Germany: Federal Labour Court Grants Entrepreneurs More Leeway: For Resource-Intensive Enterprises A Cooperation Contract No Longer Necessarily Raises The Assumption Of A Transfer Of Business

Last Updated: 10 December 2012
Article by Alexander Willemsen

The proprietor of a distressed metal-construction enterprise concluded in March 2007 a sole distribution and cooperation contract with the sued company. Following further measures, such as the transfer and lease-back of fixed assets and immaterial values to a real estate company, essentially all that was left at the original company were the liabilities and employment relationships.

As of March 2007 the former business proprietor ceased paying any wages and salaries to its employees. On 29 May it filed a petition for the opening of insolvency proceedings; two days later, at the company's instigation all 29 employees of the business declared the immediate termination of their employment relationships. The Federal Employment Agency [Bundesagentur für Arbeit] paid the employees affected insolvency pay retroactively for the months March to May. In June 2007 the Defendant gradually recommenced production at its business. By mid June it had successively reinstated 18 employees who had already worked at the business beforehand.

The Federal Employment Agency asserted the wage claims of the employees for March to May that had transferred to it vis-a-vis the Defendant as the supposed acquirer of the business.

The Federal Labour Court [Bundesarbeitsgericht, BAG], like the Regional Labour Court [Landesarbeitsgericht, LAG]Hamm before it in the previous instance, rejected the existence of a transfer of business and affirmed the validity of the terminations declared by the employees (BAG dated 27 September 2012 - 8 AZR 826/11). Although in such configurations terminations by employees are deemed null and void amongst other things if an employment relationship at the business acquirer has simultaneously been agreed or promised with binding effect, and these means have been used to circumvent mandatory statutory provisions on the transfer of a business, the court could not establish anything to indicate that this was the case.

For this reason the BAG only examined whether a transfer of business to the Defendant had already taken place prior to 31 May 2007 and the terminations declared by the employees had thus been without substance. In the opinion of the judges, however, the sole distribution and cooperation contract had not triggered a transfer of business. Although it established the economic dependence of the former business proprietor vis-a -vis the Defendant, it did not establish a change in business proprietor. In case of a resource-intensive business, such a change in business proprietor only takes place with the transfer of the possibility to use the resources - that is to say when the party assuming the resources actually continues to use these resources or uses them again, and when the former business proprietor discontinues the use thereof at its business or business unit.

The legal consequences of a transfer of business, including the entry into all rights and obligations under the employment relationships, are not always desired, especially in transactions involving distressed companies. Models such as the one under decision here should reduce the risks of a transfer of business. The Federal Labour Court has already dealt with the permissibility of such structures on many occasions in the past. The judges made a distinction thereby on the basis of whether the employees had already been promised an employment relationship at the business acquirer, respectively had been given the prospects of such employment relationship with binding effect. Contractual structures whose objectives are aimed at removing the continuity of the employment relationship whilst simultaneously retaining the job were deemed null and void.

The Federal Labour Court has now anchored this principle. Transaction structures which are aimed at avoiding the legal consequences of a transfer of business should therefore always bear in mind that the business acquirer should announce the prospects of an employment relationship to the employees in question at best once the employment relationship with the former business proprietor has already been validly ended.

The judges have simultaneously somewhat extended the leeway for entrepreneurs: For resource-intensive enterprises a cooperation contract no longer necessarily raises the assumption of a transfer of business. For personnel-intensive enterprises, e.g. in the services sector, however, this will not apply.

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.

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