Transfer of Undertaking

If you are planning to transfer a company to someone else or to take over someone else’s company, you may wonder whether this takeover also applies to the personnel. Depending on the reason why the company is taken over and how the takeover is carried out, this may or may not be desirable. For example, is a part of the company taken over by a company that has little experience with such business activities? In that case, it may be fine to take over the specialised employees and allow them to carry on with their normal activities. On the other hand, is there a merger of two similar companies in order to save costs? Then certain employees may be less desirable, because some positions have already been filled and considerable savings can also be made on labour costs. Whether the employees should be taken over depends on the applicability of the regulation on the ‘transfer of undertaking’. In this article, we explain when this is the case and what the consequences are.

Transfer of Undertaking

When is there a transfer of undertaking?

When there is a transfer of undertaking follows from Section 7:662 of the Dutch Civil Code. This section states that there must be a transfer as a result of an agreement, merger or division of an economic unit that retains its identity. An economic unit is “a group of organised resources, dedicated to pursuing an economic activity, whether or not that activity is central or ancillary”. Since takeovers are carried out in a wide variety of ways in practice, this legal definition does not offer a clear guideline. Its interpretation therefore strongly depends on the circumstances of the case.

Judges are generally quite broad in their interpretation of transfer of undertaking as our legal system attaches great importance to the protection of employees. On the basis of existing case law, it can therefore be concluded that the last phrase ‘an economic entity retaining its identity’ is the most important. This usually concerns a permanent takeover of a part of the company and the associated assets, trade names, administration and, of course, the staff. If only an individual aspect of this is involved, there is usually no transfer of undertaking, unless this aspect is decisive for the identity of the undertaking.

In short, there is usually a transfer of undertaking as soon as the takeover involves a complete part of an undertaking with the objective of carrying out an economic activity, which is also characterised by its own identity that is retained after the takeover. Therefore, a transfer of a (part of a) business with a non-temporary character soon constitutes a transfer of undertaking. A case in which there is explicitly no transfer of undertaking is a share merger. In such a case, the employees remain in the service of the same company because there is only a change in the identity of the shareholder(s).

Consequences of transfer of undertaking

If there is a transfer of undertaking, in principle, all staff forming part of the economic activity are transferred under the conditions of the employment contract and collective agreement in force with the previous employer. It is therefore not necessary to conclude a new employment contract. This also applies if the parties are not aware of the application of the transfer of undertaking and for the employees of which the transferee was not aware at the time of the takeover. The new employer is not allowed to dismiss the employees because of the transfer of undertaking. Also, the previous employer is liable alongside the new employer for one more year for fulfilling the obligations from the employment contract that arose before the transfer of the undertaking.

Not all employment conditions are transferred to the new employer. The pension scheme is an exception to this. This means that the employer may apply the same pension scheme to the new employees as it does to its current employees if this is declared in time for the transfer. These consequences apply to all employees with whom the transferring company is in service at the time of the transfer. This also applies to employees who are unfit for work, sick or on temporary contracts. If the employee does not want to transfer with the enterprise, he/she can explicitly declare that he/she wishes to terminate the employment contract. It is possible to negotiate about the employment conditions after the transfer of the company. However, the old employment conditions must first be transferred to the new employer before this is possible.

This article describes that the legal definition of transfer of undertaking is fulfilled quite soon in practice and that this has major consequences regarding the obligations towards the employees of the undertaking. Transfer of undertaking is namely the case when an economic unit of an enterprise is taken over by another for a non-temporary period, whereby the identity of the activity is preserved. As a result of the regulation on transfer of undertaking, the person taking over must employ the employees of (the part of) the transferred undertaking under the employment conditions that already applied to them. The new employer is therefore not allowed to dismiss the employees due to the transfer of the undertaking. Would you like to know more about transfer of undertaking and whether this rule applies in your specific circumstances? Then please contact Law & More. Our lawyers are specialised in corporate law and labour law and will be pleased to help you!

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