Employees have rights in a Norwegian transfer of business

Norway’s current Working Environment Act entered into force 1 January 2006. Due to the country’s membership in the European Economic Area (EEA), EU rules regarding transfer of undertaking apply, in principle irrespective of whether a sale is of shares or assets. These rules have since 1994 been incorporated in the Working Environment Act. If an acquisition or a merger constitutes a transfer of undertaking which falls within EU Directive 2001/23/EF, various obligations related to the employees of the target must be respected by both the seller and the buyer. Following last month’s look at merger regulations, in this article we examine the regulations regarding employees and how they operate in practice.

Transfer of undertaking

A transaction is considered a transfer of undertaking if it implies transfer of an autonomous unit that retains its identity after the transfer. In practice, a share sale in itself does not constitute a transfer of undertaking. In relation to asset sales, it must be considered whether the above criteria are complied with. The rules do not only apply to transfer of the entire business of a legal entity, but may also extend to transfer of departments, and may in principle apply to the transfer of only one employee.

If the rules apply, the Working Environment Act regulates the relationship to the employees in the transferred undertaking in detail. If only parts of a legal entity are transferred, it must be assessed as to which employees pertain to the transferred business. The main principle is that the transfer (which follows from an agreement which the employees are not a party to, and are not in a position to influence) cannot result in a reduction of the transferred employees’ rights or obligations. Accordingly, all rights and obligations of the former employer in force on the date of transfer must – as the main rule – be transferred to the new employer.

Important exemptions

However, important exemptions, e.g. with respect to collective (tariff) agreements and collective pension schemes, apply. The new employer may declare within three weeks from the transfer date that it will not be bound by the former employer’s collective agreement. The new employer may also normally terminate the transferred employees’ pension scheme and include them in its own existing scheme, even if this reduces the employees’ pension entitlements.

Furthermore, the former and new employer (seller and buyer) are jointly responsible for providing information to, and consulting with, the employees’ representatives. The information and consultations must include the background of the transfer, the transfer date, the legal, financial and social consequences of the transfer, changes in collective agreements, planned measures towards the employees, as well as the employees’ right to object to the transfer and to a preferential right to new employment. The discussions must have the aim of reaching an agreement. Furthermore, all employees must receive information on the same matters mentioned above.

Right to object

In the event of a transfer of an undertaking, the employees have the right to object to the transfer. The right must be exercised within a time limit set by the employer, which may be no shorter than 14 days after the above information was provided. An employee who exercises his or her right to object to the transfer has a preferential right to new employment with his or her former employer for a 12-month period after the transfer, subject to certain requirements. If the entire business of a legal entity is transferred, the exercise of the right to object to the transfer will normally lead to termination of the employment.

Protection against unfair termination represents an important part of Norwegian labour law. The basic requirement of the law is that a termination must be based on objective grounds of fact and fairness.

The transfer in itself does not constitute a sufficient reason for termination of employment agreements. A rationalisation or closure of the business, or parts of the business, resulting from the transfer will, however, normally constitute sufficient legal grounds for termination. This is not the case, however, if the employer is in a position to offer the employee another suitable post within the business. In practice, who to dismiss appears to present the biggest problem to employers. Qualifications (formal and informal) and personal suitability are normally considered as relevant and sufficient factors in themselves, and may be supplemented by criteria such as seniority, age and the social situation of the employee in question. In areas covered by collective (tariff) agreements, seniority will in practice often be decisive.

Mass redundancies

An important aspect is the employer’s procedural approach in relation to the planning of a large-scale termination of employees, so-called mass redundancies defined as the dismissal of 10 or more employees. Such redundancies must be discussed with representatives of the employees as early as possible with the aim of reaching an agreement. Redundancies must be reported to the public employment service and must not come into effect until 30 days after the employment service’s receipt of such notice.

A termination in connection with a transfer of a business is frequently supported by other arguments, normally related to a subsequent rationalisation or closure of the business. Terminations in this connection may meet problems, particularly bearing in mind the potential conflict of interest between employees of the purchaser and the vendor. Procedural problems may arise from the exercise of the protection rules against both purchaser and vendor.

Based on tariff agreements and also non-statutory law, the employer may also make employees temporarily redundant if there is a temporary need for a reduction of the workforce (so-called temporary lay-offs). The procedures in such cases will mainly follow the same principles as an ordinary redundancy. The employer will only be liable for salary for a limited time, after which the employees will be entitled to unemployment benefits from National Insurance. After 26 weeks, however, the employer’s obligation to pay salary will resume.

Arne Didrik Kjørnæs is a senior partner at Wikborg Rein in Oslo, and Tormod Ludvik Nilsen is a senior associate at Wikborg Rein in Shanghai. Simen Smeby Lium, a senior associate at Wikborg Rein in Oslo, also contributed to this article