Legal Briefing

Transfer of undertaking and changes to personnel and employment conditions within the organisation: not always a simple matter 


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Human Resources | 01 December 2012

This article deals with two situations that occur frequently in connection with a transfer of undertaking, namely: i) dismissal of personnel and ii) harmonisation of employment conditions.

TRANSFER OF UNDERTAKING

In the case of a transfer of undertaking, the employees of the transferred undertaking will enter the service of the acquiring undertaking by operation of law. Pursuant to Article 7:663 of the Dutch Civil Code, the rights and obligations arising from the employment contracts that existed at the transferor will transfer to the acquirer by operation of law. Both written and oral agreements will transfer. 


DISMISSAL IN RELATION TO 
THE TRANSFER OF UNDERTAKING

In the case of an acquisition, an acquirer may be confronted with a personnel surplus. It often happens that certain positions are suddenly double staffed or that the staff complement is too large for the current and future workload. In such cases, the acquirer will want to reduce the staff complement. It also happens in practice that, prior to the acquisition, an acquirer ‘instructs’ the transferor to dismiss certain employees. Dismissal, other than with the consent of the employee(s) involved, is no simple matter in such cases. The reason is that both the transferor and the acquirer are prohibited from dismissing employees for reason of the transfer of undertaking. This follows from Article 4 of European Directive 2001/23/EC and the prohibition of termination for reason of a transfer of undertaking provided for in Article 7:670, paragraph 8, of the Dutch Civil Code, which is derived from said European Directive. The transfer of undertaking in itself therefore cannot constitute grounds for dismissal.

Dismissal before or after the transfer on the basis of so-called ETO grounds, ie Economical, Technical and Organisational grounds, is allowed, however. What does this mean? The term ETO grounds has not been laid down in law. Nor is absolutely clear from case law how ETO grounds should be interpreted. The general opinion is that is has to concern economical, technical and organisational reasons that occur ‘in the ordinary course of business’. Consequently, these reasons may not be purely based on the transfer of undertaking.

Recent case law shows that ETO grounds are not readily assumed. Dismissing employees with the aim of making the undertaking ‘easier to sell’, therefore prior to the transfer, is in any event not an ETO ground1. ETO grounds are not readily assumed after a transfer has taken place either. An example, which has received some criticism, is a decision by the Amsterdam Subdistrict Court2. It concerned the following. After the acquisition, the acquirer requested termination of the employment contract of an office manager. The acquirer put forward in support of this request that the acquisition had forced it to review its working processes within its undertaking and to implement several organisational measures. After the acquisition, there were two office managers within the undertaking and their duties were largely similar. However, the organisation was small and there was no need for two office managers. One of them was therefore proposed for dismissal. The Subdistrict Court then held that the request for termination was entirely related to the acquisition. It was the opinion of the Subdistrict Court that the acquisition was the sole cause of the situation that there were two office managers for whom there was not enough work. The Subdistrict Court consequently did not allow the dismissal. The Subdistrict Court might have rendered a different decision if the application to make an employee redundant had been made at a later stage. After all, a restructuring becomes less easy to trace back to the transfer of undertaking as it takes place later in time from the moment of the transfer of undertaking.

HARMONISATION OF EMPLOYMENT CONDITIONS FOLLOWING A 
TRANSFER OF UNDERTAKING

An acquirer will usually want to apply the employment conditions that apply within their undertaking to the acquired group of employees as well. An acquirer is not able, however, to immediately change the employment conditions during the transfer of undertaking, that is prohibited3. Following an acquisition, an acquirer will usually have a group of acquired employees within their company with employment conditions that are different to those of the resident population and the acquirer will want to realise a harmonisation of the employment conditions. This is not a simple matter, however, without the co-operation of the employees involved. In practice, a change is sometimes permitted if a generous transitional arrangement, possibly involving compensation, is offered for this purpose.

Incidentally, in principle, company-specific employment conditions, such as personnel discounts on specific company products such as insurance and mortgages, are also included in the transfer. This is even the case if it is clear in advance that the acquirer will not be able to continue these conditions or only against significant cost. The acquired employees will nevertheless have to accept, within reasonable limits, that company-specific employment conditions lapse and that they will receive compensation in respect thereof. It is important in that connection whether the employee representatives have been involved in the compensation arrangement and agree to it.

Invoking the ETO grounds can also provide a solution as regards the harmonisation 
of employment conditions. On the basis 
of these ETO grounds, changing employment conditions should be possible as the ground for the change is organisational in nature and not the transfer in itself. In such cases, the harmonisation of employment conditions after a transfer of undertaking can constitute a reasonable to substantial interest for the undertaking that should prevail over the interest of the employee(s).

The Amsterdam Subdistrict Court recently determined that ETO grounds cannot be laid down in a Collective Agreement (CAO). Whether such grounds exist will have to be determined on the basis of all circumstances of the case and not by reference to them in a CAO.

CONCLUSION

In the case of a transfer of undertaking, the employees of the transferor will enter the service of the acquiring undertaking by operation of law. They retain their rights and obligations arising from their employment contract and they cannot be dismissed for reason of the transfer. Dismissal on the basis of the ETO grounds is permitted. These are grounds that occur ‘in the ordinary course of business’. Such reasons are not readily assumed. A restructuring is less ‘suspicious’ and is less easy to trace back to the transfer of undertaking as it takes place later in time from the moment of the transfer of undertaking.

An acquirer is not able to immediately change the employment conditions during the transfer of undertaking. Harmonisation of employment conditions following a transfer of undertaking without the 
co-operation of the relevant employees is no simple matter. Such cases require a generous transitional arrangement including compensation. The acquired employees will have to accept, within reasonable limits, that company-specific employment conditions lapse and that they will receive compensation in respect thereof.