The “international” transfer of undertakings in Germany and Europe – a perennial issue

Over time, increasingly more situations have arisen – especially in the international realm – in which a foreign company makes an investment in the United States, for example, which at least indirectly affects European and especially German companies and partial or entire operations. These investments, of course, also affect the employees. This investment can take many forms. For example, the company can acquire shares in a Dutch company that, in turn, employs workers in Germany perhaps without having a permanent establishment in Germany. Or only "assets" are acquired, i.e., assets without an actual corporate structure. Finally, it is also conceivable that the acquisition only involves employees and no other assets.

Current situation

The German statutory regulation on the transfer of an undertaking (Section 613a of the German Civil Code) is based on a European law requirement. Employees must be protected when their "employer" changes. If a business or part of a business is transferred to another owner via a legal transaction, the new owner assumes the rights and obligations arising from the employment relationships existing at the time of the transfer. According to German law, if these rights and obligations are regulated by the legal provisions of a collective agreement or by a works agreement, these rights and obligations become part of the employment relationship between the new owner and the employee and cannot be changed to the disadvantage of the employee until one year has passed after the transfer date.

Risks for the employer

The classic case is that a group of employees and their activities are taken over and continued by another business. In this case, the (new) employer is liable for the employees taken over; any termination of the employment relationship of an employee by the previous employer or by the new owner because of the transfer of an establishment or part of an establishment is invalid.

New case law of the ECJ: continuance to the detriment of the employers

The European Court of Justice (ECJ) has recently issued several rulings that are significant for labour law practice. The ECJ is involved here because the German statutory regulation concerns the implementation of a legally binding European directive.

According to the ECJ judgement of February 27, 2020 (C-298/18), a transfer of an undertaking can also exist if the entity acquiring the undertaking does not take over any definitive operational resources. The judgement differentiates between a transfer of an undertaking and a mere contractual succession. In this specific case, the case law had to reach a decision regarding the employees of a bus company for which the buses were not taken over as part of the deal.

Even if a catalogue of points to be individually considered has been developed to ease comparison with comparable circumstances, it must be noted that the courts analyse the entire situation and that this entails considerable risks for the employer. Another judgement dated March 23, 2020 (C-344/18) takes a similar stance. Here the court stated that an employment relationship can also be transferred to several acquirers, whose implementation can naturally have unpredictable consequences, not to mention the issue of whether this is feasible in practice.

Consequences in practice

In consequence to the latest decision of the ECJ (C-344/18), several part-time employment relationships with the various acquirers would then have to falsified to comply with the ECJ case law. Whether this is in the employees’ best interest remains to be seen.

In any case, case law presents further risks for employers that are difficult to overlook, to put it mildly. Because the tendency of the ECJ seems to be, perhaps also out of an existing basic mistrust of employers, to extend the definition of a business transfer further and further in order to ensure an ostensibly "fair compensation".

In terms of consulting practice for employers, this means placing even more emphasis on identifying company structures and having to understand the ramifications of these companies down to the smallest detail, provided they really exist!

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This is a post from our newsletter "People in Business" 1-2021. The entire newsletter can be found here. You can also subscribe to this newsletter and receive the current issue directly on the release date.