Until recently, it was true that if the criteria of transfer of employees are met, no steps may be taken to avoid or hinder such transfer. New case law of the Supreme Court of the Czech Republic creates a breakthrough into the current perception of the transfer of employees. Nevertheless, the transferee still must be duly prepared and know in advance what the employment conditions of the transferred employees are. The transfer might namely lead to unequal treatment of one of the group employees, current or new.
Transfer of employees under Czech law
The legal regulation of the transfer of employees by operation of law is included in the Czech Labour Code (Act No. 262⁄2006 Col.) in Sec. 338 and following. The legal basis for such regulation was the Council Directive 2001/23/EC (the “ARD directive”).
The Czech regulation, however, goes beyond the regulation of the ARD directive as it covers more than just the statutory transfer of employees in case of transfer of an economic entity. Under Czech law, the transfer of employees occurs also when (i) activities, (ii) tasks or (iii) parts of such activities or tasks are transferred.
If these conditions of a statutory transfer under Czech law are met, the employees pass along with the transferred activities/tasks to the new employer, on the condition that the transferee has the capability to be a new employer and can continue fulfilling the activities (tasks) of the transferor. Until now, the legal practitioners thought that the parties to the transaction (e.g. the seller and the buyer) have little chance to influence such transfer. It is not possible under Czech law for the employer to terminate employment because of such transfer; the transfer is not a reason under which the employment can be terminated by the employer and such an act would be considered as an act contrary to the mandatory legal regulation of the Labour Code.
Nevertheless, the current case law of the Supreme Court of the Czech Republic brings a new view on the transfer of employees. The Supreme Court concludes that it is possible, within the contractual freedom of the parties, to terminate the current employment by an agreement and to conclude a new employment agreement with the new employer. In such case, the transfer of rights and duties form the former employment to the new employer does not even occur. The Supreme Court thus has enabled the possibility to exclude the application of the mandatory provisions on the transfer of employees, even though until now it was believed that the transfer of rights and duties (if the statutory conditions are met) occurs irrespective of whether or not a new employment agreement was concluded. But even in such a case, there is a certain corrective measure: good morals. The above described process would not be possible if good morals would be breached.
Practical impact — outsourcing
There have been broad discussions on the practicability of the provision of the Labour Code on the transfer of employees. The transferred activities of the employer need not be key activities but can also be ancillary activities. A simultaneous transfer of assets aimed to secure these activities is not relevant; the transfer of employees by operation of law also may occur without the transfer of any other assets. Under such circumstances, it may happen (and often does) that the transferee receives along with the activities also new employees. From such a perspective, any decision on the outsourcing of activities would likely meet the legal criteria of Czech regulations on statutory transfers. Also, if the respective employee performs various activities and only some of them are subject of the transfer, it might be questionable, whether the employee should pass along to the new employer or rather stay with the current one. This, of course, makes any operational decisions on outsourcing more difficult, as the outsourcer would also have to accept employees it has no previous experience with and under conditions it did not agree on. In this context, it would be quite interesting to follow subsequent development of the case law of the Supreme Court, which, as it seems, is leading rather towards easing the application of the employees’ transfer regulation.
Consequences of statutory transfer
As a general rule, the conditions of the transferred employees must remain the same after the transfer: The employees are transferred along with their current rights (in particular in the field of remuneration) and duties. These conditions may not be changed due to the transfer. The aim of the statutory regulation is to protect the employee not only against dismissal but also against a worsening of their position.
Another general rule of Czech law is that the employer must treat all its employees equally unless there is an objective justification for not doing so. As a result of the transfer, the new employer might face the situation of having its original employees with certain employment conditions and its new employees with others.
Such situation creates a struggle of two above mentioned general principles, (i) mandatory transfer of employees and (ii) equal treatment. This conflict is even more visible in case when there are two clearly comparable employees of the same employer (transferee) and the transferred activities are the same as previously provided by the transferee
The Czech legal regulation does not cover how to proceed in such case. It regulates only the applicability of potential collective agreements, stating that all rights and obligations arising out of the collective agreements are, along with the transferred employees, transferred to the transferee, but are applicable only to the transferred employees. In any case, such collective agreements cease to exist at the end of the following calendar year after the employee’s transfer at the latest.
Practitioners wonder whether the statutory transfer of employees leading to different employment conditions might be considered a justification of unequal employment conditions. So far, there is no specific case law dealing with such question. The respective regulation on equal treatment does not provide for exemption related to the transfer of employees. However, as the potential unequal treatment is a result of the application of and compliance with statutory regulation, the employer has good grounds to defend itself. It is however questionable, whether the different treatment of former and new employees will be still acceptable after lapse of longer period (e.g. after 10 years after the transfer occurred).
For the above reasons, it is important to assess early the risks connected with the statutory transfer of employees and inquire into the employment conditions of the transferred employees before entering into the transaction. A potentially viable preventive solution is not to merge the transferred employees into the existing entity, but to establish a SPV that would act as a new employer. The issue of unequal treatment should then be avoided. If this is not possible, the employer might improve the employment conditions of all employees (so that the conditions are the same for all; such solution might be from the practical perspective too expensive for the new employer) or continue with the current conditions with the risk that this would be held as violating equal treatment and have further negative consequences, such as fines or claims from employees. In connection with the case law of the Supreme Court of the Czech Republic, there is potentially a new third solution offered – the disruption of the employment relationships of the employee and creation of new ones. This solution, even where there is this new case law of the Supreme Court, cannot be recommended, as it is still connected with a high level of risk on the employer’s part. We expect that the new decision of the Supreme Court will be widely discussed, and it is not certain whether the conclusions of this decision will be applicable even in the future.
It is important to assess early the risks connected with the statutory transfer of employees and inquire into the employment conditions before entering into the transaction.