In M&A transactions, there is often a transfer of activities and a subsequent transfer of rights and obligations under employment law within the meaning of European Directive 2001/23/EC on the approximation of the laws of the Member States on safeguarding employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses (TUPE transfer). As a result, the seller’s employees who worked in the transferred establishment will transfer to the buyer. If the buyer has existing employees, the working conditions of the original and new employees may differ. These differences can pertain to salaries and benefits. Are they permissible?
Until recently, the prevailing view was that salary differences among employees resulting from the TUPE transfer did not constitute unequal treatment. It was assumed that the disparity in working conditions arose from the application of a legal norm (the directive and its implementing legislation) and was therefore justified. The Supreme Court of the Czech Republic recently addressed this issue (21Cdo 2559/2023). Its conclusions are surprising and will certainly have to be considered in M&A transactions.
The Supreme Court explicitly stated that the transferee employer is entitled to change the terms and conditions of employment from the moment of transfer, even to the detriment of the employees transferred under TUPE regulations. Thus, it accepted that the working conditions of the transferring employees may deteriorate. It further clarified that the TUPE transfer legislation does not, in itself, justify unequal treatment or permit the existence of different conditions between original and new employees. The buyer is obliged to take measures to eliminate unjustifiable inequalities in all areas, particularly in remuneration. This “equalization of terms and conditions of employment” must occur within two months of the TUPE transfer taking effect. After this period, any difference in treatment is no longer justified, except in cases governed by a collective agreement.
The above will apply where the original and the transferred employees perform comparable activities. Seen through the lens of the Labor Code, this represents so-called equal work or work of equal value (working conditions, complexity, etc.), which will be most easily identifiable when the buyer takes over an enterprise engaged in the same activities as its own. However, in light of Directive (EU) 2023/970, to strengthen the application of the principle of equal pay for equal work or work of equal value between men and women through pay transparency and enforcement mechanisms (Pay Transparency Directive), it is necessary to go further. Even seemingly different jobs must be evaluated where the difficulty of the work is comparable.
If differences are found, they will need to be reconciled. From a legal perspective, this will undoubtedly be easier where the employer unilaterally regulates wages and other working conditions, particularly by internal regulations or wage assessments. Unfortunately, the Supreme Court does not provide guidance on how to proceed where the employees’ wage conditions are agreed in the employment contract or wage agreement (the employer is unable to unilaterally modify those terms). Employees will be reluctant to accept a voluntary pay reduction, leaving the buyer with no choice but to increase the wages of the lower-paid employees. This will certainly have a negative impact on the overall cost of the transaction and could affect the intrinsic value of the target being acquired (increased costs may reduce profit margins).
Another option is for the buyer to acquire the transferred establishment through a special purpose vehicle (SPV). This approach would seemingly obscure the possibility of such comparisons, as the employees would formally work for different employers (the buyer and the SPV). However, this issue has been addressed at the European level. It is now clearly referred to in the Pay Transparency Directive that equality of terms and conditions must exist even between different employers if there is a “single source establishing the terms and conditions.” Therefore, if it is still the buyer who ultimately determines the terms and conditions of the transferred employees, they can also be compared between the buyer’s existing establishment and the SPV. However, we believe that this would not apply on a cross-border basis, particularly due to significant differences in the regulation of remuneration, minimum wages, mandatory surcharges, and other factors.
In the event of a breach of the principle of equal treatment, the Labor Inspectorate may impose a fine of up to EUR 40,000. A much greater risk, however, lies in possible private law claims by employees affected by unequal treatment, particularly claims for wage compensation up to the amount of a comparable employee, plus mandatory contributions.
It can therefore be concluded that the importance of employment aspects in M&A transactions will continue to grow and that the associated risks should not be underestimated.
By Helena Hangler, Head of Employment, Schoenherr
This article was originally published in Issue 11.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
