Standardization of working conditions after the transfer of an undertaking

Is the requirement to adhere to dynamic reference clauses in line with EU law?

More than a few restructuring measures are performed with the aim of changing collective bargaining conditions, i.e. replacing the normatively applicable collective bargaining agreement with one which the company deems more favourable. This is often due to collectively bargained wages constituting an adverse economic development in which crisis-ridden companies, in particular, do not want to participate (or cannot afford to do so without the risk of insolvency). Occasionally, however, it is simply the desire – following a takeover – to ensure, as far as possible, that uniform and sector-compliant employment conditions are in place.

Dynamic reference clauses as a disruptive element

This pursued objective is often thwarted, however, by an employment contract’s “dynamic reference” to a collective bargaining agreement which normatively no longer applies because this “dynamic reference” still leads – by way of the favourability principle (Günstigkeitsprinzip) (Section 4, paragraph 3 of the German Collective Bargaining Act (TVG)) in accordance with the current case law of the Federal Labour Court (BAG) – to participation via the employment contract in the undesirable development of collectively bargained wages. Under the BAG’s established case law, a separation between the employment contract and the undesirable development of collectively bargained wages can only be enforced “unilaterally” by the employer by notice of termination in combination with an offer of a change of contract (Änderungskündigung). In view of the BAG’s very high requirements with regard to the admissibility of a notice of termination in combination with an offer of a change of contract, the implementation of such a notice of termination has hitherto been a matter of considerable expense and effort and of considerable uncertainty.

Has everything changed since Alemo Herron?

Companies might, however, have found relief in the judgment by the European Court of Justice (ECJ) in the Alemo Herron case from 2013 (ECJ dated 18 July 2013, Case C-416/11). The European Court of Justice found under English law that

• following the transfer of an undertaking, the transferee is not bound by collective bargaining agreements
• that are applicable by force of dynamic reference in employment contracts
• if they were concluded after the transfer of undertakings and the transferee was not in a position to have any influence over their contents.

Submission to the European Court of Justice

A preliminary ruling before the ECJ could finally clarify the matter. In its decision dated 17 June 2014 (file no.: 4 AZR 61/14), the 4th chamber of the BAG put to the ECJ the question whether the BAG’s current case law on the continued validity of dynamic reference clauses upon transfers of undertakings is in line with EU law. The preliminary ruling, published merely as a press release, is based on the case in which an employment relationship was transferred pursuant to Section 613a of the German Civil Code (BGB) to a transferee that obviously does not, or is unable to, meet the requirements for membership in the municipal employers’ association (KAV) and is nevertheless bound – by force of dynamic reference in the employment contract – to apply the collective bargaining agreements most recently concluded by the KAV. In its press release on the matter, the BAG assumes that its current case law will prevail.

BAG’s current case law presumably not in line with EU law

It appears very likely, however, that the European Court of Justice will overturn the BAG’s current case law. According to the principles following the Alemo Herron decision, the permanent binding of a transferee to dynamic reference clauses is not in line with EU law. Although the Alemo Herron decision was passed with regard to English law, the arguments brought by the ECJ in that decision are transferrable.

Thus, in factual terms, it makes no difference whether collective bargaining instruments oust non-mandatory statutory provisions – as in Germany – or whether they form aspects of the employment relationship for which a statutory provision is lacking – as in England. Similarly, the distinction between obligations under an employment agreement and those under a collective bargaining agreement, as made in Article 3 paragraphs 1 and 3 of the Directive on Business Transfers (Directive 2001/23/EC) is unable to convincingly establish the continued application of the BAG’s current case law. This is because in both cases, account must be taken of evaluations under Article 16 of the Charter of Fundamental Rights of the European Union which – in the ECJ’s view, at least – are opposed to the transferee’s permanent binding to the outcome of third-party collective bargaining negotiations if the company involved has no power to influence said negotiations. Whether this permanent adherence comes about via a reference in the employment contract (Section 613a, para. 1, sentence 1 BGB) or by statutorily becoming part of the employment contract (Section 613a, para. 1, sentence 2 BGB) cannot be the decisive factor. This applies all the more if the employment relationships are legally transferred to the transferee as part of the business and the transferee – unlike the employee – has no power to oppose and prevent such transfer. To offset this, it must be ensured that at least future changes in employment conditions which the employer has no relevant power to influence, are ruled out.

Possible solutions in business practice

If the ECJ should find that the BAG’s current case law is not in line with EU law, the BAG could conceivably return to its previous case law which stipulated that such reference clauses should, as a rule, be interpreted as “agreements on equal treatment” (Gleichstellungsabreden) under which the employer intended to ensure that only the collective bargaining conditions that applied to it were brought to bear, regardless of whether the employee was a member of a union.

It is also reasonable to assume, however, that Section 613a, paragraph 1, sentence 3 BGB would have to be applied analogous in the present case, resulting in the exclusion of the favourability principle (Günstigkeitsprinzip) to the transferee’s benefit. In this case, application of Section 613a, paragraph 1, sentence 3 BGB would result in the transferee being subject to both statutory and individually agreed collective bargaining provisions. This would, in turn, result in uniform employment conditions subject to collective bargaining provisions.

Even anyone not wishing to take this take this step will at least have to permit the transferee to eliminate the dynamic aspect by way of notice of termination in combination with an offer of a change of contract (Entdynamisierung). The BAG has previously referred to this type of notice of termination as an instrument in this context even though it rejects it in established case law as a means of reducing employment conditions to a lower common denominator. If, however, one recalls that elimination of the dynamic aspect does not have the effect of reducing pay but of maintaining the status quo as it ensures that the contents of the agreement are protected from change by the collective bargaining parties and as it, ultimately, applies the legal consequence prescribed by Section 3, paragraph 3 TVG to the contractual validity of the collectively bargained wage, then this elimination of the dynamic aspect is – at least in the light of the ECJ’s comments on the protection of the contractual freedom of the transferee in the Alemo-Herron case – as a rule, socially justified (Section 2 of the German Act on Protection Against Unfair Dismissal (KSchG)). In this regard, the strict criteria for a notice of termination in combination with an offer of a change of contract aimed at a wage reduction cannot – contrary to the BAG’s findings in its current case law – be brought to bear (any longer).

For more details on the above matter, see Mückl, Zeitschrift für Wirtschaftsrecht (ZIP) 2014, p. 207 et seq. (in German)