Business Transfers Across Europe. Employment (Europe)

Transcription

1 Business Transfers Across Europe Employment (Europe)

2 Contents Introduction Transfers in France 1 Transfers in Germany 5 Transfers in Italy 9 Transfers in Spain 12 Transfers in The Netherlands 15 Transfers in the UK 18 Key Contacts 22 This note is written as a general guide only and reflects the law at 1 May It should not be relied upon as a substitute for specific legal advice. This note is written as a general guide only. It should not be relied upon as a substitute for specific legal advice.

3 3 Introduction In 1977 the Acquired Rights Directive ("Directive") was adopted by the Council of the European Communities in order to safeguard employees' rights in the event of transfer of businesses or parts of businesses ("business transfer") as a result of legal transfers or mergers. It was amended in 1998 and consolidated in Directive 2001/23. Member states were obliged to implement it in its amended form by 17 July The protections offered by the Directive are threefold: There is an automatic transfer of the employment relationship on business transfer and consequently the purchaser ("transferee") is obliged to take on the employees of the vendor ("transferor"); Both transferor and transferee are required to inform and consult employee representatives; and Since the purpose of the Directive is to secure continuity of employment on transfers of businesses, dismissals effected in order to avoid the Directive are prohibited, except where they are for economic, technical or organisational reasons entailing workforce changes. The Directive was quite radical in imposing obligations on the parties to commercial transactions as it is not possible for them to contract out of the terms of the Directive. However, member states were given some discretion in applying the Directive, particularly with regard to: the definition of a dismissal; the consequences of a refusal by employees to be transferred; and the sanctions imposed for failure to inform and consult and for dismissing on transfer. The national laws deriving from the Directive are subject to considerable debate both at European and national level. Especially mergers, acquisitions and in- and outsourcing projects give rise to a lot of contested questions concerning the conditions of a business transfer and its legal implications. Moreover, different countries took different approaches in implementing the Directive resulting in various answers to the same questions or to entirely new controversies. This client note aims to give an overview of the conditions and implications of a business transfer for a selection of jurisdictions across the European Union.

4 1 Transfers in France In France, employment issues triggered by business transfers are codified in article L of the French Labour Code (previous article L ), dating back to a law of 1928 and article L of the French labour Code, dating back to a law of 28 June HOW IS A BUSINESS TRANSFER TRIGGERED? 1.1 Conditions of a business transfer In France, the law does not explicitly refer to the concept of a "business transfer", but to the modification of the "legal situation" of the employer. However, case law has defined such a modification by reference to the "business transfer". As in the UK, a transfer takes place when there is a change in the person responsible for running the business or undertaking. Case law considers that article L applies when the transfer of a business or undertaking from the private sector to the public sector or vice versa does not affect the functioning of the business. In determining whether or not a transfer has taken place, the courts analyse whether the activity is sufficiently independent and permanent; and whether or not it is specific, with its own organisation, dedicated assets (tangible and/or intangible), and dedicated employees. There are three conditions for a transfer: a) The transfer must be that of an economic entity, defined by French case law as "an organised group of people and assets dedicated to the running of a business which has its own objective". The existence of a client base and the means of carrying out a business (premises, equipment and inventory) are the main factors in considering whether the business concerned forms an economic entity. However, case law does not necessarily require those two criteria to be satisfied. In some cases, a transfer of clients without the means of carrying out a business may be regarded as the transfer of an economic entity. In order to assess compliance with this condition, the courts usually ask the following questions: How many employees are dedicated to the transferred business? Are they exclusively dedicated to the transferred business? Have transfers taken place between staff of the transferred business and other departments of the company? Do the employees have specific knowledge/skills? Are all the employees of the business to be transferred? If a significant number of employees exclusively dedicated to the transferred business and in possession of specific knowledge/skills are transferred, it is probable that we are dealing with an economic entity. Moreover, the courts usually ask the following questions in order to assess compliance with the above condition: Does the activity make use of specific tangible or intangible assets such as premises, materials, vehicles, client basis, brands, licences, contracts, etc? Do the assets belong to the company itself or to a third party? Are the assets of the activity shared with other departments of the company? Are all the assets transferred? If all the assets belong to the company itself, are not shared with other departments of the company and all of them are transferred, it is probable that we are dealing with an economic entity. b) The economic entity must be "autonomous". This means that the personnel (at least one employee) and the means of carrying on a business must be specifically attached to the business. In order to assess compliance with this condition, the courts usually ask the following questions: Does the transferred business constitute an organised group of people? Is it a distinct division/department? Is the transferred business conducted in distinct premises? Does the transferred business appear separately on the organisational chart of the company? Does it have distinct and autonomous management? Does the business transferred have its own accountability? Will the business transferred continue to be conducted in the same way? If the answer to these questions is "yes", it is probable that we are dealing with an autonomous economic entity. c) The activity must be the same or similar after the transfer. The following questions may be considered to determine if this criterion is fulfilled: Will the transferee retain a similar employment structure?

5 2 Will the transferee keep the business as an autonomous entity within its company or integrate it into its own activities? Will the transferee propose the modification of essential terms of the employment contracts, with particular reference to the functions and workplace? If the answers to these questions indicate that the identity is maintained and remains the same after the transfer, it is probable that a business transfer has taken place. The courts in France have, over the years, extended the scope of article L Careful review of the facts of each matter will be required to assess whether a transfer has taken place and who has been transferred. The fact that the transferee has taken over some of the employees does not automatically trigger the application of article L , but is one of the criteria for its application. Finally, even though article L may not apply in strict legal terms, some "branch" collective bargaining agreements do require its application subject to certain conditions set out in those agreements. The Cour de Cassation debated for a long time as to whether a contractual agreement between the former employer ("transferor") and the new employer ("transferee") was a necessary condition for the business transfer. It was only after the decision by the European Court of Justice ("ECJ") of 1988, to the effect that the Directive is applicable even though no "contractual arrangement" exists between the successive employers, that the Cour de Cassation changed its position to reconcile conflicting European and French law. In three cases on 16 March 1990, the Cour de Cassation judged that article L applies to any transfer of an autonomous economic entity which maintains its identity and whose operation is continued or resumed after the transfer, even when there is no "legal link" between the successive employers. 1.2 Recent Case Law On 17 June 2009, the Cour de Cassation ruled that the transfer of an autonomous entity only takes place if tangible or intangible assets significant and necessary to the running of the entity are transferred, directly or indirectly, to the transferor. In this ruling, the Cour de Cassation maintains its reductive interpretation of the provisions of the French Labour Code compared to the provisions of the European Directive and confirms the essential character of the transfer of tangible and intangible assets, whereas these elements are not always essential for the European courts (ECJ, 14 April 1994, C- 392/92 and ECJ, 7 March 1996, Merckx, aff. C-171/94). 2. WHAT IS THE EFFECT OF A BUSINESS TRANSFER? When implementing article L , case law treats the contracts of employment transferred to the new employer as if the employer had not changed, so that terms and conditions remain the same and continuity of employment is preserved. Certain legal consequences will result from this rule. 2.1 Transfer of employees The employment relationships which existed at the time of the business are transferred from the transferor to the transferee by operation of law, article L of the French Labour Code. The transferor's rights and powers under or in connection with the employment contracts are also transferred to the new employer. For example, the "disciplinary power" of the former employer is transferred to the new employer, who can dismiss a transferred employee for fault occurring prior to the transfer. The employees to be transferred are those who worked in the transferred part of the business on the date of the business transfer, whether on a full time basis or otherwise. Indeed, employees may be transferred when only a part of their work is relevant to the business transferred. In the event of transfer of part of a business, the principle of continuation of employment contracts applies only to the employees working in the part of the business transferred. An employee partially deployed in the transferred part of the business will become an employee of the new employer for the purpose of that specific activity. The contract may be any kind of employment contract (e.g. fixed or indefinite term, trial contract). The fact that the contract of an employee may have been suspended for a limited period of time (e.g. for illness) will not prevent the transfer of that contract. The employees representatives (e.g. works council members) are also automatically transferred with their roles intact. However, in the case of a transfer of part of a business, their transfer must be authorised by the labour administration, which will verify whether or not the employees concerned are properly attached to the business or undertaking, articles L and L of the French Labour Code. The transfer of employees cannot be excluded prior to the transfer, e.g. by concluding a termination agreement whilst simultaneously agreeing on a new employment relationship with the transferee. An agreement of this kind would be considered a circumvention of article L of the French Labour Code and the legislator s intention of preserving the employment relationship and protecting its terms and conditions against any changes based on the business transfer. Agreements with this effect will therefore be null and void. 2.2 Employees' right of objection The employment contracts automatically transfer to the transferee. An employee to be transferred does not need to be consulted on his transfer, as he has no right to object to it. If an employee objects to his transfer, the objection

6 3 constitutes a serious fault leading to dismissal by the transferor. An employee may only object to his/her transfer in the following situations: (i) if the transfer triggers a modification to the employment contract which requires his/her prior consent; or (ii) if the transfer is required under the terms of certain "branch" collective bargaining agreements; or (iii) if the transfer is agreed by the transferee and the transferor on a voluntary basis, as the legal and case law conditions are not met. 2.3 Transfer of employment conditions When the conditions for a transfer are met, the continuation of the employment contracts by the new employer is mandatory pursuant to article L of the French Labour Code. This is an exception to article 1134 of the Civil Code, which states that contracts are binding on the parties only. The practical effect is that the transferee will inherit all the existing terms of the employment contract, whether express or implied, article L of the French Labour Code. This includes the employee's length of service, his/her level of remuneration, and specific terms and conditions contained in his/her employment contract, such as non-competition clauses. The transferor's practices and unilateral commitments are also transferred to the transferee in application of article L of the French Labour Code, unless formal objections to these are raised after the transfer. For instance, the payment of a 13th month premium, which was implemented through customary practice and was regularly paid to employees by the transferor, is also enforceable against the transferee. However, the transferee can cease to apply this by raising a formal objection to the practice, e.g. by informing the employees individually and by collectively informing employee representatives with sufficient notice to enable negotiations to proceed. After the transfer, the in-house collective bargaining agreement and if the principal activity of the new employer is different from that of the former employer the branch collective bargaining agreement will be "subject to review". This means that the collective bargaining agreements which were applicable by the transferor continue to apply for a maximum period of 15 months following the transfer ("continuation period"), unless a substitution or adaptation agreement is concluded to replace it before the end of that period. During the continuation period, the new employer is obliged to negotiate with the trade union delegates to try to reach such an agreement. If a substitution or adaptation agreement is not implemented during that period, the transferred employees will retain any individual advantages accrued under the old collective bargaining agreement from which they have already benefited, article L of the French Labour Code. Employees whose employment contracts have been transferred to the transferee can refuse any modification of their employment contracts after the transfer. However, if the modification is justified on economic or legal grounds by the necessity to reorganise the economic entity for business reasons, an employee who refuses such a modification could face lawful dismissal for economic reasons. However, French Labour Courts insist upon very convincing evidence of the existence of such reasons. 2.4 Transfer of pension entitlements Pension schemes implemented by the transferor will not transfer, unless the circumstances of the transfer allow the transferee to keep such schemes. Instead, the transferred employees will enjoy the pension schemes and other benefits existing in the transferee's business. 3. WHICH RIGHTS OF EMPLOYEE REPRESENTATIVES HAVE TO BE CONSIDERED? French Labour Law requires both the transferor and the transferee to inform and consult their respective Works Council (if any) in respect of the proposed transfer, article L of the French Labour Code. The Works Council must be provided with complete information (at least three days before its meeting) concerning: the date of the transfer; the reasons for the transfer; the identity of the transferee; a description of its respective group activities; and the probable consequences of the project on the employees. During its meetings, the Works Council will have the opportunity to question the employer on the prospective transfer. Consultation means that the works council members will be asked to give their opinion on the prospective project. The opinion issued by the Works Council is not binding on the transferor's decision to transfer the business. The Works Council can delay the transfer by refusing to deliver its opinion until it considers that it is being properly consulted. In that case, the employer could file a claim before the employment tribunal to force it to render its opinion. As a general rule however, an absence of opinion will not prevent the company from enforcing the transfer, provided, however, that the company has taken every possible step to enable the works council members to render an opinion.

7 4 Failure to consult the Works Council in the proper manner will trigger criminal sanctions: up to one year s imprisonment and/or a fine of up to 3,750 for each offence committed for the legal representatives of the company and/or 18,750 for the legal entity itself, article L of the French Labour Code. Co-determination rights of the Works Council (such as those applicable in Germany) do not exist in France. 4. IS THERE A DUTY TO INFORM THE AFFECTED EMPLOYEES? Contrary to European law, there is no legal obligation under French labour law to inform each employee individually of his/her transfer. However, in practice, the transferor informs the transferring employees prior to the transfer (e.g. during an individual meeting or by sending out a letter of notification) to ensure a smooth transfer. The information given to the employees is roughly the same as that passed on to the Works Council. 5. IS IT POSSIBLE TO GIVE NOTICE OF TERMINATION AFTER THE BUSINESS TRANSFER? Any notice of termination given because of the transfer (e.g. at the request of the transferee) will be treated as fraudulent and unfair but not void. In that case, employees can either obtain damages or be reinstated. The transferor and the transferee are jointly liable for damages paid in the case of a fraudulent dismissal prior to the transfer. If an employee is dismissed prior to the transfer, then given a new contract with the transferee immediately afterwards, this will be considered null and void due to a circumvention of the transfer of business regulations, and the employee will retain the terms of his previous employment contract. However, dismissals of employees by the transferor or the transferee may be justified by the need to reorganise the activity for business reasons or on personal grounds, unless the aim is to avoid the application of article L of the French Labour Code. If the transferee needs to reorganise his business after the transfer and to cut down on jobs, the employees to be dismissed will be selected in accordance with the legal criteria from the whole of the transferee's workforce, not from the transferring employees only. The general legal rules for the validity of a redundancy (for economic reasons) apply in this case. 6. WHO IS LIABLE AFTER A BUSINESS TRANSFER? In general, the transferee will inherit liability for the debts of the transferor (e.g. remuneration, pension entitlements, claims for damages). However, this general rule does not apply in the case of insolvency of the transferred business or when a business is transferred without any "agreement" between the transferor and the transferee (such as business transfers occurring in application of "branch" collective bargaining agreements) under article L of the French Labour Code. Debts arising after the transfer are borne by the transferee. However, this latter may claim reimbursement from the transferor for sums corresponding to the period before the transfer and sums which arose before the transfer, unless provisions in this regard were already agreed in the transfer contract. In the event of insolvency, employees can claim payment from the representative of creditors for debts prior to the insolvency procedure, or from the transferee for debts which arose after the insolvency procedure. In both cases, such debts are guaranteed in full or part by a specific body known as AGS ("Association pour la gestion du régime d'assurance des créances des salariés").

8 5 Transfers in Germany The Directive was implemented in Germany by section 613a of the Civil Code [Bürgerliches Gesetzbuch "BGB"] The provisions set out in sec. 613a BGB are aimed at: protecting existing employment relationships and allowing them to continue on the same terms after the transfer; regulating the liability of the transferor and the transferee; and ensuring continuity of the acting Works Council. 1. HOW IS A BUSINESS TRANSFER TRIGGERED? 1.1 Conditions of a business transfer A business transfer is triggered if a whole operation or a separate, operationally and organisationally identifiable unit thereof ("operational unit") is transferred from the old owner ("transferor") to a new owner ("transferee") by means of a legal transaction thereby enabling the transferee to pursue the same or a similar business purpose without changing the identity of the business, sec. 613a par. 1 sentence 1 BGB. The transferee may be a legal entity; he/she may already exist at the time of the business transfer or be established only on the occasion of such transfer. However, the provisions are only applicable in the event of a business transfer in contrast to the position in a share deal. In the case of a share deal, the legal owner of the business remains the same, and only the shareowners of the legal entity itself change. Typically, the business transfer results from an asset purchase agreement between purchaser and vendor. However, as sec. 613a BGB is intended to be a "catch-all clause", other scenarios may also come within its scope, e.g. the transfer of a restaurant or petrol station franchise from the franchisee to its successor with the approval of the principal franchisor. Under the guidance of the European Court of Justice, German courts have developed a test to determine whether a certain transaction represents a business transfer under sec. 613a BGB. The test considers seven criteria ("Seven-Criteria- Test"). The seven criteria are: nature of the enterprise or business; transfer of tangible assets (e.g. buildings, equipment or furniture); transfer of intangible assets (e.g. good will, know-how, intellectual property rights); takeover of the major part of the workforce; takeover of customers or suppliers; degree of similarity between the activities performed before and after the transfer; and duration of any interruption of activity. All the criteria must be considered in a comprehensive view. This means that single criteria might have a different weighting depending on the type of the business in question. E.g. strong evidence for a business transfer may be the transfer of relevant tangible or intangible assets. Whereas in manufacturing businesses the focus generally lies on the transfer of tangible assets, this criterion is less significant in service/commercial enterprises, in which case much greater importance is attached to whether or not intangible assets are assumed by the transferee. Intangible assets often constitute the essence of the service/commercial enterprises, which means that their transfer is generally speaking strong evidence of a business transfer. Another significant indicator of a business transfer may be the assignment of a significant number of employees. However, the number of employees to be transferred if a business transfer is to be triggered depends on the qualification of the transferred employees. Low-qualified employees must be assigned in large numbers to trigger a business transfer, while a takeover of a small number of high-qualified employees may suffice to trigger a business transfer. If a business transfer is triggered either by the assignment of a high number of lowqualified employees or the assignment of a smaller number of high-qualified employees the remaining employees in the (part of the) business who have not been assigned are transferred to the transferee by operation of law (see no. 2.1 below). 1.2 Recent Case Law Until quite recently, the German Federal Labour Court ruled that a business transfer requires the maintenance of the organisational identity of the transferred business. Thus, a business transfer was denied if the organisational identity of the business was changed significantly by the transferee (e.g. by integrating it into a different or major organisation structure). According to a preliminary ruling of the European Court of Justice in 2009, the maintenance of the organisational identity is not a prerequisite for a business transfer. As long as "the functional connection between the transferred factors is maintained" a business transfer is also triggered if the business organisation is completely integrated into the organisation of the transferee. Due to this decision by the European Court of Justice, German Labour Courts can no longer deny a business transfer simply because the business was fully integrated into the organisation of the transferee. Instead, they will have to look more closely at the transferred factors (e.g. workforce,

9 6 tangible and intangible assets) and decide whether these are still used in the same or a similar connection by the transferee. It is only if little or no functional connection between these factors is maintained that a business transfer can be excluded. This means that, in future, a business transfer can probably only be avoided by a major split-up of the tangible and tangible assets by the transferee. 2. WHAT IS THE EFFECT OF A BUSINESS TRANSFER? Certain legal consequences will result from the business transfer pursuant to sec. 613a BGB. 2.1 Transfer of employees Employment relationships existing at the time of the business transfer will pass together with all rights and obligations from the transferor to the transferee by operation of law, sec. 613a par. 1 sentence 1 BGB. Moreover, employees' length of service under the transferee will have to include the time worked for the transferor. In general, all individuals employed in the acquired business are transferred to the transferee. However, if a part of the business is closed down by the transferor prior to the transfer of the whole business, the employees working in this part of the business will not transfer. They would have to be made redundant. Also, if only a part of the business is transferred, only the staff employed in that part will transfer. The transfer of employees cannot be excluded prior to the transfer, e.g. by concluding a termination agreement while simultaneously agreeing on a new employment relationship with the transferee. Such agreement would be considered a circumvention of sec. 613a BGB and the legislator s intention of preserving the employment relationship and protecting its terms and conditions against any changes based on the business transfer. Any agreements with this effect will therefore be null and void. 2.2 Employees' right of objection The transfer of employees by operation of law does not require the consent of the transferor, the transferee or the employees. The employee does however have the statutory right to object to the transfer of his/her employment to the transferee, sec. 613a par. 6 BGB. In this case, his/her employment relationship is not transferred, and he or she will continue to be employed by the transferor. The right of objection expires one month after the employees affected have received proper and comprehensive information of the transfer (see no. 4 below). As the legal requirements for the content of the information are very strict, great care must be taken in drafting it. If insufficient information is provided, the employees' right to object will continue to exist for a reasonable period of time. To avoid future objections and to ensure planning reliability, in practice, both the transferor and the transferee seek to obtain the approval of the transferring employees prior to the transfer. In this way neither party runs the risk of "losing" or "regaining" employees a long time after the transfer. 2.3 Transfer of employment conditions As explained above, employment relationships existing at the time of the business transfer will pass together with all rights and obligations from the transferor to the transferee, sec. 613a par. 1 sentence 1 BGB. This means that individual employment conditions continue to apply regardless of whether they arise from individual agreements, standard employment contracts, company practice or the principle of equal treatment. The legal situation with regard to collective agreements (works council agreements and collective bargaining agreements) is more complicated. These may apply on a collective or on an individual basis. Generally speaking, works council agreements remain valid on a collective basis, if the identity of the business is retained by the transferee. If this is not the case (e.g. because the business is integrated into the operation of the transferee), the terms of the works council agreement continue to be valid only on an individual basis. The legal situation with regard to collective bargaining agreements is similar. These continue to be valid on an individual basis only, if the business withdraws from a collective bargaining agreement (e.g. because the transferee is not bound by any collective bargaining agreements). However, there is one exception to this general rule: If there is a conflicting collective agreement at the transferee, this "overrules" the collective agreement of the transferor, i.e. the collective agreement of the transferor is no longer applicable on an individual or a collective basis. Individual employment conditions can be changed after the transfer only by mutual agreement with each employee or by notice of termination for change of terms in line with the restrictions of the Protection Against Dismissal Act [Kündigungsschutzgesetz "KSchG"]. However, collective agreements that continue to apply on an individual basis cannot be modified in a way detrimental to the employee for a period of one year after the transfer, sec. 613a par. 2 sentence 2-4 BGB. 2.4 Transfer of pension entitlements All current pension entitlements transfer, i.e. the transferee must take on all the pension obligations of the transferor and fulfil the pension entitlements when they fall due. However, pension entitlements of former or retired employees do not transfer. 3. WHICH RIGHTS OF EMPLOYEE REPRESENTATIVES HAVE TO BE CONSIDERED? In practice, a transfer of business is regularly connected with measures triggering the rights of the Economic Committee and the Works Council.

10 7 3.1 Rights of the Economic Committee In the event of a business transfer, the transferor and the transferee have to provide the Economic Committee (as far as it exists in the undertaking) with early and comprehensive information to enable it to competently discuss the matter with the transferor/transferee, sec. 106 Works Council Constitution Act [Betriebsverfassungsgesetz "BetrVG"]. The transferor/transferee is obliged to submit information on the economic situation of the business and the effects on personnel planning, provided no trade or business secrets are jeopardised. However, the Economic Committee is not entitled to any co-determination rights or to block the decision of the transferor. 3.2 Rights of the Works Council In businesses with a regular workforce exceeding 20 employees, the (co-determination) rights of the Works Council are triggered in the case of a change of operation ("Betriebsänder-ung"), sec. 111 par. 1 sentence 1, 3 BetrVG. A change of operation takes place if the structure of the undertaking is changed in a way that could trigger considerable disadvantages for the company's workforce as a whole or in part. Principally, the transfer of a business does not constitute a change of operation. Nevertheless, in practice nearly every business transfer is combined with measures constituting a change of operation (e.g. reduction of headcount, relocation of an operation, restructuring measures), as a result of which the following (co-determination) rights of the Works Council are triggered: a) Information and consultation rights The Works Council must be informed promptly and comprehensively of the intended measures that constitute a change of operation ("measures"), sec. 111 par. 1 sentence 1 BetrVG. The person in charge of this information is the employer who takes the measures ("employer"). Depending on the facts of the case, this may be the transferor, the transferee or both. The employer must provide any information necessary for the Works Council to evaluate the forthcoming changes in the business structure and their detrimental effects on the employees. Furthermore, the employer has to consult with the Works Council on the intended measures, sec. 111 par. 1 sentence 1 BetrVG. b) Co-determination rights In addition to the information and consultation rights, the Works Council also has co-determination rights. The Works Council is entitled to negotiate a Reconciliation of Interests ("Interessenaus-gleich") and to agree on a Social Plan ("Sozialplan"), sec. 112 BetrVG. Whereas the Reconciliation of Interests describes the operational changes in the (part of the) transferred business, the Social Plan contains measures to compensate or mitigate the economic disadvantages for the employees due to these changes (e.g. severances, reeducation opportunities, mobility packages). Moreover, negotiations with the Works Council often result in further agreements covering such aspects as voluntary programmes, protection against dismissals and guarantee of wages. It is important to note that the employer is only obliged to conclude a Social Plan with the Works Council. If no agreement can be achieved, the matter must be submitted to a Conciliation Committee ("Einigungsstelle"), which is entitled to issue a binding decision on the Social Plan, sec. 112 par. 4 BetrVG. In contrast to the above, the employer cannot be forced to conclude a Reconciliation of Interests with the Works Council. He is only obliged to initiate negotiations with a view to reaching an agreement. However, the attempt to reach an agreement with the Works Council can be very timeconsuming. If the employer does not succeed in concluding a Reconciliation of Interests with the Works Council, negotiations must continue in the Conciliation Committee (sec. 112 par. 3 BetrVG) until the Conciliation Committee states the failure of negotiations. Prior to this statement, the employer is not allowed to implement the change of operation. Otherwise he/she runs the risk of facing preliminary injunction proceedings. Though it is regarded as highly controversial, several lower courts recognise such a general claim for injunctive relief and may therefore stop the implementation of a planned change of operation. In addition, the employer risks successful compensation claims ("Nachteilsausgleich") by employees for disadvantages incurred through his/her failure to negotiate a Reconciliation of Interests, sec. 113 BetrVG. Due to its extensive co-determination rights, the Works Council is able to delay the implementation of a change of operation drastically. This has to be considered in the context of time planning. 4. IS THERE A DUTY TO INFORM THE AFFECTED EMPLOYEES? As explained before, the employees affected by a business transfer have the statutory right to object to the transfer of their employment relationships, with the result that they continue to be employed by the transferor, sec. 613a par. 6 BGB. In order to enable the employees to assess whether they want to be transferred to the transferee or stay with the transferor, German statutory labour law provides for an obligation to inform the affected employees. Either the transferor or the transferee has to inform them prior to the transfer in written form of: the date or intended date of the business transfer; the reason for the transfer;

11 8 the legal, commercial and social consequences of the transfer for the employees; and any actions intended to be taken with regard to the employees, sec. 613a par. 5 BGB. According to the jurisdiction of the Federal Labour Court, the information must be proper and comprehensive. Generally speaking, any known consequence of the business transfer or any intended action thereafter that may influence the employees' decision to object to the transfer has to be described. Thus, the employees must be informed of the identity of the transferee (name, corporate structure, address); any planned reorganisation/restructuring programmes and/ or any planned harmonisation of employment conditions; the existence of a Works Council or a board of directors; current or expected insolvency proceedings; and the (future) existence and if possible the (future) content of a Social Plan which applies to the transferred employees. Furthermore, the legal consequences of the business transfer have to be explained (e.g. transfer of the employment relationships, transfer of employment conditions and pension entitlements, existence and content of applicable Works Council agreements and collective bargaining agreements, liability of the transferor and transferee, notice protection and the right of objection). As the notice can be issued by both the transferor and the transferee, the responsibility for doing so as well as the liability in the event of insufficient information should be agreed in the transfer agreement. It may also be advisable to reach agreement on liability in the event of objections to the business transfer and potential claims arising from (future) Social Plans. Generally speaking, employment issues should be thoroughly considered while drafting the transfer agreement. 5. IS IT POSSIBLE TO GIVE NOTICE OF TERMINATION AFTER THE BUSINESS TRANSFER? Any notice of termination given because of the transfer, i.e. which has no other justification under KSchG, is null and void, sec. 613a par. 4 sentence 1 BGB. However, the right to terminate the employment relationship for reasons other than the transfer remains unaffected, sec. 613a par. 4 sentence 2 BGB. Apart from personal grounds or misconduct, a dismissal may also be justified by business reasons (e.g. restructuring concept of the transferor prior to the transfer, restructuring concept of the transferee for the acquired business, no vacant positions for employees who objected to the transfer and remain at the transferor). However, the burden of proof for establishing the real motive will fall upon the employer, if the validity of the dismissal is disputed by the employee in a labour court. The employer will therefore have to establish that reasons other than the business transfer itself motivated the dismissal. 6. WHO IS LIABLE AFTER A BUSINESS TRANSFER? As a rule, the transferee is liable for all claims arising out of the transferred employment relationships (e.g. remuneration, pension entitlements, claims for damages). This rule also covers claims which have already arisen by the time of the business transfer even though it was the transferor who benefited from the value of the work performance at this time. Liability therefore includes not only outstanding claims for remuneration and pension entitlements but also all future pension entitlements, irrespective of whether (substantial) parts of the pension entitlement had been vested and accrued during the period when the employee worked for the transferor. The business transfer does not completely discharge the transferor from liability. The transferor and the transferee are jointly and severally liable for obligations which arose prior to the business transfer and fall due within one year after the transfer, sec. 613a par. 2 sentence 1 BGB. In the case of insolvency of the transferor, the transferee's liability for any claims arising out of the employment relationships prior to the business transfer is limited. The decisive point in time for the limitation of the transferee's liability is the commencement of the insolvency procedure: the transferee is only liable for claims arising after the commencement of the insolvency procedure. This means that the transferee is only liable for claims that arise between the commencement of the insolvency procedure and the business transfer, while there is no liability for claims accrued prior to the commencement of the insolvency procedure. The transferee also remains liable for claims arising after the business transfer.

12 9 Transfers in Italy The European Directives were implemented in Italy by Law no. 428 of 29 December 1990 and by Legislative Decree no. 18 of 2 February Article 2112 of the Italian Civil Code, which regulates business transfer, was amended following the implementation of the European Directives. The provisions regulating business transfer are aimed at safeguarding employees. Whenever a business transfer occurs, the employment relationships transfer by operation of law from the transferor to the transferee. 1. HOW IS A BUSINESS TRANSFER TRIGGERED? 1.1 Conditions of a business transfer A transfer of business is triggered if a business/undertaking - whether profit-making or not - which produces or exchanges goods or services is transferred from an employer ("transferor") to another ("transferee") regardless of the nature of contract and/or the transaction as a result of which such change occurs (e.g. merger, acquisition, several contracts, etc.). Usufruct and lease of business also fall within the scope of a business transfer for the purposes of article 2112 of the Italian Civil Code. A business transfer also occurs when an autonomous part of the business of an organised economic entity is transferred ("transfer of part of a business"). The part of the business in question must be autonomous at the moment of the transfer of business. The retention of the identity of the business is the key factor in deciding whether a business transfer has taken place. In compliance with the European Directives, Italian law requires that the transferred business is a duly and stably organised economic entity. No business transfer takes place if the change of ownership occurs merely as a result of a transfer of shares. Indeed, in such a case, the company-employer remains the same (with the consequence that, in terms of employment law, no transfer of business from one employer to another has taken place). 1.2 Recent Case Law A business transfer occurs whenever all the assets used to conduct an economic activity are transferred from one employer to another. When the transfer regards a part of a business, the organisational and economic autonomy of the part of the business plays a key role in assessing the existence of a business transfer. The suitability of the assets for the conduction of the activity must be actual and objective, and their concrete existence has to be demonstrated before the transfer. As a consequence, on the basis of a judgement by the Italian Supreme Court in 2008, the mere transfer of assets which might be potentially suitable to perform an autonomous activity after the transfer does not fall within the scope of article 2112 of the Italian Civil Code. The Supreme Court ruled that the mere outsourcing of so called "general services" to be activated in the future by the transferee did not amount to a business transfer. As already pointed out above, the transferred part of the business must be autonomous. The requirement of autonomy is assessed regardless of the number of personnel employed in the part of the business. In a recent ruling on this specific matter, the Supreme Court affirmed that the outsourcing of the canteen service from one company to another amounted to a transfer of part of a business, regardless of the fact that only one employee was actually employed by the branch. 2. WHAT IS THE EFFECT OF A BUSINESS TRANSFER? Certain legal consequences will result from the business transfer pursuant to article 2112 of the Italian Civil Code. 2.1 Transfer of employees If a business or a part of it is transferred, all the employees pertaining to the business involved are transferred to the transferee by operation of law, thereby maintaining the same terms and conditions of employment. This includes seniority and any incentive plans/benefits existing at the date of the transfer, unless these are not transferable due to their nature (e.g. a stock option plan covering shares of the transferor would not pass to the transferee and should be terminated in accordance with its terms and conditions). No employee's consent is necessary for the continuation of the employment relationship. The mere circumstance that a business transfer occurs does not constitute grounds for dismissal. However, the employer retains the power to terminate the employment relationship in compliance with the provisions of Italian law (see no. 5 below). The transfer of employees cannot be excluded prior to the transfer. All employees pertaining to the transferred (part of the) business have the legal entitlement to be transferred. This means that concluding a termination agreement whilst simultaneously agreeing to a new employment relationship with the transferee would be regarded by a Labour Court as an attempt to violate the mandatory provisions of article 2112 of the Italian Civil Code. As a result, the two agreements would be declared null and void and the employee would be entitled to be transferred to the transferee by operation of law as explained before. 2.2 Employees' right of objection The employees working in the transferred (part of the) business cannot refuse to transfer, article 2112 of the Italian Civil Code. They can only resign or object to the existence of

13 10 an actual transfer of business. Indeed, if a Labour Court ascertains that no transfer has occurred, the employees can only be transferred with their express consent. 2.3 Transfer of employment conditions As mentioned above (see no. 2.1), the individual employment agreements transfer from the transferor to the transferee by operation of law. Employees maintain all contractual rights previously accrued (i.e. salary, holidays and leave accrued and not taken, service seniority; incentive plans/benefits, etc). The transferee must apply the National Collective Agreement and/or the collective agreements implemented by the transferor until their expiration date to the transferred employees. This applies in all cases, unless they are replaced by collective agreements of the same level as those applied by the transferee to its employees. This means that the transferee cannot unilaterally reduce the global economic conditions applicable to the employees, except in the case of specific compensation/bonuses under the terms of the transferor's collective agreement, which are replaced by transferee's collective agreement on the same matter. 2.4 Transfer of pension entitlements Mandatory pension schemes are not affected by a business transfer, and are therefore passed on from the transferor to the transferee by operation of law. On the other hand: Complementary pension schemes under the terms of the National Collective Agreement continue to apply - unless the transferee applies a different National Collective Agreement (in which case the employees may transfer their position to the complementary pension scheme subject to the National Collective Agreement which applies); Complementary pension schemes individually negotiated by the employees automatically transfer to the transferee. 3. WHICH RIGHTS OF EMPLOYEE REPRESENTATIVES HAVE TO BE CONSIDERED? In the event of a business transfer, employers with more than 15 employees (in total - not just in the part of the business to be transferred) have to set up a consultation procedure. The transferee and the transferor have to issue written notice of the proposed transfer to the relevant Works Councils ("Rappresentanze Sindacali Aziendali" or "Rappresentanze Sindacali Unitarie") in the production units ("Unità produttive") concerned. If no Works Councils exist, the notice must be issued to the relevant trade union representatives; and to any trade unions ("Unions") which have implemented collective agreements applied by the transferor and/or the transferee. If more than one site is involved in the transfer, notice must be issued to the Works Council at each production unit. If, for example, the transfer involves employees working in two different locations - such as Milan and Rome - the Works Councils of both sites must be duly informed. Notice must be issued at least 25 days before the document giving rise to the transfer is executed, or before the date on which the parties reach any other binding agreement relating to the transfer, if prior to the execution date. The notice has to contain the following information: when the transfer will take place or is likely to take place; the reasons for the transfer; the implications of the transfer for the employees affected, including the legal, economic and social implications; and any measures which the new employer will take in relation to the employees affected. Within seven days of receiving the notice, the Union and/or Works Council representatives may submit a request that the parties hold a "joint examination" of the issues within seven days of receipt of the request. The Procedure is deemed to be completed: (i) if the Unions issue no request for a joint examination within the seven day period; or (ii) within 10 days term of the joint examination, regardless of whether the parties enter into an agreement. The deadlines specified by the provisions are mandatory. If they are not observed, the Union representatives will lose the right to ask for a "joint examination". The consultation procedure has to be followed even if decisions concerning the transfer were taken by a parent company. The fact that the parent company has not provided the necessary information to the transferor/transferee does not justify any failure to follow the consultation procedure. Failure to observe the consultation procedure constitutes antiunion behaviour under the terms of article 28 of Law no. 300 of May [Statuto dei lavoratori - "Workers' Statute"]. Pursuant to article 28 of the Workers' Statute, the local organisations of the relevant national Unions may start proceedings in the Labour Court if they believe that the employer has engaged in behaviour which is aimed at preventing or limiting the activity of the Unions. If this happens, the Unions can obtain an injunction preventing the employer from acting in breach of the transfer legislation and ordering that the consultation process

14 11 requested go ahead. A court order of this kind has an immediate and binding effect. This measure can be particularly effective, as: The proceedings in the Labour Court can be concluded within a few days; The contents of consultation forced on the employer may be quite broad-reaching; and An employer who does not comply with the orders of the judge may be subject to criminal sanctions. In the event of breach of the judicial injunction, he/she may be subject to a maximum of three months imprisonment or a fine of approx. 207,00 maximum, article 650 of the Italian Criminal Code. 4. IS THERE A DUTY TO INFORM THE AFFECTED EMPLOYEES? There is no statutory duty to inform the transferring employees. However, in practice the transferor and the transferee inform the transferring employees just before the transfer and once the consultation with the Unions has been duly completed. The information is provided in written form and generally simply states that as of a certain date the employment relationship will continue in the same way with the transferee. 5. IS IT POSSIBLE TO GIVE NOTICE OF TERMINATION AFTER THE BUSINESS TRANSFER? As mentioned above (see no. 2.1), pursuant to article 2112 of the Italian Civil Code, the business transfer itself cannot be considered as a valid reason for dismissal. This means that any dismissal which takes place in connection with a business transfer is unlawful, unless it is for an economic, technical or organisational reason which entails changes in the workforce (e.g. job losses due to a restructuring concept in connection with the business transfer) or for just cause (i.e. gross misconduct). The burden of proof that the dismissal is lawful lies with the transferee and/or the transferor, depending on which of the two terminated the employment contract. An employee whose terms of employment are materially changed to his/her detriment within three months of the business transfer has the right to resign for just cause (i.e. without the need to comply with any notice requirements). However, he/she will then have no claim for wrongful termination, since he/she decided to terminate his/her employment. In such a case, the resignation would be regarded as "grounded on a just cause". Consequently, the employee would be entitled to receive in addition to any other mandatory items due in case of termination (e.g. severance indemnity treatment ( TFR ), holidays and leave accrued but not taken) - indemnity in lieu of the notice. 6. WHO IS LIABLE AFTER A BUSINESS TRANSFER? The transferor and the transferee are jointly liable for all sums (e.g. salary, TFR, holidays and paid leave accrued but not taken, 13th and 14th monthly instalments, bonus) owed to the transferring employees at the moment of the transfer, regardless of whether the transferee was aware of such debts. However, the employee may waive the transferor's liability by entering into a settlement agreement to be formalised before the Unions or Labour Office. In the case of employee credits deriving from social security contributions payable prior to the transfer, the transferee could be considered liable only if these credits were recorded in the statutory accounting books. The transferee is fully liable for all future obligations. If an agreement for the supply of services is implemented in the context of a transfer of part of a business, liability is joint and several between the principal and the contractor for two years after the end of the service, pursuant to article 29 of Legislative Decree no. 276 of In the event of insolvency procedures, in order to improve the chances of rescue of the company, the provisions of article 2112 of the Italian Civil Code do not apply to the transferring employees, provided that an appropriate agreement with the Works Councils aimed at the retention of the workforce has been implemented. As there is no transfer of employees by operation of law, only part of the employees pertaining to the business can be transferred in cases of insolvency. In addition, with a view to encouraging the transferee to take over the business, there is no joint liability between the transferor and transferee. Employees who have not been transferred to the transferee in the context of insolvency procedures have the right of preference in the event of any recruitment by the transferee during the first year following the transfer. This means that before taking on a new employee the transferee must first assess whether any of the employees remaining with the transferor is suitable for the position.

15 12 Transfers in Spain Business transfers in Spain are subject to article 44 of Royal Decree 1/1995 of 24 March, under which the Spanish Workers' Statute [Estatuto de los Trabajadores -"WS"] was approved. 1. HOW IS A BUSINESS TRANSFER TRIGGERED? 1.1 Conditions of a business transfer There are three conditions for a business transfer: A business or part of a business which is or could be considered an economic entity must be transferred. Case law requires that the essential assets of the business (i.e. assets necessary to carry out the business) must transfer for article 44 WS to apply - thus, no transfer will take place if only certain assets of the economic entity are transferred; The economic entity must be autonomous, i.e. the assets transferred (personnel and the means of carrying on the business) must be capable of being exploited independently of any other business of the transferor; and The activity transferred must be continued after the transfer by the transferee on the same or a similar basis. As previously stated, for a business transfer the essential assets of the business unit must accompany the transfer. In defining an "essential asset" of a specific business unit, Spanish case law refers not only to tangible assets (furniture, equipment, and buildings) but also to intangible assets (good will, know-how, intellectual property rights), or even to the workforce of the business. The assets of each business which are considered as essential may vary substantially, and the specific circumstances of each case must be taken into account. A significant body of case law has been built up in this regard. To take the example of a company in which the core business is based on the tangible or intangible assets required to carry out the company's activities, such as manufacturing companies, the transfer of relevant buildings and equipment would be essential to determine a transfer of business. In the case of companies whose main activity is based on the performance of the employees, on the other hand, the transfer of tangible assets may be of no relevance. If a transfer takes place within a group of companies (when the headquarters transfers part of its activity to a subsidiary, for example), and the transfer also results in a movement of employees from one company to the other, Spanish case law does not regard this transaction as being a business transfer, as there is no change in the person responsible for the overall running of the business. Nevertheless, it is important to note that in certain cases (e.g. a merger of the assets of the two companies involved, a merger of their workforces or a reliance by the subsidiary on the headquarters for its personnel) the merger etc. may be declared as a transfer of business under Spanish employment law, as a result of which the headquarters and the subsidiary would be jointly liable (see no. 6 below). The reason for this is that Spanish courts seek to protect employees' accrued rights under the WS. In addition to article 44 WS, the applicable Collective Bargaining Agreement may lay down specific rules for employment issues in the event of a business transfer. In fact, some sectors of activity (such as cleaning services, call centres, gardening, etc.) have their own regulations on business transfers which vary enormously from one sector to another (e.g. private security services, cleaning services, telemarketing/telesales, etc). 1.2 Recent Case Law Recent case law has defined the practical circumstances to which Article 44 WS shall apply. These include: transfers "inter vivos", for example the purchase, merger or rental of a business; and transfers "mortis causa" (where a business survives the death of an individual employer, or the extinction of the legal entity that was the employer). In 2009, the Spanish Supreme Court also ruled that in the event of a transfer affecting an outsourced service, transfer of business regulations apply if the activity is continued on the same basis and with the same equipment. Moreover, case law precedents on article 44 WS have also stated that this applies to the sale of a business as opposed to the sale of shares. Article 44 WS therefore applies to mergers, takeovers and demergers, provided these do not take place by way of share sale. 2. WHAT IS THE EFFECT OF A BUSINESS TRANSFER? Certain legal consequences will result from the business transfer under the terms of article 44 WS. 2.1 Transfer of employees Article 44 WS states that, if a business is transferred, everyone who is employed in that business immediately prior to the transfer is automatically transferred to the transferee. All employment conditions of the transferred employees remain unchanged and are not affected by the transfer. This includes salaries, seniority, length of service, etc. The employees who transfer are those who are employed and assigned to the relevant business (or part thereof) immediately before the transfer. Although neither article 44 WS nor Spanish case law specify what happens to employees with duties/functions split between the transferred activity and any retained part, it is

16 13 assumed that, depending on the facts, the position is as follows: The employee should remain on a full time basis in the department/business in which he carried out most of his duties/functions; and If the employee's duties/functions were effectively split in half, he would have two part-time roles after the transfer, unless otherwise agreed with him by amending his employment contract prior to the transfer. Given the potential uncertainty, such an agreement with the employee is highly recommended. In any case, it has to be noted that there is no legal obstacle which prevents the employer from terminating employment contracts before the transfer is effective. An unfair dismissal would give rise to the relevant legal consequences (e.g. severance payments), but would not affect a subsequent transaction constituting a transfer of business. 2.2 Employees' right of objection In the case of a business transfer, everyone employed in the (part of the) business immediately prior to the transfer is automatically transferred to the transferee. Employees are obliged to transfer with the business, and they cannot refuse to transfer or object to the transfer. 2.3 Transfer of employment conditions All of the transferor's rights, powers, duties and liabilities under or in connection with the employment contract are transferred to the transferee as if the employment contract had originally been concluded between the employee and the transferee (article 44.1 WS). Thus, all individual employment conditions such as working time, remuneration system, job position, salary and seniority are transferred. Unless otherwise agreed between the transferee and the employee representatives (e.g. conclusion of a conflicting collective agreement), any collective agreements in place between the transferor and the trade union which affect the transferring employees remain fully valid and effective even after the transfer, as these have been stipulated between the transferee and the employee representatives, article 44.4 WS. This continues until a collective agreement comes to its natural conclusion or until a new collective agreement applicable to the transferred business is stipulated. Individual employment conditions can be changed/amended after the business transfer by mutual agreement with the employee. A change of individual employment conditions cannot be imposed on the transferred employees, unless specific and justified organisational, productive, technical or economic grounds exist. Generally, this process will require prior information and consultation with the employee representatives. 2.4 Transfer of pension entitlements Pension entitlements are transferred along with all the other conditions of employment, and remain unchanged unless an agreement is reached with the employees. However, if, as a result of a transfer of business, the same entity manages two or more pension plans, those pension plans must be merged within the period of 12 months following the transfer. 3. WHICH RIGHTS OF EMPLOYEE REPRESENTATIVES HAVE TO BE CONSIDERED? Article 44 WS stipulates that both the transferor and the transferee have to inform the employee representatives of the business transfer by providing the following information: estimated date of the transfer; grounds for the transfer; legal, economic and social consequences of the transfer; and measures to be taken in relation to the employees. The information provided therefore has to include a brief explanation of the transaction that will take place, the estimated date and a comprehensive description of the measures to be adopted in relation to the employees. Article 44 WS indicates that the information must be provided sufficiently in advance of the effective date of the transfer, to enable the employees to consider the likely impact. In addition, article 44 WS specifies that when the transfer results from a merger or spin-off, both the transferor and the transferee have to provide the information no later than the issue of the invitations to the shareholders' meeting(s) on the merger or spin-off. Breach of the obligation to supply information by the transferor or the transferee would not affect the validity of the transfer, although it could lead to the application of a fine (up to 6,250) by the Labour Authorities Finally, depending on the way in which the business is sold, it may also be necessary to comply with the provisions of article WS. Under this rule, the employee representatives must issue a report if a merger, takeover or any other modification of the legal status of the company takes place which will affect the number of employees in the company. In any case, if any measure is considered which implies a modification of the employment conditions or terminations of employment, a special consultation period with the employee representatives and certain legal procedures have to be observed. In practice, the measures affecting employees are adopted after the transfer by the transferee, so that he/she has to initiate the relevant legal procedures and consultation periods.

17 14 In any event, it should be noted that the employee representatives cannot stop or impede the business transfer. In the same way, the employee representatives have no codetermination rights. They may only ask the labour courts to rule that the employment conditions are to remain unchanged. 4. IS THERE A DUTY TO INFORM THE AFFECTED EMPLOYEES? If there are no employee representatives, the transferor and/or the transferee have to inform the employees affected directly by providing them with the information mentioned in no. 3 above, article 44.7 WS. If the employees are not informed, a fine (up to 6,250) may be imposed by the Labour Authorities. 5. IS IT POSSIBLE TO GIVE NOTICE OF TERMINATION AFTER THE BUSINESS TRANSFER? There is no specific rule on the dismis-sal of employees before or after the business transfer. Consequently, there are no additional legal obstacles to the termination of employment relationships after the transfer of the business. However, article 44 WS states that the employment contracts must be respected and continued by the transferee. As a consequence, neither the transferor nor the transferee can terminate an employment contract without taking into account Spanish legislation on fair dismissals/redundancies. The redundancy legislation states that for a redundancy to be lawful it has to take place for an economic, technical, organisational or productive reason which entails changes in the workforce ("ETOP reason"). ETOP reasons include a reduced need for output, implementation of new production procedures or changes in working methods which are necessary to maintain the viability of the company. The ETOP reason must be detailed in the relevant termination letter. If the employee files a claim against the dismissal, the effective existence of the ETOP reason must be proved by the employer before the labour court. 6. WHO IS LIABLE AFTER THE BUSINESS TRANSFER? Article 44 WS states that the transferor and the transferee will both be jointly liable for three years after a business transfer in respect of any obligation regarding labour issues (e.g. pending salaries, severance payments, etc), and for four years after the transfer in respect of any obligation on social security rights and obligations (e.g. outstanding social security contributions, fines imposed by the social security authorities, etc) arising before the transfer took place (article of Royal Decree 1/1994 for the approval of Spanish Social Security Law). If the transferor and the transferee imposes employment or social security conditions inferior to the conditions legally established under Spanish employment law on the employees to be transferred in a fraudulent or abusive manner, this may be regarded as a criminal offence. In such a case, both the transferor and the transferee will be held jointly liable in respect of any obligation regarding labour and social security issues arising after the transfer took place, article of Spanish Criminal Code. In the event of insolvency of the transferor or the transferee, the periods of joint liability referred to above will be applicable. A transfer may be a criminal offence if a company uses it as a way to avoid its obligations to the employees or if, through such conduct, the employees affected have reduced likelihood of recovering the sums owed to them by the company (e.g. when the business is transferred from a solvent company to an insolvent company). If the transfer is a criminal offence, both transferor and transferee are liable for the obligations arising after the transfer took place.

18 15 Transfers in The Netherlands The European Directives have been implemented in the Netherlands by articles 7: of the Civil Code, article 14a of the Act on Collective Labour Agreements and article 2a of the Act on Orders Declaring a Collective Labour Agreement binding on an industry, 7:670 par. 8 of the Civil Code. 1. HOW IS A BUSINESS TRANSFER TRIGGERED? 1.1 Conditions of a business transfer Articles 7: of the Civil Code apply if a business or part or branch of a business is transferred to another owner. A change of control of a business resulting merely from a share acquisition, without a change in the employer, cannot be regarded as a transfer. The general definition of a business is an economic entity, which is in turn defined as the whole of the organised resources (employees and assets) which carry out an (economic) activity. All organisations, with or without a profit making purpose, which produce or exchange goods or services, may be considered as a business. A public sector body or a subsidised foundation may also be regarded as a business. There are three conditions for a business transfer: There must be an economic entity which transfers and which continues to exist; The economic entity is transferred as a consequence of an agreement, a merger or a split. The courts take a wide view of what constitutes an agreement a direct agreement between the transferor and transferee is not required; and The economic entity which is transferred must retain its identity, which means among other factors that the type of business, assets, personnel, customers and activities before and after the transfer must be similar. There are a number of factors which need to be considered to assess whether a business has been transferred, such as: whether buildings and moveable property (tangible assets) have changed hands; whether (a significant part of the) employees have been taken over; whether customers or orders are being taken over; whether permits, know-how and goodwill have been taken over; the degree of similarity between the activities carried on before and after the transfer; the value of the intangible assets in the undertaking at the time of the transfer; and the duration of a possible interruption in the activities. In order to determine whether or not a business transfer was effected, the court will take all the relevant circumstances into consideration. It is of vital importance that the identity of the transferred business be retained. It is not essential for the assets to be transferred. In the case of entities requiring (mainly) qualified employees, the degree to which employees are transferred will be a significant factor in determining whether or not a business has been transferred. 1.2 Recent Case Law On 12 February 2009, the European Court of Justice pronounced a decision on the transfer of part of a business in the case of Klarenburg v Ferrotron Technologies. The European Court of Justice emphasised (again) that for a business transfer to take place, an economic entity has to retain its identity. The fact that the activities are performed by other employees or in another way may not be decisive as such, as long as the functional link between the various (production) factors that existed before the transfer is preserved after the transfer. 2. WHAT IS THE EFFECT OF A BUSINESS TRANSFER? Pursuant to article 7:663 of the Civil Code, all rights and obligations arising from a contract of employment and existing on the date of the transfer will pass, by operation of law, to the transferee who will be the new employer. Certain legal consequences will result from this rule. 2.1 Transfer of employees Employment relationships existing at the time of the business transfer will pass from the transferor to the transferee by operation of law. It follows that the employment agreements between the employees and the transferor will terminate at the time of the transfer by operation of law. The employees who will transfer are those employed by the transferor in the business or in the relevant part of the business on the date of transfer. The key question is whether the employee is assigned to the part transferred. It is irrelevant whether the employee works full-time or part-time, or for an indefinite or fixed period of time. The managing director, provided he/she is working on the basis of an employment agreement, will also transfer. Although not applicable to public servants, the business transfer rules do apply to employees working on the basis of a (civil) employment contract in the service of the national government, provincial government, municipal government, water board or any other public corporate body. 2.2 Employees' right of objection As the employment agreement of each employee will transfer by operation of law, any refusal by an employee to the transfer will lead to his "resignation" from the transferor. The employment agreement with the transferor will then terminate

19 16 by operation of law at the moment of the transfer. The employee cannot claim any compensation from the transferor or transferee. If the working conditions have changed as a consequence of the transfer, the employee can request the District Court to terminate the employment contract by court's decision. In that case, the employee cannot be blamed for the termination, which implies that the employee will usually be entitled to a reasonable severance. In addition, the employee will be entitled to receive unemployment benefits. 2.3 Transfer of employment conditions The practical effect is that the transferee will inherit all existing contractual terms, whether express or implied. This includes salary and benefits, notice provisions, restrictive covenants, any terms incorporated from a collective agreement, years of service and share options, profit sharing schemes and incentive schemes creating an entitlement which can be regarded as a term of the contract (unless the scheme provides that the employee's entitlement is at the sole discretion of the transferor). In principle, the transferee must respect the pre-transfer employment conditions. The transfer of business in itself cannot be a valid reason for unilaterally amending the employment conditions of the employee. If the transferee intends to harmonise the employment conditions, this may be possible by mutual consent. However, consent of employees to changes to their employment conditions in connection with the transfer may be legally invalid, in particular where the conditions of a binding collective labour agreement continue to apply. Moreover, the employee may under certain circumstances be obliged to accept a reasonable modification to certain minor employment or working conditions. Changes to employment conditions will be allowed if it is practically impossible for the transferee to continue to provide certain benefits, in which case the transferee can offer the employee compensation for the loss of a benefit by offering a similar employment condition or another form of compensation. If the employment agreement is terminated (on the initiative of the employee) after the transfer because of a substantial change in employment or working conditions to the detriment of the employee, the transferor faces the risk that the employee could request a court to dissolve the employment agreement, and the court may award compensation to the employee for such termination. In such a case, the transferor will be held responsible for the termination. 2.4 Transfer of pension entitlements Article 7:664 of the Civil Code provides that pension commitments and therefore the rights and obligations arising from the applicable pension schemes of the transferor will pass by operation of law to the transferee, unless one of the following three exceptions applies: The transferee has its own pension scheme for existing employees and will offer, before the transfer, the same pension commitments to the transferring employees; or The transferee or the transferred employee is obliged to participate in an industry-wide pension fund ("Bedrijfstakpensioenfonds"); or A collective labour agreement applicable to the transferee provides for another pension arrangement. 3. WHICH RIGHTS OF EMPLOYEE REPRESENTATIVES HAVE TO BE CONSIDERED? Article 25 of the Works Councils Act ("Wet op de Ondernemingsraden") provides that a Works Council has a right to advise on a transfer proposal, provided that the proposal is significant. The advice should be sought prior to making the decision to effect a transfer. Following receipt of the advice, the transferor must inform the Works Council of its decision. Should the decision deviate from the Works Council's advice, the reasons for this must be explained. In such a situation, the implementation of the decision will be suspended for a period of one month, unless the Works Council expresses its willingness to waive that obligation. Within the one month period, the Works Council can lodge an appeal against the decision with the Enterprise Chamber. An appeal may also be filed if the transferor failed to request the advice of the Works Council. If no Works Council exists, the transferor may have a Staff Association ("Personeelsvertegenwoordiging") in place. A Staff Association only has the right to give advice on proposals potentially resulting in the loss of jobs or in significant changes to the workforce, the terms of employment or the working conditions of at least 25% of the employees. Should the decision of the transferor deviate from the advice of the Staff Association, no appeal to the Enterprise Chamber is possible. However, following conciliation with the Industrial Committee, the Staff Association can start court proceedings to enforce their right to give advice. 4. IS THERE A DUTY TO INFORM THE AFFECTED EMPLOYEES? Both the transferor and transferee have to inform the Works Council or the Staff association of the business transfer. If no such representation is in place, article 7:665a of the Civil Code stipulates that the employer (in this case meaning both transferor and transferee) is obliged to inform the employees who are involved in the transfer (not exclusively the employees who will be transferred) on: the intended decision to transfer (part of) the business; the intended date of transfer; the reasons for the business transfer;

20 17 the legal, economic and social consequences of the business transfer for the affected employees; and the considered measures regarding the employees. It is important that the employees be informed before the decision to transfer has been taken and before the date for transfer has been fixed. Any failure to (fully) inform the employees who are involved in the transfer may be regarded as an infringement of the obligation to act as a good employer (article 7:611 of the Civil Code) and may lead to a wrongful act against the employees (article 6:162 of the Civil Code), on the basis of which the employees may claim damages. 5. IS IT POSSIBLE TO GIVE NOTICE OF TERMINATION AFTER THE BUSINESS TRANSFER? A transfer does not in itself constitute valid grounds for dismissal by the transferor or the transferee. In the case of a dismissal arising from the transfer, the employee will retain his/her employment as a result of the transfer, because such a dismissal will be null and void. The rule that a transfer does not in itself constitute grounds for dismissal does not prevent transferred employees from being dismissed for economic, technical or organisational reasons. In the case of redundancies on economic grounds, if a choice has to be made between more employees with exchangeable positions, the 'age reflection principle' is applied. On the basis of this principle, those employees will have to be divided into five age groups (15-25, 25-35, 35-45, and 55 and older), among which the dismissals will have to be divided equally. Within each age group, the most recently recruited employee will be eligible for dismissal. If two age groups qualify equally, the employee with the lowest tenure will have to be selected. In that respect, it is important to take into consideration the fact that years of service will transfer automatically in the case of a transfer. 6. WHO IS LIABLE AFTER THE BUSINESS TRANSFER? The transferee will inherit: liabilities for any breach of the employment contract before the transfer; liabilities under the employment contract, e.g. for remuneration, pension entitlements (exceptions, see above 2.4), social insurance premiums, minimum wage, payment of damages in the case of an apparently unreasonable dismissal; and pending court proceedings. The business transfer does not completely discharge the transferor from liability. The transferor and the transferee will be jointly and severally liable for one year for all obligations relating to the employment agreements existing before the date of transfer. During this period, the employee is therefore entitled to bring a claim arising from employment with the transferor against either the transferor or the transferee. After one year, the employee can only bring such a claim against the transferee. In the event of insolvency of the transferor, the rights of the employees arising from the employment relationship prior to the business transfer will, in principle, not transfer to the transferee.