Out-Law News 2 min. read

ECJ closes employee transfer loophole


Employees of a firm which is transferred to another company must retain their rights even if the company with which they had an employment contract does not transfer, the European Court of Justice (ECJ) has said.

The ruling closes a loophole which could let employers escape obligations under the Acquired Rights Directive, implemented in the UK by the TUPE (Transfer of Undertakings (Protection of Employment)) Regulations.

John Roest worked for Dutch brewer Heineken in the catering department. All Heineken employees were employed by a central company and then allocated a Heineken subsidiary to work for. Roest worked for Heineken Nederlan.

Its functions were transferred to a third party catering firm, Albron, in 2005 and Roest claimed that he was due all the protections that the Directive afforded transferred workers. The Directive ensures that workers who are transferred from one employer to another retain their benefits and working conditions at the new employer.

Roest's contract of employment was with the central Heineken company, not with Heineken Nederland. Albron argued that because it was the functions of the subsidiary that were transferred, and not those of the company with whom Roest had an employment contract, the Directive did not apply.

The ECJ has rejected those arguments, and has said that the rights guaranteed under the Directive can transfer even if the company whose functions are moved is not the one with which employees have a contract.

The ruling said that either the company with the contract or the company in charge of the transferred workers could be the 'transferor' mentioned in the Directive, meaning the company whose rights and conditions must be adopted by the new employer.

"The requirement under Article 3(1) of [the] Directive that there be either an employment contract, or, in the alternative and thus as an equivalent, an employment relationship at the date of the transfer suggests that, in the mind of the Union legislature, a contractual link with the transferor is not required in all circumstances for employees to be able to benefit from the protection conferred by [the] Directive," said the ruling.

"If, within a group of companies, there are two employers, one having contractual relations with the employees of that group and the other non-contractual relations with them, it is also possible to regard as a ‘transferor’, within the meaning of [the Directive], the employer responsible for the economic activity of the entity transferred which, in that capacity, establishes working relations with the staff of that entity, despite the absence of contractual relations with those staff," it said.

Employment law expert Michael Ryley said that the ruling may not often apply, but that it does a necessary job of clarification of the law.

"This covers a technical but awkward point that has been around for 20 years and has needed resolving for all that time," he said. "The problem arises because employees of many big companies are in a service company. For ease of administrative convenience everybody is employed by one company but they perform the functions of another company."

Ryley said that a 1987 case involving Barclays bank in the UK had determined that employees were not part of a transfer which would allow them to keep their rights if they worked for a service company that was different to their contractual employer.

"As TUPE law developed it was increasingly felt that this was an anachronism, and that something that was purely a way of arranging the furniture for ease of HR and management should not have an impact on the rights of employees in a transfer of the business," he said.

"This is an authoritative determination that courts should not allow that kind of technicality to frustrate employee rights," said Ryley. "This makes it clear that employee rights are protected, and employers know where they stand. It has been used as a loophole, but now it is not going to be available to employers. "

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