In the event of a transfer of business, one of the important issues is the treatment of so-called ‘objectors’ in the workforce and the associated costs of separation. Now, the German Federal Labour Court (the ‘BAG’) has provided an option that eliminates a key risk of objection.
In a transfers of a business in Germany, the employment relationships are automatically transferred from the seller of the business to the acquirer of the business. The employee can prevent this by lodging an objection, but the objector can no longer be employed in the same job by the seller, because the job is now with the acquirer. One solution to this muddled situation has been to offer the employee employment with the acquirer. If the employee refused this, he or she had to have the lost earnings offset against the ‘default of acceptance’ wage under the German Civil Code, and the result was zero. Now the BAG has provided an avenue that eliminates the risk of default of acceptance.
In the context of a spin-off, the defendant seller of a business had agreed with the purchaser of the business that, in the event of objections to the transfer by employees, the resulting vacancy at the purchaser would be ‘compensated’ for a period of twelve months by way of employee leasing. Accordingly, the objecting plaintiff employee was offered a job as a temporary employee for a limited period of twelve months under unchanged conditions in the business of the acquirer. After the plaintiff rejected the offer and the defendant seller did not want to continue employing her in its own company, the defendant terminated the employment relationship with the plaintiff. In the ensuing legal dispute over protection against dismissal, the plaintiff also claimed default pay until the end of the notice period; the plaintiff argued that she could not reasonably be expected to work as a temporary employee and that this was not contractually owed.
In its ruling the BAG decided that the plaintiff was not entitled to default of acceptance pay. It ruled that the offered temporary employment with the acquirer of the business was reasonable, because ultimately the plaintiff would not be performing work as a classic temporary employee, but rather the same activity (albeit for the acquirer of the business) at the same place of work for the last remuneration received before the spin-off. After all, the German Civil Code bases the exclusion of the default of acceptance wage on a reasonable alternative earning opportunity, not on the contractually owed one.
The decision will be welcomed by employers. It is of particular importance for the drafting of contracts in mergers and acquisitions. When the parties agree on a distribution of risks and procedures with regard to objectors, the possibility of lending the objectors back to the acquirer of the business should always be considered in the future. In this way, cost risks can be avoided, especially from the seller’s perspective. This is because M&A agreements typically provide that the seller must indemnify the acquirer against the resulting costs in the event of objections. These costs include severance costs and salaries during the notice periods, which can in turn be reduced or even avoided as a result of the leaseback, provided that the acquirer is obliged to deploy objectors by way of employee leasing.
If the employee is made aware of an agreed reassignment model in the context of the transfer of the business, this should make the objection much less attractive in the future. After all, the objector not only has to fear that the transferor of the business will terminate his or her employment, but also that there will be no default of acceptance pay during the notice period.