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An introduction to European employment law for Japanese companies

Freshfields Bruckhaus Deringer

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European Union, Japan February 25 2014

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 

in Europe.

Acquisitions – issues to expect

Collective consultation

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.

Pension schemes

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.

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

Hiring

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 

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 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.

Redundancies

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.

Restrictive covenants

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.

Freshfields Bruckhaus Deringer - Kathleen Healy, Akiko Yamakawa, Holly Insley, Rob Van Eldik, Laura Chapman and Jean-François Gerard

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