A simple breakdown of European TUPE-regulations (Transfer of Undertakings - Protection of Employment)

The TUPE regulations basically require the acquiring company to employ the employees that were formerly working with the acquired enterprise or undertaking. Of course this rule is not very surprising when a company buys the share capital of an existing company, including all rights and obligations attached to that legal entity. The rule, however, also applies to companies that, instead of buying share capital, buy the assets of an existing company, for example the customer base, commercial contracts, real estate, etc., and continue the activities of that company.

Does this mean that every acquisition of assets of a business automatically constitutes a transfer of all employees related to those assets? No. Under the European TUPE-regulations, laid down in the Transfer of Undertakings Directive (2001/23/EC) (TUD), there has to be a transfer of an undertaking (or part of an undertaking) to trigger the TUPE-system. A transfer of an undertaking in the meaning of the TUD is defined as “a transfer of an economic entity which retains its identity, meaning an organized grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary” (art. 1.1.b. TUD).

In its decision of Spijkers v Gebroeders Benedik Abattoir CV the European Court of Justice (ECJ) came to an important decision as to whether there is a transfer of an undertaking in the meaning of the TUD. The ECJ, in short, ruled that it is necessary to consider whether the business in question is transferred as a “going concern”, which in turn depends on the specific facts relating to the transfer, for example:

–   Whether the business’s tangible assets, such as buildings and movable property are transferred;
–   The value of its intangible assets at the time of the transfer;
–   Whether the majority of its employees are taken over by the new employer (in case the transferee only buys part of the transferor’s total business);
–   Whether its customers are transferred;
–   The degree of similarity between the activities carried on before and after the transfer; and
–   The period, if any, for which those activities were suspended.

These are referred to as the so-called “Spijkers”-criteria.

As a result of the transfer of an undertaking, new employment agreements are automatically (by law) created between the transferee and transferor’s employees working for that undertaking. The employment agreements between the transferor and these employees are automatically terminated as a result of the transfer. The date of transfer is usually the date on which the transferee gains control over the acquired business. Some Member States (e.g. the Netherlands) have adopted legislation under which the transferor remains liable for obligations to employees that arose before the date of transfer.

Can the transferee decide, after the transfer, to terminate one or more employees that entered into his service as a result of the transfer, because of the transfer itself? The answer is no, since that would basically undermine the TUPE-system. However, if the transferee can show that the decision to terminate is based on economic, technical or organizational reasons entailing changes in the workforce (art. 4.1 TUD), then the termination is still valid even if it is related to the transfer. The TUD does not define what actually constitutes an economic, technical or organizational (ETO) reason, however, there is case law on this. An example of an ETO-reason is the situation where the transferee realizes after the transfer that he is overstaffed and has to implement a lay-off to save its business (economic reasons). Also, a transferee could end up in a situation where he is obliged to take over an employee, for example an HR Director, whereas the transferee already has an HR Director and has no need (nor funds) for another one.

It is important to note that the TUPE-system does not apply to transfers where the transferor is the subject of bankruptcy proceedings (art. 5.1 TUD). Thus, buying an undertaking from a company that has gone bankrupt does not trigger the TUPE-rules.

Finally, the TUD is a “directive” in the sense of art. 288 TFEU, so it has to be implemented into national law before the rules can take effect. All EU Member States have currently implemented the rules of the Transfer of Undertakings Directive (check the website of the European Commission).