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Change in service provider was not a transfer of an undertaking

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Legal news
calendar 24 October 2019
globus Denmark

In a new judgement, the Danish Labour Court established that the Danish Act on Transfer of Undertakings did not apply when a cleaning task for a municipality was transferred from one cleaning company to another as the transfer did not comprise a substantial part of the workforce.

The case concerned a cleaning services company, which overtook a cleaning service for Frederikssund Municipality following a public tender. The cleaning service had previously been carried out by another supplier for which 100 employees had been employed to carry out the services.

Consequently, the new cleaning services company decided to initiate a recruitment process following the tender and within a few months it had employed 34 of the employees of the previous supplier.

As a result of the indirect transfer of employees between the two companies, disagreement arose between the transferred employees’ trade union and the cleaning company as to whether these 34 employees were entitled to receive seniority allowance. According to the trade union, the transferred employees had, undoubtfully, retained the seniority accrued during their employment with the previous supplier because their new employment had resulted in a transfer covered by the Act on Transfer of Undertakings.

The main question of the case was, therefore, if the transfer of several employees from the previous supplier to the cleaning company had resulted in a transfer of an undertaking.

Fixed-term employees counted as part of the workforce

For the Transfer of Undertakings Act to apply, it is a precondition that the transferred economic entity has retained its identity after the transfer. Where the transfer concerns an activity such as cleaning services which primarily relies on labour, the assessment must consider whether the transferee has taken over a “substantial part” of the workforce considering the number and qualifications of the employees carried over. 

However, the parties to the case could not agree on how the “substantial part” of the workforce should be calculated. Their disagreement concerned if fixed-term employees should count in the calculation or not. Out of the 100 employees who had previously performed the task, 56 were permanently employed while 44 were fixed-term employees. The Labour Court, therefore, initially had to establish which employees were included when determining the workforce and which were not.

On one side, the trade union argued that only employees who were permanently employed could be considered as part of the economic entity. On this basis, the cleaning company had naturally taken over a substantial part of the workforce by employing 34 of the 56 employees. On the other side, the cleaning company held that all employees, undoubtedly, must be considered as part of the economic entity – also fixed-term employees. Consequently, the cleaning company maintained that only 34 of the previous supplier’s 100 employees had been carried over.

The Labour Court found that the existence of an economic entity presumes that it could be considered as organised in a stable manner. Because the previous supplier would not have been able to perform the cleaning task in the preceding period without the fixed-term employees, these 44 employees were naturally a part of the economic entity.

Irrespective of whether the cleaning services company also had carried over several of the previous supplier’s key employees with the employment of the 34 employees, the Labour Court held that a substantial part of the workforce had not been transferred. Based hereon, the cleaning company was not required to pay seniority allowance to the 34 transferred employees.

IUNO’s opinion

The judgement confirms that when the primary asset of a transferred activity is the workforce, the number of employees being transferred is decisive for the assessment. At the same time, the judgement also establishes that as a main rule, no distinction should be made between employees who are permanently employed and employed on a fixed-term basis when determining if a substantial part of the workforce has been transferred. The decisive factor instead remains whether the economic entity can be considered as organised in a stable manner without the fixed-term employees.

IUNO recommends that companies on a case-by-case basis assess whether the Act on Transfer of Undertakings may apply to determine the risks in the transfer agreement in advance. This also allows companies to address the different options and risks, which arise when taking over a company or part of a company. 

The case concerned a cleaning services company, which overtook a cleaning service for Frederikssund Municipality following a public tender. The cleaning service had previously been carried out by another supplier for which 100 employees had been employed to carry out the services.

Consequently, the new cleaning services company decided to initiate a recruitment process following the tender and within a few months it had employed 34 of the employees of the previous supplier.

As a result of the indirect transfer of employees between the two companies, disagreement arose between the transferred employees’ trade union and the cleaning company as to whether these 34 employees were entitled to receive seniority allowance. According to the trade union, the transferred employees had, undoubtfully, retained the seniority accrued during their employment with the previous supplier because their new employment had resulted in a transfer covered by the Act on Transfer of Undertakings.

The main question of the case was, therefore, if the transfer of several employees from the previous supplier to the cleaning company had resulted in a transfer of an undertaking.

Fixed-term employees counted as part of the workforce

For the Transfer of Undertakings Act to apply, it is a precondition that the transferred economic entity has retained its identity after the transfer. Where the transfer concerns an activity such as cleaning services which primarily relies on labour, the assessment must consider whether the transferee has taken over a “substantial part” of the workforce considering the number and qualifications of the employees carried over. 

However, the parties to the case could not agree on how the “substantial part” of the workforce should be calculated. Their disagreement concerned if fixed-term employees should count in the calculation or not. Out of the 100 employees who had previously performed the task, 56 were permanently employed while 44 were fixed-term employees. The Labour Court, therefore, initially had to establish which employees were included when determining the workforce and which were not.

On one side, the trade union argued that only employees who were permanently employed could be considered as part of the economic entity. On this basis, the cleaning company had naturally taken over a substantial part of the workforce by employing 34 of the 56 employees. On the other side, the cleaning company held that all employees, undoubtedly, must be considered as part of the economic entity – also fixed-term employees. Consequently, the cleaning company maintained that only 34 of the previous supplier’s 100 employees had been carried over.

The Labour Court found that the existence of an economic entity presumes that it could be considered as organised in a stable manner. Because the previous supplier would not have been able to perform the cleaning task in the preceding period without the fixed-term employees, these 44 employees were naturally a part of the economic entity.

Irrespective of whether the cleaning services company also had carried over several of the previous supplier’s key employees with the employment of the 34 employees, the Labour Court held that a substantial part of the workforce had not been transferred. Based hereon, the cleaning company was not required to pay seniority allowance to the 34 transferred employees.

IUNO’s opinion

The judgement confirms that when the primary asset of a transferred activity is the workforce, the number of employees being transferred is decisive for the assessment. At the same time, the judgement also establishes that as a main rule, no distinction should be made between employees who are permanently employed and employed on a fixed-term basis when determining if a substantial part of the workforce has been transferred. The decisive factor instead remains whether the economic entity can be considered as organised in a stable manner without the fixed-term employees.

IUNO recommends that companies on a case-by-case basis assess whether the Act on Transfer of Undertakings may apply to determine the risks in the transfer agreement in advance. This also allows companies to address the different options and risks, which arise when taking over a company or part of a company. 

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Anders

Etgen Reitz

Partner

Søren

Hessellund Klausen

Partner

Kirsten

Astrup

Associate

Flora

Hua Ting Chieng

Associate

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