. If establishing and operating a share plan is regarded by a buyer as unattractive or impractical, it could consider establishing a cash-based incentive plan as an alternative. Legal and tax issues for incentive schemes vary across Europe, and specific advice is likely to be required. Employing staff in Europe Hiring Countries such as Italy, Spain, France and Germany impose on companies over a certain size a requirement to employ a minimum number of disabled employees. The position is similar in Korea, where employers must employ a minimum number of disabled employees or pay a fine. In the Netherlands, Belgium, France and the UK, by contrast, no such positive discrimination obligation exists, though financial incentives may be offered to Belgian employers that hire workers with disabilities. Notice periods may vary from one week up to one year or more Pre-hiring medical examinations are not mandatory in most of Europe, except in France. In fact, employers must take care that any requirement for an employee to undergo a medical examination is not seen as discriminatory, for example, on the grounds of disability. Bonuses and participation in profits Several European countries have a requirement for a 13th (and in some cases, 14th) month s salary payment to be made to employees by way of bonus payment. In France there is a statutory requirement for companies over a certain size to allow employees to participate in the company s profits, and in other countries collective agreements with trade unions or works councils may set out the terms of incentive arrangements that an employer must offer. The award of discretionary bonuses, and the size of these bonuses, has been an issue that has featured strongly in European employment case law in recent years, as employees try to argue that a discretionary bonus is, in fact, a contractual entitlement. Care must be taken when drafting the rules of any discretionary bonus scheme and when operating such a scheme perverse or irrational exercises of discretion will generally be struck down by the courts, even where a scheme s rules apparently give total discretion to the employer. Termination of employment Like Korea, countries in Europe do not operate an employment at will system, and as a general rule, there must be just cause for any dismissal. However, the process for effecting dismissals and the consequences of getting the process wrong, differ in some respects between Europe and Korea. In addition, termination of employment is an area where there are some significant variations between different European countries. 4 An introduction to European employment law for Korean clients, February 2014

5 Generally, an employer will be able to dismiss an employee without notice if the employee s conduct justifies this (eg serious misconduct) or if it would be unlawful for the employment relationship to continue. In other circumstances, notice periods must usually be observed or payment made in respect of the applicable notice period. These notice periods may be specified in the relevant employment legislation or in an individual s employment contract. Notice periods may vary from one week up to one year or more, depending on the seniority of the employee. Countries such as Belgium used to distinguish between blue-collar and white-collar workers, and certain employment rights differed depending on which category an employee fell into although a new law has recently entered into force harmonising the notice periods that apply to these two categories of workers. Italy requires employers to operate a severance fund for employees and, like in Korea, Italian employees are entitled to receive their severance payment even if they are dismissed with just cause. Most other jurisdictions do not operate severance funds of this nature but do provide for statutory payments to be made to employees in the event of redundancy (redundancies are discussed further below). In jurisdictions such as the Netherlands, an employer is unable to unilaterally terminate an employment agreement, other than in exceptional circumstances. Instead, the employer must either ask the court to terminate the employment agreement or must apply to the Dutch labour authorities for a permit to serve notice. Under proposed labour market reforms, from July 2015 this process will be replaced with a one-route system, where the route to be followed depends on the reason for dismissal. In Germany, meanwhile, an employee cannot be dismissed unless the works council (if any) has been consulted. In most European countries, in common with Korea, even if an employer observes the relevant notice period for dismissal, the reason for the dismissal is still relevant. Lack of a fair reason (eg poor performance, misconduct or economic reasons) could lead to the employee being reinstated or awarded damages. In addition, a strict procedure must often be followed to render a dismissal fair. Recent labour market reforms have affected this area of the law and have been received positively by employers. In Italy, for example, the availability of reinstatement as a possible remedy is now more limited than previously, thereby reducing the negotiating power of employees in termination discussions. Collective consultation obligations and time periods apply Redundancies European law recognises the concept of redundancy as a potentially fair reason for dismissal. The term redundancy in Europe broadly describes the dismissal of an employee for business reasons for example, if the employer is shutting down a workplace or making efficiency savings by reducing the size of the workforce. This is similar to the urgent business necessity test applied in Korea but may be slightly broader (for example, an employer in Europe will not necessarily have to suffer financial losses over a significant period to argue that there is a need for redundancies). Where a number of redundancies will be made, collective consultation obligations and time periods apply. Like in Korea, if an employer proposes to make redundancies, it must inform and consult employee representatives (in Europe this could include a works council, trade union or other elected representatives) before making any dismissals. The number of proposed redundancies that triggers the collective consultation obligation varies, but can be as low as two. The consultation period ranges from around 30 days to several months. In some European countries, failure to comply with the collective consultation obligations will render the dismissals void and employees will be reinstated. The potentially lengthy and uncertain period of redundancy consultation in countries such as France has in the past been a concern for employers. However, recent labour market reforms have introduced a fixed time limit on such consultations. As in Korea, some jurisdictions require the labour authorities to be notified before redundancies take place. Freshfields Bruckhaus Deringer LLP 5

6 Restrictive covenants Most European jurisdictions, like Korea, recognise post-employment restrictive covenants (eg preventing employees from working for competitors) as valid and enforceable, provided that the duration and scope of the restriction are reasonable. In several countries, such as Spain, Italy, France and Germany, the employee must be compensated in exchange for observing any restrictive covenants. The complexities of European employment law can be challenging to negotiate The post-termination restriction that may be enforced varies between European countries and in some cases is significantly longer than the six to 12 months that would be typical in Korea. In the Netherlands and the UK, 12 months is usually considered the maximum non-compete restriction that is enforceable. In Spain and Germany, however, the maximum is two years, while in Italy, ordinary employees can be restricted for three years and executives for five. Conclusion An increasing number of Korean companies are considering a move into the European market, where they may encounter European employment law for the first time. The complexities of European employment law can be challenging to negotiate, even for companies that are familiar with the system. For companies entering this field for the first time, it can be a daunting prospect. Freshfields employment lawyers throughout Europe are happy to provide further information on the topics in this guide, and to help clients to understand and negotiate the employment issues that arise when doing business in Europe. We also track and advise on the changes and developments in European labour law, particularly the labour market reforms introduced in a number of European countries over recent years to alleviate the effects of the economic slow-down. 6 An introduction to European employment law for Korean clients, February 2014

7 Your main employment, pensions and benefits contacts: Kathleen Healy Partner T T E Holly Insley Senior Associate T E Rob Van Eldik Senior Associate T E Laura Chapman Senior Associate T E Jean-François Gerard Head of Practice Development T E Freshfields Bruckhaus Deringer llp is a limited liability partnership registered in England and Wales with registered number OC It is authorised and regulated by the Solicitors Regulation Authority. For regulatory information please refer to Any reference to a partner means a member, or a consultant or employee with equivalent standing and qualifications, of Freshfields Bruckhaus Deringer llp or any of its affiliated firms or entities. This material is for general information only and is not intended to provide legal advice. Freshfields Bruckhaus Deringer LLP, February 2014, 00182

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