In the handover of a business, the employees are transferred to the new employer as pre-existing employees. While handing over a business is not an inherently problematic process, it requires caution on the part of the employer, as the relevant regulations are widely applicable, sometimes in unexpected situations.

Change of ownership and continuity of employment relationship

A transfer of undertaking – conventionally known as a Transfer of Undertakings (Protection of Employment) (TUPE) transfer(1) – refers to any arrangement where a business is transferred from one entity to another. The basic structure of the TUPE transfer is an acquisition of business carried out as an asset transaction. The establishment of a joint venture can also match the characteristics of a TUPE transfer if one or more of the participants have carried out similar activities before and transfer these activities to the new joint venture.

No matter the underlying circumstances, the effects on the employees are always the same. The employment relationships of the transferring employees shall continue uninterrupted, and the terms of the employees' employments shall remain unchanged. Employees transfer to the new employer as pre-existing employees, as the matter is often carried out publicly.

Lost tender may result in TUPE

The regulations concerning the TUPE are designed for business acquisitions, but in legal praxis, the scope of the regulations has been extended to cover other situations – for example, where the company and business activity changes while another entrepreneur continues the same business in the same location. In legal practice, the norms regarding the TUPE have been applied, for instance, to the change of operator in a coffee shop, the outsourcing of cleaning and even to a sale of a truck. In cases where there has been no contractual relationship between the new and the old entrepreneur, but both have entered a contract with a same third party, either a customer or an employee, the regulations also apply. As the key assets that were needed to run the business have ended up in the hands of the new entrepreneur, the courts have ruled that the entire business has been transferred from the old entrepreneur to the new entrepreneur.

The nature of the business determines which assets are the key in the assessment. If the business relies on the intellectual property rights developed by the company, the transfer of the business cannot take place unless the new entrepreneur acquires these necessary assets. The transfer of special equipment or tools can be an indication of the TUPE in an industry where such equipment is needed for the business. In some cases, both the equipment and intangible assets are secondary, and the primary assets are the people; in which case, hiring a few key employees may escalate into a TUPE that forces the new entrepreneur to take over all employees with their existing terms and conditions.

Not for parties to decide

The regulations concerning TUPEs are part of the mandatory labour legislation, and the parties to an asset sale cannot determine whether the transaction qualifies as a TUPE or not. If the transaction meets the criteria for a TUPE, the employees shall transfer to the new company directly under the law. At most, the parties can agree who will ultimately be liable for any employment-related liabilities. But such an agreement only affects the parties involved. The employees always have the right to direct any employment-related claims towards their new employer, even if the claim is based on events that took place before the transaction.

Employees are safe during transfer, but not thereafter

When the employee transfers to the service of the new employer in a TUPE, the employment relationship continues uninterrupted. The employee is also protected against dismissals as the employer that gives up its operations is not entitled to terminate the employees' employment due to the closure of operations if another entrepreneur continues operations, and the employment should transfer to the new entrepreneur by virtue of a TUPE.

However, employees do not enjoy any special protection after the transfer has been completed. The company that bought the business can reorganise operations and even terminate employments if the company has legal grounds for dismissals and fulfills its cooperation obligations. The buyer could commit to retaining all employees as part of the terms of the acquisition, but in practice such commitments have been seen mainly in arrangements implemented between public bodies.

Permission to leave

Forced labor is prohibited and an employee cannot be forced to work for an employer even if their employment would transfer in a TUPE. However, the employee is given a very limited choice. The employee cannot choose their employer after a transfer of undertaking. The employee is only given the opportunity to refuse the transfer by terminating their employment effective on the transfer date – regardless of the normal notice period and even if the employee would have a fixed-term contract that could not be terminated under normal circumstances.

Consistency of employment conditions

For the employees, a TUPE should only mean that their employer changes. The duties, salary and other conditions of employment should remain unchanged. The sole exception to this rule involves the benefits that are linked to the former employer's operations and methods of operation. If an airline transfers support functions to a service company, the service company is not obliged to offer the transferred employees cheaper flight tickets, even if they had the opportunity to do so while employed by the airline. A new employer is not obliged to get a cabin in Lapland for the use of the employees even if there was one at the old workplace.

If the new employer was engaged in the same activity before the business transfer, the influx of employees (with the terms determined by the prior employer) usually results in employees doing the same work while having different salaries and other benefits. A TUPE has been recognised as an acceptable reason for possible salary differences. However, the employer cannot remain inactive indefinitely. To treat all employees equally, the employer must standardise the working conditions of the employees, including salaries, within a reasonable time.

The TUPE does not give the employer the right to weaken the employees' terms and conditions unless the employer would have proper grounds for termination. To harmonise the terms of employment, the employer is typically forced to increase the salaries and benefits of all employees to match the best benefits that existed before the transaction. The legislation does not specify an exact deadline for the harmonisation. In the past a transfer of a business was deemed as a justifiable reason for salary differences even 16 years after its implementation, but recent case law has been far more stringent. Based on recent case law, the employer must start the harmonisation process as soon as possible after the transaction has been completed, and the salary and other benefits should be fully harmonised within a few years after the transfer of the undertaking takes place.

Grace period for new collective agreement

The Employment Contracts Act explicitly stipulates that the transferred employees shall remain within the scope of their current collective agreement until the end of the collective agreement's term. However, in its decision in Autumn 2021, the Labor Court confirmed that the old collective agreement will only be applied to employees who were transferred with the business. If the new employer hires more employees, these employees will be governed by the new collective agreement from the beginning of the employment relationship, even if their transferred colleagues remain under the older collective agreement.

TUPE or not TUPE? – Commentary – Lexology

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