Draft legislative proposal on legal status employees in corporate takeover during bankruptcy
Based on an EU directive, specific rules are in place aiming to protect employees in the event of a corporate takeover that legally can be qualified as ‘transfer of undertaking’ (overgang van onderneming, hereinafter referred to as “ToU”).
However, these rules do not protect the employee when the employer is declared bankrupt. The 2017 case FNV/Smallsteps revolved around these employees’ rights in the case of a ToU in a so-called ‘pre-pack’ bankruptcy (in short: a silent trustee prepares the bankruptcy, aiming for a restart). From the EU Court of Justice judgment in the FNV/Smallsteps case it became clear that the legal status of the employees depends on the specific facts of the case. The goal of each bankruptcy procedure has to be reviewed on a case by case basis. This leads to legal uncertainty. To end this uncertainty, the Dutch government published a draft legislative proposal: the Transfer of Undertaking in Bankruptcy Act (Wet overgang van onderneming in faillissement). Below, the most relevant employment law measures are set out.
1. Connection with employee rights in the case of a regular (non-bankruptcy) ToU
The Dutch government has drafted the aforementioned legislative proposal in order to better connect the employment status of employees during bankruptcy and the status of employees when there is no bankruptcy. The proposal involves that also in the event of a ToU during bankruptcy, all employees will transfer with unchanged employment conditions. This will only be different if the loss of jobs is inevitable because of economic, technical or organizational reasons. In this case, the remaining employees have to be selected objectively and transparently. In addition, the draft proposes that employment conditions of transferring employees can be adjusted under strict conditions, in consultation with unions. Lastly, debts that are the consequence of employment agreements and which have occurred before the ToU will not transfer to the acquirer. This concerns outstanding wages, accrued but not taken holidays, not yet paid holiday allowance and due bonuses.
2. Non-competition clause lapses if job is lost
Currently, a non-competition clause does not lapse automatically in the case of bankruptcy of the employer and the consequent termination of the employment agreement by the liquidator. The Dutch government proposes to add a sixth paragraph to article 7:653 of the Dutch Civil Code, making clear that a non-competition clause automatically lapses.
3. Clarification of works council and employment representation rights prior to bankruptcy
In a 2017 judgment the Dutch Supreme Court adjudicated that the works council has a right of consultation during bankruptcy as well. With the draft legislative proposal, the Dutch government plans to include this judgment in the Works Councils Act (Wet op de ondernemingsraden). A new, seventh paragraph is added to article 25 of the Works Councils Act in which the right to consultation of the works council during bankruptcy is set out. Also, a new article 31g is added to the Works Councils Act, which obliges companies to inform the works council, the staff consultation committee or the staff consultation meeting about a request for a suspension of payment, a application for bankruptcy or a request to be declared bankrupt.
Jim MargrySenior Associate Attorney at law
Jim Margry, attorney at law (senior associate), is a member of the Employment & Benefits Practice Group. He has all-round experience in employment law, with a particular focus on the employment law aspects of M&A-deals, restructurings and collective dismissals, co-determination procedures, cross-border labour and employee participation structures.T: +31 20 578 56 31 M: +31 6 22 09 52 11 E: email@example.com