A recent decision of the Court of Justice of the European Union (CJEU) on the transfer of undertakings and the “retention of identity” of part of a business is instructive to practitioners in advising on the transfer (or potential transfer) of employees.

When advising on employment aspects in commercial transactions, particularly on the application of the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 (TUPE), many practitioners fail to initially consider whether there is in fact a transfer of business at all. Most employers decide that there is and assume that the obligations imposed under TUPE apply. This decision often happens without reviewing the intricacies of the transaction to determine whether an undertaking (or part thereof) is transferring between two employers as a result of a legal transfer so as to trigger the application of TUPE.

The Law:

Regulation 3 of TUPE specifies that “transfer” means the transfer of an economic entity which retains its identity. An economic entity means “an organised grouping or resources which has the objective of pursuing an economic activity whether or not that activity is for profit, or whether it is central or ancillary to another economic or administrative entity”.

It is well established that any consideration of whether there is a transfer of an economic entity involves a detailed consideration of the following particular areas:-

  • the type of undertaking or business concerned;
  • whether or not its tangible assets, such as buildings and movable property, are transferred;
  • the value of its intangible assets at the time of the transfer;
  • whether or not the majority of its employees are taken over by the new employer;
  • whether or not its customers are transferred; and
  • the degree of similarity between the activities carried on before and after the transfer, and the period, if any, for which those activities were suspended.

All of these matters are single factors in the overall assessment which must be made and cannot therefore be considered in isolation (see judgment in Spijkers, 24/85; Süzen, C‑13/95).

The Case:

In a recent case Ferreira da Silva e Brito and Others [2015] EUECJ C-160/14 the CJEUconsidered whether the Transfer of Undertakings Directive (2001/23) would apply in a situation involving aircraft companies in Portugal.

The Portuguese company at the centre of the dispute, Air Atlantis SA (AIA), operated non-scheduled (charter) flights in the air transport sector, and was wound up in 1993.  Its employees were dismissed as part of a collective redundancy. From 1 May 1993, TAP, the company which was the main shareholder in AIA, began to operate at least some of the flights which AIA had contracted to provide for the period from 1 May 1993 to 31 October 1993. TAP also began to operate a number of charter flights (it hadn’t been active in the charter flight market before this) and used some of the assets which AIA had used for its activities, in particular four aeroplanes. TAP also assumed responsibility for the payment of charges under the leasing contracts relating to those aircraft. It took over the office equipment which belonged to AIA as well as other moveable property. In addition, TAP took on a number of former AIA employees.

The Employment Tribunal in Lisbon held that there was a transfer of a business. This was because, at least in part, the identity of the business had been retained and its activities had been continued. TAP had effectively replaced the former employer in the contracts of employment.

However, on appeal the Supremo Tribunal de Justica stated that the fact that a commercial activity is ‘merely continued’ is not a sufficient ground for concluding that there had been a transfer of a business. The court found that the business had not retained its identity. It found that when TAP operated the flights in question over the course of the summer of 1993, it did not use an ‘entity’ with the same identity as the ‘entity’ previously belonging to AIA. In its view, a transfer of a business could not be said to have occurred since the two ‘entities’ were not identical.

The Supremo Tribunal de Justica also found that there had not been a transfer of customers from AIA to TAP. The business owned by AIA was one linked to a specific asset, namely a licence, which was not transferable. This meant that the transfer of the business was impossible, since only individual assets could be disposed of, not the business itself.

The CJEU Decision:

On reference to the CJEU, it confirmed that the aim of Directive 2001/23 is to ensure continuity of employment relationships within an economic entity, irrespective of any change of ownership. The decisive criterion for establishing the existence of a transfer within the meaning of the Directive is, therefore, the fact that the entity in question retains its identity. This can include a consideration of  the fact that its operation is actually continued or resumed.

In particular, the Court stated that the degree of importance to be attached to each criterion will necessarily vary, according to the activity carried on and the production or operating methods employed in the undertaking, business or part thereof.  The Court proceeded to determine the issue by examining case-law, while taking account of the principal matters of fact set out by the national court.

Key issues which were considered by the CJEU were the following:-

  1. Transfer of tangible assets was a key factor. TAP replaced AIA in the aircraft leasing contracts, used the aircraft (i.e. the essential assets for pursuing the economic activity) and took over other equipment.
  2. AIA customers were taken over and routes were taken over by TAP. Employees who had been seconded to AIA were brought back into TAP for the purpose of carrying out identical tasks to those performed within AIA.
  3. There was an integration of AIA’s assets and staff into the TAP structure. The fact that it did not retain an autonomous organisational structure was deemed to be irrelevant in the application of the Directive. There was a link preserved between, on the one hand, the assets and staff transferred to TAP and, on the other, the pursuit of activities previously carried on by AIA.
  4. In particular, the preservation of identity of the economic entity wasn’t the retention of its own organisation factors. It was the retention of a functional link between the various elements transferred which allowed the transferee to use them to pursue an identical or analogous economic activity.
  5. This occurred even if they were integrated, after the transfer, in a new and different organisational structure.

Accordingly the CJEU held that Directive 2001/23/EC must be interpreted as meaning that the concept of a ‘transfer of a business’ would encompass a situation in which an undertaking took the place of another undertaking which had been wound up and:

  • took over the aircraft leasing contracts;
  • took over ongoing charter flight contracts;
  • carried on activities previously carried on by the undertaking that had been wound up;
  • reinstated some employees that had previously been seconded to that undertaking;
  • assigned those employees  tasks identical to those previously performed; and
  • took over small items of equipment from the undertaking that had been wound up.

Why this case is important to Irish workplaces:

The case gives further insight into the decisive criteria for the application of TUPE and how they will be considered by courts/tribunals. In particular, it supplements the already growing body of case law on how the retention of identity will be considered, which is all the better for practitioners.

By way of aside, the circumstances of the winding up of AIA were not considered in detail but it is worth reminding practitioners that while Regulation 6 of TUPE excludes the transfer of an undertaking, business or part thereof where the transferor is the subject of bankruptcy or insolvency proceedings, this will not apply where the sole or main reason for the institution of bankruptcy or insolvency proceedings in respect of a transfer is the evasion of an employer’s legal obligations under TUPE.