Solution outsourced? – Case comment on C-458/12 Lorenzo Amatori

Julian Emanuel Titze

LLM student, King’s College London

 

A transfer of undertaking providing for the continuity of employment relations is usually in the interest of employees. This was, however, not the case in the preliminary ruling Amatori handed down by the CJEU on 6^th March 2014. In its first judgment on transfer of undertakings after the highly contested ruling in Alemo-Herron[1] last year, the Court clarified the freedom of action Member States enjoy to define a transfer beyond the Acquired Rights Directive[2]. Upon the particular facts of Amatori, the application of this finding seems to be in conflict with the purpose of the Directive.

 

The facts of the case concern an outsourcing operation by Telecom Italia. The liberalization of the telecommunication market in Italy resulted in increased competitive pressure. As the incumbent, Telecom Italia carried out a reorganisation in 2010 to drive down costs.[3] It decided to formally split its IT operations department and outsource part of them. The operation of the software and testing services was bundled and transferred to a subsidiary company called ‘Shared Service Center’. The innovation and design operations were kept in the mother company and continued to collaborate with the outsourced employees.

Lorenzo Amatori and other claimants sought a declaration from the Tribunale di Trento that the transfer could not be relied on and their employment with Telecom Italia continued. On 20^th September 2012 the Italian court decided to stay its proceedings and make a preliminary reference to the CJEU to ask the Court whether the Acquired Rights Directive 2001/23 precluded national legislation such as article 2112 of the Italian Civil Code. It provides for the continuity of employment relations without the employee’s consent in the case of a transfer of an economic entity that retains its identity. It allows the transferor to identify a functionally autonomous economic entity for the purpose of the transfer.

The question arose whether the Directive precluded defining a transfer without the need to identify a functionally autonomous economic entity existing before the time of the transfer. Linked to this issue is Member States’ freedom of action in the context of a partial minimum harmonization in the area. The application of implementing measures is particularly problematic where a transfer of undertaking is to the material detriment of an employee.

Having revisited the notorious notion of a transfer of undertaking (I), the case revealed the ambiguous nature of a transfer for employees (II).

 

I) The notion of a directive transfer revisited

The Court explained that an economic entity to be transferred must have been independent before the transfer, whereas the transferor’s control over the transferee is immaterial to fall within the scope of the Acquired Rights Directive.

 

A) Independence of the economic entity before the transfer

The CJEU’s point of departure is to recall its previous case law on the notion of a business transfer under Article 1 of the Directive. There must be an economic entity that retains its identity (Spijkers[4] criteria). In addition, the object of this transfer must be a stable economic entity with a sufficient degree of functional autonomy.[5] As can be deduced from Art. 6(1) of the Directive, this autonomy need not be preserved in the transferee’s organizational structure, i.e. a transfer cannot be avoided by a reorganization following the transfer.[6]

However, “the use of the word ‘preserved’ in the first and fourth subparagraphs of Article 6(1) means that the independence of the entity transferred must, in any event, exist before the transfer” (Amatori paragraph 34). If a transferor bundles specific operations ad hoc in order to source them out, it is doubtful whether this will be the case. The present case is therefore likely to fall outside the scope of the Directive. Was there not a differing provision in Italian law, this would be a new way to avoid the application of the transfer guarantees. Arguably, the transferee doesn’t have the economic advantage of taking over a business as a going concern in such a case. Nevertheless, this seems to be an easy way to circumvent the guarantees of the Directive in Member States other than Italy.

 

B) Control over transferee immaterial

Unsurprisingly, the Court rejected the claimants’ argument that there cannot be a transfer of an undertaking where the transferor exercises control over the transferee, notably a subsidiary. As the Court had decided before, the companies in question may well be part of the same group.[7] The emphasis of the Court on the formal separation of distinct legal personalities aims to avoid abuse and guarantee the safeguard of the rights of employees. However, this line of reasoning sits uncomfortably with the CJEU’s functional notion of an employer in the Heineken[8] case and does not sound very convincing, where a transfer is to the material detriment of an employee[9].

 

II) The ambiguous nature of a transfer for employees

The Court makes it clear that Member States are free to adopt a wider concept of a transfer than the Directive. Upon the particular facts of the main proceeding, its application of this finding appears to be in conflict with the objective of the directive.

A)     A partial minimum harmonisation

Having indicated that services bundled ad hoc to be outsourced are not covered by the Directive, the CJEU analyses whether a national law such as article 2112 Italian Civil Code is compatible with the Directive. By not requiring functional autonomy before the transfer, Italian law essentially adopts a broader notion of a transfer than the directive.

The Court refers to the preamble of the Directive providing for the protection of employees by appropriate measures. “Therefore, the mere lack of functional autonomy of the entity transferred cannot, in itself, prevent a Member State from ensuring in its national law for the safeguarding of employees’ rights after the change of the employer” (paragraph 39). To support this finding the Court refers to Article 8 of the directive allowing for regulations more favourable to employees than the directive itself (minimum harmonisation). Moreover, it refers to the fact that Article 4(1) of the Directive doesn’t harmonise the general protection against dismissal in national law, but merely excludes a dismissal on the ground of a transfer itself (partial harmonisation).

This is an important finding for the UK. Its TUPE Regulation[10] also adopts a broader notion of a business transfer. The legal effects of a transfer are not only attached to a ‘directive transfer’ under Art 3(1)(a), but also beyond the scope of the directive to service provision changes under Art 3(1)(b). The contested recourse in Alemo-Herron to the transferee’s freedom to carry out a business under Article 17 of the Charter of Fundamental Rights has been interpreted as changing the nature of the harmonisation of business transfers from “floor to ceiling”[11]. This threw some doubts on the compatibility of the TUPE regulation. Amatori now makes it clear that Member States remain free to adopt a wider concept of a business transfer than the Directive. However the Court should have explained this distinction in the judgment. Arguably, it is based on the fact that the notion of a transfer discussed in Amatori defines the scope of application of the directive, whereas Alemo-Herron concerned the interpretation of its legal effects. It is unfortunate that the Court decided to deal with the case without a written opinion of an Advocate General. Upon closer examination Amatori contains new questions of law that should have been further analysed.

In summary, if the Tribunal di Trento finds that the outsourced services were not functionally autonomous before the transfer – as indicated by the CJEU – the Directive doesn’t preclude the tribunal from attaching the legal effects of a business transfer to this operation. It should be noted that in any case, the Italian courts should verify if article 2112 Italian Civil Code is really intended to deviate from the directive or if its interpretation should be modified in line with the interpretation of the CJEU.

 

B) An application of the Directive in conflict with its purpose

In order to approve of Member States’ freedom of action to adopt a broader notion of a transfer, the Court refers to the need of protecting employees from the risks of business transfer. With reference to Rask[12] the Court recalls that the aim of the Directive is to “ensure that the employee is protected in his relations with the transferee to the same extent as he was in his relations with the transferor under the legal rules of the Member State concerned” (paragraph 41). No reference is made to the most recent ruling on the directive in Alemo-Herron. In that judgment, the Court suggested for the first time that the objective of the Directive was not only protecting employees concerned by a transfer, but to ensure “a fair balance between the interests of those employees (…) and those of the transferee”[13]. It can be inferred that the Court’s Ninth Chamber doesn’t seem to endorse such a re-interpretation of the objective of the Directive.

Unfortunately, it did not take into account the characteristics of the corporate transfer at hand. Upon the particular facts of the main proceeding, the assumption that a wider transfer notion under Italian law was in line with employee protection was mistaken. In fact, Mr. Amatori sought to defend himself against an outsourcing transfer materially undesirable for him.

In Member States like Italy where collective agreements are legally binding on the parties, employers such as Telecom Italia use transfer arrangements in a purposeful way to modify the employment conditions of their employees.[14] This can be done by transferring staff to a (subsidiary) company bound by a less generous collective agreement. If the wording of Art 3(3) of Directive 2001/23 seems to allow such practice, the Court’s ruling in Scattolon has created a heated debate whether the purpose of the Directive precludes any overall deterioration of collective agreement provisions. A preliminary reference[15] by the Austrian Supreme court in the proceeding between the Austrian Trade Union Federation and Austrian Airlines about the continued effect of a defunct collective agreement of the transferor could clarify matters.

The underlying contradictions about the purpose and effect of the Acquired Rights Directive that surfaced in Alemo-Herron remained undiscussed in Amatori. It is to be hoped that the preliminary reference by the Austrian Supreme Court will give rise to an extended Advocate General’s opinion engaging with corporate practice and the rationale of the Directive. For the time being, Amatori exemplifies that the extending the scope of a transfer is ambiguous for employees. If the legal consequences of a transfer can include a deterioration of collectively agreed work conditions, a closer scrutiny of transposing regulation will be warranted. The Court must double-check whether Member States’ regulations going beyond the directive are “more favourable to employees” (Article 8 of the Directive) upon the particular facts of a case. In the absence of legally binding collective agreements under UK law, this should not be a problem for the compatibility of the British TUPE regulation.