Outsourcing is a trend. To realise cost savings, a growing number of companies are outsourcing certain activities. At first, mainly ICT-infrastructures and applications were outsourced, but now complete business processes such as salary administration or the functions of a financial department, are being outsourced. This form of outsourcing is often called “business process outsourcing” (“BPO”). BPO fits in with the strategy of many companies which are looking to limit their activities to their ‘core business’, or even only to that part of the core business that is of strategic interest.
An outsourcing transaction is often regarded as a ‘transfer of an undertaking’ within the meaning of the Act on the Transfer of an Undertaking. This may have far-reaching consequences for the legal position of the employees concerned. In this article we clarify when an outsourcing transaction qualifies as a ‘transfer of an undertaking’ under Dutch law and what consequences this will have for the legal position of the employees concerned.
The Act on the Transfer of an Undertaking
The Act on the Transfer of an Undertaking (hereinafter: “the Act”) is part of the Dutch Civil Code and protects employees against dismissal or deterioration of their employment conditions as a result of the transfer of the undertaking (or part thereof) in which they are working. The core of this protection lies in the fact that when a company transfers its undertaking (or part thereof) to a third party, all employees working in this undertaking (or part thereof) will automatically (by operation of law) be transferred to that third party. For clarity’s sake it is noted that only employees who actually work within the transferred part or the transferred department are transferred by operation of law. Employees who, for example, work in other departments but carry out work for the transferred department (such as staff departments) will not, in principle, be transferred by operation of law.
Is an outsourcing transaction a ‘transfer of an undertaking’?
The question is whether an outsourcing transaction qualifies as a ‘transfer of an undertaking’. Outsourcing has many different faces. On the one hand there are outsourcing transactions whereby no personnel or assets but only the activity itself is transferred to the supplier, who will subsequently carry out this activity with his own personnel and business assets (a so-called ‘bare outsourcing’). On the other hand, there are transactions whereby an entire part of the company is transferred to the supplier, including business assets and personnel. In the latter case there certainly is a ‘transfer of an undertaking’. In the first case, this will depend upon the circumstances of the case. Where does the boundary lie?
First, it must be determined whether the part of the company that is being outsourced is a ‘part of an undertaking’ within the meaning of the Act. Often this is not easy. According to the Dutch legislator a part of an undertaking is ‘a more or less independent part of the business activity with which certain employees or a certain group of employees are connected’. In case law one can find the following examples: the photo department or repair department of a department store, the transport department of a factory and the canteen or cleaning services of a company. Other obvious examples are the IT department or network operation and management department.
Moreover, it is important to know whether the identity of the part that is outsourced will be maintained after the transfer. This is particularly the case when the exploitation of this part will be continued in the same way (in an outsourcing transaction this usually is the case). A number of other factual circumstances should also be taken into account, such as the nature of the undertaking involved, whether or not business assets or personnel are being transferred and the extent to which the activities performed before and after the transfer correspond with each other. As a consequence of their abstract character these criteria only give limited guidance in answering the question whether the transaction qualifies as a ‘transfer of an undertaking’. Case law of the European Court of Justice however shows that the mere transfer of activities and a substantial part of the personnel (particularly in the labor-intensive sectors) may imply that there is a transfer of an undertaking. In short, if an outsourcing transaction is more than simply a ‘bare outsourcing’ and personnel and business assets are transferred in addition to the activity itself, the Act on the Transfer of an Undertaking will almost certainly apply.
The legal position of the employees
What are the consequences of an outsourcing? If the Act on the Transfer of an Undertaking applies, employees who are working in the department that is being outsourced automatically enter into the employment of the supplier. Their legal position remains unchanged. With regard to these employees, the supplier therefore automatically adopts all the obligations of the former employer, which in principle also include certain obligations in respect of pensions and saving schemes within the meaning of the Pensions and Saving Funds Act. This Act has only been in force since 1 July 2002.
The Act on the Transfer of an Undertaking does not exclude the possibility that the outsourcing company or the supplier may dismiss an employee for economic reasons. The employer must however show that there is an economic necessity for the dismissal which is not related to the outsourcing, which is not always simple. Such an economic necessity may arise when developments in the market make a reorganisation necessary for the continuation of the company.
What if the employee does not wish to be transferred to the supplier? Obviously, an employee cannot be forced to work somewhere against his will. This means that he may refuse to be transferred. This does not mean, however, that he will continue to be employed by his former employer. A refusal to be transferred actually means that the employee gives notice to terminate the employment contract on the date of transfer of the undertaking or part in question. If the employee does not wish to be transferred, he will lose his job (unless, of course, the former employer wishes to retain him, but for this explicit agreement is required). Moreover, his unemployment benefit is threatened, as it will be easily assumed that his unemployment is imputable to his own acts. For the protection of the employee, it may only be assumed that he waived the protection of the Act on the Transfer of an Undertaking if he has made an explicit declaration of intention that shows that he deliberately chose not to be transferred.
In some cases, an outsourcing can be a reason for the employee to claim termination of his employment contract (after the formal transfer). Examples are cases in which the outsourcing leads to a considerable deterioration of his position (e.g. loss of any chance of real promotion prospects or a considerably longer travelling time). The risk of such deterioration of the employee’s position is borne by the employer. In particular circumstances this may subsequently lead to a higher level of compensation being payable to the employee.
In many cases the Act on the Transfer of an Undertaking will apply to outsourcing transactions. This is particularly so if the outsourcing company transfers personnel or business assets to the supplier in addition to business activities. If the Act applies, the supplier will automatically employ all employees who are working in the transferred department. The supplier is not entitled to dismiss these employees just because of the outsourcing transaction. Furthermore, he is not allowed to modify the employment conditions of the transferred employees unilaterally.
If the Act on the Transfer of an Undertaking applies, the employees who are working in the department that is being outsourced are confronted with a new employer. In such a case, they cannot choose to stay with their former employer. If they do not wish to work with their new employer, they obviously cannot be forced to. The unattractive consequence however is that they lose their job and also might lose the right to unemployment benefit.