Employment and Industrial Relations Law

Transfer of Undertakings

03 Nov 2013

8 min read

When deciding to transfer or acquire an undertaking, business or part thereof; or when deciding to sub-contract an activity or take over an activity previously carried out by the client or another sub-contractor, it is important to establish whether such transaction falls within the remit of the Transfer of Business (Protection of Employment) Regulations (Legal Notice 433/2002) in determining the future of those employees working in relation to the business or activity transferred or taken over.  Where such transaction qualifies as a transfer in terms of the said Regulations then, the very fact that the transferor no longer requires the services of the employees working in relation to the business/activity so transferred, is not a sufficient ground to dismiss such employees and/or declare them redundant.

Article 38 of the Employment and Industrial Relations Act (Chapter 452 of the Laws of Malta) clearly provides that when a business or other undertaking is taken over, any employee in the employment of the transferor on the date of transfer shall be deemed to be in the employment of the transferee and the transferee shall take on all the rights and obligations which the transferor has towards such employee.

Article 3 of the  Transfer of Business (Protection of Employment) Regulations, which transposes the European Council Directive 2001/23/EC on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses, defines those transfers in relation to which the said Regulations apply as including transfers of economic entities which retain their identity, with the objective of pursuing an economic activity.

In a landmark judgment determined by the Court of Appeal in its Inferior Jurisdiction, (Appeal 32/2007 Maria Norma Abela vs Pater Holding Company Limited et) determined on the 30th April 2008, the Court held that, essentially, for there to be a transfer of undertakings in terms of law, what is required is the concurrence of two elements – (i) the continuation of the business or activity as an economic entity; and (ii) the substitution of the person operating the said business or activity.  The Court also retained that the transfer of assets, whether capital or otherwise is not a pre-requisite. This particular case dealt with the decision of a company engaged in the importation and servicing of vehicles to sub-contract all the cleaning activities of one of its establishments to a third party cleaning company.  In this case the transferor decided to dismiss its cleaner by making her redundant.  The Court held that the cleaning activity of the company constituted an autonomous economic activity which was going to continue to be operated by a third party and as such determined that there was a transfer of undertakings in terms of law.  Consequently the Court ruled that the cleaner employed with the transferor carrying out the cleaning activities so transferred was also to be transferred with the cleaning company and therefore the dismissal of the employee was illegal.  The Court thus ordered the cleaning company to employ the said employee subject to the same conditions enjoyed when she was still employed with the transferor.

Following this judgment, of particular significance are the amendments introduced to the Transfer of Business (Protection of Employment) Regulations in virtue of Legal Notice 363/2012 which formally extended the application of the Regulations to those situations involving “service provision changes” which essentially refer to situations in which activities cease to be carried out by a client on its own behalf, or a contractor on behalf of a client and are taken over by a contractor/a subsequent contractor on behalf of the client or the client itself, as the case may be.

In a preliminary ruling determined by the European Court of Justice (ECJ) on the 21st October 2010 (ECJ Case C-242/09 (Albron Catering, Netherlands)), the ECJ dealt with an action brought by an employee against a dutch company named Albron Catering BV (Albron) who had entered into an agreement with Heineken Nederland BV (Heineken Nederland), a subsidiary company of the Heineken Group, whereby the latter company transferred all catering activities carried out by it to the said Albron. From the facts of the case it transpired that all staff of the Heineken Group were employed with a company called Heineken Nederlands Beheer BV (HNB) who performed the function of central employer and detaches the staff to the various operating companies of the Heineken group in the Netherlands.  The employee in question was assigned by HNB to Heineken Nederland which, until the date of transfer, supplied catering at various locations to employees of the Heineken Group.  Notwithstanding the said assignment, no contractual relationship existed between the employee and Heineken Nederland, which relationship remained with HNB.  Following the transfer of the catering business between Heineken Nederland and Albron, the employee argued that the employees of HNB, who were assigned to Heineken Nederland, automatically became staff members of Albron as from the date of transfer and this notwithstanding the fact that their formal employment relationship was with HNB.  In this case the ECJ held that, within the meaning of Directive 2001/23, in the event of a transfer of an undertaking belonging to a group to an undertaking outside that group, it is possible to regard as a ‘transferor’, the group company to which the employees were assigned on a permanent basis without however being linked to the latter by a contract of employment, even though there exists within that group an undertaking with which the employees concerned were linked by such a contract of employment.

As already stated above, the main effect of the application of the Transfer of Business (Protection of Employment) Regulations is that, following the transfer, the contract of employment of each person employed by the transferor shall have effect as if originally made between the person so employed and the transferee and all the transferor’s rights, powers, obligations and liabilities in connection with the said contracts of employment shall be transferred to the transferee.

As a result, all benefits enjoyed by the employee with the transferor shall continue to be enjoyed with the transferee as if the employee was continuously employed with the transferee.  These include benefits which refer to the period of employment with the transferor but payment of which becomes due on a date when the employee is employed by the transferee.  In virtue of the amendments introduced by Legal Notice 363/2012 the transferor shall be responsible to reimburse the transferee for the payment of any statutory bonuses and income supplements in terms of law made to the employee which relate to the period in employment prior to the transfer as well as the payment for the pro rata annual leave entitlement not availed of during employment with the transferor in respect of the period during which the transferor was the employer.  On the other hand the transferor shall have the right to be reimbursed by the transferee in respect of any annual leave which had been granted to the employee by the transferor prior to the date of transfer which was in excess of the pro rata entitlement of annual leave till the date of transfer.

Also in virtue of the amendments introduced by Legal Notice 363/2012, it has now been clarified that where employees, who were employed in the business or part of the business to be transferred have been made redundant prior to a transfer of business which would have otherwise resulted in the transfer of their employment with the transferee, the transferee has an obligation to re-employ, with the same conditions of employment, such employees if their previous posts become available within one year from the notice of redundancy. In this respect the transferor must provide to the transferee all the necessary information in order for the latter to be able to abide by this requirement.

The Employment and Industrial Relations Act also provides that following a transfer, the transferee is also obliged, in respect of those employees so transferred, to continue to observe the terms and conditions in any collective agreement applicable to the transferor until the date of termination or expiry of the collective agreement or the entry into force or application of another collective agreement.

Establishing whether a particular transaction qualifies as a transfer of undertakings in terms of law is essential at the early stages of any transaction, not only so as to carry out the proper due diligence, but also to ensure that both transferor and transferee satisfy any notification and consultation obligations in respect of those employees affected by the said transfer as required at law prior to the execution of any such transaction.