Article 13 November 2018

New Supreme Court rulings on transfer of business

The Supreme Court of Finland recently gave three precedents defining the scope of a transfer of business.

In two cases (KKO 2018:65 and KKO 2018:66), a municipality had outsourced its intensive care services for the elderly to a third party service provider and later terminated the outsourcing agreement and taken over the service. In both cases, the service provider had terminated the employees' employment relationships due to the municipality refusing to take over the employees. The municipality considered that the situation did not constitute a transfer of business under the Employment Contracts Act and the employees claimed the opposite.

In the third case (KKO 2018:64), a municipality changed its service provider for schoolchildren's afternoon activities. The former service provider terminated the employment relationship of an employee due to cessation of activities while three other fixed-term employment relationships terminated at the time of change of service provider. The employee contested the termination arguing that the change of the service provider constituted a transfer of business.

Supreme Court's reasoning

According to the Supreme Court, the assessment whether the transferred businesses could be considered to have remained the same or similar after the transfer and constitute business transfers under the Employment Contracts Act must be based on an overall consideration whereby the nature of the business is taken into account.

In evaluating the transfers, the Supreme Court referred to the well-known criteria established by the Court of Justice of the European Union (CJEU):

  1. the type of business;
  2. tangible assets transferred;
  3. the value of the intangible assets transferred;
  4. whether the majority of the personnel has been transferred;
  5. customers transferred;
  6. whether the transferred business remained the same or similar after the transfer; and
  7. the period for which the business activities have been interrupted.

The Supreme Court further declared that the importance of each criterion established by the CJEU depends on the nature and special characteristics of the business activities in question. The key in assessing whether the transfer at hand is to be considered a transfer of business is to assess whether the most important factors in keeping the business running are transferred.

For instance, in the two cases concerning intensive care services, the Court considered the tangible assets, i.e. the premises and appliances, to be the most essential factor for the functioning of the business. Consequently – and somewhat surprisingly – the business of intensive care services for the elderly was considered to be non-labour-intensive. Therefore, the fact that the majority of the employees were not hired by the municipality was not the decisive factor in the assessment. As the core tangible assets were transferred, the Supreme Court found, based on an overall consideration, that the transfers constituted transfers of businesses.

In the case concerning schoolchildren's afternoon activities, the Supreme Court considered the business to be largely based on the personnel but also requiring appropriate premises and furnishing. Therefore, the business is neither asset reliant nor labour-intensive but it requires both. Thereafter, the Supreme Court stated that as the new service provider had continued providing the services in the same premises with the same furnishing to the same clientele, the transferred afternoon activities had remained similar enough rendering the transfer a transfer of business despite the fact that only one out of four employees had been hired by the new service provider.

Transfer of business assessment easy as ABC after the Supreme Court's rulings?

As the Supreme Court gave three precedents concerning transfers of business on the same day, the intention must have been to set rules for defining a transfer of business. Was this successful?

In one of the cases the panel of judges was not unanimous: two out of five judges were of the opinion that the transfer did not constitute a transfer of business. This may tell us of the difficulties the Supreme Court experienced in defining a transfer of business. The rulings, however, emphasised the importance of the overall consideration alongside with the nature of the business in question. The Supreme Court's rulings may have paved the way for a broader interpretation of a transfer of business and we shall see how they will affect the general understanding of the topic.

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