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2021-05-11
Academic Board Review 2020: Transfer of Undertaking
Niklas Bruun[1]
Introduction
The Transfers of Undertakings Directive 2001/23/EC is one of the labour law instruments within the European Union that has given rise to and continues to cause numerous court cases on both an EU and a national level. During the year 2020 the ECJ (CJEU) issued three important preliminary rulings regarding the interpretation of this Directive. In the following I will briefly refer to and discuss these three judgments before I draw some general conclusions based on them.
1. Grafe and Pohle (C-298/18)
SBN, a German company operating public bus passenger transport had, in 2008, executed a tender contract with Landkreis Oberspreewald-Lausitz. In September 2016, it chose not to participate in a new tender and subsequently ceased business operations. The winner of the tender was KVG/Rhenus Veniro GmbH & Co, which set up a new wholly owned subsidiary, OSL Bus to provide the transport service. OSL Bus recruited many of the bus drivers and some of the management staff from the former operator, SBN. By letter of 10 April 2017, the new operator informed SBN that it would not purchase or lease or otherwise use the tangible assets – buses, depots, workshops and operating facilities – which the latter owned. In subsequent proceedings, in order to direct their respective claims, the question arose whether there had been a transfer of undertaking. OSL dismissed the claims, as it had not taken over any tangible assets, relying on the well-known Oy Liikenne case (C-172/99) to argue that there could be no transfer of an undertaking within the meaning of Article 1(1) of Directive 2001/23.
When these questions ended up at the ECJ, the Court pointed to its decision in Oy Liikenne. However, it also held that the transfer of buses cannot be the sole factor determining whether a transfer had taken place – all particular circumstances must be taken into account. In this respect, according to the Court, it was apparent from the order for reference that compliance with the new technical and environmental standards required by the contracting authority as regards operating resources did not enable, from both an economic and legal point of view, the successful tenderer to take over the operating resources of the undertaking previously holding the contract for the public transport services at issue in the main proceedings. It would not have been sensible, from an economic point of view, for a new operator to take over an existing bus fleet consisting of vehicles which, having reached the end of the period of operation authorised and not complying with the constraints imposed by the contracting authority, could not be operated. Even if the old operator would have continued the tender, it would have had to replace the buses. In this context, according to the Court, the fact that no buses were transferred did not necessarily preclude a transfer.
The Court stressed that it is for the referring court to determine whether other factual circumstances support the conclusion that there has been a transfer of an undertaking. It pointed out that the bus transport was essentially similar to the previous undertaking, that service had not been interrupted and probably been operated on many of the same routes for many of the same passengers. It also noted that the presence of experienced bus drivers in a rural area such as the Landkreis is crucial for the purpose of ensuring quality of public transport. In particular, they must have sufficient knowledge of routes, timetables in the area, fare conditions as well as information on other regional bus routes, railway routes and existing connections, not only to sell tickets but also to provide adequate information to passengers.
In that context, the group of workers might constitute the economic entity, which could maintain its identity if a major part, in terms of their numbers and skills, of the employees specifically assigned to the task are transferred.[2]
In the light of all the foregoing considerations, the Court concluded that the answer to the questions referred is that Article 1(1) of the Directive must be interpreted as meaning that in the context of the takeover by an economic entity of an activity, the pursuit of which requires substantial operating resources, such as under the factual circumstances in the present case, the taking-over of the majority of the employees and the pursuit, without interruption, of that activity, make it possible to establish that the identity of the economic entity concerned has been retained. The Court finally noted that this is a matter for the referring court to assess.
2. ISS Facility Services NV (C-344/18)
Ms Govaerts had been employed by (predecessors) of ISS since 1992 and had become a project manager of the cleaning and maintenance tasks of ISS in Ghent (Belgium). These activities had been divided into three lots, being (1) museums and historical buildings, (2) libraries and community centres and (3) administrative buildings. Following a call for tenders, ISS lost all three lots, (1) and (3) to Atalian, and (2) to Cleaning Masters NV.
ISS took the view that Ms Govaerts had transferred to Atalian following Belgian law, but Atalian disagreed. Ms Govaerts brought actions against both companies. In appeal proceedings, ISS maintained that Ms Govaert’s contract had transferred in a proportion of 85% to Atalian and a proportion of 15% to Cleaning Masters. The Higher Labour Court of Ghent (Belgium) inter alia asked the ECJ whether this was possible.
According to the Court, the first paragraph of Article 3(1) of Directive 2001/23 provides that a transferor’s rights and obligations arising from a contract of employment or from an employment relationship existing on the date of the transfer are, by reason of that transfer, to be transferred to the transferee, but does not envisage a situation where a transfer involves a number of transferees. The Directive intends to safeguard employees’ rights in the event of a change of employer by enabling them to continue working on the same terms and conditions. The purpose of that Directive is to ensure, as far as possible, that the contract of employment or employment relationship continues unchanged with the transferee, in order to prevent the workers concerned from being placed in a less favourable position solely as a result of the transfer.[3] However, that Directive cannot be invoked in order to obtain an improvement of remuneration or other working conditions on the occasion of a transfer of an undertaking.[4]
Still, the position of the transferee, who must be in a position to make the adjustments and changes necessary to carry on its business, cannot be disregarded[5] since the Directive does not aim solely to safeguard the interests of employees in the event of transfer of an undertaking, but seeks to ensure a fair balance between the interests of the employees and the transferee. That being the case, the fact that the economic entity has been transferred to one or more transferees has no effect on the transfer of the transferor’s rights and obligations arising from a contract of employment existing on the date of the transfer of that entity.
Rejecting that a transfer had taken place at all – which had been considered by the referring court – would not safeguard the rights and obligations of the employee, and hence would deprive the Directive of any effectiveness. The Court therefore analysed two options.
The first option was to transfer the employee to the acquirer that had taken on the most part of the work. However, that option disregarded the interests of the transferee, which then would have to provide a full-time employment to the worker while it only had taken on part of his/her tasks.
The second option would be to allow ‘proportionate transfers’. As regards that option, the Court stated, in the first place, that, in accordance with Article 2(2) of the Directive, that it is to be without prejudice to national law as regards the definition of a contract of employment or employment relationship. Accordingly, it is for the referring court to determine how any distribution of the contract of employment might take place. In that regard, the referring court may take into consideration the economic value of the lots to which the worker is assigned, as suggested by ISS, or the time that the worker actually devotes to each lot, as proposed by the European Commission. In the second place, to the extent that such a possibility amounts to dividing one full-time employment contract into a number of part-time employment contracts, it must be borne in mind that, under Article 2(2)(a) of the Directive, the Member States may not exclude from the scope of that Directive contracts of employment or employment relationships solely because of the number of working hours performed or to be performed. Consequently, such a division cannot be excluded merely because it involves the transfer to one of the transferees of a contract of employment that covers a small number of hours of work. According to the Court, such transfer in principle makes it possible to ensure a fair balance between the protection of interests of workers and transferees, as the rights of the first are safeguarded while the transferee takes on only part of the obligations.
Regarding the practicability of such situation, the Court held that under Article 4(1) of the Directive, while the transfer of an undertaking or part of an undertaking cannot constitute in itself a ground for dismissal for the transferor or the transferee, other than in the situations mentioned in Article 4(1) of the Directive, that provision does not however preclude the possibility of dismissals occurring for economic, technical or organisational reasons entailing changes in the workforce. Further, Article 4(2) states that if the contract of employment is terminated because the transfer involves a substantial change in working conditions to the detriment of the employee, the employer is to be regarded as having been responsible for termination. This also applies in this situation, even if the termination was initiated by the worker.
In the light of this reasoning, the answer given by the Court to the question referred was that, where a transfer of undertaking involves a number of transferees, Article 3(1) of the Directive must be interpreted as meaning that the rights and obligations arising from a contract of employment are transferred to each of the transferees, in proportion to the tasks performed by the worker concerned. This conclusion is valid provided that the division of the contract of employment as a result of the transfer is possible and neither causes a worsening of working conditions nor adversely affects the safeguarding of the rights of workers guaranteed by that Directive, which it is for the referring court to determine. If such a division were impossible to carry out or would adversely affect the rights of that worker, the transferee(s) would be regarded as being responsible for any consequent termination of the employment relationship, under Article 4 of that Directive, even if that termination were to be initiated by the worker.
3. TMD Friction (Joined Cases C-674/18 and C-675/18)
The two cases in the main proceedings concerned two employees who saw themselves confronted with transfers of establishments which took place after the opening of insolvency proceedings and which were carried out by the insolvency administrator, transfers in which both the employment contracts and the assurances which ensued from the supplementary occupational pension scheme were transferred to the transferees. The employees brought legal proceedings against those transferees, claiming that the transferees were also liable with respect to their rights to a retirement pension for the periods of employment completed before the opening of insolvency proceedings since, under national law, the occupational pension guarantee association (PSV) was not liable with respect to those rights or was liable to only a limited degree. The referring court asked the ECJ whether the German law was compatible with both Articles 3 and 5 of Directive 2001/23 and Article 8 of (Insolvency) Directive 2008/94.
The Court noted that the exception of Article 5(1) did not apply as the insolvency procedure was aimed at ensuring the continuity of the undertaking. Article 5(2)(a) also did not apply to this specific issue. The Court then recalled that according to Article 3(4)(a) of Directive 2001/23, the transfer of all rights and obligations does not need to apply to inter alia old-age benefits, although Member States must then still ensure protection of the (former) employees’ interests in them.
In such a situation, it must be held that, first, a Member State ‘provides otherwise’, within the meaning of the clause in Article 3(4)(a) of that Directive, solely with respect to that portion of the rights of employees to a retirement pension under a supplementary occupational pension scheme which must be transferred to the transferee. Second, the obligation to adopt the measures necessary to protect the interests of the employees is incumbent on that Member State, under Article 3(4)(b) of that Directive, both with respect to that portion of those rights which are transferred to the transferee and with respect to those rights which remain capable of being relied on only against the transferor, where necessary, in insolvency proceedings opened with respect to the transferor.
The Court then noted that the wording of Article 3(4)(b) of the Directive reproduces, in essence, that of Article 8 of the Insolvency Directive and that Article 5(2)(a) of the Directive, which concerns transfers of undertakings in the event of insolvency proceedings, expressly requires a protection that is at least equivalent to that provided for in the situations covered by the Insolvency Directive. It follows that the measures necessary for the protection of the interests of employees that must be adopted by the Member States under Article 3(4)(b) of the Directive must be understood to include, in any event, the measures prescribed by the Insolvency Directive 2008/94, designed to deal with the insolvency of their employer, whether the employer is the transferee or, as in this instance, the transferor.
The Court therefore concluded that, in the event of the transfer of an undertaking after the opening of insolvency proceedings, the protection of the employees with respect to their rights conferring immediate or prospective entitlement to old-age benefits under supplementary occupational or inter-occupational pension schemes, for the purposes of Article 3(4)(b) of the Directive, must be at a level that is at least equivalent to the level of protection required by Article 8 of Directive 2008/94. The Court then went on to determine the level of protection required by Article 8 of Directive 2008/94 and concluded that Article 3(4)(b) of Directive 2001/23, read together with Article 8 of Directive 2008/94, must be interpreted as precluding national legislation which provides that, on the occurrence of an event that confers eligibility to old-age benefits under a supplementary occupational pension scheme after the opening of insolvency proceedings in the course of which a transfer of an undertaking has been made, with respect to the portion of those benefits for which the transferee is not liable, the insolvency guarantee body established under national law is not required to intervene where the rights conferring prospective entitlement to old-age benefits had not already become definitive at the time when those insolvency proceedings were opened, if the consequence of that legislation is that the employees are deprived of the minimum protection guaranteed by Article 8. In the same context, Article 3(4)(b) precludes legislation which provides that, for the purposes of determining the amount relating to the portion of those benefits liability for which falls on that body, the calculation of that amount is to be based on the gross monthly remuneration earned by the employee concerned at the time when those insolvency proceedings were opened. Last but not least, the Court also answered that Article 8 of Directive 2008/94 might be capable of having direct effect, provided that PSV meets the applicable requirements to qualify as a State body.
4. Conclusions
The case law from the EJC in 2020 covers three important cases focussing on ‘new’ issues in the context of Directive 2001/23. All three cases can be characterised as borderline cases, where we are in the outskirts of the application of the Transfers of Undertakings Directive. The first two cases were related to situations where the transfer of undertakings were related to a public procurement procedure, the third clarified the relationship between the Directive and the Insolvency Directive 2008/94. In all three cases the Court emphasised that a strict interpretation of the Transfers of Undertakings Directive in order to protect employees during transfers must be adopted, but it also recalled that the interests of the transferee must be taken into account.
The first case dealt with the minimum requirements that must be fulfilled in order for an entity to retain its economic identity within the context of the transfer.
Traditionally since the Schmidt case[6] the Court has made a distinction between activities based essentially on manpower, such as cleaning and surveillance, and activities based essentially on assets, such as public transport or catering. Therefore, in the case of providers of services whose activities are based essentially on manpower, the taking over by the new employer of a major part, in terms of their numbers and skills, of the employees specifically assigned by its predecessor to the provision of the services in point can result in the maintenance of the identity of the entity.[7] Similarly, in the case of providers of services whose activities are based essentially on assets, the taking over by a new operator of the assets indispensable for the provision of the services can result in the maintenance of the identity of the entity, even when the essential part of the staff has not been taken over. However, the identity is not maintained when the new operator does not take over the assets indispensable for the provision of the services. [8]
In the case Grafe and Pohle (C-298/18) the Court clearly modified its earlier views in this regard and deviated from the interpretation favoured in the case Liikenne (C-172/99) in 2001. In Liikenne the Court had stated that:
However, in a sector such as scheduled public transport by bus, where the tangible assets contribute significantly to the performance of the activity, the absence of a transfer to a significant extent from the old to the new contractor of such assets, which are necessary for the proper functioning of the entity, must lead to the conclusion that the entity does not retain its identity (para. 42).
Furthermore, the Court concluded in Liikenne that the Transfers of Undertakings Directive does not apply “in a situation such as that in the main proceedings, where there is no transfer of significant tangible assets between those two undertakings” (para. 44).
The main arguments for why the activity retained its economic identity in Grafe and Pohle was that it was apparent that:
the members of staff taken on by the new operator are assigned to the same or similar tasks and hold specific qualifications and skills which are essential to the pursuit, without interruption, of the economic activity concerned (para. 40).
The Court also referred to the lack of competent and experienced bus drivers in the region and to the circumstances for why the tangible assets or buses could not be part of the transfer in this case.
The conclusion is that the transfer of the employees’ know-how, skills and knowledge can form assets which constitute an economic identity in the context of a transfer of an undertaking even in cases where existing tangible assets are not transferred.[9] The problem we will face in the future in similar situations in light of the new Court practice is how to avoid that a transferee can influence the scope of application of the Directive by simply refusing to take on any employees.
Also, in the ISS Facility Services case (C-344/18) the Court entered into new territory regarding the interpretation of the Directive. Here the question was whether it can be regarded as a transfer under the Directive when the economic activity is split into three parts and taken over by different economic undertakings. Here the Court is rather cautious although it accepts the principle that a transfer under the Directive can take place to several transferees. Indeed, a cautious approach is well founded since the circumstances in which we find several transferees can vary very much.
In the third case(s) EM and FL – v – TMD Friction the Court gave a welcomed clarification regarding the relationship between the Transfers of Undertakings Directive and the Insolvency Directive in situations regarding transfers of rights related to supplementary occupational pension schemes.
[1] Niklas Bruun is a professor in private law at the University of Helsinki.
[2] Here the CJEU refers to the judgment CLECE, C-463/09, EU:C:2011:24.
[3] The CJEU refers to the judgment Colino Sigüenza, C-472/16, EU:C:2018:646, para. 48.
[4] Scattolon, C-108/10, EU:C:2011:542, para. 77.
[5] See the judgment Werhof, C-499/04, EU:C:2006:168, para. 31.
[6] In this case, the Court held that one employee who cleans a bank can be an undertaking within the meaning of the Directive, ECJ 1994, C-392/92 (Schmidt).
[7] ECJ 1998, C-173/96 and C-247/96 (Sánchez Hidalgo).
[8] ECJ 2001, C-172/99 (Liikenne).
[9] The fact that when a very limited transfer of assets has occurred, this is not sufficient for concluding that no transfer of undertaking has taken place was also confirmed in the Supreme Court of the Netherlands (Hoge Raad der Nederlanden) in case ECLI:NL:HR:2019:1858. This case involved KLM and it was decided in 2019 before the Grafe and Pohle case. Here the question at stake was whether a transfer can take place even when no airplanes are taken over by the new owner. A special feature in the KLM case was that KLM had full control over the transferor, which belonged to the same group of companies as KLM. See further EELC 2020 No 2, 118-120.