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18 Dec 2015

Outsourcing transactions in Europe – does the Acquired Rights Directive apply?


When dealing with outsourcing transactions involving other European jurisdictions, one of the key questions that comes up is whether the Acquired Rights Directive ("ARD") would apply to that transaction.   In the UK, TUPE implements ARD and has provisions that cover a service provision change (e.g. an outsourcing/insourcing of services).  However, in other European countries which implement ARD, such as France, Germany and Spain, there is no equivalent service provision change wording in their domestic legislation.  In broad terms, the test that applies in determining if an outsourcing of services would be caught by ARD is whether there is a transfer of an economic entity which retains its identity.  This test has provided a level of uncertainty for parties involved in outsourcing transactions.  

Do assets and employees need to be taken on by the transferee in order for ARD to apply?

The short answer is no.  Previous case law in the European Court of Justice ("ECJ") has held that if there is a transfer of significant tangible assets and the transferee has taken on a majority of the transferor's employees, it is likely that ARD would apply.  However, the recent ECJ case of Administrator de Infraestructuras Ferroviarias ("ADIF") v Aira Pascual and others serves as a useful reminder that ARD can still apply even where there is no transfer of assets and the transferee does not take on the transferor's employees.  In this case, ADIF decided to insource the management of rail freight that had been provided by a supplier.  It failed to take on any of the supplier's employees and there was no transfer of assets (the assets that had been used by the supplier belonged to ADIF).  Nevertheless, the ECJ concluded that ARD could still apply to the insourcing of the management of rail freight in this particular case.  It referred the case back to the Spanish courts to decide whether ARD did apply in this particular case.  

The applicable test

The ECJ set out the "multifactorial" test in deciding whether there is an economic entity which retains its identity, stressing that it is necessary to consider all the facts characterising the transaction in question, including:  

  1. type of business/undertaking;
  2. whether tangible assets are transferred;
  3. value of intangible assets at the time of transfer; 
  4. whether the majority of employees transfer;
  5. whether customers transfer;
  6. degree of similarity between the activities carried on before and after the transfer; and
  7. the period, if any, the activities are suspended.

What does this mean if you are involved in an outsourcing of services in Europe?

In theory, any outsourcing or insourcing of services on the continent could be caught by ARD.  There are no blanket exceptions.  You would need to consider the factual circumstances of each transaction and the test set out by the ECJ in ADIF should help to assess the likelihood of ARD applying.


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