Wednesday, October 9, 2013

Autumn Edition - October 2013

Dear all

Welcome to the Autumn edition of the newsletter. This edition, we have articles from Europe, the US and the Gulf Cooperation Council. We look forward to a bumper edition at Christmas - please contact me if you are interested in submitting an article on developments in your jurisdiction.

Helen Colquhoun
Withers LLP
Dual qualified NY/England and Wales

Collective Consultation in the US and UK

Unfortunately, in the current economic climate mass restructurings and layoffs have remained commonplace on both sides of the pond. However, the statutory obligations imposed upon employers in the US and the UK differ broadly, with US employers unsurprisingly having much greater flexibility (and employees thus having fewer protections) than their UK counterparts when mass redundancies are envisaged.

These key differences in statutory obligations can cause difficulties for multinational employers, particularly where global restructurings are envisaged, with employers facing not only two (or more) sets of differing legal obligations, but also different triggers for those obligations and different timescales for compliance. Forward planning and awareness of these differences is essential to ensure that employers do not inadvertently fall foul of applicable local legislation.

In the UK, employers have typically (if somewhat reluctantly) become well versed in the collective consultation obligations which apply when mass redundancies are proposed. In brief, collective consultation is required where an employer proposes to dismiss 20 or more employees from the same establishment within a period of 90 days or less. Where 100+ redundancies are proposed, employers were previously required to consult with employee representatives for at least 90 days before the dismissals took effect. Recent changes to reduce the burdens this obligation imposed have provided welcome relief to employers. Among these changes is a reduction in the consultation period for 100+ redundancies from 90 days to a minimum of 45 days. The minimum consultation period of 30 days for a proposal to dismiss 20-99 employees remains unchanged.

The reduction for larger scale layoffs is intended to reduce the uncertainty caused by lengthy consultation periods and to allow employers to implement business change more swiftly. However, it is important for employers proposing redundancies in the UK to keep in mind that such consultation, even for the reduced period, is still required to be ‘meaningful’ and to address ways of avoiding dismissals, reducing the number of redundancies and mitigating the effect of any dismissals.

Conversely, employers in the US have no federal statutory requirement to consult at all with employees in mass redundancy situations. Rather, under the Workers Adjustment and Retraining Notification Act (‘WARN’) covered employers simply have an obligation to provide 60 days notice to employees that redundancies will be taking place. Not only is no consultation required, but in addition the notification obligation is triggered only when redundancies are actually known to be taking place. This differs from the UK consultation regime under which the obligation on employers to engage in meaningful consultation is triggered much earlier; namely, when redundancies are in the proposal stage. Employers in the UK also need to build in adequate time before the consultation period commences to elect employee representatives where no existing representatives are in place. This serves to extend the forward planning which UK employers need to undertake before any redundancies can lawfully take effect.

The federal WARN regime also applies in a narrower range of scenarios than the UK consultation obligation. In brief, the WARN regime applies only where an employer with 100+ employees will be implementing a plant closing or mass layoff. Employees who have worked for less than 6 months in the last 12 months and employees who work less than 20 hours per week (unless those part-time workers collectively work at least 4,000 hours per week exclusive of overtime) are generally excluded when determining whether or not an employer has met the 100+ employee threshold for the notification obligation to apply.

For the purposes of WARN, a ‘plant closure’ is defined as a facility or operating unit closing for more than 6 months, or where 50+ employees will lose their jobs during any 30 day period at a single site of employment. A ‘mass layoff’ is defined as 50-499 employees being affected during any 30 day period at a single employment site if these employees represent at least 33% of the employer’s workforce at the site where the layoffs will occur. If over 500 employees will be affected, the 33% rule does not apply.

As a further concession to employers to maximize their flexibility to simply implement business change, the 60 day advance notification requirement can be reduced where the layoffs are the result of a company’s financial difficulty, unforeseen business circumstances or natural disaster.

Employers in the US do, however, have one added complication to consider which UK employers do not; namely, the requirement to comply with any state legislation which can apply in addition to the federal WARN obligations outlined above. Local state legislation tends to be slightly more protective towards employees than the federal-level legislation, but typically simply by extending the notification period or ensuring that the notification obligation is triggered at a lower threshold. It is therefore important for any employer in the US to consider both local and federal level protections.

In summary, employers in the US generally have far greater flexibility to implement required business restructurings and layoffs without being legally required to consult with employees or their representatives first. However, failure to comply with the notification requirement does carry financial penalty, with employees being able to claim pay and benefits for the period of violation (up to a maximum of 60 days). This is similar in remedy to the UK regime, whereby employees can claim up to 90 days’ pay for failure to comply with the consultation obligations.

Any employer with operations in more than one jurisdiction therefore needs to tread carefully, and with forward planning, if redundancies are planned overseas or globally to avoid unwittingly falling foul of local legislation and incurring the costs which result.

Helen Colquhoun, Withers LLP

Labor and employment in the Gulf Cooperation Council - a strategic overview

The Gulf Cooperation Council (GCC) comprises the states of Bahrain, Kuwait, Oman, Qatar, Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE). It was formed on 11 November 1981 and launched a common market on 1 January 2008 which remains in a state of development. All six economies are characterised by being rentier (meaning they are largely state run and oil based). The GCC labour force has been characterised by high rates of public sector employment for GCC nationals and a private sector workforce dominated by expatriate labour. In the coming years, as attempts are made to develop and diversify the national economy and workforce, employment legislation is increasingly on the government agenda.

The GCC legal system is a civil law system modelled on the laws of Egypt which in turn are modelled on the Napoleonic Codes of France; the exception is Saudi Arabia which although it has a number of codified laws, has a legal system based on Sharia law. Each GCC country has a Labour Code providing a framework for minimum employee entitlements and a consistent approach to labour matters.

Local Law and Expatriates

Local law will have mandatory application on any individual working within a GCC country and an integral part of obtaining work and residency authorisation for non-nationals is the registration of a local employment contract. Both the contract and the authorisations must be obtained by a locally based entity, meaning that many expatriate employees on international secondment or assignment have dual employment contracts. Senior employees, even when locally recruited and employed, may often also have dual contracts (one with the local entity and the other with the holding company or main operating company outside the region) due to corporate governance reasons (for example a need to have a contractual agreement with the listed entity at which level regulatory duties will apply).

It is also worth noting the special function of an entity's General Manager whose name appears on the local entity's trade licence and to whom statutory duties apply, such as in relation to ensuring the company submits audited accounts and complies with regulatory requirements. The General Manager can face personal civil and criminal liability for corporate actions. A key consideration is putting in place adequate powers of attorney to a General Manager and other key senior staff, with regard to signatory authorisations and issues such as the power to enter into client contracts.

Payment of remuneration and benefits to international assignees can also be problematic, with local labour codes stipulating payment of employees in local currency in country. As a result of the economic crises and a desire to regulate the labour market, Kuwait, KSA and UAE have also introduced a monitoring system to ensure employees are paid by direct electronic transfer in country leading many employers to split payroll for seconded employees.

Minimum Employee Entitlements

The labour codes set out requirements in relation to notice, holiday, work hours, probationary periods, sick leave, maternity and Hajj.

The labour codes also stipulate minimum rest breaks and statutory overtime for work in excess of the 8 hour day, work on a week-end and on a public holiday. Another key restriction is an employer's ability to terminate employment for gross misconduct which is strictly regulated and permitted only for stipulated reasons.
The greatest employment related liability is a terminable benefit known as End of Service Gratuity (Gratuity) payable on termination (whether due to employee resignation or dismissal) other than if termination is for gross misconduct. Gratuity is conceptually akin to a pension entitlement and is payable to non-national employees and to nationals only in so far as their earnings are above the maximum earnings limit for compulsory state pension contributions. The formula for calculating Gratuity differs within the GCC as follows (note that in certain GCC countries Gratuity is reduced if the employee resigns):

• Conditional on 12 months' service;
• 21 days' basic salary (plus commission if applicable) for each complete year
• 30 days' basic salary (plus commission if applicable) for each complete year over 5 years
• Cap of 2 years' basic salary (plus commission if applicable)
• Pro-rata entitlement for part years
• Reduced if employee resigns in first 5 years
• ½ month's remuneration for each year
• 1 month's remuneration for each year over 5 years
• Pro rata entitlement for part years worked
• Conditional on 12 months' service
• 3 weeks' basic salary for each complete year of service
• 15 days' remuneration for each complete year of service
• 1 month's remuneration for each complete year over 5 years' service
• Cap of 1.5 years
• 15 days' remuneration for first 3 years of service
• 1 month' s remuneration for each year over 3 years
• Conditional on 12 months' service
• 15 days' basic wage for each year
• 1 month's basic wage for each service year over 3 years

Common Law Jurisdictions : QFC and DIFC

In an effort to establish global financial centres, Qatar and the Emirate of Dubai have established free zone areas which operate separately to the wider national civil law system. Both the Qatar Financial Centre (QFC) and the Dubai International Financial Centre (DIFC) are common law jurisdictions with separate civil and commercial laws, as well as independent courts modeled on common law and in which the default position for the purposes of legal construction and interpretation is English law. Both the QFC and the DIFC have separate employment laws applicable to entities and employees established and based within their jurisdictions. Both laws provide for minimum employee entitlements but notably do not provide for any entitlement to claim unfair dismissal. The QFC employment law also does not provide for Gratuity (although there are proposals to amend the law to provide for this benefit).

Workforce Nationalisation

With the oil boom in the 70's and increased economic prosperity, the GCC has experienced a demographic boom (75% of GCC populations are under 25, with youth unemployment ranging from 20 to 30%). Between 2010 and 2015, 4.5 million GCC nationals will enter the workforce and will have to look to the private sector for employment. With this imperative in mind, workforce nationalization is increasingly being put onto a statutory footing with sector based quotas imposed, an obligation on employers to train nationals to take on more roles and restrictions on employers being able to obtain work and residency authorizations for non nationals. There is a general labour market test set out in each labour code, however, the GCC governments (with the exception of KSA) have not to date strictly enforced these through requirements such as minimum advertising requirements or strict recruitment processes.

The range of measures in this area varies across the GCC with the following quotas applying (the quotas do not apply within free zones and wouldn't apply in the QFC or DIFC):

Kuwait: banking (60%); financial services and investment (40%); petroleum and refinery (30%). Private sector employers failing to meet quotas are unable to contract with Government entities;

Bahrain: the quotas are sector dependant (each sector having an applicable quota) and range from 5% to 80%, most industries being subject to a quota of 20-50%;

Oman: the Ministry of Manpower sets quotas for every sector which then apply for four years. Quotas are usually high, above 50% and many sectors are subject to a quota of up to 90%;

UAE: banking (4%), insurance (5%), retail (2%); certain roles are reserved for nationals (largely administrative roles); and

KSA: every employer is subject to a quota depending on its size and industry under the Nitiquat system which awards points for each criterion complied with and categorizes employers into grades according to their employment of nationals; the higher the grade the more visas the employer is granted to employ foreign nationals and the more administrative benefits it receives. Typical quotas are at least 30 to 35% and 40 roles (mainly administrative) are reserved for KSA nationals. Employers with a ratio of less than 1:1 of nationals to non-nationals must pay a levy of SAR 2400 for each foreign employee, payable at the time the work and residency authorizations are applied for or renewed.

Legislative Reform

Most GCC countries acceded to the WTO in the mid 1990s (Bahrain and Kuwait in 1995, Qatar and UAE in 1996, Oman in 2000) and KSA joined in 2005. As part of the accession agreements and integration process, each GCC member state has embarked on a programme of legislative reform, including revising restrictions on foreign ownership, updating the company law, foreign investment laws and following the economic crisis introducing insolvency laws for the first time. Part and parcel of these reforms is labour legislative reform with Kuwait issuing a new labour code in 2010, Bahrain in 2012 and KSA and UAE introducing reforms by way of amending ministerial resolutions and royal decrees. Much of this reform is aimed at closing the gap between the private and public sectors in terms of benefits and pay so as to encourage the employment of nationals in the private sector, introducing minimum wages, and liberalizing the employee sponsorship system so that foreign employees are able to readily change jobs without employer consent. Other reforms have also included bringing domestic workers within the remit of labour codes (already a reality in KSA and Bahrain) and regulating labour supply from labour exporting countries such as India, Philippines and Indonesia. Introducing discrimination legislation is also another area of recent attention, Bahrain's new labour code providing for non discrimination provisions with regard to recruitment, terms and conditions of employment and termination. Kuwait's revised labour code also prohibits termination based on discrimination due to sex, race, and religion. It remains to be seen whether and how other GCC countries follow suit.

Sara Khoja, Clyde & Co, Dubai

Significant changes to case law and legislation in France, Germany and the UK impact European cross-border asset deals


As employment lawyers, we know that a European cross-border deal involves a delicate balance between meeting the commercial drivers and time-scales for the deal and complying with local laws. Typically, we advise on whether and how to comply with duties to inform and consult the European works council, local works councils, recognised trade unions or other employee representative bodies, whether the identified employees will transfer by operation of law pursuant to the Acquired Rights Directive (EC 2001/23/EC) (“Directive”) as implemented in each local jurisdiction as well as how to deal with those employees who are not wholly assigned or do not automatically transfer. When advising, we need to be alive to the latest changes in local laws and how they impact the deal timetable, structure, documentation, signing, completion and any post-deal integration activities. In this article we draw together some of the more significant recent legislative changes and current trends in case law in France, Germany and the UK including the recent Law on Employment Security (n°2013-504 of June 14, 2013) (the “Law on Employment Security”) in France and the proposed changes to the UK’s Transfer of Undertaking (Protection of Employment) Regulations 2006 (“TUPE”) announced last month.


Structuring asset deals involving France

In France, the signing of an asset deal requires prior information and consultation with any relevant works council. In order for information and consultation with the works council to be valid, the employer is supposed to still have the ability to modify the terms of the deal in light of comments raised during the consultation process even if such modification rarely happens in practice. This is the reason why the consultation is supposed to be conducted in advance of the signing of any agreement to buy the assets. A failure to comply with this obligation of prior consultation is a criminal offence under Articles L. 2328-1 and L. 2346-1 of the French Labour Code. Whilst it is possible in theory for officers of the company to be imprisoned for up to one year, the more likely sanction for breach is a fine of up to €3,750 for an individual officer of the company, €18,750 if the company itself is convicted and/or an injunction preventing the transaction completing until the employee representatives have been duly consulted. Buyers and sellers have often wrestled with the significant impact of this requirement on deal structure and timing. Historically, buyers and sellers have taken a commercial view and used the “conditional precedent” deal structure whereby the parties sign an asset purchase agreement with completion delayed pending satisfaction of a condition to inform and consult with the works council(s).

For some time now, parties to French transactions have taken a different approach which is now filtering through to cross-border asset deals involving France. This new approach is known as an irrevocable offer or undertaking and is a form of put option. The irrevocable offer (set out in a form of letter) is negotiated at the same time as the asset purchase agreement. The irrevocable offer is executed by the buyer and the offer is then presented for consultation to the works council. Once consultation is completed, the seller accepts the offer and the parties execute the asset purchase agreement. Reducing the length of French works council consultation Once the parties have structured their deal, they still need to carry out the information and consultation process. Although, ultimately, the opinion of the works council is not binding and cannot prevent the transaction, the consultation process is usually time-consuming. For example, the works council can delay providing its opinion to negotiate concessions from the buyer regarding redundancies or variations to terms and conditions that will apply post transfer. Therefore, it is not unusual for the works council process to delay completion by several months.

However, the new Law on Employment Security is a radical attempt by the French government to limit the length of this consultation. Once a new edict (expected in October) is introduced, the timeframe for consultation is expected to be reduced to as little as 15 days unless otherwise agreed between the employer and the works council. Article L.2323-3, al.3 provides that if the works council has not opined before the end of this timeframe, it will be considered to have been consulted and to have rendered a negative opinion, thus enabling the seller to proceed with the transaction. But, the parties will still need to be mindful of other obligations. For example, Article L.2323-4 provides that the works council can apply to the president of the civil court (Tribunal de Grande Instance) to extend the consultation period and order the provision of further information if it considers that the works council is facing serious difficulties in rendering its opinion due to insufficient information.

Co-employment post-transfer

Another unusual feature of asset transfers in France arises from the divestment of a business where employees are not 100% assigned to working on the business or assets transferring. In France, there is the possibility that individual affected employees may end up after a sale having their full time employment split into two part-time employments with the seller and the buyer. Under this structure an employee partially assigned to the transferred business transfers to the buyer in respect of that part of his employment but remains employed by the seller in respect of the rest. This structure of two concurrent part-time employments contracts clearly causes practical difficulties. A French Civil Supreme Court case from March 2010 (Cass. Soc. March 30, 2010 no 08-42.065, Sté Bécheret v./ Lescail) led many to consider that this practice of co-employment had ended when it held that the employee must totally transfer to the buyer where the bulk of his activity is with the transferred business. However, a more recent decision of the same Civil Supreme Court, (Cass. Soc., September 28, 2011, no 09-70.689 Sté Ciba v./ Bucher) reaffirms that the principle of co-employment remains. Therefore care still needs to be taken to address issues of assignment as part of the information and consultation process and at completion. This therefore remains something that parties to a French asset sale must be alive to.


Definition of an operating unit and allocation of employees

In its decisions of 24 January 2013 (ref. no. 8 AZR 706/11) and 21 February 2013 (ref. no. 8 AZR 877/11), the Federal Employment Court in Germany has handed down guidance to assist when deciding if article 613a of the German Civil Code, the German implementing legislation for the Directive (“article 613a”) applies to the sale of part of a business. It held that a ‘transfer of an economic unit’ for the purpose of article 613a requires an independent, separable organizational unit at the seller pursuing a purpose within the overall purpose of the business and that indicators for a separate operating unit are autonomous management and a self-determined employment of the workforce. In addition, the ECJ’s decision in Klarenberg v Ferrotron Technologies GmbH (ref. no. C-466/07) held that there does not have to be continued organisational independence in the buyer’s structure post-transfer. At the same time, the Federal Employment Court also considered the issue of assignment to an operating unit. Pursuant to the decisions, the employees need to work predominantly for a unit to be allocated to it. Interestingly, if an employee works equally for several units, the employer has the right to decide which unit the employee is allocated to for the purpose of the transfer.

Post-sale transitional services agreements/co-operation contracts

It is not uncommon for the parties to a transaction to agree a transitional services agreement (known in Germany as a co-operation contract), under which, following the sale of assets, the seller continues to work with the transferred assets on behalf of the buyer. Such agreements are often used to accelerate the closing of a deal and to provide a smoother transition from seller to buyer. The Federal Employment Court held in its decision of 27 September 2012 (ref. no. 8 AZR 826/11) that, where a buyer and seller agree a co-operation contract, article 613a will only apply to transfer the employment of affected employees if there is a de facto transfer of the control over the business. Therefore, unless the buyer has operational control under any such co-operation contract there may not be an automatic transfer of employment. In light of the court’s decision, such co-operation contracts maybe a way of avoid or at least delay the application of the provisions of article 613a.

Equal treatment

There have been a number of cases confirming that it is lawful for there to be differences in treatment and pay between existing employees and new joiners who transferred by law under article 613a if there are objective reasons for such differences. In the latest of the cases, the Federal Employment Court has held in its decision of 19 January 2013 (ref. no. 3 ABR 19/08) that a group-wide agreement in relation to a company pension scheme could include provisions limiting eligibility to directly engaged employees (and excluding those acquired under article 613a) as the company is not able to predict the exact terms of the employment contracts of staff acquired under article 613a.

IT services constitute labour-intensive businesses

The labelling of a business as asset-reliant or labour-intensive can impact whether the Directive (as implemented locally) applies to the transfer at all. In an interesting decision of 21 June 2012 (ref. no. 8 AZR 181/11), the Federal Employment Court held that an IT department can be a transferable business unit and IT services are labour-intensive. As a result, whether the employees transfer is a key factor when deciding if there has been a transfer of undertaking under article 613a. Moreover, the court ruled that IT equipment (such as PCs and software licences) only supports the workers and therefore whether or not it transfers is not the decisive criterion. In order to decide what percentage of employees need to transfer for it to constitute a transfer of undertaking, the court assessed the qualifications of the individual employees. In this case, the new IT service provider took over 50 out of 80 employees (62%) and there was a transfer of undertaking. Applying this more widely, we anticipate that a transfer of more than 50% of the workforce will now trigger a transfer under article 613a. The court noted that most IT services require an average IT background but, interestingly, it held that in some cases the transfer of just a few special employees with exceptional know-how may suffice to transfer a business, but the lower the qualifications of the employees the higher the percentage of transferred employees required for a transfer of undertaking.

The UK

On 5 September 2013, the UK government published the response to its consultation regarding changes to TUPE, which are due to come into effect in early 2014. The government’s stated rationale for these changes is to improve TUPE’s effectiveness and flexibility and to align it more closely with the wording of the Directive. However, the government has abandoned its proposal to amend the service provision change rules and settled on a series of more limited changes than many expected. We set out below the legislative changes and briefly comment on their likely impact.

Service provision changes

The UK rules on service provision changes which apply to outsourcings, in-sourcings and re-tenders will remain but the rules will be amended to reflect the case law position that for there to be a TUPE transfer, the activities carried on after the service provision change must be “fundamentally or essentially the same” as those carried on before.


Relocating a workplace following a transfer in the UK will become “an economic, technical or organisational reason entailing a change in the workforce” (ETO reason). Therefore, dismissals resulting from relocations will no longer be automatically unfair.

Changes to collectively agreed terms and conditions

In line with the ECJ decision in Parkwood Leisure Limited v Alemo-Herron C-426/11, the government is proposing a static (as opposed to dynamic) interpretation of collectively agreed terms, meaning such terms will remain as at the date of transfer and transferees will not be bound by subsequent changes to collective agreements over which they have no control. Under the TUPE changes, it will now be possible to vary terms derived from collective agreements from 12 months after the transfer provided the overall change is no less favourable to the employee. This will not equate to a universal power for the employer to vary or harmonise all terms but it will allow such changes agreed with staff (even if partly less favourable) to be valid. We anticipate that there will be significant scope for litigation over whether a change is less favourable overall.

Collective redundancy consultation

For the purposes of a UK employer’s duty to carry out collective redundancy consultation (section 188 Trade Union and Labour Relations (Consolidation) Act 1992), the transferee will be able (with the transferor’s agreement) to begin collective redundancy consultation before the transfer. Pre-transfer consultation will be entirely voluntary, must be meaningful and will not be able to finish before the date of the transfer but we anticipate that this new law could significantly reduce the costs for a transferee where redundancies are inevitable.

Employee liability information

Transferors will have to provide employee liability information 28 days before the transfer date rather than the current 14 days.

Micro businesses

Employers with ten or fewer employees will be allowed to consult directly under TUPE with affected employees if there are no existing employee representatives no an independent trade union.

Changes to the ability to vary terms and conditions and make transfer dismissals

To avoid TUPE being interpreted more widely than required, the current two pronged definition of void contractual changes (regulation 4(4)) and automatically unfair dismissal (regulation 7(1)) will be replaced by a new test, likely limiting prohibited changes/dismissals to those caused by “the transfer itself” and not including reference to “reasons connected with the transfer”. An exception for changes/dismissals caused by a transfer that amounts to an ETO reason will remain. The changes to regulation 4 will also make clear that contractual provisions which would have allowed changes to a contract before a transfer (such as a mobility clause), will continue to be exercisable after a transfer. We expect litigation in relation to the uncertainty as to whether the reason for a change/dismissal is the transfer itself or a connected change.


Cross-border asset deals involve a significant number of moving parts. In this article, we have only considered some of the key latest legislative and case law changes for three jurisdictions. Whilst there is no substitute for local advice, in order to understand how our respective jurisdictions fit together for the project timetable, the structure, the deal documents and the information and consultation exercise, we all need at least an overview of these differences and an understanding of when significant changes impact our advice. As some of those legislative changes bed down (or in the case of the UK are implemented) we are left with the conclusion that whilst we may all derive our business transfer rules from the same source, the implementation of its principles into local law and the interpretation by local courts can have quite different and interesting outcomes. Suzanne Horne, Deborah Sankowicz and Stéphane Henry are partners and Tom Perry is an associate at Paul Hastings (Europe) LLP and Jan-Ove Becker is an associate at Vangard Rechtsanwälte.