Post-lockdown deal activity raises employee-related questions for Dutch businesses

Written on 23 Jun 2021

The end of lockdown and a return to near normal conditions in the Netherlands this summer has triggered business sales that raise questions around employers' obligations to employees

As local job protection schemes draw to a close and a record recovery in merger and acquisition activity gains pace, businesses in the Netherlands are seeing a renewed focus on corporate reorganisations that will have an impact on their workforces This poses specific challenges and raises a range of questions particularly around business sale activity and the alternatives for redundancy.

Are employees automatically transferred to a buyer upon the sale of a business, what is the legal test for identifying this transfer and can employees object? Are there obligations to inform and consult with employees or their representatives when a business is sold, are there penalties for non-compliance, can terms be changed with or without employee consent, and are there alternatives to redundancy?

Are employees automatically transferred to a buyer by operation of law on a business sale?

A business sale may trigger an automatic transfer of employees if it qualifies as a transfer of an undertaking under Dutch law. This is the case if there is a transfer of a stable economic entity that retains its identity after the transfer. Whether this test is met is determined by reference to various factors, in particular, whether customers, assets and employees have transferred, and the degree of similarity of activities before and after the transfer.

What is the legal test for identifying which employees transfer?

Employees who are considered to be dedicated to the transferring economic entity will transfer by operation of law. Normally this is the case if the employees work predominantly for and in that economic entity. Under Dutch law there is no clear threshold or strict guidance on how to analyse which employees meet this test.

Can employees object to the automatic transfer of their employment and what are the consequences of an objection?

Employees who refuse to transfer must do so unambiguously. The employee must be informed of the consequences of, and of their rights in relation to, the transfer in advance of it. The employer must fully inform employees about the choice between transferring to the buyer and refusing such transfer, and about the consequences of each option. If the employee unambiguously refuses to transfer, such refusal is considered to be a resignation, as a result of which the employment agreement terminates by operation of law at the time of transfer and the employee has no entitlement to severance. An employee who resigns on account of a “substantial change in working conditions to their detriment” will be treated as dismissed and will be entitled to a statutory severance payment.

Do obligations to inform and consult employees or employee representatives arise on a business sale?

The seller/buyer must seek their respective works council’s advice regarding a proposed business transfer in sufficient time to enable the works council to substantially influence the decision whether to proceed with the transfer or connected measures. The works council must give an opinion within a reasonable time. There must be at least one consultation meeting. The Social and Economic Council (SEC) Merger Code 2015 has a separate obligation to inform and consult any trade union (where a Netherlands-based enterprise employs 50 or more employees or belongs to a group that employs 50 or more employees) in respect of a proposed “merger”, which comprises a business sale. The relevant trade unions must be informed and consulted in sufficient time and ahead of a works council’s advice so that their opinion can still influence the proposed decision.

What are the penalties for non-compliance with information and consultation obligations on a business sale?

If the seller/buyer does not obtain or follow their respective works council’s advice (and the works council is opposed to the transfer), the implementation of the decision must be suspended for a one-month period, within which time the works council can appeal to the court on the ground that management could not have reasonably reached its decision. If the appeal is successful, remedies given by the court may include an order requiring that the decision be withdrawn (wholly or partly) and that the consequences of the decision be reversed. Where there is non-compliance with the SEC Merger Code 2015, the Dutch SEC may issue a (public) statement concerning non-compliance.

Can changes to employment terms be made with or without express employee consent?

In principle, an employer cannot unilaterally change the employee’s employment terms unless: a unilateral amendment clause is included in the employment agreement (or in the collective labour agreement, if applicable); and the employer has a substantial interest in making the change whereby the interest of the employer outweighs the employee’s interests that are harmed by the change – in practice, this threshold is high.

Must an employer consult individually or collectively with affected employees or their representatives (if any) before making changes to employment terms?

In principle, this is not required. However, prior consultation is generally recommended as otherwise a unilateral change may be considered unreasonable and invalid. The employer can try to obtain the employees’ consent to amend the employment terms in individual cases. Approval by the works council in relation to collective changes to employment terms can be (further) evidence of the substantial interest required.

Do additional restrictions apply if changes are proposed in connection with or following a business transfer?

A change to employment terms is ineffective following a business transfer that qualifies as a transfer of undertaking, if the transfer itself is the reason for the change. This is the case even where the change is consensual and the less favourable terms are offset by other benefits so that the contract of employment as a whole is no less favourable.

If harmonisation of contractual employment terms and conditions is essential post-transfer, possible practical options in light of the effect of Dutch legislation include: obtaining the consent of each individual employee post-transfer to the contractual changes, with, if the changes are more beneficial to the transferred employee as a whole, the aim of avoiding any legal challenge; agreeing with the relevant trade unions a new collective labour agreement to be effective post-transfer and aimed at harmonising (collective) employment terms and conditions; or unilaterally imposing the contractual changes post-transfer for a reason that qualifies as an economic, technical or organisational (ETO) reason entailing changes in the workforce – which is known as the "ETO reason".

However, unilateral adverse changes to fundamental contractual employment terms (such as contractual remuneration arrangements) are strictly and narrowly construed by the Dutch courts and are rarely upheld as enforceable if challenged. These options do not preclude the risk of an employee bringing a legal challenge.

What are the penalties for non-compliance with these procedures?

Employees could challenge the unilateral changes to their employment terms in court proceedings. A Dutch court may also – at the employee’s request – rescind the employment contract, entitling the transferring employee to a severance payment, the amount of which will reflect and attribute the degree of the employer’s blame.

Do national laws promote or permit any alternatives to redundancy (for example, layoff or short-time working)?

Dutch law does not promote or permit any alternatives to redundancy, such as temporary layoffs, short-time working, mandatory shorter working hours or leave. However, shorter working hours or leave (for example, using vacation days or unpaid leave) can be agreed with the employees, although this is uncommon. In addition, employees can in certain circumstances claim a reduction in hours, also to avert redundancy. If certain conditions are met, the employee may be entitled to a partial statutory severance payment relating to the reduction in hours.