New principal Supreme Court judgment on release of obligation to work in connection with business transfer

The Supreme Court has just taken a position on a principle question concerning the release of an employee from the obligation to work prior to the date of transfer of the company.

42 employees were chosen to be transferred to a buyer from a company, which was declared bankrupt, together with the activities in the company. The acquisition date was agreed to be 30 December, 2011. An employee who was also elected as the shop steward, was not among the selected employees and was consequently terminated from his position on 27 December 2011, and at the same time released from the obligation to work during the notice period by the receiver of the bankruptcy estate. The notice of termination expired only after the acquisition date.

Termination as a result of business transfer

It follows from Article 4 of Directive 2001/23/EC (the Acquired Rights Directive) that the transfer of the undertaking, business or part of the undertaking or business shall not in itself constitute grounds for dismissal by the seller and the buyer. The rules do not stand in the way of dismissals that may take place for financial, technical or organisational reasons entailing changes in the workforce. This provision is implemented in Danish law by section 3 (3) of the Business Transfer Act.

Back in 1994, in the Dethier Équipement case, the European Court of Justice ruled that employees unjustifiably terminated by the transferor shortly before the transfer, were still considered to be employed, even if the employee had not been taken over by the buyer after the transfer of the company. The employee could then make a claim against the buyer for unfair dismissal etc., even if the employee was terminated by the seller. This is due to the fact that, according to the directive and the Danish Act, the buyer automatically enters into the employment conditions of the employees employed in the company at the time of the transfer of business.

Release from obligation to work

Employees who have been effectively and definitively released from the obligation to work prior to the acquisition date have not been considered as being in an existing employment relationship in the sense of the Business Transfer Act, even if the termination notice had not expired on the date of acquisition.

It may be questioned whether this practice has been consistent with the effective implementation of Directive 23/01/ EC, when the employment relationship continues, regardless of the employee’s being released from the obligation to work. In relation to the duty of loyalty and the obligation to pay salary, there is no doubt that the employment relationship exists until the expiration of the notice of termination.

High Court decision

There was a consensus between the parties that there was a real and definitive free position before the acquisition date.

On this basis, the Danish High Court Eastern Division found that the employee’s employment relationship with the bankruptcy estate as a transferor, did not exist on the acquisition date and that, therefore, the transferee had not entered into the employment relationship.

Supreme Court decision

The Supreme Court also reasoned that, as a rule, the buyer did not enter into rights and obligations in relation to the employee, unless the termination of the employee was in breach of section 3 (3) of the Business Transfer Act. First

As the termination of the employee occurred in close conjunction with the transfer of business, the Supreme Court found that the employee was dismissed due to the transfer of the company.

The Supreme Court also assumed that the employee had extensive experience and could be used in many functions within the company. In particular, considering that 42 of the former employees in the company were taken over the buyer, the Supreme Court found no compelling reasons for dismissing the employee, who was also elected as shop steward.

Against that background, the Supreme Court found that the dismissal of the employee was in violation of section 3 (1) of the Business Transformation Act. Therefore, the buyer was liable for the employee’s claim for pay during the notice period and for compensation for unjustified termination in accordance with Section 2 of the Business Transfer Act.

Comments

The judgment changes the previous legal situation as interpreted by Danish courts. According to the decision from the Supreme Court, there is still room for previous case-law, which says that the buyer does not assume obligations towards employees who have been terminated and released from the obligation to work prior to the date of acquisition in cases where the termination is justified by financial, technical or organisational reasons that entails changes in the work force.