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EU Directive on Transfers of Undertakings

Purpose: The Directive1 imposes obligations on employers and protects certain employee rights in connection with certain corporate transactions.

Scope

Covered Employees.
The Directive covers full-time, part-time and indefinite-term or fixed-term employees.  The Directive does not cover independent contractors or other persons who are not regarded as “employees” under national law.

Covered Transactions.
The Directive broadly covers transactions involving a change in the entity responsible for a business (or part of a business)2 resulting in a change of employer, such as an asset sale or a merger.3  The Directive requires the relevant business (or part) to constitute an “economic entity”.  Broadly, this requires resources (whether tangible and/or intangible) that are deliberately organized together for purposes of pursuing economic activity of some sort.

Excluded Transactions.
The Directive does not generally apply to: 

  • Businesses (or the relevant part) not situated within the EEA.
  • Stock sales.  
  • Transfers of assets not constituting an “economic entity” or where the economic entity does not retain its identity.  However, the analysis of whether the transfer of assets constitutes an economic entity is fact-specific, and legal advice should always be sought before concluding that the Directive does not apply.
  • Unless an EU Member State provides otherwise, liquidations in bankruptcy or analogous proceedings.4  Where an EU Member State provides that the Directive does apply in this context, the EU Member State may relax the usual rules and provide that (i) certain employee debts do not transfer where they are otherwise protected under national law and (ii) changes to employees’ terms and conditions may be agreed, provided these are designed to safeguard employment opportunities by ensuring the survival of the business.
  • Transfers between certain governmental bodies.

Transfer of Employment and Certain Rights and Obligations by Operation of Law

  • In General.  Employees assigned to the business transfer automatically by operation of law to the transferee at the same time as the business is transferred, and on their existing terms and conditions of employment.5  The transferee becomes the new employer.  As a result, all rights and obligations arising from the employment contracts of those transferred employees, or from the employment relationships more broadly, are also transferred to the transferee, and (except as provided in “The Pension Exception” and “Joint and Several Liability” below and otherwise by the relevant EU Member State) the transferor is released from those obligations by operation of law.
  • The Pension Exception. Unless EU Member States provide otherwise, an employee’s rights to old-age, invalidity or survivor’s benefits under supplementary company or intercompany pension schemes outside statutory social security schemes do not transfer automatically by operation of law to the transferee, and so remain with the transferor.
  • Joint and Several Liability. EU Member States may provide that, after the transfer, the transferor remains jointly and severally liable with the transferee for obligations that arose in respect of the transferred employees before the transfer.
  • Collective Agreements.  The transferee is required to continue to observe the terms and conditions agreed in any collective agreement applicable to the transferred employees on the same terms as the transferor, until the termination or expiry of the collective agreement or the entry into force or application of another collective agreement.  EU Member States may limit the period for observing collective agreements, provided it is not less than one year.
  • Employee Representative Recognition.  If the transferred business (or part) preserves its autonomy and is maintained as a separate operating unit after the transfer, the status and function of employee representatives (i.e., recognised trade unions) must also be preserved by the transferor.  However, this does not apply if, pursuant to applicable law, conditions for the new appointment of employee representatives are satisfied. 

Specific Employee Protections

  • Protection Against Dismissal.  The corporate transaction cannot, in itself, constitute grounds for dismissal by either the transferor or the transferee.  However, dismissals for economic, technical or organizational reasons entailing changes in the workforce are not prohibited by the Directive.  Whether those reasons exist in any particular transaction depends on the facts and circumstances.
  • Substantial Changes in Working Conditions.  If the transfer involves a substantial change in working conditions to the detriment of an employee and the employee resigns in response, the employer is nonetheless regarded as having been responsible for the termination and the employee may under national law be entitled to severance benefits.
  • Right to Object to the Transfer.  It is for the EU Member States to determine the implication of an employee deciding not to continue to work for the transferee.
  • Contracting Out.  Any purported waiver by an employee of rights under the Directive is deemed to be invalid as a matter of public policy.

Employee Engagement

  • Obligation to Provide Information.  Both the transferor and the transferee must provide representatives of their respective affected employees (or, in certain circumstances if there are no representatives, the employees themselves) with specified information about the transfer “in good time before the transfer is carried out” (i.e., prior to closing).  EU Member States have interpreted this timing requirement in different ways.  The information required to be provided is (i) the date or proposed date of the transfer, (ii) the reasons for the transfer, (iii) the “legal, economic and social implications” of the transfer for the employees, and (iv) any measures envisaged in relation to the employees.  Generally, a “measure” may include limited changes or adjustments to terms and conditions of employment, changes to work locations or practices, redundancies or administrative changes such as changes to the date an employee is paid, but the determination of which actions may constitute a measure is EU Member State-specific. 
  • Obligation to Consult.  Where the transferor or the transferee envisages taking “measures” in relation to its respective affected employees, it must consult representatives of those employees on such measures “in good time before the change in the business is effected”.  Consultation must be with a view to reaching an agreement.
  • Parent Decisions. The obligations to inform and consult apply irrespective of whether the decision resulting in the transfer is taken by the employer or by a parent.

Cross-Border Transfers

EU Member States have some flexibility in how to implement the Directive and differences between EU Member States are sometimes significant.  Such differences give rise to legal uncertainty in case of cross-border transfers as the Directive does not provide for solutions in case of conflicting laws.

[1] Directive 2001/23/EC.

[2] The Directive also applies to undertakings, which is a broad concept and includes, for example, charities, trade associations, certain governmental bodies, schools and universities, whether or not operating for profit.

[3] The Directive may protect employees of the surviving entity in a merger, subject to the structure of the transaction and the applicable law of the member state in which such merger occurs.

[4] With respect to insolvency proceedings that do not involve a liquidation, the Directive will apply, but certain of the Directive’s requirements may be relaxed by the EU Member State.

[5] There is no statutory definition of “assigned”, and the determination of whether an employee is assigned to the business (or part) will be based on the relevant facts and circumstances and the applicable case law of the European Court of Justice.