France: Practical Employment Consequences of Mergers and Acquistions


Practical Employment Consequences of Mergers and Acquistions

The consequences of merges and acquisition under French employment law are often either ignored or misunderstood. Only Article L12.24.1 of the French Employment Code (the so called TUPE regulations) which imposes on the new employer the continuation of the employment contracts, tends to be globally recognized and applied. These rules are not specifically Franco-French but are applicable throughout the European Union.

In fact, the principle of maintaining employment contracts “in the case of the transfer of undertaking or business, or part of an undertaking or business, to another employer as the result of an acquisition or a merger” is set out in the EU directive n° 77-187 of 14 February 1977, amended in 1998 by the directive n° 98-50-CE of 29 June 1998 and included in the EU directive of 19 march 2011, directive n° 2001/23-CE.

The jurisprudence of the European Court of Justice is often far more flexible in the application of these provisions in certain cases, and in the precise case of a simple transfer of a market, than the jurisprudence adopted by the Supreme Court in Paris.

Transfers of businesses have obviously collective consequences with regard to the representative institutions of employees, the collective terms in force and the collective agreements that are applicable to the absorbed or transferred business.

  1. 1.         Impact on the institutions representing the employee

The provisions of the French Employment Code envisage the maintenance of the mandate of the employee representatives (trade unions representatives, employee representatives) in the event of amendments to the legal situation of the employee within the meaning of article L12.24.1 of the Employment Code, in the following cases:

-       the business conserves its legal autonomy ;

-       the business becomes a distinct business sector within the receiving business;

-       the transferred business is a distinct business sector which conserves its character in the company receiving the business.

Before the Supreme Court in France, with regard to article L 12.24.1 of the Labour Code or with regard to the European directives of 14 February 1977 and 28 June 1998, in the case of changes to the legal situation of the company, the mandate of the employee representatives continue when the transferred business or absorbed business conserves de facto, its autonomy and therefore, its material autonomy, whether or not it loses its legal autonomy (constant jurisprudence of the Supreme Court between 1995 and 2009).

With regard to the representatives of the trade unions, the Supreme Court has gone a lot further in that it admits, in the case of a partial transfer of the dismiss, where the question of material autonomy of the transferred entity was more than disputable, the maintenance of the mandate of the trade union representatives (Supreme Court jurisprudence from 2000 and 2001).

For the Supreme Court, the mandate of the trade union representatives is maintained each time that article L 12-24.1 would have the possibility of being applied. This position is all the same contrary to the text of European directive, in particular Article 5 of directive n° 2001-23 of 12 March 2001, which states that if the business or establishment or part of the business or establishment conserves its autonomy, the position and the function of the employee representatives or the representatives of the workers concerned continues, subject to the necessary conditions being met with regard to the representation of the workers.

At the European level, the criteria of autonomy is a determining criteria, not applied within French internal law, which results in the maintenance of the mandates of trade union representatives on an almost systematic basis, in the same way as those of other institutions of employee representation whose mandates are suspended due to the confusion of the employees in the absorbing business.

Over and above the effect on the employee representatives, is the question concerning the collective agreement, in particular when the two companies concerned do not apply the same agreement.

  1. 2.         Impact on collective agreement

The effect on the collective agreement is regulated by article L 22-61.14 of the Labour Code which envisages that the collective agreement applied by the absorbed or transferring business is brought into question. This assumes by definition a change of activity and that the transferred activity within the absorbing or acquiring company is not clearly differentiated.

This oppoition is automatic by the operation of law without it being necessary for either of the businesses or the new entity to put in place any written document. It takes place at the effective date of the merger or business transfer, without taking into account the legal merger and any retroactive effects that may be envisaged under French company law.

The oppoistion however does not result in the immediate disappearance of the collective agreement, which continues to apply. It remains applicable during an interim period of 15 months during which its terms may not be waivered without the agreement of the employees concerned. This period can be brought to an end if in the meantime the employee representatives sign an agreement of adaptation providing for the substitution of the former collective agreement.

Again, in order to achieve this, the business requires to have a spokesperson and a trade union representative within the absorbing or acquiring company.

In the absence of an agreement of adaptation, the transferred employees can claim the application of the terms of their original collective agreement during the period of 15 months.

But not only in the case of a merger or acquisition with a change of business activities, the collective agreement applicable to all the businesses is in principle the one that corresponds to the actual business activity of the new entity. In addition, the employees may lawfully claim the provisions of the more favorable collective agreement in the merged company, with the effect that they find themselves during a transitory period in a more favorable situation than the employees of the absorbing business or the transferor.

At the end of the 15 months period and in the absence of an agreement of adaptation, the employee benefits in any event from the maintenance of individual advantages acquired (the right to remuneration, which each employee is entitled to benefit from individually and even if several amongst them can simultaneously benefit from it).

This is not without consequence for the new entity who wishes to harmonise the conditions of its employees. At the moment, the Supreme Court admits that the maintenance of acquired advantages pursuant to the application of an agreement that is brought into question, in particular following a merger, cannot constitute on its own for the employees of the business, discriminatory practices.

We hope that this solution will be maintained in an economic climate where the numerous business transfers will mean that employees during the course of their professional carreer will experience numerous changes in the legal situation of their employer and consequently their terms of employment.

The transfer of a business should not only be scrutinised from a poin tof view of company law, accounting, finance and tax. An audit of the employment situation should be carried out before any legal operation is undertaken in order to be able to anticipate the impact of the merger or the acquisition in all areas and not just with regard to the simple representations and warranties and the guarantee of liabilities often put in place, in particularly in relation to the application of the provisions of article L 12-24.1 of the Labour Code.