Small, dynamic reference clause with transfer of company ownership

BAG, judgment dated 17.6.2015 – 4 AZR 61/14

The Federal Labor Court (BAG) has submitted a request to the ECJ (European Court of Justice) for a preliminary ruling (Art. 267 Treaty on the Functioning of the European Union), in order to obtain conclusive clarification concerning the application and content of a small dynamic reference clause following a transfer of company ownership.

BAG case law

According to BAG case law (BAG 18.4.2007 – 4 AZR 652/05; BAG 17.11.2010 – 4 AZR 391/09) in the event of a transfer of a business or withdrawal from an employers’ association, the previous content of the collective agreement does not remain applicable merely statically, but rather continues to regulate the employment relationship with its time-dynamic development even after the transfer of business or withdrawal from the employer’s association.

ECJ case law

Following two ECJ decisions (ECJ 9.3.2006 – C-499/04 – Werhof; ECJ 18.7.2013 – C-426/11 – Alemo Herron), literature has in part supported the opinion that this BAG case law is not compatible with ECJ case law. On the one hand, the ECJ has referred to the freedom of association of the party acquiring the business. Negatively, this (also) includes not joining any association, with the result that it is questionable whether the previous collective agreements could also be applied to the party acquiring the business if the latter is not similarly bound by a collective agreement. On the other hand, the ECJ has decided that, in the event of a transfer of business, contract of employment rulings that refer dynamically to collective agreements, can only be enforced against the acquiring party if the acquiring party has (had) the opportunity of participating in the negotiations concerning the collective agreements. In terms of the application and content of a small dynamic reference clause, the considerations of the ECJ would mean that dynamics with respect to the party acquiring the business could only be assumed with difficulty following withdrawal from an association, because and if the party acquiring the business is, on the one hand, bound by collective agreements that do not correspond to his association membership, and he has no possibility of exercising an influence over the development of the collective agreement. The issue under European law concerns Art. 12 Subsection 1 EU Fundamental Rights Charter (freedom of association) and Art. 16 EU Fundamental Rights Charter (free enterprise).

Submission in accordance with Art. 267 Treaty on the Functioning of the EU

In its order to refer the matter to the ECJ dated June 17, 2015, the 4th Senate of the BAG is (still) of the opinion that the party acquiring a business is bound by the small dynamic reference clause after the transfer of company ownership in the same way as the party selling the business. Nevertheless, the 4th Senate recognizes that this ultimately depends on the interpretation of EU law provisions (Art. 3 of the Transfer of Undertakings Directive) and certainly Art. 16 Fundamental Rights Charter – by contrast, Art. 12 Subsection 1 Fundamental Rights Charter is not problematized. The interpretation of these EU law provisions is the sole responsibility of the ECJ. The question has therefore been submitted to the ECJ for a preliminary ruling. The decision of the ECJ will have to be awaited.

Formulation options in contracts of Employment

The discussion concerning the application and content of the small dynamic reference clause indicates an urgent need to exercise utmost care when formulating reference clauses in contracts of employment.

• It is possible to agree on merely a static reference to a collective agreement.
•    It is also possible to agree on a large dynamic reference clause in the sense of a change of collective agreement clause, so that those collective agreement provisions apply to the employment relationship that are respectively applicable to the employer.
•    Finally, it is possible to formulate the small dynamic reference clause in a way that the dynamics end in the event of a transfer of business or withdrawal from an employers’ association, so as to also avoid unpleasant and unmanageable consequences if a business is sold or in the event of withdrawal from an employers’ association.

Summary

For the time being, the application and content of small dynamic reference clauses have not been clarified conclusively. Under previous BAG case law, the consequences of a small dynamic reference clause constitute a problem in the event of a transfer of company ownership or withdrawal from an association. A duty of careful formulation of employment contracts is to create the necessary clarity, and to take account of the appropriate rulings for a transfer of company ownership or withdrawal from an association.