If you transfer an undertaking or part of an undertaking you are obliged by law to take your employees with you. What’s more they retain all their rights and obligations under their current employment contract. Although this rule seems relatively clear, all sorts of questions arise in practice regarding specific employment conditions. For example, the question was and is to what extent do the applicable collective labour agreements transfer (they do) and remain in force, and how must conflicting labour agreements be dealt with (a legal maze). In this we discuss some specific employment conditions that have a special regime.
Non-Competition clause
The non-competition clause passes to the new employer by operation of law. This clause must of course be valid. A non-competition clause in a fixed-term employment contract applies only if the employer has stated in writing that the non-competition clause is necessary for serious business or service reasons. If that necessity does not exist, the clause is voidable. Moreover, a non-competition clause in a fixed-term contract that has not been substantiated in writing is even void. In that case there is no transference of the non-competition clause. Even if a valid non-competition clause does exist, the acquiring undertaking would do well to take heed. Although the transfer of undertaking does not cause the non-competition clause to lapse, the situation after the transfer could still lead to the (partial) lapse of the clause. Serious business or service interests must exist for inclusion of the clause in fixed-term employment contracts. The non-competition clause can lose its effect in indefinite term contracts if, after the transfer, this clause seriously impacts the employee as a consequence of a radical chance in the employment relationship. There must then be a change in the actual situation. This is the case if, for example, the employment contract has acquired a substantively different content or if the non-competition clause acquired a fundamentally different (geographical) reach after the transfer. In such situation it would be prudent if the transferee, as the new employer, were to again agree the non-competition clause in writing with the employee. Note: the former employer may no longer rely on the non-competition clause after the transfer.
Company-related facilities/employment conditions
The transfer also covers ‘facilities’ that the employer may offer or withdraw at its discretion, such as the right to use the gym located in the building where the employer is located. The option to withdraw may not only be based on the transfer of undertaking. But what if specific employment conditions or facilities are so company-related that the transferee is not able to offer them? These could for instance include – in addition to the lack of a gym in the vicinity of the new employer – a staff discount on mortgage interest while the transferee does not offer mortgages. It has been ruled in case law that the loss of such company-related employment conditions cannot simply be ‘bought off’ with a compensation arrangement. Employees don’t have to just accept the loss of (some) of their entitlements without reason. The acquiring party must, where possible, offer alternative comparable employment conditions. For example, in the case of a profit-sharing arrangement, a similar profit-sharing arrangement could be introduced at the transferee. It will, however, not be possible to offer a comparable employment condition with respect to certain company-related employment conditions, as is the case with regard to the mortgage interest referred to above. In that case a failure to perform exists on the part of the transferee. Parties must then seek a solution which will often lie in the payment of compensation. In a few exceptional cases, claiming performance will conflict with requirement of being a good employee. Consider for example the continuation of a share option scheme at the transferor. After all this type of scheme is (also) designed to encourage employee commitment to the company. The transferee cannot be required to facilitate an employment condition that encourages commitment to another company. Put succinctly, the employment conditions that relate specifically to the transferor’s company also, in principle, pass on to the transferee on transfer of the undertaking. If the transferee is not able to offer the same employment conditions, it is bound to do its utmost to offer comparable conditions. If this is not possible, it must bear it mind that it might have to pay compensation.
Pension
The right to pension, in principle, also passes to the new employer. This means that the transferee will have to continue the pension scheme of the employees transferred. Sometimes transition will not be smooth as the transferee might, for instance, not be allowed to participate in the scheme because it does not fall under the relevant sector and is consequently refused admittance to the scheme by the pension fund. The transferee will then, in our opinion, have to offer an comparable arrangement. What is more important however is that the legislature has accommodated the transferee: if the transferee had a pension scheme in place at the time of the transfer then it is allowed to include the employees in that scheme even if it a less favourable arrangement. This is an important exception to the rule that the employee may not be in a worse position as a consequence of a transfer of undertaking. Should this be the case, for example, because the transferor and the transferee already fall under the same scheme (they are both in the same sector), then it must be borne in mind that the premium arrears are also transferred. According to case law, the pension fund even has an independent right to claim the premium from the transferee. Incidentally the rule that pension debts are transferred, may be derogated from in collective labour agreements.
Seniority
In employment law the number of service years accrued by an employee is important in various ways. It, for instance, affects the statutory notice period, the amount of the transition payment and it plays a role when determining which employees are eligible for dismissal on reorganisation. It is therefore important to the employees that their years of service are taken into account at the new employer. The length of service accrued by the employee is, in itself, not a right that passes on to the transferee. It is merely a factual circumstance from which certain rights could be derived. Only if the length of service at the transferor was linked to a specific financial or other right, then both the acquired right and the length of service applicable to that right pass to the transferee. Although this has not yet been explicitly determined at European level, this seems to also apply to non-pecuniary seniority rights, the notice period, the transition payment and the dismissal sequence. The underlying principle that seniority only passes over insofar as it is linked to a specific right needs some nuancing. If the employee performs the same activities after the transfer and because the accrued years of service have not been taken into account, suffers a substantial loss in salary, e.g., because the pay scale at the transferee is dependent on the length of service, then accrued years of service must be transferred so that this loss is more or less negated.
Statutory provisions
It seems not to ensue from the law itself – which after all talks of rights and obligations under the employment agreement – but at the beginning of 2015 the European Court of Justice determined that statutory provisions governing social security are also transferred. Up until that time this was not accepted in the Netherlands although there were exceptions in case law. For instance, the Court of Appeal (twice) ruled that the transferee had to assume obligation imposed on the transferor regarding continued payment of the employee’s salary (loonsanctie) because the rehabilitation obligations had been breached. It is therefore important that you are well-informed on this so that this can be borne in mind during the negotiations on the takeover. The same applies to possible premium arrears in relation to employees’ insurances. According to the Court of Appeal, these also pass on to the transferee. Nevertheless, it is questionable whether the transferee will be able to reclaim what it has paid from the transferor (if it then still exists at all).
Conclusion
A transfer of undertaking entails the automatic transfer of rights and obligations from the employment contract. Practice is, however, more intractable than the clear rule suggests: non-competition clauses can be given different substance, certain facilities can lapse/be replaced, pension entitlements are sometimes passed on, the fate of seniority/length of service is difficult to define and according to recent case law statutory rules relating to the employment contract sometimes also pass on. And so for each takeover it is important that the existent employment conditions, the agreements made and the premium arrears are identified and listed.
