An Advocate General (“AG”) of the European Court of Justice (“ECJ”) has considered whether a transfer of an undertaking occurred where a contract to operate a Spanish music school was terminated and another contractor resumed the service five months later. Under the EU Acquired Rights Directive (“ARD”), a transfer of an undertaking occurs where there is a transfer of an economic entity which retains its identity. An economic entity consists of an organised grouping of resources (i.e. persons and assets), organised with a view to carrying on economic activity.
Facts of the case
Mr Colino Sigüenza worked as a music teacher at the Municipal Music School of Valladolid (“the School”) which was managed by the Ayuntamiento de Valladolid. In 1997, management of the School was outsourced via a tender process and the contract was awarded to Músicos y Escuela (“Músicos”).
Músicos was a small private company set up expressly to tender for this contract. It did not have, or seek, other clients. Músicos took over the facilities, premises and resources for providing the services, recruited some of the staff of the Ayuntamiento (including Mr Sigüenza) and continued the School’s activities.
Músicos won successive tenders for the same contract over the next 15 years. Its final contract was due to continue until 31 August 2013, but during the 2012/13 academic year the School suffered a sharp decline in pupil numbers and became unprofitable. In April 2013, after a collective dismissal procedure, Músicos dismissed its entire staff and ceased all activities. The company was wound up in July 2013. The employee representatives brought an unsuccessful legal challenge to the dismissals.
Following Músicos’s collapse, In-pulso Muscial Sociedad Cooperativa (“In-pulso”) was awarded the contract to take over management of the School. The new contract began in September 2013. In-pulso was given use of the same premises, instruments and resources for managing the School, but employed entirely different staff.
Mr Sigüenza and his former colleagues claimed unfair dismissal against Músicos, the Ayuntamiento and In-pulso. The claims were dismissed for jurisdictional reasons and on the basis that there had not been a transfer of an undertaking. The fact that the activities were not resumed until five months after the dismissals was persuasive evidence there has been no transfer. Mr Sigüenza appealed and the court referred the case to the ECJ for a preliminary ruling on the following questions:
- Was there a transfer of an undertaking for the purpose of the ARD?
- If so, were the dismissals of Músicos’ employees for economic, technical or organisational (“ETO”) reasons entailing changes in the workforce, or were they caused by the transfer and therefore void?
The AG’s opinion
The AG considered that there had been no transfer of an undertaking as there had been no transfer of an economic entity which retained its identity.
Músicos’ economic activity was managing the School. Each time that the contract with the Ayuntamiento came to an end - in the case of the final contract, on 31 August 2013 - the activity of Músicos also ended and it ceased to be an entity within the meaning of the ARD. When In-pulso resumed management of the School in September 2013, Músicos as an entity had already ceased to exist, so there was no entity capable of having been transferred.
In addition, said the AG, Músicos lacked permanence. It was limited to performing only the contract in force at any given time. When a contract ended, the link between the elements of the company became too loose for it to be considered an economic entity. Músicos’ successive contracts did not alter this analysis.
Even if there had been an entity before the transfer, the AG’s view was that it did not retain its identity when In-pulso resumed the activity. This was having regard to the factors established by previous ECJ decisions: the type of undertaking; whether tangible and intangible assets transferred; whether the majority of staff were taken over by the new employer; whether customers transferred; the degree of similarity between the activities before and after the transfer; and any period for which the activities were suspended.
The AG pointed to the fact that, while the tangible assets in this case (premises, instruments, classrooms etc) were transferred, none of the staff were taken on and neither was (intangible) management of the School. Músicos stopped running the School in April 2013 and In-pulso only resumed the activity in September 2013; it did not take over Músicos’ contract, but was awarded a new one for a different period of time.
The AG acknowledged that temporary inactivity between service providers does not necessarily preclude a transfer, but the significance will depend on its relevance for the particular activity. This would be a matter for the domestic court to decide.
As for whether the dismissals had been for an ETO reason, even if there had been a transfer, the AG considered that economic reasons (the eventual insolvency of Músicos) were the true reason for the dismissals rather than the transfer. There was no causal link between transfer and dismissals.
The AG’s opinion could be summarised by his statement that the ARD “concerns transfers but does not provide for ‘resurrections’”. It remains to be seen whether the ECJ will follow this approach, but on these facts there seems little to criticise.
This case would be analysed somewhat differently in the UK under TUPE’s rules on service provision changes, given there is no requirement for a transfer of significant assets or a major part of the workforce. Nonetheless, the substantial gap in the provision of services would still potentially sit uneasily within the TUPE test for a service provision change.