Commission issues Memorandum on Transfer of Undertakings

On 5 March 1997, the European Commission issued a Memorandum on the interpretation of the 1977 Directive on the transfer of undertakings. The Memorandum seeks to address the criticisms levied against its attempt at updating the Directive in the light of the changes resulting from the single market, and of judgments by the European Court of Justice as well as national courts.

Introduction

On 5 March 1997 the European Commission issued a Memorandum on the interpretation of the 1977 Directive on business transfers (77/187/EEC) which aims to clarify certain aspects of the Directive. It also seeks to address the criticisms levied against the draft Directive to replace the 1977 text, launched by the Commission in 1994. The proposed draft sought to take into account the changed business environment following the implementation of the single market project.

Purpose of the Directive

The original Directive was intended to safeguard the rights of employees in the event of the transfer of an undertaking, business or part of a business. To achieve this purpose it enshrined three main principles:

• all of the transferring employer's (transferor's) rights and obligations arising from employment relationships or contracts of employment in place on the date of transfer are automatically transferred to the employer taking over the business (the transferee). This so-called "automatic transfer principle" is enshrined in Article 3 of the Directive. This provision, however, excludes rights relating to old-age, invalidity or survivors' benefits arising under existing occupational pension schemes;
• according to Article 4 of the Directive, the transfer itself cannot constitute grounds for the dismissal of employees either by the transferor or transferee. However, this does not preclude dismissals taking place on the grounds of economic, technical or organisational reasons; and
• an obligation to provide specified information to and in more limited circumstances to consult with, representatives of employees who may be affected by the prospective transfer, is enshrined in Article 6 of the Directive

The Directive thus provided an important measure of protection to workers whose employers where subject to mergers and takeovers, and served to extend recourse to legislation in such cases in many member states.

The need to adapt to a changing environment

Because of the complexity of the area of transfers of undertakings, the Directive has been the subject of a plethora of cases before the European Court of Justice (ECJ) and - in its transposition to member state legislation - before national courts, over the many years since its introduction.

The introduction of the single market considerably extended the scope for the application of the Directive and it because clear that further clarification was required. In September 1994, the Commission submitted proposals for a Directive (P/94/50) aimed at amending and replacing Council Directive 77/187/EEC. The Commission argued that its draft sought to take account of the impact of the single market, legislation introduced by member states relating to the rescue of firms in economic difficulties, the case law of the ECJ and the recent amendment of the collective redundancies Directive.

The proposed draft Directive had the following four main aims:

1. to clarify the application of the Directive in cases of international transfers of undertakings;
2. to allow for greater flexibility in situations where transfers are taking place as part of an insolvency procedure;
3. to introduce a joint limited liability of the of the transferor and the transferee; and
4. to clarify the application of the Directive in cases of the transfer of solely one activity of the undertaking.

Being based on Article 100 of the Treaty, the proposal was submitted to the Economic and Social Committee (ECOSOC) and the European Parliament (EP) before being passed on to the Council of Ministers for decision.

Commission draft is criticised by the social partners

ECOSOC adopted an Opinion on the proposal in early 1995 which was largely critical of the Commission draft. In criticised, in the main, what it saw as the ambiguity of the proposals and the uncertainty of their likely outcomes. The Committee felt that the distinction between "economic entity" and the "activity" of an undertaking remained ambiguous and would require further interpretation by the ECJ. The Committee was concerned that the proposal could be viewed as a step backwards from the level of protection enshrined in the 1977 Directive. There was also some anxiety that certain aspects of the proposal would have discriminatory effects (eg, the exclusion of ancillary activities from the scope of the Directive was seen likely to affect women disproportionately). The Committee also called for changes in the definition of workers' representatives to enable reference to be made to European Works Councils. The Committee's Opinion reflected many of the criticisms made of the proposal by the European Trade Union Confederation (ETUC) shortly after the publication of the proposals.

At a plenary session in January 1996, the European Parliament equally rejected the draft amendment, as it was seen to increase - rather than eliminate - legal uncertainties. Padraig Flynn, the commissioner responsible for social affairs, who was present to defend the proposal, agreed to discuss the matter further with his fellow commissioners.

The Union of Industrial and Employers' Confederations of Europe (UNICE) was equally critical of the draft, despite welcoming the attempt at clarifying the scope of the Directive. It expressed itself particularly concerned at what it perceived to be the widening of the Directive, and in particular its application to the contracting out of services. UNICE argued that the draft amendment left to many "grey areas" which would be open to the individual courts' interpretation. UNICE condemned the expansion of the Directive by some countries to seagoing vessels. UNICE also opposed the inclusion of temporary workers under the scope of the Directive and sought to see the mandate of employee representatives limited to a transition period. Furthermore, it called for the introduction of a confidentiality clause into the Directive to protect sensitive information from disclosure. Finally, UNICE called for the possibility to implement the Directive by agreement between the social partners rather than national legislation.

In the 1995-1997 Medium-Term Social Action Programme, which was published in 1995, the Commission committed itself to the publication of a Memorandum aimed at providing additional guidance and clarification on the application of the Directive. The Memorandum was published in March 1997, at around the same time as the Commission issued an amended version of its draft Directive in the light of the criticism received (see Record EU9703115N).

The contents of the Commission Memorandum

The Memorandum sets out in detail the Commission's interpretation of the scope of the original Directive as well as the effect of European case law. The Memorandum also contains a list of questions and answers designed to highlight the rights of workers in the event of a transfer of undertakings.

Scope of the Directive

The Memorandum clarifies the scope of the Directive, stating that it applies to all EU countries, as well as other nations in the European Economic Area (EEA). The Directive applies to the transfer of any type of undertaking, business or part of a business (public or private, profit or non-profit making), to another employer. The Directive specifically excludes operations involving seagoing vessels, although a number of member states have opted to include such operations in the scope of their national implementations. The Directive should be interpreted to protect all employees who, at the time of the transfer hold a contract of employment as defined by the laws of each member state.

The Memorandum states that all transfers resulting from a contract, an administrative or legislative act, or a court decision should be seen as falling under the scope of the Directive. The assessment whether or not there has been a transfer in the sense of the Directive should be based on the following factors:

• type of undertaking or business;
• whether or not tangible assets were transferred;
• the value of intangible assets at the time of transfer;
• whether or not the majority of employees are taken over by the new employer;
• whether or not customers are transferred;
• the degree of similarity between the activities carried out before and after the transfer; and
• the period, if any, for which those activities were suspended.

The ECJ has ruled that the Directive is to apply to all situations where there is a change in legal or natural person responsible for an undertaking. The transfer of ownership of most of the shares of a company is insufficient to constitute a transfer under the Directive.

The rights of employees are still safeguarded if transfer is carried out in two stages as, for example, is the case if a lessee ceases to be the employer, the owner steps in and subsequently appoints a new lessee.

In most cases, transfer operations associated with insolvency proceedings are not to be seen fall under the Directive.

Consequences of the transfer

The Directive stipulates that the transferor's obligations arising from employment contracts are passed on to the transferee upon transfer. However, a number of member states have chosen to accord joint liability in these cases.

The transferee is also bound by the terms of any existing collective agreements, until these expire or another collective agreement is put in place. This does not apply to employees appointed after the transfer. Member states may limit this period, provided it is not less than a year.

Changes in working conditions after the transfer are subject to the same restrictions as those that governed the original employment relationship.

As well as protecting employees from dismissal solely on the grounds of the transfer, it protects the status of employee representatives as defined by the laws of each member state.

Information and consultation

The transferor and transferee are required to inform workforce representatives of the following:

• the reasons for the transfer;
• the legal, economic and social implications of the transfer for employees; and
• measures envisaged in relation to employees.

Commentary

In light of the criticisms levied against the draft amendment issued in 1994, it seems unlikely that this Memorandum will satisfy the social partners and lead to a much greater degree of clarity in the application of the Directive. Indeed, shortly after the document was published, the European Court of Justice announced a ruling defined the concept of a transfer further. The judgment found that the mere fact that a service carried out by an old and a new awardee of a contract is similar does not automatically mean that there has been a transfer of an "economic entity'" - the key definition used by the courts to establish whether a transfer of undertakings has taken place. It therefore appears that the Directive will continue to be subject to further interpretation by the European and national courts. (Tina Weber, ECOTEC)