In the classic example of a transfer of business, the acquirer takes over the essential operating assets from the previous owner of the business, and the corresponding employees consequently pass to the acquirer. Essentially, the economic unit and its identity are taken over by the new entity.
However, German labor courts have decided in multiple cases that merely employing the main staff of a business— or even taking over only the "highly qualified" employees (the "critical mass")—may constitute a transfer of business. This means that a company which solicits only the key employees of a competitor may be compelled to "receive" employees to whom no offer was submitted but who successfully argued that a transfer of business had taken place.
Recent Judgments of the German Federal Labor Court (Bundesarbeitsg ericht ; BAG)
The takeover of personnel therefore ranks as high as other possible criteria when determining whether a transfer of business has taken place. In industries in which the essential factor is manpower, a group of employees working together who share a common purpose, such as the production of automobile components or the provision of financial services, can constitute an economic unit. This economic unit preserves its identity if the acquirer continues the respective activity and takes over those personnel who are essential according to number and expertise, i.e., the main staff. The individual structure of the business will determine how many employees, and which ones, may be taken over without necessitating the takeover of the entire staff.
On the assumption that employees in jobs requiring fewer qualifications are more easily exchangeable and that such employees are less "characteristic" of the business than their more highly qualified co-workers (who are less easily exchangeable), the BAG established the principle that the lower their qualifications are, the higher the portion of assumed employees must be in order for a transfer of business to occur. This means that the takeover of a small number of employees may also work in favor of a transfer of business (in addition to other criteria) if their jobs require high qualifications and involve expert knowledge.
Court rulings have shown a lack of uniformity when determining how many employees must be taken over for a transfer of business to occur, mainly because of the need to focus on the individual circumstances and to conduct an overall assessment. However, it may be stated that in the case of jobs which do not require highly qualified employees, the BAG requires nearly complete takeover of the staff; taking over 75 percent of the former employees, for example, will not suffice. The German regional labor courts, on the other hand, have at times assessed this quite differently, occasionally considering a smaller number of employees sufficient for a transfer of business. And in businesses characterized by working equipment, a transfer of business can occur without the takeover of personnel if the essential equipment is taken over.
The principles of the two latest BAG decisions may be summarized as follows:
- BAG, judgment dated December 15, 2011 – 8 AZR 197/11
(Guarding and Protection Business ):
- Mere succession in order or function does not constitute a transfer of business. (Here, the replacement of one security company with another was not deemed a transfer of business, since only the function of providing security was taken over, not the personnel.)
- Another assumption is to be made if essential working equipment is taken over.
- The takeover of the main staff also may work in favor of a transfer of business, since security-service companies are businesses with "little working equipment."
- A quantitative and qualitative assessment is required.
- In the case of businesses that use primarily less qualified employees, a larger percentage of employees may be taken over without triggering a transfer of business (example: for cleaning services, up to 60 percent of the old staff may be taken over; for security, up to 61 percent; and for collection and delivery services, up to 75 percent).
- In the current case, the "acquirer" took over only 57
percent of the security guards working on the property, so the BAG
denied a transfer of business. In addition, the acquirer had not
taken over any of the people responsible for the property
(supervisors), whose takeover the BAG would probably have
considered essential for a transfer of business (because such
employees "characterize the business's identity in terms
- BAG, judgment dated June 21, 2012 – 8 AZR 181/1 1
- IT-services businesses are characterized by the expert knowledge and qualifications of their employees.
- Because the employees of such a company are assumed to have a high level of qualification, the takeover of "far more than half" of these employees (here, 57.5 percent) is sufficient to assume preservation of the company's identity and thus a transfer of business.
- Taking over the inventory, the customer base, and the service maintenance contracts and hiring the managing director and the executives would constitute a transfer of business.
- A transfer of business is not affected by whether the acquirer newly establishes its own marketing and distribution structures and henceforth has a direct contractual relationship with end customers. Taking over the PCs, the telephone system, and all office rooms, as well as the company name, is also nondecisive, as is performing some company services from different rooms.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.