Transfer of undertakings and the right of objection from a Portuguese vantage point

Abstract

This article seeks to analyse the right of the employee to object to her employment contract being transferred to a new employer (transferee) under the framework of the transfer of undertakings. I will first address the terms, basis, and consequences of the right of objection in accordance with the Portuguese Labour law amendment of 2018. Subsequently, I will show how that right is already being divergently interpreted by the national courts. In conclusion, I will argue that despite the fact that the Portuguese final legal outcome restricted, or sought to restrict, the right of objection to the existence of motives to do so, and regardless of the intense debate in both the doctrine and jurisprudence around it, the social and legal benefits that are inherent to the model will not be outweighed. In fact, the legal enshrinement of the right of objection in Portugal has had a significant impact on the protection of fundamental employment rights.

1. Introduction

Neither Council Directive 2001/23/EC nor any of its predecessors provide for employees from the transferred economic entity who wish to object to their employment contracts being transferred to the transferee, whilst bound to their first employer (transferor), even if over the head or against the will of the latter.

It must be said that it was not expected that the provision for this right be clear, as the aim of the Community law was mainly to boost (or at least enable) economic activity, namely, company mergers and acquisitions. In fact, though ‘discreetly’, the Directive's own Preamble did not omit this specific motivation by considering that variations regarding transfers among Member States can have a direct effect on the functioning of the common market.

In truth, although the Community Directive was aimed at ‘safeguarding [of] employees’ rights’ affected by the transfer of the undertaking, it was, in fact, anchored to the purpose of building a European market, one which needed to be ‘harmonised’, mitigating the ‘systemic noise’ created by the differing voices on national employment legislation which were subject to the erosion caused by the demands of a political, social and economic context that involved more than the classic nation-state limitations.

The importance of the social dimension of employment relationships must, however, not be dismissed, including the need to protect employees’ rights.

Ultimately, considering the above, the response to the question of whether the right of objection is provided for or not depends on what the Directive aims to achieve. If employees are not allowed the right to object, that means that the Directive's social dimension is a mere consequence of its economic objectives, the prevalence of which would imply that the transfer of employment contracts is essential to ensure that the transferee's undertaking comprises every condition needed to operate efficiently and, therefore, must be transferred together with the business. Conversely, should employees have the right to object, the social aim of the Directive is seen as a superior objective which leads to a distinction between the transfer of the undertaking and the transfer of the employment contracts.

2. The right of objection in the Portuguese law

Up until March 2018, the Portuguese legal framework did not explicitly provide employees with the capacity to refuse the continuation of their contract of employment with the transferee. Even before the adoption of Directive 77/187/EEC, Portuguese law traditionally accepted that upon transfer of the undertaking, reference to the parties in these contracts would simply be amended (from the original employer to the transferee), which would not affect the core of the existing employment relationships, as if everything remained the same for the employees. It is important to note, however, that both the national jurisprudence and doctrine were aware of the matter regarding the right of objection, as it was assessed in several instances by the Portuguese courts in light of the Katsikas case.

The right to object is provided for, from the amendments introduced by Act 14/2018, of 19 March, to the undertakings or business transfers regime, and, more specifically, as laid down in Article 286-A (added to the Portuguese Labour Law Code by the 2018 Act).

In effect, section 1 of this Article establishes that:

‘An employee may exercise the right of objection to the transfer of the position of the employer in her employment contract in the case of transfer, transfer or reversal of an undertaking or business, or part of an undertaking or business, that represents an economic unit, under the terms of paragraph 1 or 2 of Article 285, namely, where it is likely to cause serious damage to it, in particular as a result of a manifest lack of solvency or a difficult financial situation for the transferee, or even if the work organisation policy of the latter does not deserve her confidence.’

Section 2 adds:

‘The objection of the employee provided for in the preceding paragraph prevents the transfer of the position of the employer in their employment contract, under the terms of paragraph 1 or 2 of Article 285, and the relationship with the transferor remains in effect’.

And section 3 states:

‘Employees exercising their right to object must inform their employer in writing within five business days as of the expiry of the period for the appointment of the employees representative commission, if the latter has not been established, or after the agreement or the term/end of the consultation referred to in paragraph 4 of Article 286, providing their identification, the activity contracted and the basis of the objection, as per paragraph 1.’

As per the legal text, while the law acknowledges the right to object, though limiting it by certain preconditions, it does not mean that it provides employees with unlimited power. The normative wording does, however, make its interpretation somewhat challenging. ¹ Indeed, upon reading the end of Article 286-A(1), it seems there are two possible interpretations.

One interpretation is that the law establishes only one basis, outlined by a general clause, serious damage, that is legally integrated by a few indicative elements, such as manifest lack of solvency, financial difficulties of the transferee, or even the transferee's work organisation policy not deserving the confidence of the objecting employee. The criteria are merely indicative of (namely) the general clause (serious damage) and work alternately (resulting from the conjunction ‘or’, which restricts the statement).

However, the literal content of the legal provision, the wording of which probably should have deserved more attention from the Portuguese legislator, gives it another meaning, a sense that the law has established a double basis. In other words, the right to object can be based on either: 1) serious damage to the employee, where it has materialised or where there is evidence of such damage (the transferee's manifest lack of solvency or financial difficulties); or (a more acute wording would probably recommend the use of ‘then’ rather than ‘even’, as in section 2) 2) a lack of confidence in the transferee's work organisation policy.

The use of the present tense in the wording of the second section - ‘or even that the transferee's work organisation policy does not deserve the confidence’ - reinforces this interpretation. Two verbs – cause (damage) and deserve (confidence) – point to two different grounds.

Backing this dual logic, I could say that the aim of the legislator was to differentiate the grounds of the objection in line with the verifiability of the prognosis that is inherent to them. In this way, I would have objective tenets that do not need to be proven (serious damage), on the one hand and, on the other, the subjective tenets, a ‘belief’, something that ‘cannot be contested’ (distrust).

But if that is the case, I can legitimately ask: what is the sense of the double grounds? If the element of distrust is an autonomous basis in itself, what is its scope? Why the need to establish the serious damage element? Would it not be sufficient for an employee to invoke that they do not have confidence in the transferee's organisation policy to immediately take advantage of the right to object?

Let us consider the following example: a company is going through a transfer process and two of its employees decide to object to the rule of automaticity, thus objecting to the transfer of the employment relationship to the transferee. Objecting employee A invokes the element of serious damage without, however, being able to prove the objective elements that support such damage; while objecting employee B invokes distrust. Would it make sense that only employee B continues their relationship with the transferor?

The legal provision allows for this interpretation, which, it seems, cancels the scope of the first tenet for objection: repeating what has been said above, why would an employee invoke and prove serious damage in order to exercise their right to object if they could achieve the same result by invoking simple, uncontrollable grounds for objection, i.e., distrust? In fact, the outcome of the strict legal wording of these tenets is the same, not only with regard to the objection which results in the continuation of the employment relationship with the transferor under the terms of Article 286-A(2) of the Portuguese Labour Code, but also with regard to the resolution of the contract, as well as compensation, as we will see below.

As I understand it, the wide-ranging serious damage concept should also comprise the reasons for objection associated with the transferee's organisational policy. The reasons for objection deriving from the transferee's financial situation are indeed more objective, easier to demonstrate. I believe, however, that serious damage to the employee derives not only from these factors, but from so many others, including the type of organisation that the business structure may take on in the future under new management. Let us suppose that the transferee's current strategic policy model is one that they already use in other undertakings: hourly shifts, for example, or that the days off vary, or that workers may be allocated to other company facilities. Would it not be legitimate for an employee to expect that, even though the transferee is more than financially stable, her integration into the new employment relationship will eventually result in changes that cause serious damage (on a family level, for example)?

The final legal result restricted, or wanted to restrict, the reasons for the right to object. In other words, it did not simply establish an unconditional right to object to the transfer of undertaking. To this extent, employees cannot exercise their right to object by simply using the transfer as justification—in a way, this restriction is also a way of safeguarding the interests of the business, such as the freedom to conduct it, which is constitutionally acknowledged (Article 61(1) of the Portuguese Constitution). A right to object without restrictions would possibly enable employees to use the transfer of the economic entity to terminate their contract and obtain material compensation.

But this does not mean that the right of objection, laid down in more restricted terms than in other legal frameworks in the European Union, is likely to make the constitutional guarantee more vulnerable.

3.1 Consequences

No less controversial are the consequences of exercising the right of objection. As we have seen, the objecting employee remains tied to the transferor (Article 286-A(2)). However, what is the solution when the transferor cannot maintain their employment relationship with the objecting employee? As would be the case if, for example, their sole premises were entirely transferred or they did not have a compatible workplace for the employee. Apparently, the Portuguese legislator did not take these matters into account, despite the light that the doctrine shed on them in the years prior to the implementation of the current legislative framework. And, as could only be expected, the doctrinal dissenting voices of the past are making a noise in the present.

In a situation where an adequate job position does not exist, there is a solution that seems more balanced to me in comparison with others, namely, in terms of the applicability of the scheme whereby the employee's position is eliminated as per the provision laid down in Articles 367 and following Articles of the Portuguese Labour Code. ² With regard to this matter, note Monteiro Fernandes’ insightful words: 'the new scheme reverses the severance onus of the contract to workers, who do not accept the subrogatory effect of the transfer. Previously, if the new employer could not maintain the same contract conditions, the employee could unilaterally terminate the contract. Now, under the new framework, it is the transferee who decides whether to continue the contract or terminate it by dismissing the employee.' ³

In the case where the undertaking is fully transferred, widespread doctrine maintains that, with due amendments, the employment contract should be terminated upon reaching its expiration date, in compliance with the provision laid down in Article 346 of the Portuguese Labour Code, where paragraph 5 provides the objecting employee with a right to compensation under the terms of Article 366 of the Code. ⁴

There are those, however, who argue that the general expiration date laid down in Article 343(b) of the Portuguese Labour Code should be applicable. Upon further analysis, this point of view seems less suitable, as it implies not only an unforeseen situation of unemployment which, according to the law, results from the supervening, absolute and definitive incapacity of the employer to accommodate the work provided (which does not seem to consider the purpose of Article 286-A(2) of the Portuguese Labour Code), but also, it does not provide for any type of compensation. ⁵ So, this being the case, giving employees the right to object does not, in principle, aggravate their situation as they most likely will not use their right to object if that means that they will be at serious risk of seeing their employment contract terminated upon reaching its expiration date with no right to compensation. Thus, the right to object is nothing but a very limited mechanism in terms of protecting employees.

3.2 Just cause termination

Regarding the employment contract with the transferee, as well as the right to object, workers also have another alternative: they can immediately invoke just cause for termination of the contract. ⁶

Indeed, Act 14/2018 has widened the scope of the two nuclear legal provisions for employees’ rights: Articles 394 and 396 of the Portuguese Labour Code.

As is now laid down by the law, in the event that it is unviable to maintain an employment relationship with the transferee, employees may immediately terminate their contract with just cause as per Article 394(3)(d): ‘employer position is transferred to the transferee in the respective contract of employment, resulting from the transfer of the undertaking, under the terms of no. 1 or 2 of Article 285, with the grounds provided for under no. 1 of Article 286-A’. ⁷ As the end of Article 394(3)(d) – which refers to the right to object – suggests, in this case, employees also have to prove serious damage. This guarantee is supported by Article 396(5), which establishes the objecting employee's right to compensation.

Another option that is worthy of note, and which I believe is just as important, is when there are no grounds for objection/termination under the terms referred and the employee wishes to terminate her employment contract. In this case, employees seem to have another alternative, which is to terminate the contract due to ‘substantial and lasting change to their working conditions when exercising the employer's lawful powers’ (Article 394(2)(b)). ⁸

3. The right to object under the Portuguese jurisprudence

As is the case within the context of Portuguese doctrine, diverging jurisprudence perspectives regarding the preconditions for employees exercising their right to object are emerging.

Indeed, some of the Portuguese courts that have addressed this issue argue that, on the one hand, it is a right that is based on a single tenet, with particular focus on the serious damage clause, which refers examples in the legal provision: manifest lack of solvency; financial difficulties; lack of confidence in the transferee's organisation policy. Thus, in its judgment of 2019/11/19 (Proc. 5819/18.3T8BRG), the Relação de Guimarães (Court of Appeal) held that: ‘Whenever the transfer of the transferee to the position of employer in the respective contract of employment is likely to cause serious damage to the employee, either due to the transferee's manifest lack of solvency or difficult financial situation, or if their work organisation policy causes feelings of distrust, or in other situations where there is the possibility of serious damage employees may exercise their right to object, and in this way remain bound to the transferor or terminate the contractual relationship (just cause for objective termination of the contract by the employee)’. In the same direction, the judgment of 2022/09/16 (Proc. 3037/20.0T8CBR.C1) by the Relação de Coimbra (Court of Appeal) stated that: ‘this legal provision includes general grounds to exercise the right to object—the “serious damage” right—and two examples that do not exclude the others, but which make interpretation easier, namely in terms of using criteria that is more or less open to what is the relevant “serious damage”.’

On the other hand, there are decisions that argue that the right of objection comprises two different tenets: serious damage and distrust. The Relação de Évora (Court of Appeal) ruling of 2021/05/27 (Proc. 3951), followed by the Relação do Porto (Court of Appeal) decision of 2021/09/20 (Proc. 2203/20.2T8VFR.P1), argued that although it involves the worker having to make a subjective and generic judgement beforehand, such distrust may be somewhat ascertained by analysing the facts invoked, facts which provide the reasons for distrust following objective and reasonable criteria and considering the perspective of an average worker, with the knowledge and in the exact situation of the employee in question.

4. Conclusion

Recognition of the right of an employee to object to her employment contract being transferred to a new employer (transferee) in the case of a transfer of undertakings is a tense subject with many conflicting perspectives. In Portugal, the final legal outcome restricted, or sought to restrict, the right of objection to the existence of motives to do so. In other words, unlike other Member State legislation, an unconditional right to object has not been enshrined in the Portuguese labour law. On the other hand, the existing doctrinal differences regarding the exercise and the consequences of the right to object have impacgted judgements relating to practical everyday problems.

Even so, I do not believe that these factors will outweigh the social and legal benefits that are inherent to the model. In fact, that is exactly what the right to object should be: a right of the employee, and never an obligation or a limitation. In this way, its legal enshrinement in Portugal has had a significant impact on the protection of fundamental employment rights.