France: Outsourcing And Transfer Of Undertakings Under French Law: Protection Of Employee Rights And Obligations Towards The Works Council

There is a long tradition of transfer rules under French law. Since 1928, French law has been providing for the continuation of employment agreements in the case of a transfer of the employer’s "undertaking" to another employer.

The purpose of this rule is to protect employment: whenever an undertaking is transferred to a different owner, the new owner must keep the employees who used to contribute to the running of the undertaking.

The French Labor Code provides that "in the event of a change in the employer’s legal situation, notably, as a result of inheritance, sale, or merger of the undertaking, a change in its legal form or its incorporation, all employment contracts in force on the date of this change in the employer’s legal situation continue between the new employer and the undertaking’s staff".

This rule has been extended by French case law to similar fact patterns of transfer of undertakings not expressly provided for by the Labor Code.

Similar provisions were enacted at the European level in 1977. Current European rules on employee transfer are now contained in Directive #2001/23 of March 12, 2001. (The original Directive 77/187/EEC was subsequently amended by Directives 98/50/EC and 2001/23/EC). To a large extent, French transfer rules were already in line with European rules when the latter became binding in France. Only slight changes had to be made in order for French law to be in line with European rules.

This presentation will first address the notion of transfer of an undertaking, and secondly, the legal obligations before and consequences of the transfer of an undertaking.

In the case of a share transfer, the legal entity of the employer is not modified. Only the shareholders change. Therefore, in this type of situation, there is no "transfer of undertaking" within the meaning of the French transfer rules.

The typical case scenario where French transfer rules apply is the situation where the assets of an undertaking are sold to a new owner ("cession de fonds de commerce"), which requires the existence of a sale-and-purchase agreement to be entered into between the seller and the buyer.

However, French transfer rules can also apply in situations where the transfer is not achieved through an agreement between the former and the new employer. Hence, the requirements for a transfer of an undertaking can sometimes be met in the following case scenarios:

• 1^st case scenario - A company outsources a line of business to a service provider: there is an agreement between the transferee and the transferor;

• 2^nd case scenario - A company terminates an outsourcing contract and concludes a new outsourcing contract with a new service provider: no agreement between the transferee and the transferor;

• 3^rd case scenario - A company terminates an outsourcing contract and takes over the line of business performed by a service provider: no agreement between the transferee and the transferor.

Where the requirements for the transfer of an undertaking are met, the employees are transferred to the new employer, even if the latter is a state-owned entity.

For example: A city decides to terminate an outsourcing contract for the running of a harbor with a private company and runs the harbor itself.

However, the transfer of employees raises an issue when the new employer must propose a public law employment agreement ("un contrat de travail de droit public"), which usually entails radical changes to the previous contractual terms and conditions, which the employee is not entitled to refuse.

In addition to the situations of transfer of assets expressly listed under the relevant provision of the French Labor Code (i.e. inheritance, sale of an undertaking, merger or incorporation of an undertaking), the notion of "transfer of an undertaking" has been extended by the French Supreme Court ("Cour de Cassation") to similar situations.

In doing so, the French Supreme Court defined the general notion of a transfer as "a transfer of an autonomous business entity that keeps its identity and whose business is continued after the transfer" ("transfert d’une entité économique autonome conservant son identité et dont l’activité est poursuivie ou reprise": Empl. Div. Supreme Court, March 16, 1990, n°86-40.686).

The "autonomous economic entity" is defined by French courts as "an organized grouping of persons and tangible or intangible assets allowing the performance of a line of business that pursues its own objective" ("un ensemble organisé de personnes et d’éléments corporels ou incorporels permettant l’exercice d’une activité économique qui poursuit un objectif proper") (Empl. Div. Supreme Court July 7, 1998, n°96-21.451).

Tangible assets = buildings, equipment, goods, inventory, manufacturing machines, etc.

Intangible assets = customers list, patent, trademark, commercial lease, etc.

There is no strict "autonomous economic entity" test. In order for an economic entity to exist, the key elements associated with the undertaking activity in question must be present. For example, in a labor-intensive business, the key element may simply be the function itself; there may be no assets associated with the undertaking. The French Supreme Court thus upheld the existence of a transfer in a case where a supermarket took over an undertaking promotion activity previously run by a subcontractor on the grounds that the supermarket had taken over most of the qualified employees associated with this business promotion activity (Empl. Div. Supreme Court September 24, 2002, #00-44.923).

An undertaking that is ancillary to the main business activity can "pursue its own objective", according to case law. The outsourcing of support services can therefore raise a transfer of undertaking issue if a specific team is assigned to the support activity concerned, with its own employees entirely dedicated to that activity and its own supervisors, equipment, and objectives. For example, the French Supreme Court held that the outsourcing of a computer hotline assistance to a service provider was a transfer of undertaking since "this department had specific means in terms of staff and equipment and tended to have its own goals and results" (Empl. Div. Supreme Court January 23, 2002, #02-17.642).

If a different undertaking activity is run by the transferee, there is no transfer of undertaking. For example, in a case where a commercial lease had been transferred, the Supreme Court held that the employees did not have to be transferred since the transferor sold fabrics whereas the transferee sold clothes (Empl. Div. Supreme Court May 9, .1989, #85-43.623).

Similarly, if the transferred undertaking is run in a totally different manner by the transferee, (i.e. different manufacturing, distribution, management processes), there is no transfer of undertaking under French law. For instance, in a situation where the sale of cars of a certain brand shifted from a sole dealership to multiple dealerships, the French Supreme Court held that the change in the manner of running the undertaking of selling these cars excluded any transfer of undertaking (Empl. Div. Supreme Court May 28, 2003, #02-41.999 and #02-42.008).

In some instances where the transfer is not compulsory, it is sometimes rendered mandatory by the relevant branch collective bargaining agreement.

Moreover, where the requirements for the transfer of an undertaking are not met, employees can nevertheless be transferred by agreement of both the transferor, the transferee and the employees.

Whenever there is no transfer within the meaning of the Labor Code, the new employer of the concerned transferred employees is not bound by the collective rules in force within the transferor's undertaking, except insofar as the same extended branch collective bargaining agreement applies to both the transferor and the transferee.

Both works councils within the transferor and the transferee must be informed and consulted before the transfer. Although, ultimately, said works councils are not entitled to object to the transaction triggering the transfer, it is essential to abide by this consultation requirement since non-compliance with consultation rules would allow the concerned works councils to obtain a court order barring the transfer and/or file penal actions.

As a result of the transfer, all contractual terms and conditions in force immediately before the transfer will remain in force after the transfer. On the other hand, collective terms and conditions (e.g. rules that flow from a collective bargaining agreement) enjoy a reverse legal treatment: as a general rule, collective terms and conditions in force within the undertaking immediately before the transfer are terminated after the transfer. French law however provides that they remain in force for a transition period during which the new employer is requested to enter into an agreement with employee trade unions setting forth new terms and conditions, failing which the new employer will remain bound by some of the previous collective terms and conditions vis-à-vis the transferred employees.

Prior information and consultation of the transferor and the transferee’s respective works councils

a) The rule

Both the transferor and the transferee must inform and consult their works council prior to the transfer.

Each works council must be informed and consulted as soon as the undertaking transfer project is sufficiently precise for them to be in a position to give their opinion on this project, and necessarily before the project becomes final and may no longer be amended.

Each works council must be informed and consulted on the transaction per se that will trigger the undertaking transfer as well as on possible consequences for the transferred employees with respect to their terms and conditions of employment.

Yet the opinion given by the works council in the information and consultation process is not binding on management. Even if the works council strongly objects to the project, management is free to decide not to amend it, and proceed with its implementation as is.

Any non-compliance with this consultation rule could result in criminal sanctions for management and the company. The works council can bring a penal action against the CEO/manager or any other person acting on his/her behalf on the grounds that he/she committed a "délit d’entrave" (a criminal offence known as "hindrance to employee representation rights"). Such "délit d’entrave" can give rise to a sentence of up to one year’s imprisonment and/or a fine of up to €3,750. The company itself could also be sentenced to a higher fine (up to 15 times €3,750, i.e. €56,250) on the basis of the same offence.

In addition to penal sanctions, the works council may request, in the same legal action, that management and/or the company be ordered to pay damages in compensation for the lack of consultation.

In a separate lawsuit for a summary civil judgment, the works council can request a court order barring management from implementing the transaction as long as the transferor and the transferee's works councils have not been properly informed and consulted.

When management has already started to implement the project, the court will thus order it to stop the project immediately and to properly inform and consult the works council, subject to possibly high late penalties for each day the company has not complied with the court’s ruling. Only once it has complied with the court order will the company be in a position to start the project all over again.

Although European rules provide that in the absence of employee representatives, each employee to be transferred must be informed prior to the transfer, there is no such provision under French law. For obvious practical reasons, however, and in compliance with European rules, it is useful and recommended, at least when there is no works council, to inform each concerned employee before the transfer that he/she will be transferred to a new employer.

The French transfer rule is a matter of public policy. Hence, the continuation of an employment contract by virtue of this rule is compulsory for both the transferor, the transferee and the employee. This is why dismissals by the transferor of employees before the transfer for economic reasons are highly scrutinized by the courts that usually rule them null and void on the grounds that they breach the transfer rule.

An employee who is dismissed by the transferor in breach of the transfer rules may choose one of the following two options:

• Option 1: The employee can accept his/her dismissal and be awarded damages for unfair dismissal by the transferor. Moreover, the employee is entitled to file such a lawsuit for damages against both the transferor and the transferee, which will be held jointly and severally liable to pay damages for unfair dismissal.

• Option 2: The employee can ask the transferee to continue his/her employment contract with the transferor, i.e. request reinstatement and payment of back pay from the date of the transfer to the reinstatement date. Such continuation can be requested by the employee filing a legal action for summary judgment.

The employee’s options are however limited if the transferee informs the employee of its intention to continue his/her employment contract before the end of the notice period. Under such circumstances, the employee has no choice but to join the transferee (option 2).

Hence, whenever an agreement is entered into between the transferor and the transferee, it is essential that the transferee obtain (i) a guarantee from the transferor concerning the list of employees dedicated to the transferred undertaking (ii) as well as a guarantee that no dismissals in breach of the transfer rules occurred shortly before the transfer and it is advisable, if possible as a bargaining matter, that (iii) the transferor agree to be solely responsible and hold the transferee harmless in the event of employee lawsuits against the transferee on the grounds of a breach of transfer rules.

In the Katsikas case, the European Court of Justice held that the employees have a fundamental right to choose their employer (ECJ December 16, 1992) and refuse to work for the transferee. However, European rules do not grant the employee the right to be kept by the transferor. They leave each EU member state the freedom to choose what should be the legal consequences of an employee's objection to his/her transfer.

French case law takes the stance that if the requirements for the transfer of an undertaking are met, the employees assigned to the transferred undertaking are not entitled to keep working for the transferor. Their only options are either to resign or work for the transferee. Any refusal to work for the transferee can justify a dismissal for breach of disciplinary duties (i.e., misconduct).

However, there is a slight exception to the public order nature of the transfer rule: Although an employee concerned by the transfer cannot require that the transferor keep him/her, the transferor can, at its own will, specifically agree to keep an employee who should have been transferred. Indeed, the French Supreme Court upholds a commitment by the transferor to continue employing employees who should have been transferred (Empl. Div. of the Supreme Court, January 9, 1985).

The employment contracts of the employees assigned to the transferred entity automatically continue with the transferee by operation of law.

All contractual terms and conditions in force with the previous employer are transferred with the new employer.

E.g.:

• the transferee must carry over the employee’s full length of service with the transferor.

• the transferred employees are entitled to perform the same duties and are entitled to the same compensation levels as with their initial employer.

Conversely, as part of the continuation of employment, the new employer may take into account the employee’s former conduct. The new employer may therefore base a dismissal or disciplinary sanction on recent misconduct committed by the employee during his/her employment with the former employer.

Unless the circumstances under which the amendment to the original employment contract was entered into give rise to a claim of fraudulent avoidance of the automatic transfer of employment contracts, the new employer can have the transferred employees accept such an amendment.

If only part of a company is concerned by the transfer, a prior authorization from the Labor administration is required to transfer employee representatives.

a) General rule applying to collective bargaining agreements:

According to the Labor Code, in the event of the transfer of an undertaking, collective bargaining agreements or company agreements that were in force within the transferor are deemed terminated within the transferee.

This general rule of termination of branch or company collective bargaining agreements is thus the opposite of the rule of continuation of contractual terms and conditions of employment, the rationale being that each employer should be entitled to negotiate with the relevant employee unions specific collective rules adapted to its undertaking.

However, such termination of collective bargaining agreements triggers a specific and fairly complex procedure, which is meant to induce the new employer to negotiate new collective rules that will be binding on the transferred employees rather than simply impose its own rules in lieu of the former rules.

This procedure is as follows:

• within three months following the transfer, negotiations must be launched with a view to drawing up new collective provisions.

• Up until a new agreement is entered into and for a period of at least 15 months (a minimum 3 months' notice period + 12 months from the term of the notice period), the transferred employees continue to be entitled to the collective rights in force with their former employer. In addition, if collective rules are in force with the transferee, the collective rules on the same issue, which are most advantageous to the employees, are binding.

• If no new agreement is entered into within this 15-month period, the concerned collective bargaining agreement or company agreement no longer applies, but the employees maintain their acquired individual rights ("avantages individuels acquis"). Such acquired individual rights are deemed contractual terms and conditions and cannot therefore be terminated without each concerned employee's prior written consent.

The notion of "acquired individual rights" is fairly difficult to grasp, e.g.:

• If a company collective agreement provides for a monthly premium, the amount of which depends upon the employee's length of service, it will be deemed an acquired individual right. However, the amount of this premium will not be increased as the employee accrues more service after the transfer. The amount of this premium for each transferred employee will remain equal to its amount immediately before the transfer.

• On the other hand, provisions that concern employees as a group do not constitute individual rights - e.g., company working time rules or employee representation rules.

• In summary, the termination of collective bargaining agreements in the case of a transfer is subject to a time period, generally of 15 months, during which the terminated agreement survives unless and until a new one is concluded. During this time period, the transferred employees are also entitled to the provisions of collective agreements in force with the transferee. At the end of this time period, if no substitute collective agreement has been entered into, the transferred employees remain entitled to the individual rights that they have acquired under the former collective bargaining agreement, unless an amendment to their employment contract provides otherwise.

The scope of this general rule of termination of collective bargaining agreements must be clearly understood: whenever a branch collective bargaining agreement is in force within the transferor, it will be also in force within the transferee if their main line of business is identical and either the agreement is extended or the transferee is a member of the same employer organization. Under such circumstances, the same branch collective bargaining agreement would simply continue to be in force within the transferee.

According to French case law, a benefit that has become mandatory as a result of a common practice within the transferor is binding on the transferee. Eg. where the former employer used to grant a thirteen month's salary to all employees each year, it is deemed a common practice, which is carried over to the new employer.

Such common practices are carried over to the new employer in the event of a transfer, but are only binding on the transferred employees, not on employees hired by the transferee before the transfer.

Similarly, collective atypical agreements (i.e. agreements not signed with trade unions, but rather with the works council) and unilateral commitments of the employer are also transferred.

However, the new employer may terminate all such rules by complying with a sufficient prior notice of termination to be given to both the employee representatives and each employee concerned.

Although they cannot be addressed in detail herein, it must be stressed that there are several exceptions to this general rule of termination of collective bargaining agreements: there are specific termination rules (i.e. a more straight-forward termination) in the case of a transfer with respect to various types of collective bargaining agreements.

E.g.:

• Mandatory and optional profit-sharing plans:

• Savings plan:

• Optional supplementary retirement scheme:

The Labor Code provides that in the event of a transfer of undertaking, the term of office of the transferor's works council members and trade union representatives is maintained, provided the employee representation body sustains its autonomy after the transfer.

E.g. in the case of a merger, if a transferred company that had a company works council becomes a separate entity or "establishment" ("établissement distinct") within the transferee's company after the transfer, the term of office of the trade union representatives and works council members is maintained: The company works council becomes an establishment works council.

Dismissals for economic reasons after the transfer can be upheld by French courts if the economic reasons are not solely connected to the transfer.

Moreover, successive employers may enter into an agreement providing for any dismissal-related costs to be split. The Supreme Court upheld an agreement whereby the transferor undertook to reimburse the transferee for indemnities covering pay in lieu of notice and severance pay for employees it contemplated dismissing after the transfer. (Employment Division of the Supreme Court, October 30, 1987).

If the transfer of the undertaking is the result of an agreement between the transferor and the transferee, they are deemed jointly and severally liable for all pending payments to be made to the employees. Consequently, the transferee can be held liable for a debt to a transferred employee in connection with work performed prior to the transfer.

However, the transferee can thereafter request reimbursement from the transferor, unless the agreement between the transferor and the transferee provides otherwise.

In any event, the transferee can ask the transferor to guarantee that it made all payments due to the employees in connection with work before the transfer and release the transferee of any liability in the event of claims for such payments from the transferred employees.

In conclusion, the main features of French transfer of undertaking rules are the following:

• 1: prior information and consultation of the concerned works councils is mandatory;

• 2: whenever the transaction triggers a transfer within the meaning of the Labor Code, dismissals for economic reasons before the transfer must be avoided;

• 3: collective redundancies can however be implemented by the transferee after the transfer if they are based on lawful grounds not connected with the transfer;

• 4: as a result of the transfer, generally speaking, individual contract terms and conditions are maintained whereas collective terms and conditions are terminated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.