Newsletter - TerraLex Connections
By Detlef Grimm and Sebastian Pelzer*
Loschelder Rechtsanwälte, Cologne (Germany)
Employment and labor law in the European Union and in Germany is significantly employee-friendly. The protection of employees and their representative bodies plays a major role in statutory and case law. When a foreign company is planning to do business in Germany and decides to acquire an existing company, independent operational unit or part of such unit it must take into consideration the laws on the protection of employees eventually triggered by such decisions. Vice versa, similar considerations must be made by the owner of a company or operational unit intended to be transferred.
Sec. 613a of the German Civil Code (Bürgerliches Gesetzbuch, BGB) is the key legal provision relating to the safeguarding of employees’ rights in the event of the transfer of a business or a part of a business. The provision’s primary aim is to ensure the continuity of the employment relationships affected by such transfers. Accordingly, sec. 613a para. 1 sent. 1 BGB reads:
“Where a business or part of a business is transferred by legal transaction to another owner, the latter enters into the rights and obligations arising from the employment relationships existing at the time of transfer.”
Thus, with regard to the employment relationships affected by the transfer of a business, the purchaser (and new owner) of the business supersedes the seller (and former owner) as employer. This happens by operation of law, i.e., without an agreement between seller and purchaser being necessary. However, sec. 613a BGB also obliges the seller or purchaser to inform the employees who have the right to object to the transfer of their employment relationship; in case of objection, the latter continues with the seller. Additionally, sec. 613a BGB provides for a liability regime, distributing employment law liabilities of the seller and the purchaser. Moreover, the provision regulates how and to which extent labor law rules (e.g., resulting from agreements with the works council) continue to apply.
Sec. 613a BGB applies to asset deals but not to share deals. The provision may also apply to certain company transformations (e.g., mergers). However, sec. 324 of the German Company Transformation Act (Umwandlungsgesetz, UmwG) shows that it needs to be assessed independently whether the prerequisites of sec. 613a BGB are met.
Sec. 613a BGB is mandatory and implements likewise mandatory European law regulated in the so-called “Business Transfers Directive” 2001/23/EC of the European Community (EC). Since all EC Member States are required to implement this directive, laws comparable to sec. 613 BGB are effective in most EC Member States as well.
2. Terms and Definitions
2.1 Basic Terms
In order to define the transfer of a business or part of it and its possible legal consequences, it is advisable to start with the dominant legal terms:
A company (“Unternehmen”) is the legal entity within which business activities are being pursued. With regard to German employment and labor law, almost always a company is also the employer.
An operation (“Betrieb”) is an organizational unit within which the owner (usually a company), alone or with its employees, continuously pursues a certain work-related purpose by using tangible and intangible assets. As a rule, an operation is also defined by having a management panel which can make significant decisions on personnel and social matters independently. However, details of the definition vary depending on the specific field of law where the term is used.
- A works council (“Betriebsrat”) is the employee representative body at operation level. It is provided with considerable codetermination rights in social, personnel and economic matters. Employer and works council can conclude works agreements which may bindingly stipulate rights and obligations of the individual employees as well. If there is more than one works council within a company, a company works council must be established at company level. If the company is part of a group of companies under a common management (“Konzern”), a group works council may be established on group level.
2.2 Business or Part of a Business
Quite close to the term “operation”, a business (“Betrieb” as well) in terms of sec. 613a BGB and according to Art. 1 para. 1b EC directive 2001/23/EC is an economic entity, meaning an organized grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary (typically, e.g., a plant or office). A part of a business may be defined as a separate, organizationally identifiable part of a business within the afore-mentioned meaning (e.g., the accounting department).
Often, a business may also meet the requirements of an operation and vice versa; this applies accordingly to parts of businesses and parts of operations.
The main prerequisite for a transfer of a business or part of a business pursuant to sec. 613a para. 1 sent. 1 BGB is that the transferred business retains its identity. The purchaser must be provided with and, to some extent, actually has to make use of the opportunity to pursue the same or a similar economic activity without significantly changing the organization of the (part of the) business. In order to assess whether such a transfer has taken place it is necessary to consider all facts characterizing the transaction. Thus, the European Court of Justice (ECJ), followed later by the German Federal Labor Court (Bundesarbeitsgericht, BAG), has developed the below-mentioned criteria:
The type of business or company (e.g., focus on production or service);
Whether or not tangible assets of the business (e.g., buildings, movable property) were transferred;
Whether or not intangible assets (e.g., intellectual property rights, good will, know-how) were transferred, and their value at the time of the transfer;
Whether or not the majority or an important part of the personnel (key employees) was taken over by the new employer;
Whether or not the customers were transferred;
The degree of similarity between the activities carried on before and after the transfer; and
The period, if any, for which those activities were suspended.
All of these criteria must be considered when assessing whether a certain transaction falls under sec. 613a BGB. The weight of each single criterion may vary depending on the specific case.
As a rule of thumb, in manufacturing companies a transfer of a business may be indicated by a transfer of considerable tangible and intangible assets (e.g., a manufacturing plant), whereas in service companies the assignment of a large number of employees or a small number of highly qualified (key) employees may indicate a transfer of a business.
Until recently, the BAG held that retaining the identity actually required a rather unchanged continuation of the business after its transfer, in particular regarding the business organization. The ECJ, however, has relaxed this prerequisite lately and now takes the view that a transaction may be regarded as a transfer of a business pursuant to EC directive 2001/23/EG even if the business loses its organizational independence by being completely integrated into the organization of the purchaser, as long as a “functional link” between the transferred factors is retained. Due to this significant shift in defining the transfer of a business, it will now become considerably more difficult for the parties of an SPA to avoid such transfer.
2.4 By Legal Transaction
At least indirectly, and not necessarily between the former and the new owner of the business, the transfer must be based on a legal transaction. Typically, this happens when a business is being transferred by means of an asset deal, i.e., when seller and purchaser conclude a Sales and Purchase Agreement (hereinafter called “SPA”) where all or selected assets of a company (including rights and liabilities, know how, furniture, etc.) are determined to be transferred specifically.
However, sec. 613a BGB also applies to certain company transformations. As a rule of thumb, the provision is likely to be applicable if it makes sense to apply its legal consequences to a specific transfer and the affected employment relationships. Thus, sec. 613a BGB applies to corporate split-offs, split-ups and spin-offs which parallel asset deals in the field of company transformations. Vice versa, sec. 613a BGB is applicable in case of mergers: At least one involved company will cease to exist, and its employees may need protection when facing a new employer.
In contrast, sec. 613a BGB does not apply to share deals, i.e., when company control is transferred by a simple purchase of shares; here, the company’s identity remains unchanged. Moreover, sec. 613a BGB is not applicable if the transfer happens by operation of law only, i.e., without any legal transaction (e.g., vesting of an estate in the heir).
2.5. Some Examples
A transfer of a business under sec. 613a BGB is likely to be triggered
if a company sells all assets of a production site to the purchasing company which continues producing without significant changes; or if a similar result is reached by performing a split-off company transformation, i.e., splitting off the production site and transferring it to an existing or newly established company by way of universal succession (sec. 123 para. 1 UmwG);
- if a company is outsourcing certain service parts of its business (e.g., logistics), dismisses the employees working there, enters into a service agreement with a company which decides to hire some 80% of the dismissed personnel, and with the outsourcing company still providing some tangible and intangible assets necessary for rendering said services.
In contrast, sec. 613a BGB is not applicable
if the purchaser destroys the identity of the acquired economic entity by conducting significant changes, e.g., by tearing apart and re-organizing the transferred factors and their functional links and organizational structures previously existing, and integrating single factors into the existing structure of the purchaser’s business;
- in case of re-organizational measures in a group of companies when only share deals are involved.
Moreover, sec. 613 BGB may apply to certain re-organizations within a group of companies, e.g., by implementing business units operating regardless of the boundaries of legal entities, or vice versa; by splitting up or consolidating production sites.
2.6 Cross-Border Transfers
In a judgment of May 26, 2011, the BAG (ref. no. 8 AZR 37/10) ruled that a transfer of a business pursuant to sec. 613a BGB may also be given if a business (or a part of it) in Germany is relocated cross-border to another site, provided the business retains its identity and unless there is a significant distance between the sites. The court held that such distance cannot be assumed if it can be covered by car in about one hour. However, the judgment had a rather unusual focus: Contrary to most of the relevant case law which deals with employees claiming continued employment with the new owner of the transferred business, in this particular case the employees affected by the relocation had just challenged their dismissals carried out by their employer due to the alleged closure of the business. They claimed that the business had not been closed but relocated which would undermine the grounds of the dismissal. Accordingly, the BAG only declared the dismissals invalid because, without the site actually having been closed, the employees’ workplaces still existed. The court did not have to decide whether the employment relationships had been transferred to the owner of the relocated site (a Swiss Company) – which would have made it necessary to decide on difficult issues of international private law.
In contrast, the BAG ruled in 1992 (judgment of Oct. 29, 1992, ref. no. 2 AZR 267/92) that the transfer of a foreign business to a company in Germany does not necessarily fall under sec. 613a BGB. The court held that if the foreign employment relationship is subject to the law of a foreign jurisdiction the crucial question with regard to assessing a possible transfer of the employment relationship to the German company/employer is whether the foreign law provides for an equivalent to sec. 613a BGB. The latter, however, was not applicable given, in particular, that it is not part of the public policy (“ordre public”) of the German jurisdiction and therefore did not demand its compulsory application regardless of the foreign law.
3. Legal Consequences
Sec. 613a BGB provides for several legal consequences resulting from the transfer of a (part of a) business dealing with different aspects of the transfer of employees.
3.1 Transfer of Employment Relationships
The core legal consequence of sec. 613a BGB is that the employment relationships of the employees affected by the transfer of a business or part of it (e.g., working in a transferred site) will transfer as well from the former to the new owner of the business. Since, basically, it is only the employer that changes, in general all rights and obligations arising from the transferred employment relationships remain unaltered.
In particular, this applies to the terms and conditions agreed upon in individual or standard employment agreements, including the seniority (years of service) of the employees with the former employer, as well as to any company usages or principles of equal treatment.
- As a general rule pursuant to sec. 613 para. 1 sent. 2 BGB, rights and obligations stipulated in collective bargaining agreements (“CBA”) or in works agreements (cf. above, 2.1) shall become an integral part of the individual employment relationship – meaning a shift of the legal basis – between the new owner of the business and the employee. However, there are mainly two exceptions to that rule:
(1) Pursuant to sec. 613a para. 1 sent. 3 BGB, the afore-mentioned rights and obligations shall be superseded by similar and thus “conflicting” regulations on the same subject matters stipulated in other CBA’s or works agreements being effective with the new owner, if any.
This exception shows that, in particular with regard to mergers, it is highly advisable to assess (e.g., within a due diligence) which labor law regulations apply to the companies determined to merge: If one company is subject to “expensive” collective bargaining agreements whereas considerably “cheaper” CBA’s apply to the other company it may make sense to merge the assets of the first to the latter.
However, companies which implement CBA’s almost always include references to these CBA’s in the employment agreements. Then, the scope of application of the aforementioned exception depends on the wording of the contractual clause. It may show that due to the wording certain CBA’s apply and cannot be superseded by different, “cheaper” CBA’s.
In light of this, it is highly important to assess within a due diligence not only the possible implementation of labor law agreements, but also its legal bases, particularly including references in the employment agreements.
(2) If the transfer leaves the transferred business completely unaltered, e.g., in case of an asset deal on an entire operation, the works council continues to exist and thus there is no need for shifting the legal basis. Instead, works agreements continue to apply.
If rights and obligations resulting from labor law agreements are being referred to in an employment agreement and, due to the wording of the reference, are effective also because of this contractual legal basis, or if such rights and obligations become part of the individual employment relationship pursuant to the general rule of sec. 613a para. 1 sent. 2 BGB, they may not be altered to the detriment of the employee until one year has elapsed following the date of transfer. Even then, most likely a detrimental alteration will only be possible if mutually agreed with the employee. An alteration carried out unilaterally by the employer is a rather theoretical option, in particular when aiming at a reduction of financial obligations.
- As a rule, all existing company pension entitlements are transferred, i.e., the purchaser has to take over all pension obligations of the seller and fulfil the employees’ pension entitlements when due. Pension entitlements of former or retired employees of the seller are not being transferred to the purchaser, though. Transferred pension obligations are an important matter to be dealt with in an SPA.
These legal consequences take place by mandatory operation of law. A contractual agreement on such transfer of employment relationships is not required, and it would happen even if it was expressly excluded in the SPA since it is not permissible to circumvent the legal consequences. For example, if an employee concluded a termination agreement with the former owner of the business and entered into an employment agreement with the new owner, both agreements would be regarded invalid.
3.2 Distribution of Employment Law Liabilities
As a general rule, the new owner of the transferred (part of a) business is liable for all claims arising from the transferred employment relationships (e.g., base salary, bonus, car allowance, pension entitlements), including claims that have already arisen by the time the business had been transferred. According to sec. 613a para. 2 BGB, the former and the new owner shall be liable jointly and individually for obligations which have arisen prior to the date of transfer and fall due before one year has elapsed following the date of transfer. Where such obligations fall due after the date of transfer, the former owner though shall be liable on a pro-rated basis only. Pursuant to sec. 613a para. 3 BGB, these rules on the liability of the former owner shall not apply if a company ceases to exist by way of company transformation.
However, these regulations regard the relationship between an employee and his/her former or new employer. Thus, the parties of a transaction may deviate from that scheme when regulating the internal distribution of liabilities in the SPA or, alternatively, adjust the purchase price in light of such obligations.
3.3 Invalidity of a Dismissal Due to the Transfer of a Business
According to sec. 613a para. 4 BGB, any dismissal of an employee carried out by the former or the new owner of the transferred business on account of the transfer, i.e., without further justification, shall be invalid. However, the right of the former or new owner to dismiss an employee for other reasons remains unaffected. Such dismissal may even be justified by operational reasons, e.g., if job positions become redundant due to a restructuring program being conducted either by the seller prior to the transaction (“sprucing up the bride”) or, afterwards, by the purchaser. Additionally, a dismissal for operational reasons may be justified if employees affected by the transfer of a business object to the transfer of their employment relationships (cf. below, 3.4.2) since most likely their workplaces will no longer exist within the organization of their former employer.
3.4 Information of Employees and Their Right to Object to the Transfer of Their Employment Relationship
The former or the new owner of the transferred (part of a) business is obligated to inform the employees affected by such transfer. This statutory obligation is closely linked to each employee’s right to object – in general within one month after due information – to the transfer of their employment relationship which, in the first instance, already happened by operation of law pursuant to sec. 613a para. 1 sent. 1 BGB. The key aim of the information requirement is to provide the employees with all information necessary to reasonably consider and decide whether they want their employment relationship to continue with their former employer or with the new owner of the business.
3.4.1 Information of Employees
According to sec. 613a para. 5 BGB, the employees affected by the transfer of a (part of a) business are required to be informed in writing prior to the transfer with respect to
the date or planned date of transfer;
the rationale for the transfer;
the legal, economic and social consequences of the transfer for the employees; and
- any measures intended to be taken with regard to the employees.
Although each individual employee affected by the transfer is to be informed, such information may be provided by a standardized letter; as a rule, there is no need to deal with specific aspects of individual employment relationships.
A particular problem is that it is very difficult (in fact, almost impossible) to meet the requirements of correct information developed by BAG case law. Even minor mistakes impair the correctness of the entire information. From a practical point of view, the information letter should include any known consequence of the transfer of the business as well as any intended measure which may be relevant to the employees’ decision whether to transfer or to stay with the previous employer.
It is therefore advisable to stipulate in an SPA not only which party has to inform the employees but also any liability and (financial) consequences in case of incorrect information.
3.4.2 Employees’ Right to Object
According to sec. 613a para. 6 BGB, an employee may object to the transfer of his/her employment relationship in writing within one month after receiving information due to and in line with sec. 613a para. 5 BGB. Objection may be declared to the former or the new owner. In case of an objection the employment relationship will continue with the former employer.
In light of the one month time it is advisable for seller and purchaser to inform the employees as soon as possible in order to learn early enough how many employees will transfer with the business and how many will stay with their previous employer.
However, the one month time for objection will not start if the information given was not correct. In this case, the individual employee may not lose his/her right to object until such objection would be regarded as acting in bad faith. This will be assessed with regard to the time elapsed since the transfer of the business and the employee’s behaviour prior to the objection. For example, an objection would be regarded invalid if it is declared after one year and if, in the meantime, the employee did not just work for but significantly committed himself/herself to the new employer, e.g., by mutually agreeing upon a promotion to another position within the new employer’s organization.
Of course, this extended time for objection is an extremely important issue for the seller that bears the risk of having to face former employees even years after the transfer, e.g., when the purchaser later happens to become insolvent. With regard to this scenario, it is highly recommended to include regulations in the SPA on the distribution of costs arising from possible later objections (cf. above, 3.4.1).
4. Rights of Employee Representative Bodies
A transfer of a (part of a) business does not necessarily trigger rights of employee representative bodies. In particular, sec. 613a BGB itself does not deal with this subject matter. However, there are a number of rights of employee representative bodies which may arise in the context of a transfer of a business.
4.1 General Right to Information
If a works council is established in an operation sec. 80 para. 2 of the German Works Constitution Act (Betriebsverfassungsgesetz, BetrVG) obligates the employer to provide the works council in good time with comprehensive information in order to enable the works council to fulfil its duties pursuant to the BetrVG.
4.2 Codetermination with Regard to Operational Changes
Substantial codetermination rights of the competent employee representative body follow from sec. 111 et seq. BetrVG in case of an operational change which could result in significant disadvantages for the personnel or a considerable part of the personnel working in an operation.
According to sec. 111 sent. 3 BetrVG, operational changes may include
a cutback, closure or relocation of the entire operation or a significant part of the operation;
a consolidation of operations or a divestiture of the operation;
fundamental changes in the organization, purpose or technical facilities of the operation; and
an introduction of fundamentally new work methods and production processes.
As a rule, the works council at operational level is competent to represent the employees with regard to the aforementioned matters. As an exception to that rule, the company works council may be competent if the operational change affects the entire company or several operations and, thus, the (local) works council(s) cannot handle the matter properly; or if the works council delegates its competence by expressly authorizing the company works council to handle the matter. In the following, we assume the works council’s competence.
The employer is obliged to inform the works council timely and comprehensively of the planned operational change and to consult about it with the works council. The consultation is intended to lead to a reconciliation of interests, structuring the operational change in a way that least impairs the interests of employees affected by the change, and a so-called social plan, i.e., an agreement on the compensation or mitigation of economic disadvantages the employees will suffer due to the planned operational change. Regarding both the reconciliation of interests and the social plan, the BetrVG provides for a detailed and time-consuming procedure, applying in particular if the employer and the works council have difficulties in reaching an agreement. However, the works council, at the end of the day, cannot compel the employer to agree upon a reconciliation of interests and, thus, cannot prevent but only delay the operational change itself. In contrast, the works council can force a social plan. For example, if the operational change leads to job redundancies the company can be sure that a social plan will be established obligating the company to make redundancy payments.
4.3 Interim Mandate; European Works Council
If the transfer of a (part of a) business or, in its context, an operational change impairs the existence of a works council (e.g., in case of a split-up) the latter will though have an interim mandate, pursuant to sec. 21a BetrVG, within which it will still represent the employees with regard to, e.g., codetermination pursuant to sec. 111 et seq. BetrVG. This may also apply if two or more companies/employers have established a joint operation. This would require a joint management with regard to personnel and social matters.
If, for example, only one company and/or its “part” of the joint operation is involved in an operational change the works council – which would be established for the joint operation and therefore represent all employees working there – will still be competent within an interim mandate.
If a cross-border transfer of a (part of a) business triggers an operational change codetermination rights may also exist with regard to cross-border employee representative bodies, e.g., the European works council.
4.4 Information of the Economic Committee
The economic committee is a subsidiary body of the works council which is required to be established in companies regularly having more than 100 employees. Sec. 106 et seq. BetrVG provides for specific rights of the economic committee with regard to the information and consultation about economic matters including, among others, the issues mentioned in sec. 111 sent. 3 BetrVG (cf. above, 4.2), though with a different, more company-related and less operation-related focus: For example, on the one hand, the employer is obligated to inform the economic committee and confer with it about a planned share deal (as well as all kinds of company transformations) or change of control. On the other hand, these matters are not subject to codetermination pursuant to sec. 111 et seq. BetrVG since it does not trigger an operational change.
5. Scope of Influence of Trade Unions
As a rule, trade unions are not involved in a transfer of a business or an operational change. However, since a works council is not able to prevent an operational change and the budget for a social plan forced by the works council is limited by statutory law, trade unions recently developed a new strategy that is intended to completely prevent the measure, in particular with regard to cross-border transactions. It is as simple as that: A trade union pretends wishing to conclude a CBA on the compensation or mitigation of economic disadvantages the employees will suffer due to the planned operational change. However, the specific claims (regarding, e.g., notice periods and compensation payments in case of dismissals) are so excessive that the transaction parties desist from their plans. Yet, this strategy will only be successful if the trade union can mobilize the employees to go on strike for a considerable time.
Transactions at company or operation level are likely to cause obligations of the parties involved with regard to several fields of employment and labor law. In particular, a transaction may constitute a transfer of a business in terms of sec. 613a BGB and would then lead to the transfer of the employment relationships affected by the transfer. Moreover, the transaction may trigger an operational change pursuant to sec. 111 BetrVG and, thus, result in codetermination rights of the works council. However, within certain limits the parties of the transaction can determine which statutory provisions will apply to the transaction. This generally requires a thorough review, by way of a due diligence, of the status quo with respect to employment and labor law issues, and sophisticated stipulations in the SPA.
* Detlef Grimm is a partner and Sebastian Pelzer is a senior associate of Loschelder Rechtsanwälte in Cologne, Germany. They provide legal advice in all fields of employment and labor law. In particular, they advise companies on day-to-day issues of employment law (e.g., drafting of employment agreements, termination of employment relationships, and litigation) as well as specific matters, such as business reorganization, transfer of a business and transactional aspects of labor law, collective bargaining agreements, works constitution law, and negotiating agreements with works councils or trade unions. Detlef and Sebastian can be contacted by email to email@example.com and firstname.lastname@example.org.