Transfer of business in a company acquisition: employment law under section 3 AVRAG

If a business or part of a business passes to another owner, the acquirer enters into the existing employment relationships as employer under section 3 AVRAG. This transfer takes place ex lege, that is by operation of law, without needing the consent of the employees or a new employment contract. The acquirer takes over the employment relationships with all rights and duties as they existed with the transferor.

Decisive is that an economic unit retains its identity and is continued by the new owner. This is typically the case in an asset deal, when the buyer takes over the business with its material and human resources. The length of service, remuneration claims and other conditions then pass unchanged to the acquirer.

The legal basis under EU law is the Transfer of Undertakings Directive, which the AVRAG implements. It protects employees from losing their claims through a change of owner. The form of acquisition you choose therefore has immediate consequences for the workforce. The comparison of the structures is covered in the post on share deal or asset deal.

With the employment relationships the collective rules also pass over. The collective agreement applicable to the acquired business at first remains applicable. The provisions with normative effect in the employment contract may as a rule not be changed to the disadvantage of the employees after the transfer, as long as no new collective agreement takes their place.

Works agreements too continue to apply after the transfer. They remain in force for the acquired business until they are replaced by a new agreement or ended under the statutory rules. For the acquirer this means that it cannot simply shake off the existing collective conditions but enters into them.

This continued application is a significant cost factor. Whoever takes over a business should capture the applicable collective and works agreements precisely in the review. How such a review runs systematically is shown in the post on the due diligence checklist.

The AVRAG grants the employee a right of objection in certain cases. If the collective conditions or the protection against dismissal deteriorate substantially through the transfer, the employee can object to the transfer of its employment relationship. It then remains with the transferor, which can mean an unwanted burden for the seller.

In addition there is a special protection against dismissal. A dismissal pronounced because of the transfer of business is legally ineffective. The transfer itself is thus not a permissible ground for dismissal. Dismissals on other, objectively justified grounds remain possible, but must be cleanly separated from the takeover.

In practice this means that a planned staff adjustment cannot simply be attached to the transfer of business. It must be justified independently and carried out under the general rules. An initial assessment of the risks of your transaction is provided by our M&A transaction risk profile.

An economically significant point is severance. For employment relationships under the old severance regime there are entitlements measured by the length of service. On the transfer of business these entitlements pass to the acquirer, which has to answer for the later severance. This obligation can be considerable depending on the workforce.

The acquirer should therefore quantify the severance entitlements precisely and account for them in the purchase price. Usual is an indemnity or a deduction by which the seller answers for the claims accrued up to the relevant date. Without such a rule the buyer bears a burden that economically belongs to the past.

Pension commitments, anniversary payments and similar obligations also belong in this review. How such burdens can be secured in the contract is covered in the post on real estate in the asset deal, which looks more closely at the takeover of individual assets and obligations.