Transposition of the EU Directive1: The rules of the Directive are mainly implemented in Section 613a of the German Civil Code (Bürgerliches Gesetzbuch).
Section 613a of the German Civil Code covers all existing employment relationships irrespective of whether full-time or part-time, indefinite-term or fixed term, active or on leave of absence as well as apprentices, executive employees (leitende Angestellte) and employees seconded outside of Germany. Independent contractors, civil servants and freelancers as well as managing directors (Geschäftsführer) and managing board members (Vorstand) are not covered.
Section 613a of the German Civil Code broadly covers transactions involving a change in the entity responsible for a business (or part of a business) resulting in a change of employer (in particular an asset sale and transfer) and also applies in cases of mergers, demergers and transfers of assets in accordance with the provisions of the German Transformation Act (Umwandlungsgesetz). Section 613a of the German Civil Code requires the relevant business (or part) to constitute an “economic entity”. Broadly, this requires resources (whether tangible and/or intangible) that are deliberately organized together for purposes of pursuing economic activity of some sort. Section 613a of the German Civil Code does not deviate from the provisions of the Directive in this respect.
Section 613a of the German Civil Code does generally not apply to:
- Stock sales.
- Transfers of assets not constituting an “economic entity” or where the economic entity does not retain its identity. However, the analysis of whether the transfer of assets constitutes an economic entity is fact-specific and highly depended on individual circumstances. Legal advice should always be sought to evaluate whether Section 613a of the German Civil Code does apply.
- Transfers exclusively by act of public authority.
- In compliance with the derogations provided for in the Directive, Section 613a of the German Civil Code applies in insolvency proceedings with regard to safeguarding jobs and the continuity of the works councils. In transfers occurring during insolvency proceedings, the liability of the transferor for claims already arisen before the transfer of undertaking are not transferred to the transferee, e.g., the transferee does not assume pension liabilities towards the transferring employees with respect to the time period prior to the transfer.
Transfer of Employment and Certain Rights and Obligations by Operation of Law
- In General. Employees assigned to the business transfer automatically by operation of law to the transferee at the same time as the business is transferred, unless the employees in question object to such transfer (see “Right to Object to the Transfer” below). The transferee becomes the new employer. As a result, all rights and obligations arising from the employment contracts of those transferred employees, or from the employment relationships more broadly, are also transferred to the transferee, and (except as provided in “The Pension Exception” and “Joint and Several Liability” below) the transferor is released from those obligations by operation of law.
- The Pension Exception. Does not apply in Germany. Under Section 613a of the German Civil Code, rights of current employees to old-age, invalidity or survivor’s benefits under company or group pension schemes outside statutory social security schemes transfer automatically by operation of law to the transferee (also with respect to pension liabilities accrued in the time period prior to the transfer) rendering the transferee fully liable for pension commitments that were initially made by the transferor. Rights of former employees of the transferor remain with the transferor.
- Joint and Several Liability. Both the transferor and the transferee are jointly and severally liable without limitation for all obligations arising from the transferred employment relationship that arose and fell due prior to the date of transfer. Joint and several liability of the transferor with the transferee is limited to obligations arising prior to the transfer but falling due prior to the expiry of one year after the date of transfer. The transferor’s liability for such obligations is prorated for the time prior to the transfer. Transferor and transferee may not deviate from this mandatory liability vis-a-vis the transferring employees, but may arrange for a different allocation among themselves.
- Collective Agreements. The transferee is required to continue to observe the terms and conditions agreed in any collective agreement (i.e., collective bargaining agreements with unions (Tarifverträge) and shop agreements with works councils (Betriebsvereinbarungen)) applicable to the transferred employees on the same terms as the transferor, until the termination or expiry of the collective agreement or the entry into force or application of another collective agreement, provided that the transferee may not amend the terms and conditions for a period of one year after the date of transfer. However, this does not apply if a certain subject matter is governed by terms and conditions of a collective agreement already existing at the transferee, in which case such collective agreement applicable at the transferee supersedes the terms and conditions of the collective agreement applicable at the transferor, even if it contains terms and conditions that are detrimental to the transferring employees.
- Employee Representative Recognition. If the transferred business preserves its autonomy and is maintained as a separate operating unit after the transfer, the status and function of employee representatives (i.e., works council) must also be preserved by the transferee. If only a part of a business is transferred, the transferors works council will retain a transitional mandate (Übergangsmandat) for six months or a remaining mandate (Restmandat) in order to preserve employee rights until the next works council elections.
Specific Employee Protections
- Protection Against Dismissal. The corporate transaction cannot, in itself, constitute grounds for dismissal by either the transferor or the transferee. The termination of the employment relationship of an employee by the transferor or by the transferee due to the transfer of a business or a part of a business is invalid. However, dismissals for economic, technical or organizational reasons entailing changes in the workforce are not prohibited by Section 613a of the German Civil Code. The same applies to other permitted reasons for termination under German labor law. Whether those reasons exist in any particular transaction depends on the facts and circumstances.
- Substantial Changes in Working Conditions. German law does not provide for an obligation to pay severance, even if the working conditions are subject to substantial changes to the detriment of the employee. Instead, the employee has a right to object to the transfer (see “Right to Object to the Transfer” below). Once the employee is transferred, there is no entitlement to severance benefits in case of a resignation. However, in case the transfer of undertaking involves a change in the business operation (Betriebsänderung) (e.g., a relocation or separation of the business operation), the works council may be entitled to demand negotiations on a reconciliation of interests and a social plan, under which the transferring employees may be entitled to compensation for any financial disadvantages of such change in business operation.
- Right to Object to the Transfer. The employee may object in writing to the transfer within a period of one month after having received an employee information letter, including, inter alia, correct and complete information on the legal, economic and social consequences of the transfer for the employees (see “Obligation to Provide Information” below). The one-month objection period only commences upon receipt of correct and complete employee information letter; an incorrect or incomplete employee information letter results in an unlimited objection right of the employees that is only subject to general forfeiture rules. In case an employee exercises the right to object, he or she does not transfer to the transferee and will remain with the transferor, risking that the employment relationship will be terminated by the transferor based on redundancy.
- Contracting Out. In general, a purported waiver by an employee of rights under Section 613a of the German Civil Code is deemed to be invalid.
- Obligation to Provide Information. In deviation to the Directive, both the transferor and the transferee must provide every affected employee with specified information about the transfer in an employee information letter prior to the transfer of undertaking, whereas no obligation to inform the trade unions exists. Such employee information letter is a quite technical and lengthy legal document that must be delivered in writing or by e-mail. As a practical matter, the employee information letter should be delivered at least one month prior to the transfer of undertaking, in order to gain clarity on which employees actually transfer at the closing of the transaction (as the one-month objection period will have generally lapsed). The information required to be provided is (i) the date or proposed date of the transfer, (ii) the reasons for the transfer, (iii) the “legal, economic and social implications” of the transfer for the employees, and (iv) any measures envisaged in relation to the employees. Generally, a “measure” may include limited changes or adjustments to the terms and conditions of employment, changes to work locations or practices, redundancies or administrative changes.
- Obligation to Consult. Where the transferor or the transferee envisages taking “measures” in relation to its respective affected employees, it must notify the competent works council in a comprehensive manner and in good time before a decision about such “measures” has been made. To the extent any such “measures” qualify as a change in the business operation, the employer must consult with the works council about such measures with a view to reaching an agreement on a reconciliation of interests and a social plan. Should an economic committee (Wirtschaftsausschuss) or a representative body for executive employees (Sprecherausschuss) exist, they have to be informed about any “measures” as well.
- Parent Decisions. The obligations to inform and consult apply irrespective of whether the decision resulting in the transfer is taken by the employer or by a parent.
Section 613a of the German Civil Code is generally applicable in cases of a transfer of undertaking from a transferor located in Germany to a transferee located abroad (irrespective of whether the transferee is located within the EU or not). However, if the essential means of production (e.g., real estate, production facilities, business premises) are being transferred to a location of transferee which is a substantial distance (generally more than several hundred kilometers) away from the transferor’s location, a transfer of undertaking within the meaning of Section 613a of the German Civil Code may not be assumed. If the employment agreement does not provide for a choice of law, the agreement will be governed by the law of the transferee after the transfer.
 Directive 2001/23/EC.