Business transfer or not? Important for job and salary

In the event of a transfer of undertaking, employees in principle automatically (by operation of law) transfer to the buyer, retaining their jobs, salaries, and terms of employment. This applies only if the undertaking retains its identity during the transfer. If that identity is not preserved, legally there is no transfer of undertaking, and the new entrepreneur is not required to assume the existing employment contracts. Whether the staff transfers therefore depends on all the factual circumstances of the case.

What is a transfer of undertaking?

A transfer of undertaking is the transfer of an economic unit that retains its identity, for example through a sale, a merger, or a demerger. In the Netherlands, this regulation is laid down in the Civil Code (Article 7:662 et seq.) and stems from European regulations concerning the preservation of employee rights during the transfer of undertakings.

The essence of this arrangement is that if an undertaking is transferred and retains its identity, the employees working in that undertaking transfer by operation of law . The rights and obligations arising from their employment contracts are automatically transferred to the acquiring party. Employees do not need to take any action themselves regarding this, and the buyer cannot simply exclude this contractually.

In this context, an “economic unit” is an organized whole of people and resources with which a specific activity is carried out. It therefore does not have to concern the entire enterprise: the transfer of a department, a branch, or a defined business unit can also fall under the regulation.

Why is identity preservation decisive?

The law and the European directive interpret the concept of “transfer of undertaking” broadly. The central question is always the same: is the identity of the undertaking preserved? If so, there is a transfer of undertaking and the existing employment contracts are retained. If not, the employees remain with the former employer.

The Court of Justice of the European Union has developed settled case law on this matter. In this regard, it is not only a matter of whether the same activity is continued, but also whether the undertaking as a whole remains recognizably the same. To this end, the judge must conduct a full investigation and weigh all factual circumstances against one another. Merely highlighting a few partial aspects is insufficient.

Which factual circumstances play a role?

The judge independently assesses whether the identity is preserved. Based on case law, the following circumstances, among others, play a role in that assessment:

• the nature of the undertaking or activity concerned;
• or transfer tangible assets (such as buildings, inventory, and machinery);
• the value of the intangible assets at the time of the transfer;
• or whether the new entrepreneur takes over the majority of the staff;
• or the customer base (the clientele) is transferred;
• the degree of continuity in the activities performed;
• the duration of any interruption of those activities.

None of these factors is decisive in itself. It is about the overall picture. In a labor-intensive sector, taking over a substantial part of the staff can be a major factor, whereas in a capital-intensive sector, the transfer of business assets can be decisive.

The rule of thumb: the more the business continues to operate in practice the same way after the transfer — same activity, same resources, same people, same customers — the greater the chance that the court will assume preservation of identity and that the staff automatically transfers.

Does this also apply to a share transaction?

The distinction between a share transaction and an asset transaction is important here. In a share transaction (share deal), the new owner purchases the shares in the company. The employer (the legal entity) remains exactly the same; only the shareholder changes. The employees simply remain employed by the same company, and the rules regarding the transfer of undertakings do not even apply.

The regulation applies specifically to an asset or asset/liability transaction, in which (part of) the enterprise, along with its business assets, is transferred to another party. Only then does the question arise whether the identity is preserved and whether the personnel transfer by operation of law. Anyone structuring an acquisition would do well to be clear on this distinction beforehand.

Practical example: the Aurora Casino in Aruba

A striking example comes from a case that reached the Supreme Court concerning the Aurora Casino in Aruba. After all, the Supreme Court is also the highest court for Aruba, Bonaire, Curaçao, Sint Eustatius, Saba, and Sint Maarten.

The facts. The parent company went bankrupt and the casino, part of a hotel, was closed. The premises subsequently stood vacant for approximately fourteen months and underwent extensive renovations. The casino became smaller, the number of slot machines was reduced, and it received a new name, a new color, and a renewed interior; the business operations were also replaced. A new operator took over the casino and hired 26 of the 44 former employees. The remaining 18 employees argued that this constituted a transfer of undertaking and hoped to retain their jobs and salaries in this way.

The judgment. The Supreme Court ruled that the mere fact that a casino was being operated again was not a decisive indication of identity preservation. After all, casinos are operated in many Aruban hotels. Together with the fourteen-month closure, the name change, the downsizing, and the lack of continuity in the client base, the circumstances actually indicated that identity not being preserved. Therefore, there was no transfer of undertaking, and the new operator was not required to respect the old employment contracts. In doing so, the court weighed all factors against each other, in line with European case law.

The lesson for practice: the fact that the same type of activity is being continued somewhere does not in itself mean that the staff will follow suit. It is about the complete picture.

Consequences and risks for entrepreneurs

For a buyer or acquiring party, the consequences are significant. If there is a transfer of undertaking, the staff automatically transfers, including accrued employment, salary, and existing terms and conditions of employment. Moreover, a transfer of undertaking may not in itself be a reason for dismissal. If you wrongly assume that the staff will not transfer, you could still be faced with wage claims and ongoing obligations months later.

On the other hand, the former employer may remain jointly liable for a period of time after the transfer for obligations that arose before the transfer. Good agreements and a careful transfer are therefore in the interest of both buyer and seller. In an acquisition, this subject touches upon both employment law and corporate law; it pays to involve both sides early in the process.

What can you do during an acquisition?

Are you going to take over a business? Then think carefully about the position of the staff in advance. A few concrete steps:

1. Map out in advance which employees belong to the activity to be acquired.
2. Assess realistically whether the company's identity is preserved; do not rely on wishful thinking.
3. Clearly stipulate in the acquisition documents what is and is not being acquired, for example, that intangible assets such as logos and corporate identity are deliberately not included.
4. Take into account in your budget the possibility that staff may transfer after all.
5. Seek legal advice in good time so that you are not faced with any surprises.

Please note: whether the staff will be retained is ultimately decided by the judge based on the factual situation. You can influence the outcome by structuring your acquisition so that the old and new identities clearly differ, but there is never complete certainty beforehand.

Frequently asked questions about transfer of business

Do employees always automatically transfer in the event of an acquisition?

Not always. Employees only automatically transfer if there is a transfer of undertaking, meaning the undertaking retains its identity. If that identity is not preserved, the employment contracts do not automatically end up with the new employer.

Do employees retain their salary and employment conditions in the event of a transfer of undertaking?

Yes. If there is a transfer of undertaking, the rights and obligations arising from the employment contract transfer to the buyer by operation of law. In principle, the employees retain their jobs, their salaries, and their other terms and conditions of employment.

What is the difference between an asset transaction and a share transaction?

In a share transaction, the employer remains the same legal entity and only the shareholder changes; the employees simply remain employed and the rules regarding the transfer of undertaking do not play a role. The regulation applies specifically to an asset transaction, in which (part of) the undertaking itself, along with its business assets, is transferred. Only then does the question of maintaining identity come into play.

Does the transfer of undertaking also apply to a restart following bankruptcy?

In principle, different rules apply to a restart following bankruptcy, and employees generally do not transfer automatically; the restarting party can often decide for itself which employees to take over. This subject is subject to legal flux, partly due to legislation currently being prepared. Therefore, always seek specific advice regarding the current situation when undertaking a restart.

May an employer dismiss someone due to the transfer of undertaking?

In principle, the transfer of the undertaking itself may not constitute grounds for dismissal. Dismissal for other, stand-alone reasons, such as business economic circumstances, may be possible under certain conditions, but the standard dismissal rules apply. Seek advice on this matter before taking any steps.

Who determines whether there is a transfer of undertaking?

Ultimately, the judge assesses this based on all the factual circumstances of the case. In doing so, the question of whether the identity of the enterprise is preserved is always at play.

Does the previous employer remain liable after the transfer?

The former employer may remain jointly liable for a period after the transfer for obligations that arose before the transfer. It is advisable to make clear agreements regarding this at the time of the takeover.

Seek advice regarding personnel during an acquisition

Are you unsure whether your acquisition constitutes a transfer of undertaking, or do you want to properly regulate the position of the staff in the acquisition documents? Our legal experts will review the situation with you, assess the factual circumstances, and help you mitigate risks. View our expertise in employment law or schedule an intake directly to discuss your situation.