The transfer of employment contracts is one of the central issues in corporate mergers and acquisitions.
In addition to the above, the company has a number of other business activities that are of particular importance to the company’s management, such as the sale of its business, the sale of its shares, and the transfer of its employment contracts. Once the transfer has taken place, the risks of litigation with employees remain high, particularly with respect to the conditions of continuation of employment contracts and the collective status of employees.
The French Labor Code provides a framework for changing employers (art. L. 1224-1 et s. of the French Labor Code). Here are the main guidelines.
1/ When does the transfer of employment contracts occur in a restructuring operation ?
The transfer of employment contracts is the legal consequence of the transfer of the business, or more precisely of the transfer of an “autonomous economic entity.”
It is this “economic” change that entails a transfer of the employment contracts of the employees who change employer.
The conditions for this transfer of contracts to take place are as follows.
1. 1. The operation must concern an autonomous economic entity
The European Court of Justice has defined the concept of autonomous economic entity (CJCE, march 11, 1997, C-13/95).
It is an organized group of persons and elements allowing the exercise of an economic activity that pursues a specific objective. It is a structured set of individuals and elements enabling the exercise of an economic activity that pursues its own objective.
1. 2. This autonomous economic entity must carry out an economic activity that pursues a specific objective
The activity carried out by the entity must be economic in nature. However, it does not matter whether it is carried out for profit or not.
1. 3. The autonomous economic entity involved in the transaction must retain its identity after the transaction
The transfer of a business will be considered as such if, despite the transaction, the identity of the entity is retained. The specific objectives or activity of the transferred business must be continued.
For example, the takeover of only part of the services in a different geographical area constitutes a change of identity (n°16-23.183). The same applies to the purchase of part of the equipment without taking over the activity carried out with this equipment.
2/ Main consequences of the transfer of a business on employment contracts
2. 1. Terms and conditions of transfer of employment contracts
When the operation is qualified as a transfer of business, the employment contracts are automatically transferred to the new employer (article L1224-1 of the French Labor Code).
The transfer of employment contracts is binding on the employees of the acquired entity, who cannot refuse the change of employer.
The transfer is also binding on the company that takes over the activity.
2. 2. Conditions for the continuation of employment contracts
2. 2. 1. Continuation of employment contracts under the previous conditions
In principle, employment contracts are continued under the previous conditions. The following are retained :
- The essential elements of the employment contracts (working time, remuneration, qualification and place of work) ;
- The clauses of the contract that are more favorable than the collective agreements that apply to the company ;
- The non-competition clause that binds the employee and his new employer (its execution cannot be claimed by the former employer) ;
- The rights that employees have acquired through their seniority or presence. For example, the employee retains his or her paid leave rights or retirement bonus.
2. 2. 2. Modification of employment contracts
Changes to employment contracts must be made by means of a rider. The individual consent of the employee affected by the change is therefore required.
2. 2. 3. Novation of employment contracts
Since the Labor Code does not prohibit it, if the new employer and the employee expressly agree to terminate the old employment contract, a new employment contract can be created (n°01-43.687). The contract will therefore be executed under new conditions
The employee does not retain his benefits in this case.
2. 3. Dismissal of employees and transfer of business
The transfer of a company does not constitute an independent reason for economic dismissal. On the other hand, economic layoffs that occurred prior to the transfer of the company, in compliance with articles L1233-3 and following the French Labor Code, are possible. For example, in the event of job losses due to economic difficulties.
3/ Main consequences of the transfer of the company on the employees’ claims
An employee who claims payment of wages due prior to the transfer of his employment contract may take action against both his new employer and his former employer (article L1224-2 of the French Labor Code).
In addition, the new employer is liable for debts arising after the transfer of the business. For instance, the new employer pays the paid leave the benefit to the employee proportionally based on the rights acquired since the transfer.
The new employer is also liable for the payment of wage claims arising prior to the transfer of the employment contracts, except :
- In case of safeguard, recovery or judicial liquidation proceedings ;
- In case of substitution of employers without agreement.
In this case, the new employer then has recourse against the former employer to obtain reimbursement of debts arising before the transfer.
4/ Main consequences on company agreements
Depending on the case, it may happen that the company agreements applied within the transferred economic entity cannot be applied after the transfer. This situation is most often observed in the case of a partial transfer of activity. For example, a clothing manufacturing and trading company that transfers its transport activity (which is not its core business) to a transport company.
The company agreements are thus called into question (article L2261-14 of the French Labor Code).
The previous company agreement remains applicable for a period of fifteen months, including three months’ notice period (unless otherwise expressly stipulated in the agreement (L2261-9 of the French Labor Code) and twelve months’ survival.
During this period, the employees concerned benefit from the agreements of their former company as well as those of the host company.
During this period, a substitution agreement should be negotiated to put an end to this cumulation and to harmonize the applicable rules.
5/ How to anticipate the consequences of a company transfer on employment contracts ?
5. 1. Negotiating between the companies involved in the transaction
The companies involved in a restructuring operation are strongly advised to negotiate the practical terms of the transfer of employees.
They cannot prevent the transfer of employment contracts but they can organize the transfer of information, the settlement of social liabilities, etc.
5. 2. Negotiating an early transition agreement
The early transition agreement, negotiated before the company agreement of the transferred entity is called into question (L2261-14-2 of the French Labor Code), allows the application of a new company agreement to the transferred contracts.
The parties to the negotiation are :
- the employers of the companies involded;
- the trade unions representing the employees in the company to which the employment contracts are transferred.
This agreement comes into force at the time of the transfer of the company for a maximum period of three years
All provisions will apply except those having the same object as the provisions of the agreement of the company to which the contracts are transferred.
At the end of the agreed period, the company agreements applicable in the company to which the contracts have been transferred will apply to the transferred employees.
5. 3. Negotiating an early adjustment agreement
The advance adaptation agreement, negotiated before the company agreements are called into question (L2261-14-3 dof the French Labor Code), replaces the company agreements of the transferred entity and revises those of the company to which the contracts will be transferred.
The parties to the negotiation are :
- The employers of the companies concerned ;
- The trade unions of the companies concerned.
The agreement comes into force at the time of the transfer of the company.
Labor law must not be neglected in company restructurings.
Too often the operation is organized without taking into consideration the social aspects, which can lead to numerous disputes.
Beyond the question of the transfer of employment contracts, it is important to remember that the consultations of the CSE must be carried out before the transfer of employment contracts.
Finally, a social audit prior to the transfer of employment contracts is strongly recommended in order to anticipate as well as possible the problems that will arise following the transfer: various bonuses and benefits, inequalities of treatment, irregularities in employment contracts, poor application of the collective bargaining agreement, non-compliance with working hours, non-compliance with the systems for monitoring employees’ activity, non-compliance with the formalities relating to employee savings schemes or the implementation of the health costs policy, absence of professional interviews, etc.
Philippot Avocats regularly performs such audits and assists companies in all social aspects of their transformations. You can already carry out a pre-audit of your organization by clicking here.