In connection with the outsourcing of tasks to an external company, which is popular these days, everyone thinks of the savings, smaller company size, and less responsibility. However, a special labour law rule must also be taken into account in connection with outsourcing, because the legal consequences of an unlawfully executed process can be more costly than the savings expected from it. In order to avoid this scenario, in this article we examine the legal background of the mentioned special labour law rule, and in the second part of the article, its practical operation, based on Hungarian and EU judicial practice.

1. Outsourcing from a labour law perspective

Outsourcing is placing one or more of the company's activities outside the organization. In most cases, this means that the company will not need the employees and/or infrastructure involved in the outsourcing after the process.

Instead of replacing the staff familiar with the tasks or replacing already installed infrastructure, it makes more sense, and it is more efficient if the outsourcer agrees with the external company regarding the handover of human and material resources, so the process does not have to be rebuilt, and in fact, the outsourcing can even be carried out without stopping the operation.

If the external company wants to hire employees previously employed by the outsourcer, the following must be examined before starting the outsourcing.

2. A possible consequence of outsourcing: Transfer of employment based on law

If, during the outsourcing, the external company wishes to take over one or more employees, the possible implementation of a special labour law rule, the transfer of employment[1] (hereinafter: Transfer of Employment) must be investigated.

The essence of the mentioned rule is that if the actual control over an independently functioning "unit" (e.g. the company's accounting department, but it can also be one person, e.g. a janitor) is transferred from one company to another, the employment relationship of the employees of the "unit" - in certain cases – automatically transfers to the receiving company

The main characteristics of the Transfer of Employment are summarized below:

Legal source of Transfer of Employment:

This legal institution is regulated in the Labour Code. Since it is based on an EU directive[2], it is also governed by EU law, including the case law of the Court of Justice of the European Union.

Purpose of the Transfer of Employment:

The legal institution protects the interests of employees in cases where control over an independent economic unit (e.g. a factory, a restaurant of a restaurant chain, accounting, etc.) is transferred to another company (for example, in case of outsourcing). In such situations, legal uncertainty may arise in connection with the employment relationship (e.g. the identity of the employer is not clear, administrative uncertainties, etc.) against which the law seeks to protect employees.

How Transfer of Employment works:

If the conditions for Transfer of Employment are met, the employment relationship of the employees in the economic unit will automatically be transferred to the receiving company by virtue of the law, and from then on, the receiving company will be the employer.

Consequences of Transfer of Employment:

• in such cases, the reason for termination by the employer cannot be solely related to the Transfer of Employment[3]
• the Transfer of Employment takes place automatically, therefore the transferring employer does not have to terminate the employment relationship, and the transferee does not have to conclude a new employment contract[4]
• in the case of Transfer of Employment, the transferor and the transferee must act in accordance with Labour Code in connection with the transfer of employees;[5]
• the employment relationship is continuous, so the time worked at the transferor must be considered by the transferee (for example, when calculating severance pay, notice period, etc.).

As you can see, the analysed labour law rule is complex, so we focus on the recognition of Transfer of Employment. If the employer suspect that it can be the case, we recommend consulting with a legal expert in connection with the outsourcing.

3. When does the Transfer of Employment take place?

According to the Labour Code, Transfer of Employment takes place in the event of a takeover of the economic unit based on a legal transaction.[6] Let's examine the elements of the definition:

“Economic Unit:”

According to the LC, the term “economic unit” means an organized group of material or non-material resources. The term should be interpreted broadly, meaning practically any organizational unit of any size that can be separated from other units and performs independent activities.

Judicial practice related to the concept:

Transfer of Employment can take place not only with the transfer of the entire company, but also by the transfer of certain organizational units or separable groups of employees. A clearly defined circle of employees affected by the agreement between the transferor and the transferee usually constitutes an economic unit.[7]

the size of the unit is not relevant, even a cleaning or yard keeper staff of 1-2 people can be considered an independent economic unit[8]

It is not necessary for the unit to be related to the company's production or service activities, areas performing a support function, such as accounting and payroll, IT services or cleaning, can also be considered an economic unit.[9]

Outsourcing typically takes place in relation to specific tasks (e.g. accounting, customer service), so it most likely affects an "economic unit".

“based on a legal transaction”

Outsourcing is typically based on a contract concluded with an external service provider, so this condition for Transfer of Employment can usually be established in case of outsourcing.

“Takeover” (+retaining of the identity)

The Transfer of Employment takes place upon takeover of the economic unit. It is necessary and at the same time sufficient to handover those resources, with the transfer of which the economic unit can retain its identity and continue operation. The examination criteria related to the takeover were developed by the CJEU (the so-called Spijkers criteria[10]), which are also used by Hungarian courts.

In our next article, we will examine the main aspect of the Transfer of Employment, the takeover of the economic unit, based on the extensive case law available, through practical examples, so we can also examine the practical implementation of the theoretical knowledge presented in this article.

4. Summary

In the first part of 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 is necessary to examine whether there is a transfer of an economic entity, and whether the transferred economic entity retains its identity, which can be established on the basis of the criteria established by the CJEU. In the next part of the article, we will analyse the so-called Spijkers criteria in detail, based on EU and Hungarian court decisions.

If there is a possibility of Transfer of Employment, we always recommend the involvement of a legal expert with experience in labour law during the implementation of the outsourcing.

 

[1] Sections 36-40 of the Act I of 2012 on the Labour Code („Labour Code” or „LC”)

[2] Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses

[3]Section 66 (3) a) of the LC

[4] Judicial decision published under No. BH 1995.434.

[5] Sections 37-38. of the LC

[6] Section 36 (1) of the LC

[7] A Munka Törvénykönyvének magyarázata (HVG-ORAC, 2020)

[8] CJEU Case C-392/92 “Schmidt”

[9] CJEU Case C-392/92 “Schmidt”, Hungarian Supreme Court EH 2014.03.M6

[10] CJEU Case C-24/85. “Spijkers”