LABOUR LAW PITFALLS OF OUTSOURCING – PART 2 – OUTSOURCING IN PRACTICE IN HUNGARY

15 December 2022

In the first part of our article, we explained that in case of outsourcing of tasks to an external company, in addition to its benefits, a special labour law rule, the so called “transfer of employment” must also be taken into account. We highlighted that the employer must be cautious if it is possible that material or human resources will be taken over by the external company, as it is possible that special labour law rules will come into effect due to the takeover of resources. In this article, we examine the aspects of takeover based on the relevant Hungarian and EU case law.

The previous article is available on this link

 

1. Main rules of transfer of employment

In our previous article, we emphasized that if, during the outsourcing, the external company wishes to take over one or more employees or important material assets, the possible implementation of a special labour law rule, the transfer of employment^[1] (hereinafter: Transfer of Employment) must be investigated.

In case the conditions of Transfer of Employment are met, the outsourcer has to act in accordance with special labour law rules in connection with the employment of the staff concerned, for example, it is unlawful if the outsourcer terminates the employment of the employees affected by the outsourcing and at the same time the external company hires them as “new” employees.

In connection with the Transfer of Employment, the role of companies is to recognize it, because in such cases, it is recommended to involve a legal expert to oversee the process.

As you may already know from our first article, Transfer of Employment takes place in the event of a takeover of the economic unit based on a legal transaction.^[2]

The term “economic unit” means an organized group of material or non-material resources, i.e. a logically separable division, department, group within the company, but it can be even one person, e.g. the janitor or the IT administrator. The size of the "economic unit" is irrelevant, the emphasis is on its independent identity[3].

The event triggering the Transfer of Employment is the takeover of the economic unit. The examination criteria related to the takeover were developed by the CJEU, which are also used by Hungarian courts.

2. Takeover of the economic unit

First of all, it is necessary and at the same time sufficient to handover those resources, with the transfer of which the economic unit, theoretically, can retain its identity and continue operation.

The takeover shall always be examined on a case-by-case basis, by taking into account all the specific elements of the given case. The existence of a single factor may not in itself establish the occurrence of the Transfer of Employment^[4].

The examination by the courts is primarily based on the so-called Spijkers criteria^[5], as follows:

·Takeover of substantial resources based on the unit's activities

First of all, it shall be established whether the activity is fundamentally based on human resources, or it is dependent on material assets.

According to the court practice, the handover-takeover of the economic unit,

1. in case the activity mainly requires human resources (e.g. secretariat, graphic designer), can be realized by taking over the majority of the employees, but it is excluded without handing over staff[6]; while
2. in case of an asset dependent activity, (e.g., operation of a bus fleet or a gas station), can be realized even by the transfer of tangible assets (e.g. movable and immovable assets, rights)[7], but is excluded in the lack of that[8].

·Takeover of customers

If the economic unit was in contact with a definable clientele, it supports the retention of the identity - and thus the Transfer of Employment - if the previous clientele remains after the takeover, so the takeover by the new company does not entail the loss of the clientele.

·Similarity between the activities carried on before and after the transfer

It also supports the retention of the identity - and thus the occurrence of the Transfer of Employment - if the work environment remains the same, e.g., after the takeover, the employee performs the same tasks at the same workplace, with the same equipment, or it would be possible.

Based on the above, it can be established that Transfer of Employment may occur in case of the takeover of the resources that are substantial based on the company's activities. If both human and material resources are transferred, and the activities and operations of the economic unit remain essentially unchanged, there is a real possibility of Transfer of Employment.

3. Case law

·Outsourcing of a secretariat[9]

The employer outsourced the secretarial tasks to an external service provider and terminated its own secretariat. Based on the contract with the service provider, the necessary qualified professionals and human resources are provided by the external company, and the material infrastructure (e.g. office) is provided by the outsourcer company. The outsourcer has dismissed its own secretary staff based on downsizing.

The employee started labour litigation because according to her view, the outsourcing resulted in Transfer of Employment, therefore her dismissal -in connection with the outsourcing- was unlawful.

According to the Supreme Court, the secretariat, as an economic unit based on human resources, does not retain its identity without the transfer of staff. Since the outsourcing agreement between the defendant and the external company stated that human resources i.e. the staff will not be taken over by the external company, the substantial resources of the economic unit, the human resources were not taken over, therefore Transfer of Employment did not occur, the downsizing due to the outsourcing and the dismissal of the employee was lawful.

·Takeover of a gas station[10]

In the court case, the defendant, who was a private entrepreneur, operated a gas station on the basis of a lease and licence agreement. The lessor and owner of the gas station, the M. Nyrt., terminated the contract in March 2012 and granted the right to operate the gas station to a company.

The staff of the gas station was not taken over by the new operator, the defendant shortly thereafter ended its business activity, and at the end of April 2012, informed the staff that since he discontinued its activity as a private entrepreneur, the entity of the employer ceased to exist without a legal successor, which resulted in the termination of the employment of the staff by law.

Since, according to the employees, the termination of the employer’s self-employed activity did not result in the termination of the employer without a legal successor, their employment had not terminated by virtue of the Labour Code, so the Defendant terminated their employment, illegally. Therefore, they started a lawsuit against the defendant.

In the proceedings, the defendant argued that when the M. Nyrt. withdrew the operation of the gas station from him during March 2012 and handed it over to another operator, there was a Transfer of Employment, based on which, the employment relationship of the claimants transferred to the new operator by virtue of law. Thus, in April 2012, he was no longer the employer of the staff, consequently, it was legally impossible for him to have terminated the employment of the staff.

The first and second instance courts found the claimants’ claim to be well-founded and obliged the defendant according to the claimants’ request.

However, in the end, the Supreme Court changed the final judgement and established that there was a Transfer of Employment. Based on the justification, the transferred service was the operation of the gas station, which cannot be performed without the tangible assets that make up the gas station.

Therefore, regardless of the fact that the new operator did not take over the employees from the defendant, the Transfer of Employment occurred due to the takeover of the substantial material assets of the station. Therefore, the employment of the claimants transferred to the new operator, who became the employer of the staff in the moment of the takeover of the station in March 2012.

As a result, it was not the defendant who terminated the employment of the staff, but the new company that took over the operation of the gas station, when it failed to continue the employment of the existing staff. The defendant did not commit unlawful termination of employment, the claimants sued the wrong person within the deadline for asserting their claim, so at the end they lost their right to initiate labour law claim against the new operator of the station, who actually violated their rights arising from the employment relationship.

4. Conclusion

In our article, we showed that the outsourcing of the tasks of a department or even a small group of employees to an external service provider can have special labour law consequences.

In order to establish the Transfer of Employment, it shall be examined if the external company has taken over control of an economic unit, i.e. the substantial resources based on the unit’s activities, and if so, whether the unit could retain its identity.

If the substantial resourced of the economic unit, either human or material, are being handed over to the external company during outsourcing, there is a possibility of Transfer of Employment, in which case, we always recommend the involvement of a legal expert with experience in labour law during the implementation of the outsourcing.