Any business seeking to do an acquisition in Europe needs to be aware of the European Acquired Rights Directive which is designed to protect employees’ rights on the transfer of a business or part of one. If the Directive (or in reality the relevant local legislation) applies then it can bring unpleasant surprises for the unwary, both buyers and sellers.
In Germany the Civil Code provides that if a business unit or part of a business unit transfers from one employer to another then the purchaser takes on responsibility for the rights and obligations of the transferring employees. It is always crucial therefore to determine whether there has been the transfer of a business unit. Historically the German Courts have held that there will not be a business transfer for these purposes if a business unit is integrated into the corporate structure of the purchaser in such a way that the original organisational structure is lost. In other words, the business unit must preserve its organisational identity for it to be caught by the transfer provisions.
In 2009, however, the European Court of Justice put a cat amongst the pigeons. In Klarenberg v Ferrotron Technologies GmbH, Mr Klarenberg was employed by ET Electrotechnology GmbH (ET) as Head of its Research and Development Department. ET sold certain product lines developed in K’s department, as well as associated contracts, IP rights and patents to Ferrotron. Four of the thirteen employees in K’s department also transferred. K brought a claim that his employment should also have transferred to Ferrotron because in his view there had been the transfer of a business unit. After his claim was rejected he appealed to the Düsseldorf Labour Court which in turn referred the matter to the ECJ. The ECJ held (in even more oblique terms than normal) that the Acquired Rights Directive may apply to the transfer of part of a business even if it does not retain its original organisational identity, provided that the “functional link between the various elements of production is preserved, and that that link enables the transferee to use those elements to pursue an identical or analogous economic entity”. It then said that this was a matter for the national courts to determine.
When this matter was referred back to the German Courts the Federal Labour Court held that K’s employment had not transferred because the product lines, contracts, IP rights etc sold did not form a business unit at ET that was capable of transferring to the purchaser. It was therefore able to decide this matter without addressing the key question left open by the ECJ, namely what is meant by the “functional link” in each case. So whilst this decision is useful for purchasers it seems that further litigation in this area is inevitable.