For Japanese 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.
This guide gives an overview of some of the key aspects of employment law that Japanese
companies may encounter when acquiring European businesses or when employing staff
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 is 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 their enforceability. Automatic transfer of employees
Another feature that is common across Europe 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.
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. In Europe it would be typical to need the consent of each individual
employee to implement a disadvantageous change to employees’ terms and conditions.
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 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. 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 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.
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. 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
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 of disability.
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
Countries in Europe do not operate an ‘employment at will’ system, and as a general rule,
there must be just cause for any dismissal. 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 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, 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. 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. If an employer proposes 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. Some jurisdictions require the labour authorities to be notified before
redundancies take place.
Most European jurisdictions 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. 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. Conclusion
An increasing number of Japanese 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.