| Date | 9 April 1997 |
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| Judgment | Ayse Suzen -v- Zehnacker Gebaudereinigung GmbH ECJ C/13 95, 11 March 1997 |
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| The Issue | Transfer of employee rights on re-tendered local authority works and services. |
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| Implication |
A transfer of an undertaking may not occur where a contractor loses the continuation of a contract to a competitor at the end of its initial term. |
printThe Acquired Rights Directive of the European Community was put into effect in 1977 in order to ensure, as far as possible, that the rights of employees were safeguarded in the event of a change of employer as a consequence of a transfer of an undertaking, business, or part of a business. This Directive was given effect in the UK by the Transfer of Undertakings (Protection of Employment) Regulations 1981, commonly referred to as the TUPE regulations. Both the Directive and regulations continue to cause difficulties for the construction industry. Just as contractors were, however, beginning to become more confident with the application of the regulations, a decision of the European Court of Justice on 11 March 1997, in the case of Ayse Suzen -v- Zehnacker, will unfortunately throw everything up in the air again. The decision concerns a fairly common set of circumstances. A local authority puts out to tender a package of works and services and an external bidder successfully wins the contract for a pre-determined period of, say, 12 months. The TUPE regulations have applied where this process has been determined to be a transfer of undertaking, and accordingly the contractor will have taken over employment responsibilities for the council's workforce relative to these particular activities. Now, 12 months on, the contract is put out to tender once more. The contractor in place fails to win the contract this time around, and the contract is secured by a competitor. The question before the European court was whether this so called "second generation" contract would be covered by the Acquired Rights Directive. They held it would not. In arriving at this decision the European Court recognised that whilst the lack of any contractual link between the two undertakings successively entrusted with the contract may point to the absence of a transfer within the meaning of the Directive, this would not be conclusive. The European Court expressed the view that there is no need, in order for the Directive to be applicable, for there to be any direct contractual relationship between the transferor and the transferee. However, the transfer must relate to a stable economic entity whose activity is not limited to performing one specific works contract. In order to determine whether the conditions for the transfer of an undertaking are met, the court ruled that it is necessary to consider all the facts characterising the transaction in question. This would include, in particular, the type of undertaking or business, whether or not its tangible assets such as buildings and moveable property are transferred, the value of its intangible assets at the time of transfer, whether or not the majority of its employees are taken over by the new employer, whether or not its customers are transferred, the degree of similarity between the activities carried on before and after the transfer, and finally the period, if any, for which those activities were suspended. Accordingly, the mere fact that the service provided by the old and the new contractors is similar does not support the conclusion that an economic entity has been transferred. The loss of a service contract to a competitor cannot therefore by itself indicate the existence of a transfer within the meaning of the Directive. A contractor entrusted with a contract does not, on losing a customer, thereby cease fully to exist, and a business or part of a business belonging to it cannot be considered to have been transferred to the successful incoming contractor. Although the transfer of assets would be one of the criteria to be taken into account the absence of such assets would not necessarily preclude the existence of a transfer. What is evident from all of this is that contractors who have taken on local authority works or services where employee rights have been transferred should not now automatically assume that these rights can be off-loaded to an incoming contractor in the event that the contract is lost. Some contractors may find themselves trapped in these liabilities and there can be no doubt that this will be a factor that contractors must take into account when bidding for local authority competitively tendered services and term contract works.
CJ-9714
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