Business transfers in Germany

Markus Kappenhagen has 12 years of experience as a labour lawyer. He is member of the European Labour Law Practice Group and Global Labour Law Practice Group of Baker & McKenzie.

He advises companies in all labour and employment related matters, in particular in conjunction with complex reorganizations, employment issues in conjunction with mergers and acquisitions, negotiations with works councils and unions, basic principles of HR management, the structuring of employment-related agreements in companies as well as the hiring of, and separation from, managerial employees.

A company wishing to transfer a business unit, a production line or a department (for example, because of an outsourcing deal) faces the difficulty of having to identify which employers are affected by the transfer. This article discusses the jurisprudence of the German Federal Labour Court (Bundesarbeitsgericht, "BAG") on the subject and suggests practical solutions.

1. Distinction difficulties: "Who belongs to which department ?"

When units of a business are purchased by way of an asset deal, the employees belonging to the unit sold will be transferred to the purchaser according to Section 613a of The German Civil Code (BGB). This does not apply if an employee raises a written objection against the transfer of their employment, since German law explicitly provides for such a right to object. If the company is purchased as a whole, all the employment relationships will be affected by the transfer and the question of allocation is not relevant. However, where the seller sells only individual units of the business, such as a particular division or product line, or where there is a splitting of the company allowing numerous legal entities to take control according to Section 123 (1) of the Transformation of Companies Act (Umwandlungsgesetz, "UmwG"), it is necessary to identify which employee belongs to which department or unit of the business. This will determine whether or not these employees get a new employer.

2. Practical consequences

The allocation of employees to a specific business unit is important for the purchaser, who will be looking to take over a well-functioning team with the necessary key employees. Only those employees who can actually be utilised should be allcated to a business unit, and not employees from other departments who do not have a role in the unit.

Practical tip:
The business transfer agreement must address which party bears the risk of employees claiming to be transferred, when they are not in fact part of the transferred business unit. This could give rise to costly termination procedures for one of the parties.

The question of allocation is also important for employees, who may find themselves faced with changes such as transfer out of the current company group, transfer to a potentially undesired employer, or replacement of their current collective bargaining agreement with one applied by the purchaser.

3. Lack of statutory guidance on allocation

The statute is largely silent on the question of how the allocation of the employment relationship is to be determined with respect to the business, or part thereof, that is the object of the business purchase. According to Section 613a BGB, the new owner merely "accedes to the rights and duties under employments existing at the time of transfer".

Only where there is a merger, a splitting, or an asset transfer under the Transformation of Companies Act will a specific legislative provision apply. In such cases, it is permissible for employees to be allocated by name to a particular business or unit in a "reconciliation of interests" (Interessenausgleich) between the employer and the works council. This can only be reviewed by a Labour Court for "gross mistakes." Hence, in the named examples in the Transformation of Companies Act, the works council and the seller may agree which employees belong to which business units. There are no specific criteria in the statute, however, about how the allocation is to be made.

4. Allocation theories

According to the jurisprudence arising from the Federal Labour Court (BAG), the allocation must first be made according to objective criteria. It is not enough that an employee has merely performed certain duties for a department without being attached to it. Neither is it sufficient that they may have worked in different departments (as a "stand-in", for example), or occupied central positions with inter-departmental duties in support departments such as accounting, personnel, IT, marketing, technical services, quality control or occupational protection.

In its early decisions, the BAG was guided by the "main focus theory". This meant that an employee was allocated to the business unit in which they were principally occupied prior to the sale. Today, however, the BAG (in accordance with the ECJ) concentrates exclusively on the organisational connection. An employee must actually be incorporated into the structure of the transferred unit for his employment relationship to be transferred to the purchaser (under Section 613a BGB). It will not suffice that an employee merely performed services for a transferred unit, whilst belonging to another, non-transferred, unit (BAG August 24, 2006 - 8 AZR 556/05, DB 2006, p. 2818).

The establishment of this organisational connection test solves the problem of inter-departmental duties. For example, the positions in a company's administrative functions will only form part of the transfer unit when functional or intangible working capital of the administration is transferred or the purchaser has acquired significant portions of the personnel working in the department according to number and expertise.

Example:
If only a production unit is transferred, then an employee in the personnel department responsible for production will not be transferred, even if his duties in the personnel department exclusively dealt with the workers in production, because he was organisationally connected primarily with the personnel department.

If it is not possible to determine the organisational connection, labour law literature has developed a number of different views on the question of allocation. Some authors assume a default transfer of the employment relationship, whilst other authors (including the State Labour Court in Berlin) are of the view that where there is no objective functional allocation of employment positions, there can be no transfer of employment relationships in terms of Section 613a BGB. Others are of the opinion that the employee, not the seller, should have the choice whether the employment relationship transfers or not.

The diversity of these opinions indicates how important it is that the parties to the business transfer agreement consider the allocation of the employees prior to the purchase and, where necessary, undertake measures to prevent allocation problems.

5. Allocation to a department by way of transferring employees

When determining the organisational structure of a business, an employer may, within the framework of employment contract regulations, transfer certain employees into other departments prior to a business transfer. Employees may also be transferred into the business unit that is to be transferred. This allows an employer to build a unit that would stand alone as a business unit. However, it may be possible to transfer only those parts of the business that are separable organisational consolidations of working capital and other assets.

An employer may carry out a transfer when an employee's employment contract contains a so-called transfer clause. This gives the company a right to redeploy an employee to another position within their capabilities. The redeployment may not be to a lower position within the business, even if the remuneration remains the same. The decision may only be challenged through the courts on the grounds that such a decision is subjective, irrational or arbitrary (see BAG January 18, 1990 - 2 AZR 183/89, BB 1990, p. 1843).

Checklist for a partial business transfer (Section 613a BGB)

Where necessary, negotiations with the works council concerning the "balancing of interests" and the "social plan" required by law.
Determination of the employees that will transfer to the purchaser.
Informing the affected employees prior to the transfer of:

The proposed date of the transfer;
The unit subject to transfer
The reason for the transfer
The consequences of the transfer
The accurate business name of the purchasing company

Notification must be in written form and must specify the signatory/sender.
Notification must be made by the seller or the purchaser (or both).

Only a complete notification will trigger the one-month employee objection period.

An employee must, when they wish to object, declare their objection in writing

The consequence of an objection is that the employment relationship remains with the seller.

6. Termination with the option of continuation under altered employment conditions

The situation becomes complicated when an employing company is unable to unilaterally exercise its ability to give instructions to transfer. If, for example, employees do not have a transfer clause in their contracts, their employer may only be able to make necessary changes through mutual agreement or (valid) termination with the option to be hired under a new employment contract (Änderungskündigung)

The latter, however, is hardly useful in practice. Firstly, the Änderungskündigung only works after the expiration of the individual notice period, which - depending on the length of employment - can be as long as 7 months. For this reason alone, redeployment by way of the Änderungskündigung is only practicable when the selling company plans the sale of the business unit long in advance. Furthermore, the works council must be consulted prior to any Änderungskündigung. In any case, the Änderungskündigung must comply with the requirements of the German statute governing protection against unlawful dismissal. Hence, an employer must be able to provide a social justification for the termination. This is an issue that can easily be disputed, particularly in labour courts (on up to three levels of jurisdiction, possibly taking several years).

An employee also has the right to conditionally accept the Änderungskündigung. In doing so, he accepts the altered employment conditions on the condition that the changes are socially justified, and institutes a parallel Änderungskündigung claim in the labour court. If the termination period expires and there is a partial business transfer prior to there being an enforceable court decision, the employee must - on the basis of the acceptance of the changes - perform his duties in the new workplace (BAG from January 18, 1990, 2 AZR 183/89, BB 1990, p. 1843). If that business unit is transferred, the employee will initially be transferred to the business purchaser. If he wins the dismissal protection case, the employee has a choice either to carry on with the new employer or to terminate his initially transferred employment relationship in accordance with the termination periods and carry on with the employment relationship with the old employer. In practice, an employee will only expose himself to this uncomfortable situation when they believe that there are other "viable" business elements left with the transferor that provide them with a job prospect.

The complicated procedural rules and processes show that the redeployment by way of the Änderungskündigung can lead to unforeseeable results. In individual cases, however, the issuing or indication of an Änderungskündigung might speed up a consensual agreement with the employees in question.

7. Participation of the works council in the transfer to another job

In practice, difficulties may be expected in dealing with the works council in the transferor's organisation. A transfer to another position requires, in each individual case, the council's prior consent (Section 99 of the Works Council Constitution Act: Betriebsverfassungsgesetz, "BetrVG"), which it may, under certain circumstances withhold because it fears disadvantages for the employees designated to be transferred. This right of codetermination should not be of particular concern, as an employer may carry on temporarily when there are actual grounds necessitating the transfer (Section 100 BetrVG). The company must apply to a labour court to obtain the consent denied by the works council. If, due to valid reasons, the immediate transfer of the employees is urgently necessary, the employer may have the urgency determined by the court. The advantage of this procedure is that the seller can carry out the measures temporarily; hence they may transfer the employees to another job within the company while the court is still deciding on the application.

An imponderable obstacle in the procedure is the possibility that a labour court in the litigation regarding individual transfers according to Section 99 BetrVG, could come to the conclusion that the rejection by the works council was justified and that the employer should not conduct the transfer. This could endanger the entire transaction.

A further problem arises for the company when a transfer affects a large number of employees, exceeding the threshold for operational changes (Sec. 111 BetrVG). This occurs when the redeployment of employees is seen as a significant change to the operational organisation.

The threshold lies at 10% of the workforce or more than 25 employees in businesses with 60 to 500 employees (in smaller or larger companies the thresholds are slightly different). In such instances, the company must enter into negotiations on the "reconciliation of interests" with the works council prior to carrying out the transfer. This can delay the transfer by several months. Furthermore, the employer must provide specific detailed answers in response to questions about the transfer and associated changes posed during this time. Under certain circumstances, a company will be required to disclose its sales plan at that early stage. If an agreement cannot be reached with the works council regarding the reconciliation of interests, then the conciliation committee must be convened - which will mean a further delay of weeks, if not months.

Ultimately the works council cannot prevent proposed operational changes. However, legally required procedures can significantly delay their implementation. This must be taken into account during the negotiations on the purchase of the business unit.

Practical tip:
If an employer intends to create the structure for a partial business sale by transferring employees into a designated (newly-organised or created) department then a correspondingly long period should be allowed before negotiations are commenced for the sale of the new business unit with the potential purchaser.

If the sale stage is eventually reached, the transferor may once again have to enter into negotiations with the works council regarding the reconciliation of interests and the social plan. This is because the sale of the business unit represents a further operational change in the form of a division or a fundamental change to the organisation of the business as a whole.

8. Agreement with employees

The last remaining practical challenge is the transfer of employees through mutual agreement. In terms of BAG jurisprudence, an agreement between the transferor, the transferee and the employee will lead to a transfer of the employment relationship even when an employee did not belong to the sold business unit at all (BAG May 5, 1988, 2 AZR 795/87, DB 1989, p. 1139 et seq) Although this amounts to a consensual transfer, the works council must nevertheless be consulted (Section 99 BetrVG), which is usually not a problem when the affected person agrees to the transfer. Even the reconciliation of interests is necessary in this situation, if the number of consensual transfers exceed the thresholds for operational change under Section 111 BetrVG. If the affected employees accept the transfer into another business unit, then it is unlikely that the works council will oppose it.

Once appropriate consents and agreements have been achieved, the transferee must initiate effective communication with the employees concerned in the transfer.

Practical tip:
The purchaser should make presentations at company meetings and give details on the new employer and, where relevant, on other organisational and related changes associated with the transfer. The newly-appointed operational or department head should be introduced and employees should be given the opportunity to ask them questions.

Such trust-building measures can help to avoid uncertainty and misunderstanding.

A consensual approach is also necessary with respect to the right of employees to object contained in Section 613a (6) BGB. In terms of this provision, those employees designated to be transferred to the new legal entity - including those with a clear organisational connection and allocation to the business unit subject to transfer - have the right to object to changes in their employment relationship. This objection must be made within one month of employees being notified of the proposed business transfer (Section 613a (5) BGB). If there is an objection (which may be made without any stated reason on the employee`s part), the employee's employment relationship remains with the seller. In many cases, the employee will have to be dismissed on operational grounds because there is no suitable position left in the remaining business for them to fill. However, general requirements governing termination for operational reasons, such as "social selection", must still be followed.

9. Conclusion

If employees are not integral to the transferring business unit, their redeployment to the unit prior to the transfer might be problematic. Accordingly, the transferor should plan a correspondingly long period before commencing negotiations in order to create clear organisational structures. In case of doubt, an employer should aim for mutual agreement with the employees in question. Responsibility for the remaining risks, especially those of costly termination procedures, should be addressed in the sale and purchase agreement.

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