Cross-border transfer of undertakings

Article 1 (2) of Directive 2001/23 of the EC on the Transfer of Undertakings (the “Directive”) provides that it shall apply if and in so far as the undertaking, business or part of the undertaking or business to be transferred is situated within the territorial scope of the European Union. This implies that all cross-border transfers from one member state to another are subject to the Directive. Moreover, since the Directive only refers to the place of origin of the business to be transferred and not the destination, it also applies to transfers outside the territory of the European Union.

However, as the member states have a wide margin of discretion regarding the implementation of the Directive, a uniform application of national law on cross-border transfers is not guaranteed. As a result, the definition and scope of a transfer of undertaking varies per member state, as well as the level of protection of the employees. The main legal problems that may arise in that respect, will be identified hereinafter.

If – for instance – a German entity purchases the assets and liabilities from a Dutch entity, while all activities are located in the Netherlands and will remain there after the transfer, this will in itself not cause any legal complications from a cross-border perspective. Pursuant to international private law, the law of the member state in which the business is located, will apply (i.e. Dutch law) and will therefore determine whether a relevant transfer of undertaking exists and what the legal position is of the transferor, the transferee and the transferred employees. Moreover, the individual employment relationships will remain subject to Dutch law for basically the same reason.

Legal complications arise when – for instance – the German entity purchases the assets and liabilities from the Dutch entity in order to integrate the activities into its existing organisation structure in Germany right after the transfer. Just as in the previous situation, the terms and conditions of the transfer itself will be subject to Dutch law. As of the date of the transfer, however, the individual employment relationships will be subject to (at least mandatory) German law by virtue of international private law. If we would assume that German law has a considerable lower level of protection of employees than Dutch law, the transferred employees will still be considerably worse off in the new situation, regardless of the protection measures which form the basis of the Directive.

It should be noted that the situation as described in the previous paragraph does not occur very often, as the application of the Directive and the implementing national law is subject to the economic entity in question retaining its identity. A cross-border transfer leads to a change of country and generally language, as well as changes in the legal, economic and social context. Those circumstances inevitably threaten the identity of the transferred economic entity. The same applies if the activities will be materially restructured upon the transfer in order to fit within the existing organisation structure of the purchaser.

If we would assume that, in spite of the above, a cross-border transfer of undertaking takes place, an interesting new question occurs: what will this mean for the transferred employees in practical terms? On one hand, the Directive provides that they will transfer into the employment of the transferee (the German entity) by operation of law, i.e. they have no right to remain employed by the transferor (the Dutch entity). On the other hand, however, the travelling distance to the new business location abroad will in most cases – and in all reasonableness – be too long for an employee in order to claim his right of employment. If this employee decides not to continue his activities abroad, is he considered to have resigned voluntarily or is he entitled to any kind of severance payment or damage from the transferee (or the transferor)? Although it seems reasonable that the latter is the case, it is questionable how this relates to the guiding principles of the Directive.

It may therefore be concluded that, in the event of a cross-border transfer of undertaking, the transferred employees are not necessarily protected adequately by the Directive. For further information please see our entire study posted on the website of the EU Commission.