Transfer of undertaking turns an asset deal into an employment transaction
The purchase of a business can carry its employees and employment obligations with it by operation of law. This note sets out the transfer-of-undertaking analysis for asset deals, carve-outs and integrations, including the distinct pension position.
The asset perimeter is not the legal answer
An asset transaction starts with a commercial perimeter: contracts, equipment, inventory, intellectual property and people. Under art. 7:662 et seq. DCC, however, the employment consequence depends on whether an economic entity transfers while retaining its identity. Where the employer is bankrupt, particular rules apply that require separate analysis. Labels in the asset purchase agreement do not decide that question.
The analysis looks at the activity and the resources that make it possible. Depending on the undertaking, relevant factors include the workforce, management, premises, customer relationships, operating assets, know-how and the continuity of activities after completion. The weight given to each factor varies materially between a labour-intensive service business and an asset-heavy operation.
A carve-out requires particular care because the relevant entity may sit within a wider group operation. The diligence exercise should establish which people are assigned to the activity, how they are managed, what assets and contracts support it, and whether the buyer will continue substantially the same activity. The legal test should be applied to the facts as they will exist at completion, not only to the seller's current organisational chart.
Employees and terms transfer automatically
Where there is a transfer of undertaking, the rights and obligations arising from the employment contracts transfer automatically to the buyer. For a statutory period after the transfer, the seller remains jointly and severally liable with the buyer for obligations under the employment contracts that arose before the transfer. The parties cannot select only the employees they wish to acquire or contract out of the transfer as against the employees. The transfer includes accrued rights and often brings employment-related liabilities that are not visible from payroll data alone.
This is why an acquired workforce often retains a distinct package after completion. The buyer may want a single set of terms across the combined business, but the transaction itself is not a free-standing reason to reduce or harmonise existing terms. A proposed change needs its own lawful basis and process, and the commercial value of standardisation should be assessed against the employment-law risk and integration timetable.
The seller and buyer can allocate economic risk between themselves in the SPA, but that allocation does not change the employees' statutory position. Warranties can address the accuracy of employment information, compliance with applicable terms, disputes and absence exposure. Indemnities can address identified liabilities, while covenants can govern cooperation over consultations, employee communications and the provision of information.
Pensions need a separate workstream
The statute contains important pension exceptions to the general transfer rule. The outcome may depend on whether the transferor has a pension arrangement, whether the buyer has its own arrangement and whether a mandatory industry-wide pension fund applies. These questions cannot safely be answered by treating pensions as another line in the general employee schedule.
A buyer with its own pension arrangement may, subject to statutory conditions, apply that arrangement to transferring employees as well. Where a mandatory industry-wide scheme applies, its scope may determine the outcome. The relevant workstream therefore maps every transferring employee, the applicable scheme, accrued rights, contribution history and the point at which any new arrangement would take effect.
The SPA should address pension information and known underfunding, but it should not promise a result that depends on a statutory scheme or third-party administrator. A specific indemnity may be appropriate where diligence identifies a historical issue. The operational plan should also identify responsibility for employee communication and for obtaining advice from the relevant pensions specialist where the facts are not straightforward.
Dismissal and reorganisation cannot be compressed into closing
The transfer of undertaking itself is not a dismissal ground. The law provides important dismissal protection in this context, so a transaction and a subsequent reorganisation must be sequenced with care. A genuine economic, technical or organisational reason may call for a separate process, but it should not be assumed that it can be implemented as part of the transfer itself.
This has a direct effect on a buyer's integration plan. Headcount assumptions, anticipated cost savings and the timing of new reporting lines should be tested against the restrictions on changing terms and dismissing staff. A transaction that depends on immediate harmonisation or reduction may need a longer operational plan and a more precise price and risk allocation.
The works council may also be involved. The works council's right to advice under the WOR can apply to the transaction and to a later significant reorganisation, which may create distinct advice processes. The employment timetable should therefore be coordinated with the corporate and regulatory timetable, without assuming that one completed consultation covers every subsequent decision.
A decision tree before the SPA is finalised
A workable transfer-of-undertaking decision tree starts with the business activity and asks whether an identifiable economic entity is moving. It then maps the people, assets, contracts and activities that sustain that entity, and considers whether it retains its identity with the buyer. If the answer is likely to be yes, the project should move immediately to employee data, terms, pensions, consultation and integration sequencing.
The agreement should reflect that analysis. The definitions of transferred assets and employees, the closing deliverables, the warranties, the known-risk indemnities and the transition services all need to describe the same operational reality. A generic statement that employment liabilities remain with the seller is rarely a satisfactory substitute for this work.
We advise clients to carry out this assessment before the structure is treated as settled. In asset deals and carve-outs, the transfer test can determine the true perimeter of the transaction and the time needed to integrate it.
Points that decide the outcome
- Art. 7:662 et seq. DCC applies where an economic entity transfers and retains its identity.
- Where the statutory test is met, employment rights and obligations transfer automatically.
- Harmonisation of employment terms needs an independent legal basis and is not achieved by the transfer itself.
- Pensions require a separate statutory and factual analysis.
- The law limits dismissal in connection with the transfer and requires careful reorganisation sequencing.
- The works council's right to advice may apply both to the transaction and to a later significant reorganisation.
Related advice