Determining whether your business is subject to transfer of undertakings rules
What is a business transfer?
The right of an employee to a comprehensive range of employment protection when their employer's business is subject to merger or transfer of ownership was first set out in the EC Transfer of Undertakings Directive (77/187/EEC). However, since its first incorporation into national regulations across the European Union [1] a large body of case law has developed which has made it increasingly difficult to determine if any given activity is covered by transfer rules.
Definitions
The most authoritative definition of a transfer of undertaking is that set out in the EU Council Directive 2001/23/EC (the revised Transfer of Undertakings Directive). Article 1(b) states that a transfer has taken place when "there is a transfer of an economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary".
Article 2 (d) of the Directive also defines an employee to be "any person who, in the member state concerned, is protected as an employee under national employment law".
A relevant transfer was defined by the European Court of Justice (ECJ) to be "a change in the natural or legal person responsible for carrying out the business, who by virtue of this acquires the obligations of an employer vis-a-vis employees of the undertaking, regardless of whether or not ownership is transferred" (Allen v Amalgamated Construction [2000] IRLR 119)
An entity has been defined by the ECJ as "an organised grouping of persons or assets facilitating the exercise of an economic activity which pursues a specific objective".
However, the ECJ has tended to take a very broad interpretation of 'economic activity' [Dr Sophie Redmond Stichting v Bartol [1992] IRLR 366, EC and Rask v ISS Kantinservice A/S [1993] IRLR 133, ECJ) by making both public sector and non-profit organisations subject to the Directive. It was for this reason that the UK government changed its orginal regulations to define a relevant transfer as being from 'one person to another of an undertaking situated immediately before the transfer in the United Kingdom or a part of one which is so situated' (Reg 3 (1)). [2]
Interpretation
A number of common criteria must clearly apply for the transfer process to fall under the above definitions:
- The entity should be stable, tangible and identifiable
- It should not be limited to the performance of a single contract
- It must retain its identity
- No assets need to be transferred, apart from the workforce
- No contractual link need exist between the transferor and the transferee
It has been established that the transfer rules also apply to:
- franchises
- transfer of leases
- public as well as private sector organisations
- subcontracted businesses transferred to a contracting company
- contracting-out or outsourcing of functions
- a single employee transferred to a contractor
- a company in voluntary liquidation
- employees separated physically into small units
It has been found that the rules do not apply in cases where:
- a new contract has radically different supervision arrangements and working times or,
- no physical assets, nor the majority of staff are transferred or,
- there is no separate entity after the transfer or,
- where only shares or physical assets are transferred or,
- the new firm does not take over any staff (provided this is not to avoid the rules), or
- the transfer of a temporary employee takes place only for the completion of a contract, or
- there is a purely administrative transfer with no other changes taking place.
Courts and tribunals across the European Union have tended to apply a variety of 'home grown' multi-factor tests in order to distinguish between those transactions involving simple asset purchases/exchanges and genuine business transfers.
The Transfer of Undertakings Directive 2001/23/EC (Acquired Rights)
Footnotes:
[1] The UK, for instance, first implemented the Directive through
the Transfer of Undertakings (Protection of Employment) Regulations 1981.
[2] The UK regulation must be assumed to refer both to natural and legal (corporate) 'persons'.
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