Transfer of undertakings

The question of whether a business transfer constitutes a transfer of undertaking pursuant to the Working Environment Act is among the most discussed topics in Norwegian employment law recently. Case law from the Norwegian courts and the Court of Justice of the European Communities has provided some clarification, but has also contributed to new questions.

1 Introduction

In short, a transfer of undertaking takes place when an undertaking, or a part of an undertaking, is transferred to a new employer. If the transfer constitutes a transfer of undertaking, the employments, including the rights and obligations under the employment contract, are automatically transferred to the new employer.
The rules regarding transfer of undertakings are found in chapter 16 of the Working Environment Act (“WEA”), which apply in the private as well as the public sector. The purpose of the rules is to ensure that the transfer of employment does not result in inferior rights for the employees than those in the employment with the former employer.

2 What constitutes a transfer of undertaking pursuant to the WEA?

2.1 General

The term “transfer of undertakings” is defined in section § 16-1 of the WEA. The rules apply to transfer of an undertaking or part of an undertaking to another employer. For the purposes of the act, transfer means transfer of an autonomous unit that retains its identity after the transfer. The section is based on the EU directive 2001/23/EC on the transfer of undertakings, and the interpretations of the Court of Justice of the European Communities are therefore relevant when determining the meaning of the term “transfer of undertakings”.

According to the interpretations of the Court of Justice of the European Communities, three conditions must be fulfilled for a transfer to constitute a transfer of undertaking:

1. The transfer must concern an autonomous, economic unit.
2. The business which is carried out by the new owner must essentially be the same as the business that was run by the former owner. In other words, the undertaking must retain its identity after the transfer.
3. The business or undertaking must be transferred to a new owner pursuant to contract or by merger. This condition is not subject to a strict interpretation. It is sufficient that the transfer takes place “within a contractual framework”. A direct contractual relationship between the former and new owner is not required. For example, the courts have determined that a change of employer following a tender procedure may constitute a transfer of undertaking in legal terms.

The condition of an autonomous economic unit and the identity condition are normally decisive for whether the transfer is a transfer of undertaking in legal terms. The conditions must be assessed individually in each case. The assessment of these conditions will often depend largely on the court’s discretion, and thus, whether there is a transfer of undertaking in legal terms may be difficult to predict.

2.2 Autonomous economic unit

The condition of an autonomous economic unit means that the transfer must concern a group of people and/or assets which are able to pursue an economic activity after the transfer.

The condition is understood as an organized grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary.

Case law has established that (all of) the following requirements must be met in order to constitute an autonomous economic unit:

• Organization
• Totality
• Substance; a minimum of persons/ assets must be transferred
• The grouping of persons and/or assets must facilitate the exercise of an economic activity which pursues a specific objective.

Thus, an autonomous economic unit must be subject to the transfer, and the unit must be able to exercise an economic activity independently, either alone or as a part of an organization.

Judgments by the Court of Justice of the European Communities and the Norwegian Supreme Court shows that the threshold for fulfilling this requirement is low. Parts of an undertaking may fulfil this requirement, and both central and ancillary functions may constitute an autonomous economic unit. There are also several examples from case law that operations carried out by a single employee can constitute an autonomous economic unit, after an individual assessment.

2.3 Identity

The autonomous economic unit must retain its identity after the transfer. This means that the business carried out by the new owner must be essentially the same as the business performed by the former owner. In order to determine whether the condition is met, it is necessary to consider all the facts characterizing the transaction in question. According to case law, the following elements shall be considered:

• The type of undertaking or business
• Whether tangible assets are transferred
• The value of intangible assets at the time of transfer
• Whether or not the majority of the staff are being transferred to the new employer
• The similarity between the activities of the undertaking before and after the transfer

It is not sufficient that the activity of the business is transferred – this is a necessary, but not sufficient condition to constitute a transfer of undertaking in legal terms, as the business must retain its identity after the transfer.

As a starting point, the courts have assessed what characterizes the identity of the undertaking. The elements which are decisive for whether the identity condition is fulfilled will therefore vary – depending on what characterizes the business. These assessments are to a large extent discretionary, and it is therefore difficult to predict which elements the courts will find decisive. This weakens the predictability of the assessments.

If the activities of the undertaking require only a minimum of assets, as in the service industry, the input factor which characterizes the business is the service and the group of employees performing the service. In order to fulfil the identity condition, a major part, in terms of numbers and skills, of the employees must be transferred to the new employer. In undertakings characterized by the workforce, transfer of tangible assets will not be sufficient.

For undertakings characterized by tangible assets, the decisive factor will be whether a majority of these assets are transferred.

If the undertaking is characterized partly by the workforce and partly by tangible assets, a sufficient part of both must be transferred.

In many situations – for example in tender procedures, the acquiring business may to a significant extent influence whether employees/assets shall be transferred, as well as the number of such employees/ assets. This may result in evasion of the rules regarding transfer of undertakings. According to the Norwegian Supreme Court (Rt. 2001 s. 248) the transfer which is carried out is decisive. The acquiring company may therefore affect whether the rules regarding transfer of undertakings in the WEA apply or not.

3 Which employees are transferred to the new employer?

3.1 Introduction

Existing employments at the time of transfer are transferred to the new employer, and the employments are transferred as they are at the time of transfer. Thus, if notice of termination is given before the transfer, the notice period will continue after the transfer. Ceased employments are however not transferred.

3.2 Which employees are included in the transfer of an undertaking?

As a starting point, the rules regarding transfer of undertakings apply to all employees employed in the company at the time of transfer, including part-time employees and temporary employees. Hired-ins and independent contractors are however not included.

In situations where a part of the undertaking is transferred, it may be difficult to determine which employees at the transferor who are subject to the transfer. This must be determined by the employee’s affiliation to the part of the undertaking which is transferred.

If the undertaking is divided into sections/divisions, employees are generally entitled to employment at the acquirer if the part of the undertaking which the employee is organizationally a part of, is transferred. It is established in case law that employees which are not organizationally a part of the undertaking which is transferred, but performs some work for the relevant undertaking, will not get their employments transferred. This is typical for employees who performs work for joint parts of the undertaking such as accounting, IT and sales support.

The question of which employees are involved in the business transfer if the business has unclear organizational frames has not been considered by the courts. The employee’s actual affiliation to the part of the business will probably be decisive. Factors in the assessment may be the hours worked for the relevant part of the business which is transferred, the value of the work performed for the relevant part, the wording of the employment contract and the allocation of costs associated with the employee’s work for the various parts of the business.

4 The employees’ rights

4.1 Individual rights and obligations

The employees’ employments are automatically transferred to the new employer upon a transfer of undertaking, unless the employee exercises his or her right of reservation.

The main rule is that all individual rights and obligations in the employment contract/-relationship continues on unchanged terms, cf. WEA section 16-2, irrespective of whether they are agreed in writing or orally. Individual rights acquired through practice are also subject to the transfer. The transfer further includes claims which are due before the transfer date, and claims which are not due. All terms of the employment are transferred, including salary, bonus, working hours, confidentiality clauses, non-compete clauses etc. For example, if the employee’s salary with the old employer exceeds the salary level for similar positions with the new employer, or the employee has more beneficial working hours or holiday arrangement, the employee has the right to maintain such benefits. Economic benefits due to seniority at the time of transfer shall normally also be transferred.

The new employer may not unilaterally change the terms of the employment unless the employee agree, or the changes are within the employer’s right to manage. Unilateral changes in the employee’s employment may be considered as a dismissal combined with a new employment offer. The new employer may only change the terms of the employment to the same extent as the previous employer could – i.e. within the frames of the employer’s right to manage.

According to section 16-2 of the WEA, claims ensuing from the contract of employment or the employment relationship may still be raised against the former employer. The liability between the former and new employer is therefore joint and several. The employees have the right to decide whether they want to bring their claim against the former or new employer. The legal relationship between the former and new employer is not governed by section 16-2, and must therefore be clarified by interpretation of the agreement(s) between them, and other applicable rules.

Furthermore, it follows from section 16-2 of the WEA that the new employer shall be bound by any collective agreements that were binding upon the former employer. This do not apply if the new employer within three weeks after the date of transfer at the latest declares in writing to the trade union that the new employer does not wish to be bound. The transferred employees nevertheless have the right to retain their individual working conditions which follows from a collective agreement until the collective agreement expires, or until a new collective agreement which is binding upon the transferred employees is concluded.

Collective pension schemes shall, as a main rule, be continued with the new employer. However, the new employer may elect to make existing pension schemes applicable to the transferred employees. Thus, the transferred employees risk getting a less beneficial pension scheme.

4.2 The reservation right and the right to choose

An employee may object to the transfer of the employment (“the reservation right”), cf. section 16-3 of the WEA. An employee who wants to object must notify the former employer in writing within specified time limits. The time limit cannot be shorter than 14 days after information about the transfer is given to the employees. If an employee fails to notify the employer, the reservation right is lost.

Whether employees who exercises their right of reservation may maintain their employment with the former employer (the “right to choose”) is not regulated by the WEA. Case law has established that employees don’t have such right, unless the transfer will cause significant negative changes in the employee’s situation. This must be assessed individually in each case, but the threshold is generally high. Thus, the employment with the former employer will normally cease if the employee exercises his/her right of reservation.

An employee who has been employed in the undertaking for a total of at least 12 months during the two-year period prior to the date of transfer, and who exercises his or her right of reservation, has a preferential right to a new appointment at the former employer. The preferential right lapses if the employee fails to accept an offer of employment in a suitable post within 14 days after receiving the offer.

4.3 Protection against dismissal

Transfer of an undertaking to another employer is not itself grounds for dismissal with notice or summary dismissal, cf. section 16-4 of the WEA. This does not mean that the new employer is unable to dismiss employees, but the termination must be carried out in accordance with the rules regarding termination in the WEA. This implies, inter alia, that the dismissal must be objectively justified.

It is not uncommon to experience redundancy with the new employer after a transfer of an undertaking, or a need for reorganization. In the event of workforce reductions, all employees shall be assessed on equal terms, including the employees who have been transferred and those already employed with the acquiring business. The employer must also consider whether there is other suitable work in the undertaking to offer the employees who risk termination.

4.4 Information and consultation

4.4.1 Information and consultation with the employees’ elected representatives

According to section 16-5 of the WEA, the former and new employer shall as early as possible provide information concerning the transfer and discuss with the employees’ elected representatives. Information shall particularly be given concerning the reason for the transfer, the agreed or proposed date for the transfer, the legal, economic and social implications of the transfer for the employees, changes in circumstances relating to collective agreements, measures planned in relation to the employees, rights of reservation or preference and the time limit for exercising such rights. If the previous or new owner is planning measures in relation to their respective employees, they shall consult with the elected representatives as early as possible on the measures with the purpose to reach an agreement.

The purpose of this obligation is to give the employees’ elected representatives information about the planned process, and give the representatives an opportunity to influence the decision before it is taken.

According to section 8-3 of the WEA, the employer may impose a duty of secrecy on the elected representatives and any advisors if the needs of the undertaking dictate that specific information should not be disclosed.

4.4.2 Information to the employees

According to section 16-6 of the WEA, the former and new employer shall as early as possible inform the affected employees about the transfer. The information which shall be provided is the same as the information which shall be given to the employees’ elected representatives in accordance with section 16-5, but the information to the employees will normally be given at a later time.

4.4.3 Information duty stipulated by collective agreements

Collective agreements may impose obligations which deviates from the requirements stipulated by the WEA. It is therefore important to identify any such requirements before the process is initiated.

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