The employment law landscape across the EU Member States is often markedly different from that in the US. Here, we take a look at five important employment issues to be aware of when a transaction includes employees in the EU.
1. Employee Representative Organizations. At the outset of any transaction involving EU employees, it is important to identify whether there is any organization representing the interests of such EU employees. Collective labor law is relatively undeveloped on an EU-wide level, meaning that each Member State has its own requirements. But, broadly speaking, it is not uncommon for there to be trade unions, works councils and collective bargaining agreements to contend with in the EU (either at an industry, company or workplace level). For example, in France, a company that has at least 11 employees will have an employee representative body known as a comité social et économique, while in Germany, there will be a works council in place if there are more than five regular employees. Employee representative organizations in the EU may have rights of information and consultation or possibly even co-determination in respect of issues arising in the context of a transaction (including those we address below); those rights can affect both the cost and the timeline of a transaction, so it is important to understand them early on. As such, it may be necessary for the closing of the proposed transaction to be conditioned upon the conclusion of the applicable information and consultation processes.
2. The Structure of the Transaction. If a transaction is structured as a stock purchase (including if a transaction involves only the change of ownership of the direct or indirect parent of a company domiciled in the EU), then such transaction in and of itself will not trigger a change in the identity of the employing entity. However, if a transaction (i) includes the sale or transfer of assets (whether or not in combination with a stock purchase) and (ii) affects employees in the EU, then such a transaction will likely be governed by the Acquired Rights Directive (ARD). The ARD applies in all Member States and serves to protect EU-based employees and their rights when their employment transfers to a new employer. Although Member States have each implemented the ARD differently, broadly speaking, legislation in each jurisdiction dictates that:
- Employee representatives need to be informed and consulted with about the proposed transfer of employment in a reasonable period of time before such transfer takes place
- The employment of anyone assigned to the business that is transferring will automatically transfer to the new employer on the transfer date, with their period of continuous service preserved
- Employees will transfer on their existing terms and conditions of employment, with very limited ability for those contracts to be amended
- The new employer will inherit all rights, liabilities and obligations in relation to the transferring employees
- Dismissals for reasons connected with the transfer may be automatically deemed “unfair dismissals,” unless they fall within certain specific exemptions
If there will be a spinoff or restructuring of assets or employees in the EU into a purchase vehicle before a stock purchase or, similarly, if there will be an intra-group reorganization of assets or employees in the EU post-transaction, then in each case, the ARD may apply to those actions. Equally, if there will be transitional services provided by EU-based employees as part of a transaction, then either the commencement or termination of the transitional services agreement pursuant to which such services will be provided could trigger ARD rights for the EU employees.
It is not possible to contract out of ARD obligations, but you can apportion the risks and liabilities arising from them in the applicable transaction documentation. For example, it is possible for the seller to remain responsible for all EU employee rights, liabilities and obligations arising prior to close, with the buyer only accepting liabilities accruing from close onwards. Similarly, you can contractually agree that the seller will be liable for any failures to inform and consult with its transferring employees, rather than that liability being joint and several between the buyer and seller.
It is important to build ample time into the transaction timetable to address ARD compliance; failure to fulfill ARD requirements could lead to fines and potentially risk the transfer of employees being deemed ineffective and the employees (and related liabilities) remaining with their original employer.
The ARD is implemented in the UK as the Transfer of Undertakings (Protection of Employment) Regulations 2006 (often referred to as “TUPE”). You can find more information about TUPE here.
3. Restructures. If a reduction in force is being contemplated in the EU (where it will often be referred to as “redundancy”), then that will trigger discrete information and consultation requirements (in addition to the others mentioned in this post). For example, redundancies in Germany require compelling operational reasons and the application of social selection criteria to potentially at-risk employees. If there is a works council in place, then that can potentially make the process slow and difficult. Also, redundancy consultation processes in the EU often increase in scope and complexity as the number of employees at risk of redundancy increases. For example, if there is a proposal to dismiss as redundant 20 or more employees in the UK, then that will trigger collective redundancy consultation requirements including the election of employee representatives and a consultation period lasting at least 30 days before any dismissals can take place. It is not always possible to avoid redundancy consultation requirements by simply buying-out the risk (i.e., paying employees in lieu of a period of consultation), so preparation and timing is key.
4. Employment Contracts. Because the employment laws in each Member State are different, employment contracts in each jurisdiction will also necessarily be different and will need to reflect applicable local law requirements, including in some cases being drafted in the local language. There are a number of variances between the standard terms of employment that an employee in the US would expect when compared with her counterpart in the EU, not least the fact that there is no concept of employment “at-will” in the EU. Beware of trying to use US employment contracts or concepts in EU jurisdictions. For example, a US style of pre-agreed severance plan may have unintended consequences in the EU and could entitle an employee to recover more than intended without a valid waiver of claims. It is also important to remember that in the EU civil law jurisdictions (such as France and Belgium) employment relationships are strictly regulated by rules, regulations and codes, meaning that the individual contract will only provide a portion of an employee’s rights and obligations. Local counsel will need to be consulted as applicable to provide the full picture of such rights and obligations.
5. Protection Against Dismissal. All EU jurisdictions afford employees some form of protection against dismissal. For example, in France, all employees may be protected against unfair dismissal from the first day of employment, while in Germany, an employee who works in a business with more than 10 employees will be protected. In the UK, employees need to have been employed continuously for two years before they obtain the protection. Broadly speaking, unfair dismissal protection means that there are limited specific reasons an employer can use to terminate employment and that a formal termination procedure must be used. In some Member States, the unfair dismissal protection can be quite pronounced, and dismissing someone unfairly can lead to litigation and, possibly, an award of compensation to the dismissed employee. Therefore, if a party is considering terminating employees in the EU as part of a transaction, it is fundamental to understand how the dismissal process will work, what the risks will be and who will be liable for them.
Whether on the buy-side or the sell-side, it is important to be mindful of EU employees who may be within the scope of a transaction when modeling potential synergies and determining how employees may fit into the new organization. Most important of all is to ascertain as early as possible whether ARD or other employee information or consultation obligations will be triggered so that there is sufficient room within the transaction timetable to accommodate them and so that liabilities can be properly considered and allocated within the transaction agreements.
One final note on Brexit: although the UK is scheduled to depart the EU on March 29, 2019, there are no plans for its EU-derived employment laws to change as a result. So, TUPE is here to stay for the foreseeable future.