United Kingdom Journals

Application of the Directive on the Transfer of Undertakings to Dealerships: A Consideration of Joined Cases C-171/94 and C-172/94 Albert Merckx and Patrick Neuhuys and Ford Motors Company Belgium

Imelda Higgins

Lecturer,
European Institute for Public Administration, Luxembourg
<eipa@pt.lu>

Copyright © 1997 Imelda Higgins.
First Published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.

Summary

The Court's ruling in Merckx and Neuhuys [1996] All ER (EC) 667 (see Davies 1996) is another in a long series of cases(1) concerning the scope of application of Council Directive 77/187/EEC of 14 February 1977 (OJ 1977 L 61, p 26), which relates to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of businesses. In the case, the Court considers the application of the Directive to the transfer of a dealership and deals with a number of other subsidiary issues including; the application of the Directive in cases where the transferor has gone into liquidation; the extent of the employee's power, under the Directive, to prevent the transfer of his contract or the employment relationship; and finally the discretion of national courts when deciding whether or not there has been a transfer of an undertaking within the meaning of the Directive.

Contents

The Facts

The Opinion of Advocate General Lenz

The Judgment of the Court of Justice

Comment

The Application of Directive 77/187/EEC to the Transfer of a Dealerships

The Application of Directive 77/187/EEC in the event of a Liquidation

The Extent of the Employee's Power to Prevent the Transfer of his Contract of the Employment Relationship

What Constitutes a Substantial Change in Working Conditions under Article 4(2) of the Directive

The Division of Competence between the Court of Justice and the National Courts

Conclusion

Bibliography

The Facts

Mr Merckx and Mr Neuhuys worked as salesmen with Anfo Motors, which was a Ford dealer. Anfo Motors decided to discontinue its activities, and it informed the plaintiffs of its decision to this effect. It also informed them that Ford would, in the future, be working with an independent dealer Novarobel, which would cover the areas previously covered by Anfo Motors, and that their contracts of employment would be transferred to this independent dealer.

Both Mr Merckx and Mr Neuhuys objected to the transfer and refused to work for Novarobel. They then brought an action against Anfo Motors and subsequently Ford, claiming compensation for breach of contract, unlawful dismissal, and redundancy, as well as their pro-rata entitlement to their end of year bonus. Anfo Motors counter-claimed for payment by Mr Merckx and Mr Neuhuys of compensation for breach of contract. The cases ultimately went to the Court of Appeal in Brussels which referred a question to the Court of Justice concerning whether or not there had been a 'transfer of undertaking' within the meaning of the Directive.

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The Opinion of Advocate General Lenz

Advocate General Lenz considered that in deciding whether or not the transfer came within the Directive two issues had to be considered. In the first place, it was necessary to determine whether or not there had been a transfer of undertaking and secondly it was necessary to decide whether this transfer was the result of a legal transfer.

In relation to the first issue, the Advocate General pointed out that the essential criterion in this respect is whether or not the business in question retains its identity. Although the Advocate General repeatedly emphasised that this is ultimately something which the national court must determine, he nevertheless proceeded to consider whether a transfer could exist within the circumstances of the case.

The Advocate General was of the opinion that it was possible that a transfer existed within the meaning of the Directive as there was nothing in the circumstances mentioned by the national court which would exclude the application of the Directive. In particular, the Advocate General did not consider the fact that Anfo Motors had been put into liquidation, or the fact that there had been no transfer of tangible assets, to remove the transfer from the scope of the Directive. While the Advocate General considered that the fact that Anfo Motors had dismissed the majority of its staff was an important factor for consideration and capable of auguring against the existence of a transfer, he did not consider that this, of itself was capable of removing the transaction from the scope of the Directive. In addition, the Advocate General pointed out that the dismissals could also have come about for other reasons, and that the Directive does not prevent dismissals that may take place for economic, technical or organisational reasons.

In relation to the question of whether or not there had been a legal transfer, the Advocate General had no difficulty in deciding that this was the case, despite the fact that no contract had been concluded between Anfo Motors and Novarobel. In the opinion of the Advocate General it was sufficient in this respect that the transfer had taken place 'in the context of contractual relations'. The Advocate General considered that a legal transfer had occurred as not only had there been an agreement between Ford and Novarobel, but both Anfo Motors and Novarobel had also agreed to the transfer. The fact that the latter agreement was not recorded in writing was not important as, according to the Advocate General, even an implicit agreement to the change was sufficient for there to be a legal transfer within the meaning of the Directive.

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The Judgment of the Court of Justice

In its judgment the Court dealt with three main issues, namely: whether or not there had been a transfer of an undertaking within the meaning of the Directive; whether or not there had been a legal transfer; and finally the extent to which employees can prevent the transfer of their contract or employment relationship.

In relation to the first issue, the Court of Justice was of the opinion that the transfer came within the scope of the Directive. In reaching this conclusion the Court relied on a number of circumstances. In the first place, Ford was a major shareholder in Anfo Motors and, by transferring the dealership to Novarobel had also transferred the economic risk. Secondly, Novarobel carried on the activity previously performed by Anfo Motors without an interruption, in the same sector and under similar conditions. Thirdly, Novarobel had taken on part of the staff of Anfo Motors, and lastly, Anfo Motors recommended Novarobel to its customers in order to ensure continuity in the operation of the dealership.

Although Merckx and Neuhuys put forward several arguments aimed at negating the existence of a transfer, the Court was not convinced. Like the Advocate General, the Court considered that the fact that there had been no transfer of tangible assets was not conclusive evidence as to whether or not the entity had retained its economic identity following the transfer. In addition, the fact that Anfo Motors had gone into liquidation did not affect the existence of a transfer. The Court felt that to support such a contention would be to undermine the objectives of the Directive and went on to point out that if the business of an undertaking is carried out by another undertaking, this tends to confirm, rather than to deny, the existence of a transfer within the meaning of the Directive. The Court did not think that the fact that the majority of the staff had been dismissed prevented the application of the Directive.

In so far as the question of a legal transfer was concerned, the Court agreed with the Advocate General and held that the existence of the same was not affected by the absence of a direct contractual relationship between the transferor and the transferee. The Court pointed out that in order to ensure that the objectives of the Directive were maintained, it was necessary to give a flexible interpretation to the concept of a legal transfer and thereby ruled that

"where a motor vehicle dealership concluded with an undertaking is terminated and a new dealership is awarded to another undertaking pursuing the same activities, the transfer of undertaking is the result of a legal transfer for the purpose of the Directive."

The Court considered that the existence of a legal transfer was further confirmed by the fact that Ford agreed with Novarobel that it would bear the expenses relating to payments for breach of contract, unlawful dismissal, or redundancy arising from claims brought by staff previously employed by Anfo Motors. Nevertheless, it appears that this latter consideration was not decisive in determining the existence of a legal transfer.

The final question considered by the Court concerned the extent of the employee's power to prevent the transfer of his contract or the employment relationship. In this respect, the Court referred to previous rulings and pointed out that the Directive does not oblige the employee to continue his employment relationship with the transferee as such an obligation would endanger the fundamental rights of the employee. The Court then went on to say that it is up to the Member States to decide the fate of the contract of employment or the employment relationship in cases where the employee decides to leave the undertaking. However, in instances where the transfer gives rise to a substantial change in working conditions, to the detriment of the employee, according to Article 4(2) of the Directive, the employer is considered to be responsible for the termination. The Court considered that a change in the level of remuneration of the employee could constitute a substantial change in his working conditions and that in such instances, the employer must be regarded as being responsible for the termination.

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Comment

The Merckx case deals with a difficult issue in so far as it concerns the extent to which the Directive on the Transfer of Undertakings may be applied to dealerships. The essential question in this regard is whether the transfer of a sales concessions from one dealer to another, by a manufacturer, can constitute a 'transfer of undertaking' within the meaning of the Directive. The case also raises other interesting issues particularly regarding: the application of the Directive in the case of liquidations; the extent of the employee's power to prevent the transfer of his contract or the employment relationship; and finally the discretion of national courts when deciding whether or not there has been a transfer of undertakings.

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The Application of Directive 77/187/EEC to the Transfer of a Dealerships

In previous cases, the Court of Justice has adopted a very wide interpretation as to what constitutes a transfer of an undertaking within the meaning of the Directive (see eg Antonmattei 1996). Essentially it seems that once the economic identity of the undertaking remains intact following the transfer, the transfer will come within the scope of the Directive. The factors which must be taken into consideration when determining whether or not a transfer comes within the scope of the Directive were set out in the Spijkers case (Case 24/85, Spijkers v Gebroeders Benedik Abbatoir CV and Alfred Benedik en Zonen BV [1986] ECR 519, para 13) where the Court held that it is necessary to consider:

"all the facts characterising the transaction in question, including the type of undertaking or business, whether or not the business's tangible assets, such as buildings or movable property, are transferred, the value of its intangible assets at the time of the transfer, whether or not the majority of its employees are taken over by the new employer, whether or not its customers are transferred and the degree of similarity between the activities carried on before and after the transfer and the period if any, for which these activities are suspended."

From the Merckx case it would appear that none of these factors are determinative when deciding whether or not a transfer has taken place. Thus in Merckx there had been no transfer of the company's tangible or intangible assets, and no preservation of the undertaking's structure and organisation. In addition, the principle place of business of Novarobel was situated in a different municipality to that of Anfo Motors. Nevertheless, the Court did not consider that these factors precluded the application of the Directive.

In this respect, therefore, the decision of the Court in the Merckx case amounts to a confirmation of Schmidt. (Case C-392/92, Schmidt v Spar- und Leihkasse der Fruheren amter Bordesholm, Kiel und Cronshagen 1994 ECR I-1311). Since the decision of the Court in the latter case, there has been much dispute as to whether the ruling really says that the existence of a transfer can be established in circumstances in which no assets, tangible or intangible, are transferred. It is clear from Merckx that this is in fact the case and whether or not there is a transfer of assets is only one element to be considered when deciding whether or not there has been a transfer of undertaking within the meaning of the Directive, and that this element is by no means decisive.

In addition, the Court did not consider that the fact that the majority of the staff had been dismissed upon the transfer meant that the transfer fell outside the scope of the Directive. In this respect, the Court emphasised that the Directive itself permits the dismissal of staff for economic, technical or organisational reasons and in addition, pointed out that even if the majority of the staff had been dismissed, this might be the result of an infringement of the Directive rather than a factor auguring against the application of the Directive. Although the Advocate General acknowledged that the fact that the majority of the staff had been dismissed constituted an important factor weighing against the existence of a transfer, the Court makes no such observation.

In reaching the conclusion that the transfer fell within the scope of the Directive, the Court relied upon a number of considerations. In the first place, the Court considered that through the transfer of the dealership Ford, which was the main shareholder in Anfo Motors, had transferred the economic risk associated with that business to an undertaking outside its own group of companies. Secondly the Court emphasised that Novarobel carried out the same activity performed by Anfo Motors, without interruption, in the same sector and subject to similar conditions and that the purpose of the business remained the same. Finally the Court considered it relevant that Novarobel took on part of the staff of Anfo Motors and that it was recommended to customers.

It is unfortunate that the Court did not indicate which of the above factors, if any, were decisive in coming to the conclusion that the transfer fell within the scope of the Directive. The application of the Directive to the transfer of dealerships raises particularly difficult issues as on the one hand, on the basis of previous case-law, it seems that such transfers will automatically come within the scope of the Directive while on the other hand it is:

"absurd to hold the directive applicable because a manufacturer has transferred the sales concession for its vehicles in a given area, from one dealer to the other." (para 23 of the Advocate General's Opinion)

Despite the Court's reticence on the point, it is probable that the Court considered that the fact that Ford was a main shareholder in Anfo Motors was an important indication that the transaction fell within the Directive. Consequently it would appear that this case does not necessarily provide general authority for the proposition that the transfer of car dealerships will inevitably come within the Directive and future cases will have to indicate the extent to which the special relationship existing between Anfo Motors and Ford was decisive in coming to the conclusion that the Directive was applicable.

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The Application of Directive 77/187/EEC in the event of a Liquidation

The Directive does not expressly exclude from its scope transfers effected in the framework of insolvency proceedings. However the Court has ruled (Case 186/83 Botzen [1985] ECR 519) that the Directive does not apply to the case of transfers

"taking place in the context of insolvency proceedings instituted with a view to the liquidation of the assets of the transfer or under the supervision of the competent judicial authority."

In this respect, it seems that the Court is of the opinion that to apply the Directive to transfers which take place in the context of insolvency proceedings would give rise to "a serious risk of general deterioration in the working and living conditions of workers, contrary to the social objectives of the Treaty" (Case 135/83, Abels para 23, 485). The Court has expanded on these rulings in the Urso case (C - 362/89, G. D'Urso & A. Ventadori et Autres c/ E. Marelli Electromeccanica Generale SPA et Autres, 1991 ECR I-4105) in which it made clear that the nature of the supervision is not conclusive and the only determining criterion is the objective (liquidation or survival) to be attained by the insolvency proceedings.

Consequently, whether or not the Directive applies to liquidation proceedings depends on the purpose of the procedure. In the Merckx case the Court held that the fact that Anfo Motors had been liquidated following the transfer did not exclude the application of the Directive. As the Court pointed out (para 23 of judgment):

"if the Directive's aim of protecting workers is not to be undermined, its application cannot be excluded merely because the transferor discontinues its activities when the transfer is made and is then put into liquidation."

It would therefore appear that in so far as the liquidation is not effected during the course of bankruptcy proceedings it may still fall within the scope of the Directive. This would appear compatible with the ruling of the Court in Abel and Botzen as it seems that the exclusion of transfers effected during the course of liquidation proceedings in those cases, was based on the fact that such proceedings were designed to liquidate the debtor's assets in order to satisfy the body of creditors. In the Merckx case there was no evidence to suggest that this was the purpose of the liquidation proceedings and consequently there was no need to exclude the transfer from the scope of the Directive on this basis.

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The Extent of the Employee's Power to Prevent the Transfer of his Contract of the Employment Relationship

The issue of whether or not an employee can prevent the transfer of his contract of employment or object to the transfer of an undertaking has arisen in a number of cases. In Berg v. Besselsen (Joined Cases 144 & 145/87, Berg & Busschers c/ Martin Besselsen, 1988 ECR 2559), the Court was asked to determine whether the employee may object to the transfer of the obligations which the transferor has assumed in regard to him under a contract of employment or an employment relationship. The Court held that even if the worker did not consent or objected to the transfer, the transferor is nevertheless discharged from all obligations. In Daddy's Dance Hall (Case 324/86, Tellerup v Daddy's Dance Hall A/S 1988 ECR 739), the Court was asked to rule on whether an employee may agree to an amendment of his employment relationship with his new employer. The Court held that it is not possible to restrict the rights of employees under the Directive even if they agree to the same. Finally in the Katsikas case (Joined Cases C-132/91, C-138/91 & C-139/91, Katsikas v. Konstantinidis, 1992 ECR I-6577. See also Davies (1993) 22 ILJ 151), the Court was asked to determine whether an employee is entitled to object to the transfer of their contracts of employment or employment relationships to the transferee. In relation to this issue, the Court considered that the Directive does not preclude an employee from deciding to object to the transfer of his contract of employment or employment relationship and that in the event of an employee deciding of his own accord not to continue with the contract of employment or employment relationship with the transferee, the Directive does not require the Member States to provide that the contract or relationship be maintained with the transferor. In such cases, it is for the Member States to determine what the fate of the contract of employment or employment relationship should be. In the Merckx case, the Court upheld this ruling and emphasised that the Directive does not require the Member States to provide that the contract or relationship is to be maintained with the transferor. In circumstances where the employee decides not to continue his employment relationship with the transferee, the Member States are thus free to decide that the relationship must be regarded as terminated either by the employee or by the employer and they may also provide that the contract of employment is to be maintained with the transferor.

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What Constitutes a Substantial Change in Working Conditions under Article 4(2) of the Directive

The Court's judgment in Merckx sheds some light on Article 4(2) of the Directive which states that where the transfer involves a substantial change in working conditions, to the detriment of the employee, the employer is to be regarded as being responsible for the termination. In this respect, the Court ruled that a change in the level of remuneration constitutes a substantial change in working conditions, even where this remuneration depends on the turnover achieved. It is worth emphasising that in Merckx, the employees retained all their contractual rights and the method of payment remained the same despite the transfer. Nevertheless, it seems that the Court will look beyond the formal situation and concentrate on the practical effects of the transfer. In Merckx, the organisational arrangements were such that it was likely that the employees would not receive the same levels of commission as before, and this was sufficient for the application of Article 4 (2) despite the fact that there had been no formal change in the employment contract.

From the Merckx case, it is not clear whether the change in remuneration has to be substantial although arguably this is implicit in the wording of Article 4(2).

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The Division of Competence between the Court of Justice and the National Courts

The final point of interest is the division of competence between the Court of Justice and the national courts in cases concerning the transfer of undertakings. Since the Sophie Redmond(2) case, where the Court made the first clear distinction between the expressions 'the transfer of an undertaking' and a legal transfer', it has been argued that these terms form the boundary line between the discretion of the national courts, and the power of the Court of Justice (see De Groot 1993). In essence the Court has repeatedly reaffirmed that it is the national courts which have the power to determine whether there has been a 'transfer of undertaking', on the basis of criteria set out by the Court of Justice. On the other hand, the Court of Justice itself will decide on whether or not there has been 'a legal transfer' within the meaning of the directive.

However the Court seems to have departed from this line of reasoning in the Schmidt case in which it stated that "a situation such as that outlined in the order for reference" fell within the scope of the directive. While Advocate General Lenz in Merckx argued that the Court may only make such findings in exceptional cases (para 18 of opinion ), the Court does not seem to agree. Thus while the Advocate General repeatedly reiterated the fact that "it is for the national court to appraise the facts in the light of the ... interpretative criteria in order to establish whether or not there is a transfer" and concluded that a transfer 'may' exist in the circumstances outlined by the national court, the Court of Justice does not once mention the discretion of the national court when deciding whether a transfer has taken place. On the contrary, the Court stated clearly that Article 1(1) of the Directive must be interpreted as applying to a situation

"where an undertaking holding a motor vehicle dealership for a particular territory discontinues its activities and the dealership is then transferred to another undertaking which takes on part of the staff and is recommended to customers without any transfer of assets." (para 32 of judgment )

This seems to leave very little discretion to the national court and would appear to show that irrespective of the division of competence acknowledged in previous rulings, the Court is nevertheless willing to intrude on this competence if it sees fit to do so. This would appear consistent with the Court's approach in other areas where it has frequently shown itself loath to respect divisions of competence which it considers to be inconvenient in a given instance.(3)

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Conclusion

The Merckx case raises a number of interesting issues particularly concerning the application of the Directive on the Transfer of Undertakings to dealership agreements; the application of the Directive in the case of liquidations; the extent of the employee's power to prevent the transfer of his contract or the employment relationship; and finally the division of competence between the Court of Justice and the national courts.

Although the Merckx case gave the Court a golden opportunity to set out comprehensive guidelines concerning the application of the Directive to dealership agreements, by and large it failed to do so. From the judgment it is unclear as to relevant importance attached to the various factors in concluding that a transfer had taken place. While it would appear that the fact that Ford was a majority shareholder in Anfo Motors was a significant consideration in coming to this conclusion, this is at best implicit in the judgment and there is no express statement of the Court to this effect. On the other hand, the decision clearly confirms the Court's ruling in the Schmidt case to the effect that the fact that there is no transfer of tangible or intangible assets will not prevent the application of the Directive.(4)

In relation to the other issues, while it would appear that the application of the Directive to voluntary liquidations was a foregone conclusion, Merckx provides useful authority for that proposition. Similar remarks can be made concerning the right of an employee to object to the transfer of his contract of employment or employment relationship. Finally, in relation to the issue of the division of competence, Merckx confirms that there is no hard and fast rule in the area, and if the Court is generally willing to recognise the discretion of the national court in deciding whether or not a transfer has taken place, it does not consider itself bound by this recognition.

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Bibliography

Antonmattei, (1996) 'La Saga de la directive no 77/187 du 14 février 1977: suite......sans fin' Droit Social, No 1 Janvier 1996

Davies, P (1996) 'Opting Out of Transfers' 25 Industrial Law Journal 247.

De Groot, C (1993) 'The Council Directive on the Safeguarding of Employee's Rights in the Event of Transfers of Undertakings: An Overview of the Case Law' 30 Common Market Law Review 331-350.

Footnotes

(1)See e.g. Case 135/83, Abels v Bedrijfsvereniging voor de Metaalindusries en de Electrotechnische Industrie, [1985] ECR 469; Case 186/83, Botzen v Rotterdamse Droogdamse Droogdok Maatschappij; Case 24/85, Spijkers v Benedik, [1986] ECR 1119; Case 287/86, Landsorganisation i Danmark for Tjenerforbundet i Danmark v NY Molle Kro, [1987] ECR 5465; Case 324/86, Foreningen af Arbejdsledere i Danmark v Daddy's Dance Hall, [1988] ECR 739;Case C-29/91 Redmond Stichting v Hendrikus Bartol [1992] ECR I-3189, Case C-209/91 Watson Rask [1992] ECR I-5755; Case C-392/92 Schmidt v Spar- und Leihkasse der früheren Amter Bordesholm, Kiel and Cronshagen [1994] ECR I-1311. Back to text.

(2)Case C-29/91 Redmond Stichting [1992] ECR I-3189 Back to text.

(3)Case C-392/93, The Queen v H.M Treasury ex parte British Telecom plc [1996] All ER (EC) 411. Back to text.

(4)It is interesting to note that initially the Cour de Cassation also adopted a liberal approach to the concept of a transfer. However when it became clear that virtually all transfers were coming within the scope of the legislation, the Cour de Cassation changed its approach and held that there had to be a legal connection between the two parties. It has since changed this approach in response to the rulings of the Court of Justice. See e.g. Soc 12 June 1986: J.C.P. 86, éd. E, II, 14790
Back to text.