13-02-2024
Carving out businesses or business units may trigger mandatory employee rights that need to be observed
Employee rights during carve-outs
Divestments of businesses or business units may give rise to mandatory employee rights that must be respected and taken into account during the evaluation phase. At times, employee rights can even be triggered without the involved stakeholders' knowledge.
Introduction
Carve-outs often involve the separation of a company’s business or business units. This is predominantly done by creating a new legal entity, for example to prepare the sale of such an entity or to facilitate an IPO. Thus, carve-outs ultimately involve the transfer of a business or business units from one legal entity to another legal entity. Carve-outs can also occur within a group.
Whenever certain functions, departments or service units are separated and ultimately transferred to another entity, the question arises whether this constitutes a so-called ‘transfer of business’ from a Swiss employment law perspective.
Gaurav Bhagwanani
Expert,Head Employment Law Services
KPMG Switzerland
Transfer of business or a business part?
According to case law a business is basically defined as an organized structure that is equipped with human, material and immaterial resources which enables it to achieve its work objectives and which enjoys a certain degree of autonomy, without this autonomy having to be of a financial, economic, administrative or legal nature. A business part is essentially deemed to be an auto-organizational service unit without its own economic independence.
In a recent landmark case, the Swiss Supreme Court held that each postal office qualifies as a business, which has served as a guideline ever since. In addition, the business (or part thereof) needs to retain its identity when transferred (e.g. service/product offering, organization).
Where businesses or business parts are effectively transferred and their identity is retained, this may give rise to certain employee rights. In one case, the termination of a restaurant lease by the owner and the award of the lease to a new tenant was deemed a transfer of (restaurant) business between the two tenants, even though they had no contractual relationship with each other. This illustrates that a transfer of business may occur even without a mutual agreement or knowledge of the stakeholders involved (e.g. possibly in outsourcing arrangements).
In the case of a ‘transfer of business’, the associated employment relationships are generally transferred by law (i.e. automatically) to the new employer (e.g. new entity).
What are the most important employee rights to consider?
Depending on the impact of the transfer on the affected employees, they may have several rights. The most important question is whether the transfer leads to changes in the employment conditions of the affected employees (e.g. salary, place of work, insurance solutions, function, etc., including terminations).
In any case, employees must be informed before the transfer about 1) the reason of the transfer and 2) the legal, economic and social consequences.
However, should employment conditions change upon transfer, it is mandatory to consult the employees prior to the transfer. The law is silent on form and details of such a consultation processes, which leaves many questions unanswered in practice.
As a rule of thumb, the consultation period should be at least two weeks. Depending on the circumstances (e.g. complexity of changes, presence of works’ council, number of employees affected, etc.), the timeframe may be shortened or needs to be extended. Naturally, time needs to be added for preparation, evaluation and decision-making. In particular, the consultation must take place before the (final) decision on the transfer and the changes is made.
In addition, employees have the right to reject the transfer, in which case their employment will terminate upon the transfer, or if transferred to the new entity, after the statutory notice period has expired.
Moreover, if termination notices are issued in connection with the carve-out and certain thresholds are reached, mass redundancy procedures would need to be observed.
Finally, if the regulations on the transfer of business are deemed to have been deliberately circumvented, then any related notices of termination may be deemed to be null and void. Further rights, e.g. based on collective labor agreements, remain reserved.
Transferring a business to a foreign entity: do the same rules apply?
When a business or part of a business of a Swiss entity is transferred to a foreign entity, the majority of the legal scholars argue for the application of the Swiss transfer of business rules, regardless of which law actually governs the employment relationships concerned (although the vast majority will typically be governed by Swiss law anyway). Therefore, even in an international setting, these rules must generally be complied with, while local laws abroad must also be taken into account.
Summary
Before carrying out a carve-out, it is important to duly assess whether a business or part of a business is present and whether transferring it would trigger any mandatory employee rights. If mandatory employee rights are likely to be triggered, the stakeholders involved must consider these early on in the evaluation phase in order to manage these rights and avoid unexpected surprises later on.