For Korean companies encountering the European employment law system for the first time, a number of its features will be familiar. However, the unique way in which law has developed across Europe means that although there are common themes, the implementation of laws varies from country to country and, therefore, specialist advice and guidance is often needed.
There are 28 countries in Europe that are member states of the European Union (EU).
As a condition of EU membership, each European member state must implement the
employment legislation passed by the European Parliament. However, each member state
has a degree of flexibility on how it chooses to implement EU legislation, and that means,
inevitably, differences have arisen in the employment law framework in each member state.
In addition, differences in implementation and approach are apparent between countries
that have been EU member states for a number of years and those that have recently joined
(with the former typically having a more sophisticated approach to employment legislation
and employee protection). Those differences mean companies operating in Europe can find
the employment law landscape a challenging one.
Recently, key European countries have implemented changes to their employment laws in
response to the economic downturn and in an effort to remove bureaucracy and stimulate
business. While generally being ‘employer friendly’, these changes mean that even companies
that are familiar with the European employment law regime may find it difficult to keep up
to date with the latest developments.
As a starting point, companies operating in Korea will find the continental European system
of employee representation through trade unions similar to the structure that exists in Korea.
Likewise, the legislation governing minimum pay and maximum working hours, the wideranging protection against discrimination and the process requirements to be followed
when laying off staff and when acquiring employees in connection with an asset sale.
However, there are other aspects of European employment law that are very different
from the Korean model, which may give rise to some unexpected hurdles or obligations.
This guide gives an overview of some of the key aspects of employment law that Korean
companies may encounter when acquiring European businesses or when employing staff
in Europe. Acquisitions – issues to expect
Employee works councils and trade unions, which represent collectively the views of
employees, are a common feature across much of Europe. Trade unions are independent,
external organisations representing employees within a certain industry or business sector.
Works councils, meanwhile, are internal employee representative bodies usually made up
of elected employees.
Works councils have the right to give advice or ‘opinions’ with respect to significant
management decisions proposed by a company. They may also have the right of
approval in relation to certain proposed decisions regarding employment benefits
and working conditions.
In addition to ‘local’ (ie country-specific) works councils, many companies operating
in Europe also recognise European Works Councils, or EWCs. EWCs must be consulted
on matters that have transnational significance, such as headcount reductions or
transactions that affect employees in more than one EU member state.
The significance of EWCs, local works councils and trade unions in Europe in the context
of a potential acquisition lies in the fact that consultation must often be carried out by
the seller with those bodies before acquisition documentation being signed. Their involvement
can in some circumstances delay or block transactions.
In the Netherlands, for example, if a works council exists, it must be consulted and asked
to give an opinion before any contracts or letters of intent are entered into. If the works
council advises against the proposed transaction, then a one-month waiting period must
be observed before the transaction can proceed. During that period, the works council
could lodge an appeal in court, claiming that the employer’s decision to proceed with
the transaction is unreasonable. A finding in the works council’s favour by the court
could block the transaction.
The interplay of EWC and local works council or union consultation processes must be
handled carefully to make sure relevant obligations are observed and timings are met.
It is typical for consultation with the EWC to be handled first with local consultation
processes following, but local laws in some European countries may require an
alternative approach to be adopted. This is an issue that must be considered early
in any transactional process.
In the early stages of an acquisition, companies – particularly listed companies with
obligations to formally announce price sensitive information – will often be concerned
about confidentiality and may therefore be reluctant to share information with employee
representatives, particularly where transaction documentation is yet to be signed.
Confidentiality is not generally regarded as a sufficient justification to enable a company
to avoid sharing information with a works council or trade union in order to comply
with the relevant legal obligations.
The confidentiality obligations to which employee representatives are subject (once
information has been shared) vary between European jurisdictions. In some countries
employee representatives are subject to stringent confidentiality requirements but in
others, the existence of confidentiality obligations (and the enforcement of any obligations)
is limited. There is often an assumption that information, once shared with employee
representatives, will soon find its way into wider circulation. This is a challenge often
faced by companies contemplating transactions in Europe, and a particular issue for
listed companies undertaking large transactions. Because of the potential impact on transaction timetables (or even the ability of the
transaction to proceed), the jurisdictions where works council consultation obligations
are regarded as most significant are France and the Netherlands. In addition to potential
delays, non-compliance with consultation obligations in France can lead to personal criminal
liability for a company’s directors. In other jurisdictions, although consultation with employee
representatives may be required, the penalties for non-compliance are usually only financial
and criminal liability is not common.
There are a number of practical options that can be considered by investors to deal
with consultation obligations. One possible route is for the buyer to make an irrevocable
offer to buy the relevant company, which is not accepted by the seller until consultation
has been completed. We advise regularly on these sorts of structures and on
Automatic transfer of employees
Another feature that is common across Europe (and which is similar to a certain extent
in Korea) is the automatic legal transfer of employees when a business is sold. Employees
who are employed within a transferring business will automatically become employees
of the entity acquiring that business and liabilities in relation to those employees will
transfer to the buyer. In Korea, employees of the transferring business have a right to
transfer with their working terms and conditions and liabilities, although they cannot
be forced to transfer.
Following the transfer of their employment, employees’ terms and conditions are protected,
which can make it difficult to harmonise the incoming employees’ terms with those of
the existing workforce. While in Korea a disadvantageous change to employees’ terms and
conditions can be implemented if the majority union or a majority of employees consent,
in Europe it would be typical to need the consent of each individual employee. In some
cases, even individual consent will not be sufficient and an employee who consents to
a detrimental change in his terms and conditions following a transfer (perhaps in return
for another, more favourable, change elsewhere in his contract) could later ‘cherry pick’
his terms – ie retain the benefit of the favourable change but argue that the detrimental
change is void. This is a particular difficulty in the UK.
In addition, employees are protected from dismissal in connection with a transfer to
a new employer. Although it is possible to take advantage of the synergies created by
business acquisitions, care must be taken that any dismissals are implemented fairly
and do not target only the incoming workforce.
In the UK, in particular, pension schemes can be a significant issue. Defined benefit
pension schemes, although declining in popularity, are still operated by a number of
companies in the UK. Like in Korea, these schemes guarantee employees a certain level
of pension on retirement. They are expensive to run and carry a high level of funding risk.
The actuarial bases used to value the assets and liabilities of defined benefit pension
schemes mean that these schemes often have significant deficits (running into many tens
or hundreds of millions of pounds) and the acquisition of a company with a defined benefit
pension scheme is often seen as unattractive. Under the legislation governing these schemes,
significant deficits can be triggered on transactions (where, for example, a target company
is leaving the seller group’s wider pension scheme) – this is a big issue for due diligence
on transactions involving UK companies.
In addition to the potential financial implications of acquiring a company with a defined
benefit pension scheme (or with a history of participation in such a scheme), the potential
involvement of the UK Pensions Regulator and pension scheme trustees, who are responsible
for ensuring the security of members’ benefits, can affect on the timing of transactions.
Defined benefit pension schemes are also present in countries such as the Netherlands and,
to a lesser extent, Spain. Significant costs may arise if purchasers are required to set up
replacement defined benefit pension arrangements for employees. Share schemes
Companies in Europe often provide access to share award schemes or option schemes
as part of their employee incentive arrangements, enabling employees to acquire shares
in their employing company or a parent company. This is particularly the case where the
parent company is US based. Share options or awards may not be available to the whole
employee population, but may be reserved just for senior management. They can be
a valuable and important part of the remuneration package for key employees.
Buyers must consider the consequences of acquiring businesses with a history of employee
participation in share plans. The ‘leaver’ provisions applicable to employees on their exit
from seller group share plans must be understood, and there may be tax consequences
associated with employees’ participation in such plans. In addition, the buyer may be
obliged (either contractually, or from an employee relations perspective) to replicate
schemes following completion of a transaction.
If establishing and operating a share plan is regarded by a buyer as unattractive or
impractical, it could consider establishing a cash-based incentive plan as an alternative.
Legal and tax issues for incentive schemes vary across Europe, and specific advice is likely
to be required.
Employing staff in Europe
Countries such as Italy, Spain, France and Germany impose on companies over a certain size
a requirement to employ a minimum number of disabled employees. The position is similar
in Korea, where employers must employ a minimum number of disabled employees or pay
a fine. In the Netherlands, Belgium, France and the UK, by contrast, no such ‘positive
discrimination’ obligation exists, though financial incentives may be offered to Belgian
employers that hire workers with disabilities.
Pre-hiring medical examinations are not mandatory in most of Europe, except in France.
In fact, employers must take care that any requirement for an employee to undergo
a medical examination is not seen as discriminatory, for example, on the grounds
Bonuses and participation in profits
Several European countries have a requirement for a 13th (and in some cases, 14th) month’s
salary payment to be made to employees by way of bonus payment.
In France there is a statutory requirement for companies over a certain size to allow
employees to participate in the company’s profits, and in other countries collective
agreements with trade unions or works councils may set out the terms of incentive
arrangements that an employer must offer.
The award of discretionary bonuses, and the size of these bonuses, has been an issue that
has featured strongly in European employment case law in recent years, as employees try
to argue that a discretionary bonus is, in fact, a contractual entitlement. Care must be
taken when drafting the rules of any discretionary bonus scheme and when operating such
a scheme – perverse or irrational exercises of discretion will generally be struck down by
the courts, even where a scheme’s rules apparently give total discretion to the employer.
Termination of employment
Like Korea, countries in Europe do not operate an ‘employment at will’ system, and
as a general rule, there must be just cause for any dismissal. However, the process for
effecting dismissals and the consequences of getting the process wrong, differ in some
respects between Europe and Korea. In addition, termination of employment is an area
where there are some significant variations between different European countries. Generally, an employer will be able to dismiss an employee without notice if the employee’s
conduct justifies this (eg serious misconduct) or if it would be unlawful for the employment
relationship to continue. In other circumstances, notice periods must usually be observed
or payment made in respect of the applicable notice period. These notice periods may be
specified in the relevant employment legislation or in an individual’s employment contract.
Notice periods may vary from one week up to one year or more, depending on the seniority
of the employee. Countries such as Belgium used to distinguish between blue-collar and
white-collar workers, and certain employment rights differed depending on which category
an employee fell into although a new law has recently entered into force harmonising the
notice periods that apply to these two categories of workers.
Italy requires employers to operate a severance fund for employees and, like in Korea, Italian
employees are entitled to receive their severance payment even if they are dismissed with just
cause. Most other jurisdictions do not operate severance funds of this nature but do provide
for statutory payments to be made to employees in the event of redundancy (redundancies
are discussed further below).
In jurisdictions such as the Netherlands, an employer is unable to unilaterally terminate
an employment agreement, other than in exceptional circumstances. Instead, the employer
must either ask the court to terminate the employment agreement or must apply to the
Dutch labour authorities for a permit to serve notice. Under proposed labour market
reforms, from July 2015 this process will be replaced with a one-route system, where
the route to be followed depends on the reason for dismissal. In Germany, meanwhile,
an employee cannot be dismissed unless the works council (if any) has been consulted.
In most European countries, in common with Korea, even if an employer observes
the relevant notice period for dismissal, the reason for the dismissal is still relevant.
Lack of a fair reason (eg poor performance, misconduct or economic reasons) could
lead to the employee being reinstated or awarded damages. In addition, a strict procedure
must often be followed to render a dismissal ‘fair’. Recent labour market reforms have
affected this area of the law and have been received positively by employers. In Italy, for
example, the availability of reinstatement as a possible remedy is now more limited than
previously, thereby reducing the negotiating power of employees in termination discussions.
European law recognises the concept of ‘redundancy’ as a potentially fair reason for dismissal.
The term redundancy in Europe broadly describes the dismissal of an employee for business
reasons – for example, if the employer is shutting down a workplace or making efficiency
savings by reducing the size of the workforce. This is similar to the ‘urgent business necessity’
test applied in Korea but may be slightly broader (for example, an employer in Europe will
not necessarily have to suffer financial losses over a significant period to argue that there
is a need for redundancies).
Where a number of redundancies will be made, collective consultation obligations and time
periods apply. Like in Korea, if an employer proposes to make redundancies, it must inform
and consult employee representatives (in Europe this could include a works council, trade
union or other elected representatives) before making any dismissals. The number of
proposed redundancies that triggers the collective consultation obligation varies, but
can be as low as two.
The consultation period ranges from around 30 days to several months. In some European
countries, failure to comply with the collective consultation obligations will render the
dismissals void and employees will be reinstated. The potentially lengthy and uncertain
period of redundancy consultation in countries such as France has in the past been a concern
for employers. However, recent labour market reforms have introduced a fixed time limit
on such consultations.
As in Korea, some jurisdictions require the labour authorities to be notified before redundancies
take place. Restrictive covenants
Most European jurisdictions, like Korea, recognise post-employment restrictive covenants
(eg preventing employees from working for competitors) as valid and enforceable, provided
that the duration and scope of the restriction are reasonable. In several countries, such
as Spain, Italy, France and Germany, the employee must be compensated in exchange
for observing any restrictive covenants.
The post-termination restriction that may be enforced varies between European countries
and in some cases is significantly longer than the six to 12 months that would be typical
in Korea. In the Netherlands and the UK, 12 months is usually considered the maximum
non-compete restriction that is enforceable. In Spain and Germany, however, the maximum
is two years, while in Italy, ‘ordinary’ employees can be restricted for three years and
executives for five.
An increasing number of Korean companies are considering a move into the European
market, where they may encounter European employment law for the first time.
The complexities of European employment law can be challenging to negotiate, even
for companies that are familiar with the system. For companies entering this field for
the first time, it can be a daunting prospect.
Freshfields’ employment lawyers throughout Europe are happy to provide further information
on the topics in this guide, and to help clients to understand and negotiate the employment
issues that arise when doing business in Europe.
We also track and advise on the changes and developments in European labour law,
particularly the labour market reforms introduced in a number of European countries
over recent years to alleviate the effects of the economic slow-down.