What Happens to Employment Contracts When the Service Provider Changes in Cases of Transfer of Undertaking?

The legislator seeks to protect the continuity of employment contracts in the most diverse situations of economic life that may place them at risk, having reflected this approach in Articles 285 to 287 of the Labour Code with regard to the transfer of undertaking.

Accordingly, when a commercial establishment, or merely an economic unit, is transferred for any reason — often through a business transfer agreement or the awarding of a service provision contract to another entity — the employment contracts follow the transfer. It is common in sectors such as cleaning, security, and maintenance for the collective bargaining agreements applicable to these sectors to provide for specific rules.

The doubts that arise for all those involved in this matter are, broadly speaking, related to the fate of employment contracts, which is the subject of this article.

What Happens to Employment Contracts

Article 285 of the Labour Code provides that, in cases of transfer of ownership of a company, assignment or reversion of the operation:

• The position of the employer in the employment contracts of the respective employees is transferred to the acquirer;

• Responsibility for the payment of fines imposed for the commission of labour administrative offences is transferred.

This transfer occurs by operation of law and is not dependent on the will of the parties. Breach of the provisions of this rule constitutes a serious administrative offence.

The contractual conditions remain unchanged, namely with regard to:

• Employees’ remuneration;

• Employees’ seniority;

• Professional category;

• Functional duties;

• Acquired social benefits.

The transferor must take into account that it is jointly and severally liable with the acquirer for labour credits that became due up to the date of the transfer for a period of two years, without prejudice to any contractually established right of recourse.

Duties of Information

The transferor of the company, economic unit, or establishment must comply with the legal duties of transparency, namely:

• Communicate the content of the contract to the inspection service of the ministry responsible for the labour area (ACT), in the case of a medium or large company, and upon request of that service in the case of a micro or small company;

• Inform the employees’ representatives, or the employees themselves where there are no representatives, about the date and reasons for the transfer, its legal, economic, and social consequences for the employees and the measures that may affect them, as well as the content of the contract entered into between transferor and acquirer;

• Consult the workers’ representation with a view to reaching agreement on the measures to be applied to the employees.

These obligations are subject to certain deadlines, which will condition the moment at which the transfer itself produces effects.

Employee’s Right to Object

Although the legal regime provides for the transfer of employment contracts as they stand on the date of the transaction, the law grants the employee the possibility to oppose the transfer of the contract when it causes them serious detriment, identifying the following situations as examples:

• Manifest lack of solvency of the acquirer or a particularly difficult financial situation;

• Lack of trust by the employee in the work organisation policy of the new employer.

The employee has five working days to exercise this right, counted from the end of the period for the designation of a representative committee of employees or, if such committee has not been established, after the agreement or the end of the consultation referred to in Article 286(4).

This communication must also be made in writing by the employee to the employer and must include the identification of the employee, the contracted activity, and the grounds for the objection.

Given the short period granted to the employee to oppose the transfer, Article 394(3)(d) provides that, even after the transfer and based on the same grounds, the employee may terminate the employment contract with just cause. In this case, the communication will be made to the acquirer of the company, establishment, or economic unit.

A Reflection

The transfer of a company, establishment, or economic unit is a legally complex operation that produces automatic effects at the level of labour relations and involves a wide range of legal obligations for the entities involved. From the transfer of the employer’s position in employment contracts to joint and several liability for labour credits, including duties of information and consultation and the possibility for employees to oppose the transfer, this is a regime that requires particular attention to strict compliance with the rules provided for in the Labour Code. In addition to labour legislation, it is also important to consult the collective agreements applicable to each sector of activity.

In this context, the correct preparation and monitoring of these operations is particularly relevant, both to prevent legal risks and to ensure the stability of labour relations and the continuity of the activity. Specialised legal advice allows the timely identification of the legal implications of the transfer, the proper structuring of the process, and the avoidance of disputes or future liabilities for the companies involved.

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