The Fate of Employment Relationships in the Event of Business Transfer

Legal Insight

June 2024

Areti Kolokotroni, LL.M.

Summary: Business transfer refers to the transfer of an economic entity that retains its identity as a set of organized resources, aimed at exercising economic activity. This transfer, whether contractual or by law, drastically affects, among other things, the staff of the business, as it entails a change in the employer. This article analyzes the implications of the transfer from the perspective of labor law in the field of active employment contracts.

1. Introduction

The change of the business entity due to the transfer (for a more detailed definition of the term transfer, see here) significantly affects the employees of the business, who had chosen to contractually provide their services to a specific person who, however, was changed during the employment relationship without their initiative.

Therefore, due to the imperative need to protect employees, the EEC Council Directive 77/187/14.2.1977 was established "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 businesses", as amended by Directive 98/50/EC. The main purpose of the Directive is "to ensure the continuation of employment relationships within an economic entity, regardless of the change of employer, and thus to protect employees in the event of such a change" (ECJ 12.2.2009, C-466/07). In our national law, Directive 98/50/EC was introduced by Presidential Decree 178/2002, which extensively regulates the fate of employment relationships in such cases.

2. Scope of Application

Presidential Decree 178/2002 applies in cases where the change of the business entity (and by extension the employer) occurs through the transfer or merger, contractually or by law, of an undertaking, business, or part of a business. Thus, the Decree, by its legal reasoning, also applies when the change of entity is due to mergers or splits of companies, conversion of a business from an individual to a corporate form, hereditary succession, auction awards, mergers of companies by law, transfers within a group of companies, etc.

Conversely, changes in the partners of a personal company or changes in the shareholders of a capital company do not constitute a change of entity. In both cases, the legal entity that has the employer status towards the employee does not change (SC 647/2003).

The subjective scope of the Decree includes all employees of the business with a dependent employment relationship, including indefinite or fixed-term contracts, part-time or full-time, seasonal, even senior employees, regardless of the position the employee holds in the company's hierarchy. It is noted that the regulatory scope also covers any employment relationships based on invalid employment contracts, on the grounds that the transfer does not depend on the validity of the contracts, and that rights and obligations that need to be secured also arise from these specific relationships.

3. Particularly in the Case of Business Acquisition

A business acquisition can be achieved in two ways: a) by acquiring its assets (asset deal) or b) by acquiring share control in the company that operates it (share deal). Only the first type of acquisition also constitutes a business transfer, resulting in a change in the legal entity that is the employer. In the latter case, the employees of the acquired company are considered, after the succession, to belong to the staff of the acquiring company, protected by Presidential Decree 178/2002.

There is different treatment in the case of acquisition through the transfer of the majority of shares, because when there is a change in the ownership status of a business through the transfer of shares, there is no change in the legal personality of the employer entity (the same legal entity remains), and the existence of employment contracts remains unaffected by this change.

4. Legal Consequences of Transfer

- Job Retention

The transfer of the business automatically results in the transfer of employment relationships between the employees and the new entity - employer. The latter, from the date of transfer, assumes the position of the previous employer regarding the rights and obligations from the employment relationship, and from that moment, the bond of the previous employer with the employee is severed. The change in the employer does not affect the existence or content of employment relationships in the business. In other words, jobs are retained with the same working conditions. Therefore, the new employer is obliged to pay the same wages to the staff, to account for the length of service of the employee with the previous employer for determining compensation in the event of dismissal, as well as for determining vacation and holiday allowance, seniority allowance, for establishing promotion rights, etc.

- Joint and Several Liability for Debts

With the transfer of the business, the transferor is in no way exempt from the obligations that arose from the employment contract until the time of the transfer, but rather continues to be jointly and severally liable for them with the successor. The liability of the transferor extends to obligations that had been created up to the time the successor takes over. After this point, exclusive responsibility lies with the latter.

According to the Decree, the new employer automatically assumes the obligations from any invalid dismissal of an employee by the original employer and from the latter's default that has not been legally remedied, without the need for the employee to offer their services to the new employer or any other action. Consequently, the successor is liable for the payment of default wages since the business's staff, including the employee unlawfully dismissed by the old employer, is integrated as a whole into the unit forming the transferred business (Athens Court of Appeal 667/2023).

5. Right of Employees to Object (?)

The primary purpose of the European Directive was to protect the weaker employee from the risk of sudden termination of their employment relationship. However, aiming also at the continuation of the business activity, the Directive provides for the automatic transfer of employment relationships without giving the employee the right to object. The provisions of the Decree constitute mandatory law, rendering any contrary agreements about the non-transfer of employment relationships null and void.

The exclusion of the right to object has been criticized on the grounds that the legislator essentially treats the employee as a mere object of the business. However, if we required the employee's consent for the transfer of their employment relationship, we would end up with the absurdity – in the absence of such consent – of the employment bond continuing with the old employer who, however, has ceased their business activity by transferring the business, making it impossible to offer work to them.

Naturally, the employee cannot be forced to provide their work to the new business entity without their consent, as this would violate their constitutionally guaranteed rights. Therefore, it is not prohibited for the employee to agree with the transferor or the successor to terminate the employment relationship or to voluntarily leave.

6. Employer's Right to Terminate

It is explicitly stated (Article 5 para. 1 of the Decree) that dismissal is prohibited, and if it occurs solely due to the transfer, it is invalid. The prohibition applies to both employers. Therefore, dismissals made by the employer in anticipation and due to the planned transfer with the sole purpose of making the business marketable, thereby facilitating its transfer, are contrary to the Decree's provisions and are thus null and void.

The same provision introduces an exception, providing that dismissals may occur for economic, technical, or organizational reasons that entail changes in the workforce (Article 5 para. 1 subpara. b). In other words, when dismissals are based on the employer's business decisions for various reasons, and the primary reason for the termination is indirectly related to the transfer, the termination does not cause invalidity. According to this provision, dismissals aimed at taking measures for the more rational organization of the business and its restructuring are permissible, even when these measures are taken to improve the business's sale prospects and are chronologically linked to the planned transfer (SC 226/2011).

Additionally, due to the mandatory nature of the provisions, the pretextual termination of the employment contract by mutual agreement between the transferor and the employee and the simultaneous signing of a new employment contract with the new business entity under different terms (mostly unfavorable for the employee) is also invalid, as with this method, although the employment relationship is maintained, its continuity is interrupted, and its content is altered (SC 838/2023).

If employees refuse to sign new contracts with new terms of employment, this refusal could not be considered as voluntary resignation on their part, but such a claim could be rejected as a unilateral detrimental change in the terms of employment by the successor and considered that the contract is terminated by the employer (Article 5 para. 2 of the Decree, see also SC 444/2019, SC 997/2018, SC 1832/2017).

7. In Conclusion

In summary, the provisions of Greek law in harmonization with the European Directive satisfactorily protect the rights of employees of the transferred business, ensuring their jobs with the same terms and providing for joint and several liability of the old and new employer for all obligations arising from the employment relationship up to the time of transfer. This protection is mitigated by the employer's ability to terminate the contract under the general pretext of rationalizing and restructuring the business, setting indistinct and vague limits on when the termination is caused by the transfer itself and when it is permissibly done for organizational and restructuring reasons.