Transfer of undertakings in EC and Dutch law

Labour and Employee Benefits 2007/08 Volume 1 Transfer of undertakings in EC and Dutch law Marian van Eck, Boekel De Nerée NV www.practicallaw.com/0-376-1087 The free movement of undertakings is one of the fundamental principles of the EU. EC transfer of undertakings legislation was first introduced in 1977, and was most recently updated in 2001 with Directive 2001/23/EC on safeguarding employees rights on transfers of undertakings, businesses or parts of businesses (Directive). Any EU business considering a transfer should be familiar with the rules. The primary aim of the Directive is to protect employees of an employer (old employer) on the transfer of the undertaking that they work for to another employer (new employer). The new employer must retain (to a certain extent) their employment conditions, and they are protected against dismissal due to the transfer. The secondary aim of the Directive is to make it easier for an employer in one EU member state to establish an undertaking in another member state. This chapter addresses the following points: The basic principles of the Directive. The following sections examine how the principles apply when the whole or part of an undertaking or business is transferred and falls within the scope of the Directive ( see below: The scope of the Directive ). Protection of employees rights On transfer, all the rights and obligations arising from employment contracts that exist between the old employer and the employees on the date of the transfer pass by operation of law to the new employer. This obligation lasts for at least one year after the transfer, although EU member states can set out a longer period. This has several implications: Automatic transfer of rights. The rights that automatically transfer include salary, holiday entitlement and overtime allowance. They also include a specific promise by the old employer that salary will increase by a certain amount during the following calendar year. However, it is possible for EU member states to exclude pension rights from this rule. When the Directive applies. A case study that demonstrates the issues that can arise on a transfer of an undertaking under Dutch law. The chapter also includes a checklist of practical issues to consider on the transfer of an undertaking ( see box, Checklist of practical steps to comply with transfers of undertakings legislation ). BASIC PRINCIPLES The Directive covers four main issues relating to transfer: The protection of employees rights. The protection against employee dismissal. The protection of employee representatives. Information and consultation obligations. The Directive sets out minimum standards. EU member states can apply legislation that is more favourable to employees. Therefore, it is essential to consult a local employment lawyer before transferring an undertaking in the EU. Automatic transfer of collective agreements. The new employer must comply with any collective agreement that was in place for the transferred employees before the transfer, until the agreement ends or another one enters into force or is introduced. Therefore, an employer may find itself bound by more than one collective agreement, as several may apply to its existing staff and a separate one may apply to staff that it has recently taken over. Joint and several liability for the old and new employers. EU member states can stipulate that the new and old employer be jointly and severally liable after the transfer for maintenance of the transferred employees rights and obligations. For example, under Dutch law, the old employer is jointly liable with the new one for the obligations under transferred employment contracts for one year after the transfer. This means that employees can sue both their old and new employers for salary claims that are based on a contract that existed on the date of the transfer. Constructive dismissal. If the employee terminates his employment contract on the grounds that the transfer involves a substantial change in working conditions to his detriment, the employer is regarded as responsible for the termination. This may have an effect on his severance pay depending on the EU member state. CROSS-BORDER HANDBOOKS www.practicallaw.com/labourhandbook 47 This chapter was first published in the Labour and Employee Benefits 2007/08 Handbook: Volume 1 and is reproduced with the permission of the publisher,

Labour and Employee Benefits 2007/08 Volume 1 In The Netherlands, if a Sub-district Court Judge dissolves an employment contract and neither the employee nor employer can be blamed for the termination, for example, in a reorganisation or after a transfer of an undertaking, the employee receives severance pay. This is calculated under a specific formula (the Subdistrict Court formula). For each year of service, the employee receives: One month s salary if he is below the age of 40 years. 1.5 months salary if he is between the age of 40 and 50 years. The old employer must give this information in good time before the transfer. The new employer must do so in good time before the transfer, and in any event before the employment and working conditions of those employees are directly affected by the transfer. In addition, if the new or old employer is planning measures related to the transfer that will affect its retained or existing employees, it must consult the employees representatives in good time on those measures, with a view to reaching agreement. For example, this obligation applies if the transfer creates ETO reasons to dismiss other employees ( see above, Protection against dismissal ). Two months salary if he is over 50 years or older. The court can increase or decrease severance pay according to the degree of fault of the employer or employee. Discussions are currently being carried out in The Netherlands on changes to the current dismissal system and severance pay. However, they are far from complete and have not yet given rise to any legislative changes. Protection against dismissal In principle, a transfer cannot be grounds for dismissal. However, an employer can dismiss employees for an economic, technical or organisational reason (ETO reason) that entails a change in the workforce. Therefore, an employer can carry out a dismissal near the date of a transfer for an ETO reason. For example, when an employer transfers a certain division of its business, this may create a significant change in its existing organisation. It may therefore need to reorganise its business resulting in some of its retained employees becoming redundant after the transfer. Protection of employee representatives The information and consultation obligations mean that an employer cannot hide behind the fact that a parent company has actual control of the transfer and made the decision to transfer. EU member states can limit these information and consultation obligations to: Cases where a transfer creates serious disadvantages to a considerable number of employees. This limitation can only be made if the member state provides that employee representatives can apply to an arbitration board for a decision on the measures to be taken in relation to the employees. Undertakings or businesses that have the number of employees required in that member state to elect or designate employee representatives. Therefore, smaller businesses may be exempt from information and consultation obligations. In The Netherlands: Undertakings that have at least 50 employees must set up a works council. Undertakings that have at least ten but fewer than 50 employees can set up an employee representative body. If the transferred undertaking preserves its identity, the new employer must retain the status and function of the employee representatives that it takes on. This does not apply if the employee representatives can be reappointed or dismissed under the laws or practice of the relevant EU member state, or under an agreement with the employee representatives. If the undertaking does not preserve its identity after the transfer, EU member states must still ensure that transferred employees remain properly represented after the transfer while new employee representatives are being appointed. Information and consultation When a transfer is contemplated, the new and old employers must inform the representatives of the potentially affected employees (or the employees themselves if they have no representatives) of the: Date or proposed date of the transfer. Reasons for the transfer. Legal, economic and social implications of the transfer for the employees. Measures that they are envisaging in relation to the employees. All companies must hold staff meetings at least twice in a calendar year. Works councils and employee representative bodies must be consulted in relation to the transfer. However, if an undertaking has not set up either of these bodies, it must still give the affected employees themselves the required information in good time before the proposed resolution to transfer the undertaking. THE SCOPE OF THE DIRECTIVE Whether the Directive is applicable depends on the following factors: There is an undertaking as defined in the Directive. There is a transfer. The Directive covers the employees. The transferring undertaking is located in the EU. The old employer does not face bankruptcy or liquidation. 48 CROSS-BORDER HANDBOOKS www.practicallaw.com/labourhandbook This chapter was first published in the Labour and Employee Benefits 2007/08 Handbook: Volume 1 and is reproduced with the permission of the publisher,

Labour and Employee Benefits 2007/08 Volume 1 CHECKLIST OF PRACTICAL STEPS TO COMPLY WITH TRANSFERS OF UNDERTAKINGS LEGISLATION When there is a transfer of an undertaking, the old and new employers must check the position under the Directive and national law. Does the transfer fall under the Directive? by the employer on the basis of changed working conditions and claim severance pay. There is, at least under Dutch law, an exception to this rule if the employer can prove that taking on company-specific terms is onerous or impossible. There are certain criteria for the Directive to apply: Is there an undertaking? The undertaking to be transferred must be an organised grouping of resources, with the aim of pursuing an economic activity. It must also retain its identity after the transfer. Is there a transfer? There must be some kind of agreement between the new and old employer, although the threshold for proving this is low. Is the personnel protected? The Directive only affects individuals who are classed as employees under national legislation. Is the transfer within the EU? The Directive only applies to employers located in the EU. Is the old employer solvent? The Directive in principle does not apply to transfers from bankrupt or liquidating employers. Protection against dismissal. An employer cannot dismiss an employee due to a transfer, unless it can show that it is doing so for economic, technical or organisational reasons that involve a change in the workforce. Protection of employee representatives. If the undertaking preserves its identity, the new employer must retain the status and function of employee representatives unless the law allows otherwise. Information and consultation. When contemplating a transfer, the old and new employers must inform affected employees or their representatives in good time before the transfer of the: transfer date; reasons for the transfer; legal, economic and social implications for employees; and What principles must be complied with? measures envisaged in relation to employees. The employer must check that the following issues are complied with: Protection of employees rights. On transfer, all the employment contracts and collective agreements in force with the old employer at the time of transfer pass to the new employer on the same terms for at least one year. If they do not, employees may be able to claim dismissal What national laws apply? The protections set out in the Directive are minimum standards. Therefore it is essential to: Consult a local lawyer. Confirm that no more favourable standards apply. An undertaking The Directive s definition of an undertaking derives partly from statute and partly from case law. General definition. The essential elements of the Directive s definition are that: The Directive applies to the whole or part of an undertaking or business. An undertaking must have the aim of pursuing an economic activity, whether central or ancillary to its main objective. An undertaking can be public or private, and does not have to operate for profit. The exception to this is that administrative reorganisations of, or the transfer of administrative functions between, public administrative authorities, are not regarded as a transfer. The legal form of the undertaking is irrelevant. The undertaking must retain its identity ( see below, Transfer of a going concern ). Case law. There is a great deal of European Court of Justice (ECJ) case law on the term undertaking, which sets out that: The undertaking does not need to have an independent role in social and economic life. Therefore, for example, an internal logistics department is just as likely to qualify as an undertaking as a restaurant or a company s debtors management department. The role that the undertaking plays in the rest of its business is irrelevant. Therefore, an ancillary or a core business can be an undertaking. The key test is whether an undertaking can be described as an organised grouping of resources. Therefore, for example, one employee who cleans a bank can be an undertaking ( Christel Schmidt v Spar- und Leihkasse der früheren Ämter Bordesholm, Kiel und Cronshagen (Case C-392/92 [1994] ECR) ). CROSS-BORDER HANDBOOKS www.practicallaw.com/labourhandbook 49 This chapter was first published in the Labour and Employee Benefits 2007/08 Handbook: Volume 1 and is reproduced with the permission of the publisher,

Labour and Employee Benefits 2007/08 Volume 1 CASE LAW ON THE THRESHOLD FOR TRANSFERRING AN UNDERTAKING Landsorganisationen i Danmark for Tjenerforbundet i Danmark v Ny Mølle Kro (Case 287/86 [1987] ECR) Ms Hannibalsen was the owner of a building in which a restaurant was located. She leased the restaurant to Mr Larsen. The transfer of an undertaking took place because the parties concluded an agreement, through which Mr Larsen took over all of Ms Hannibalsen s employees. However, shortly after the transfer, Ms Hannibalsen terminated the lease because Mr Larsen failed to make payment. The restaurant closed for two months and then Ms Hannibalsen decided to run the restaurant herself. The ECJ held that the termination of the lease constituted a transfer of an undertaking under an agreement, because Ms Hannibalsen could only have terminated on the basis of an agreement. Therefore, Mr Larsen s employees transferred back automatically to Ms Hannibalsen. According to ECJ case law, a transfer of an undertaking can take place in two or more stages (Foreningen af Arbejdsledere i Danmark v Daddy s Dance Hall A/S (Case 324/86 [1988] ECR) and Transfer of a going concern. To retain its identity, the undertaking must continue to be an organised grouping of resources (such as a department). According to ECJ case law, the test is whether there is a transfer of a going concern ( Spijkers v Gebroeders Benedik Abattoir CV et Alfred Benedik en Zonen BV, Case C-24/85 [1996] ECR) ). There are a number of factors to take into account: The type of undertaking. Whether tangible assets have been transferred. Temco Service Industries SA v Samir Imzilyen and Others (Case C-51/00 [2002] ECR)). In Ny Mølle Kro, the ECJ ruled that this does not stop the Directive applying. For example, if after termination, Ms Hannibalsen immediately leased the restaurant to another tenant, the undertaking would pass from Mr Larsen to the new tenant. Even if Mr Larsen and the new tenant made no agreement, there would still be a transfer of an undertaking between them, because Ms Hannibalsen would merely act as an intermediary and not conduct any operations. Therefore, parties cannot avoid falling under the Directive s scope by placing an intermediary between them. This ruling is of great practical importance. The termination of a lease can constitute a transfer of an undertaking and a succeeding tenant should be aware of this, because it may have to take on the former tenant s employees, on their previous terms and conditions. Even if operations are suspended (in this case, the restaurant closing for two months), if a going concern is transferred, the ECJ is likely to hold that there is still a transfer of an undertaking. contact between the old and new employers. However, case law provides that the threshold for deeming an agreement to exist is low ( Landsorganisationen i Danmark for Tjenerforbundet i Danmark v Ny Mølle Kro (Case 287/86 [1987] ECR) ) ( see box: Case law on the threshold for transferring an undertaking ). Employees The Directive only protects employees who have an employment contract or employment relationship with the old employer. The value of these assets. Whether the majority of the old employer s employees have been transferred. Whether or not customers have been transferred. The degree of similarity between the activities carried out before and after the transfer. The period, if any, during which these activities were suspended. According to case law, the transfer of tangible assets is one of the decisive factors for a capital-intensive organisation. For example, in the case of the transfer of a coach company, some coaches must be transferred to fall under the Directive because these are the company s significant assets ( Oy Liikenne Ab v Pekka Liskojärvi and Pentti Juntunen (Case C-172/99 [2001] ECR) ). However, in the labour-intensive sector (for example, the cleaning sector), the transfer of employees is more important. A transfer The Directive only applies if the undertaking is transferred under an agreement or a merger. This implies that there must be some The employees transferred must be protected as employees under the relevant member state s national legislation. Although this definition has been left to member states, the Directive does mention various groups that cannot be excluded. For example, no distinction can be made between: Part-time and full-time employees. Employees with open-ended or fixed-term contracts. Member states also cannot exclude temporary staffing relationships. However, the Directive does not limit member states freedom to determine whether temporary employees are employees of their temporary employment agency or the employer who hires them. In The Netherlands, agency staff are protected as employees employed by the temporary employment agency. Therefore, they only fall under the scope of the Directive if the whole or part of their temporary employment agency is transferred as an undertaking. Civil servants are an example of employees who can be excluded from protection under national legislation. In the case of Collino and Chiappero v Telecom Italia SpA ( Case C-343/98 [2000] ECR ), which involved the privatisation of an Italian government service, the ECJ ruled that civil servants who are not subject to public-law status in Italy are not protected as employees. Because civil servants are regulated differently from employees in Italy, they could 50 CROSS-BORDER HANDBOOKS www.practicallaw.com/labourhandbook This chapter was first published in the Labour and Employee Benefits 2007/08 Handbook: Volume 1 and is reproduced with the permission of the publisher,

Labour and Employee Benefits 2007/08 Volume 1 not rely on protection as employees under the Directive. The ECJ appears to have reasoned that individuals must have an employment contract or employment relationship under national law on the date of the transfer. In The Netherlands, employees are protected if they have a contract that is qualified as an employment contract by the Dutch Civil Code on the date of the transfer. Civil servants in The Netherlands do not have this type of employment contract, but other individuals who work in government may be protected. Geographical scope The Directive applies to transfers that are located within the territorial scope of the EU. Therefore, it always applies when: Both undertakings are located within the EU. An undertaking that is located in the EU takes over an undertaking located outside the EU. However, the Directive does not apply when an undertaking outside the EU takes over an undertaking located in the EU, particularly if it conflicts with the laws of the country where the new employer is located. Bankruptcy or liquidation If the old employer is involved in bankruptcy or similar proceedings aimed at liquidation under the supervision of a governmental organisation, the principles of protection against dismissal and of employees rights and obligations do not apply ( see above, Basic principles: Protection of employees rights and Protection against dismissal ). EU member states can decide that the Directive does apply in this situation. In all cases, EU member states must take measures necessary to avoid any abuse of insolvency proceedings that aims to deprive employees of their rights. A DUTCH CASE STUDY 119 employees did not accept this agreement and brought summary proceedings to demand that Astron observe all of ING s employment conditions, in particular, ING s: Profit-sharing scheme. Discount on banking and insurance products. Share option scheme. The employees were unsuccessful in the summary proceedings and filed an appeal. The Court of Appeal upheld the previous decision. According to the Court of Appeal in s Hertogenbosch, in principle, all rights and obligations, including company-specific ones, pass to the new employer, and employees can demand that they be maintained. Agreements between the old and new employers and the trade unions are therefore not binding. The old employer cannot amend any terms beforehand because of the transfer. However, it held that the new employer does not have to apply all the terms if it can justifiably argue that there are special circumstances that make this unacceptable. The transfer itself is not grounds for not applying the old terms and conditions. Astron s general defence that the claims would jeopardise Dutch outsourcing practice and that maintaining the conditions was unreasonably onerous was unsuccessful. The employees claim failed because the Court of Appeal looked at whether employees had the right to claim that the new employer continue to observe each individual company-specific condition. It ruled that employees could not demand conditions that were factually impossible for the new employer to observe, such as the ING share option scheme. The Court did not address the question of whether financial compensation for the loss of certain conditions was adequate, because the employees had brought a claim to observe the conditions rather than for compensation. However, it did state that it is conceivable that taking over transferred employees terms and conditions may require changes to or compensation for those that could not be implemented. Recently, an interesting legal case arose in The Netherlands in relation to transfers of undertakings legislation. This serves to show the various issues and controversies that can arise. One of the basic principles of the Directive is that the rights and obligations arising from the employment contract between the old employer and the transferred employees pass by operation of law to the new employer ( see above, Basic principles: Protection of employees rights ). It may be onerous or even impossible for the new employer to apply all these conditions, particularly if they are company-specific. In ING/Astron [2007] (LJN: BB0038, KGC 200700406), the Court of Appeal dealt with the question of whether employees can successfully demand that all their conditions be maintained in this situation. ING, a bank and insurance company, outsourced a support department to Astron, a printing company. 700 employees were transferred under the Directive. ING, Astron and the trade unions involved agreed that company-specific employment conditions would not pass to Astron, on the basis that Astron s package of employment conditions would still be equivalent to ING s package. Astron financially compensated transferred employees for any lost or less favourable employment conditions. The employees claims were also disallowed partly because of the nature of Dutch summary proceedings. Their interest in demanding observance was not sufficiently urgent, and they were offered compensation for the loss of company-specific conditions. Although the Dutch Court of Appeal did not issue a ruling on this point, it must be assumed that a new employer must offer transferred employees reasonable financial compensation for the loss of their previous employment conditions. If it does not, the employees can claim termination of contract under the Directive because of a substantial change in their working conditions to their detriment. Under the law of many EU member states, including The Netherlands, this means that the employer owes compensation to the employee for termination ( see above, Basic principles: Protection of employees rights ). TRANSFER OF UNDERTAKING: THE CHALLENGE FOR THE EMPLOYER It is clear, therefore, that the issues raised on a transfer of an undertaking will continue to provide challenges. Employers should consider carefully the effect of EC and national law to avoid costly disputes. CROSS-BORDER HANDBOOKS www.practicallaw.com/labourhandbook 51 This chapter was first published in the Labour and Employee Benefits 2007/08 Handbook: Volume 1 and is reproduced with the permission of the publisher,

Your law firm in the Netherlands Gustav Mahlerplein 2 1082 MA Amsterdam the Netherlands www.boekeldeneree.nl Boekel De Nerée is a leading Dutch business law firm based in Amsterdam that acts for large national and international clients. In addition to advising on contracts, the firm s employment lawyers resolve and litigate on labour disputes (individual dismissals and mass redundancies) and supervise applications for permission to dismiss workers. Boekel De Nerée has a total staff of 350 and employs 160 lawyers consisting of Advocaten and Civil Law Notaries. Contact: Marian van Eck. Tel. (31.20) 795 31 34 E-mail: marian.vaneck@bdn.nl