Table of Contents
Transfer of Undertakings: Legal Concept, Employee Protection, and Contemporary Challenges
I. Introduction
The transfer of undertakings is a central concept in modern labor and commercial law, operating at the intersection of business restructuring and employee protection. It addresses a recurring economic reality: companies change ownership, merge, outsource operations, or reorganize their activities, while the workforce attached to those activities faces uncertainty regarding job security, working conditions, and continuity of rights. The law of transfer of undertakings seeks to reconcile two potentially conflicting interests—economic flexibility for enterprises and stability for employees—by regulating the legal consequences of business transfers.
At its core, the doctrine prevents employers from circumventing employment protections through corporate or transactional techniques. Without such rules, a simple change in ownership or contractual structure could effectively dissolve employment relationships, undermine collective agreements, and erode accrued rights. The legal regime governing transfers of undertakings therefore plays a crucial role in safeguarding social continuity within market economies.
II. Concept and Legal Definition of Transfer of Undertakings
The legal concept of a transfer of undertakings is deliberately framed in functional and economic terms rather than formalistic or purely contractual ones. This choice reflects a core normative objective of labor law: to prevent the circumvention of employee protections through changes in legal structure, ownership, or contractual arrangements. Accordingly, the definition of a transfer of undertakings focuses on the factual continuity of an economic activity rather than on the legal technique by which that continuity is achieved.
At its most general level, a transfer of undertakings occurs when an organized economic entity is transferred from one employer to another and retains its identity after the transfer. The emphasis on “economic entity” and “retention of identity” is crucial. An undertaking is not merely a collection of assets or contractual rights, but a structured and autonomous set of resources—human, material, and organizational—capable of pursuing a specific economic objective.
1. The Notion of an Economic Entity
An economic entity is understood as an organized grouping of resources that is sufficiently stable and structured to carry out an economic activity, whether principal or ancillary. The entity must exist independently of the legal personality of the employer and must be capable of continuing its operations after the transfer. This excludes situations involving the mere liquidation of assets or the fragmentation of business components that cannot function autonomously.
The composition of the economic entity may vary significantly depending on the nature of the activity. In capital-intensive sectors, such as manufacturing or transport, the presence of physical assets—machinery, infrastructure, or vehicles—may be decisive. In contrast, in labor-intensive sectors, such as cleaning services, catering, or care work, the workforce itself may constitute the core of the undertaking. In such cases, the transfer of a substantial part of the employees may suffice to establish the existence of a transferred economic entity, even where tangible assets are minimal or absent.
2. Retention of Identity as the Central Criterion
The defining criterion for a transfer of undertakings is the retention of identity of the economic entity after the transfer. This requirement distinguishes a transfer from a mere cessation of activity followed by the creation of a new and unrelated operation. Retention of identity is assessed through a holistic evaluation of factual elements rather than through any single decisive factor.
Relevant considerations typically include the nature of the business activity, the transfer of tangible or intangible assets, the assumption of employees, the continuity of management or organizational structure, the preservation of customers or contracts, and the degree to which the activity continues uninterrupted or with only minimal modification. No single element is determinative; instead, the assessment depends on the overall impression created by the transaction.
This flexible approach allows the law to adapt to diverse economic realities. At the same time, it introduces a degree of legal uncertainty, as borderline cases require careful factual analysis and judicial interpretation.
3. Legal Form Irrelevance and the Principle of Economic Reality
One of the most distinctive features of the legal definition of transfer of undertakings is the irrelevance of the legal form of the transaction. Whether the transfer occurs through sale, merger, lease, concession, outsourcing, or service contract change is immaterial. What matters is whether control over the economic entity passes from one employer to another.
This principle reflects a broader labor law doctrine of economic reality, under which courts look beyond contractual labels to the actual substance of working relationships and business arrangements. By adopting this approach, the law prevents employers from avoiding their obligations through strategic restructuring or nominal reclassification of transactions.
As a consequence, even complex, multi-layered contractual arrangements may give rise to a transfer of undertakings if, in practical terms, the same economic activity continues under a different employer with substantial continuity.
4. Partial Transfers and Functional Autonomy
A transfer of undertakings does not require the transfer of an entire enterprise. The law also recognizes partial transfers, provided that the transferred part constitutes a functionally autonomous economic entity. This autonomy means that the transferred unit must be capable of operating independently, both before and after the transfer.
For example, the transfer of a distinct department, business line, or operational unit may qualify as a transfer of undertakings if it retains its functional coherence. Conversely, the mere redistribution of tasks among different entities, without the transfer of an identifiable organizational structure, will generally fall outside the scope of the regime.
The concept of functional autonomy is particularly significant in modern enterprises characterized by internal outsourcing, decentralization, and project-based organization.
5. Exclusions and Negative Definitions
Equally important to the legal definition are its exclusions. Not every change in business arrangements constitutes a transfer of undertakings. Situations involving the mere loss of a client, the award of a contract to a new service provider without any substantial transfer of resources, or the reorganization of activities within the same legal employer may fall outside the scope of the doctrine.
Similarly, purely share-based transactions—where ownership of a company changes but the employing entity remains the same legal person—do not, in themselves, constitute a transfer of undertakings, as there is no change of employer. The employment relationships remain anchored to the same legal entity, despite the shift in ownership control.
These exclusions highlight the centrality of the employer’s identity rather than corporate ownership in determining the applicability of transfer protections.
6. Normative Function of the Definition
The legal definition of transfer of undertakings is not merely descriptive but deeply normative. By privileging continuity over form, the law affirms that employment relationships are embedded in social and economic realities that transcend corporate techniques. The definition thus serves as a gatekeeping mechanism, determining when the protective consequences of transfer law—automatic transfer of contracts, protection against dismissal, and continuity of collective rights—are triggered.
In this sense, the concept of transfer of undertakings reflects a broader legal philosophy: that market transactions must be constrained by social considerations, and that workers’ rights should not depend on the technical architecture of corporate decisions.
III. The Principle of Continuity of Employment
The principle of continuity of employment constitutes the normative and operational core of the legal regime governing the transfer of undertakings. It embodies the fundamental proposition that employment relationships are not extinguished by a change in the identity of the employer when the underlying economic activity continues. Instead, those relationships persist automatically, attaching themselves to the undertaking rather than to the individual legal person who previously controlled it.
This principle represents a deliberate departure from classical contract law logic. Under traditional private law doctrines, a contract is intuitu personae and cannot be transferred without the consent of both parties. Transfer of undertakings law suspends this paradigm in the employment context, recognizing that the social function of work and the structural imbalance between employer and employee justify a mandatory continuity mechanism imposed by law.
1. Automatic Transfer of Employment Relationships
Continuity of employment operates ex lege, meaning that employment contracts are transferred automatically by operation of law at the moment the undertaking changes hands. No novation, assignment, or renegotiation is required, and the parties cannot contract out of this effect. The employee does not enter into a new employment relationship; rather, the existing relationship continues with the transferee employer as a direct legal successor.
This automaticity is essential to the protective function of the regime. If continuity depended on individual consent or contractual arrangements, employees would be exposed to pressure, uncertainty, and potential loss of rights at precisely the moment of greatest vulnerability. The law therefore intervenes to stabilize employment relations during structural economic change.
2. Scope of Transferred Rights and Obligations
The continuity principle extends to all rights and obligations arising from the employment relationship at the time of transfer. This includes express contractual terms—such as remuneration, working hours, job classification, and place of work—as well as implied terms, statutory entitlements, and rights accrued through practice or custom.
Seniority and length of service are preserved, ensuring that employees do not lose access to benefits linked to tenure, such as notice periods, redundancy entitlements, or promotion eligibility. Likewise, ongoing disciplinary records, grievances, and pending claims generally follow the employment relationship, binding the transferee employer as if it had originally been the contracting party.
By transferring both benefits and burdens, the law preserves the integrity of the employment relationship and prevents selective assumption of obligations.
3. Limits on Unilateral Variation of Employment Terms
A direct corollary of continuity is the restriction on unilateral modification of employment terms following a transfer. The transferee employer cannot lawfully alter contractual conditions solely by reason of the transfer or for reasons intrinsically connected to it. Any such changes risk undermining the very continuity the law seeks to protect.
This does not mean that employment terms are frozen indefinitely. Variations may occur where they are genuinely justified by reasons independent of the transfer and comply with general employment law principles. However, courts tend to scrutinize post-transfer changes with particular rigor, especially when they result in a deterioration of employees’ conditions.
The underlying concern is that allowing contractual downgrading under the guise of reorganization would effectively permit employers to achieve indirectly what the law prohibits directly—namely, the erosion of employee protections through corporate restructuring.
4. Employee Consent and the Right to Object
While continuity is imposed for the benefit of employees, it is not entirely paternalistic. In many legal systems, employees retain a limited right to object to the transfer of their employment to a new employer. This objection does not invalidate the transfer itself but may result in the termination of the employment relationship at the time of transfer.
The exercise of this right reflects the residual contractual autonomy of the employee and acknowledges that the identity of the employer may, in certain circumstances, be of fundamental importance. However, the legal consequences of objection are often severe for the employee, as termination in this context may not give rise to dismissal protections or compensation.
As a result, the right to object functions more as a safeguard of personal autonomy than as a practical alternative for most employees.
5. Continuity and the Prohibition of Artificial Termination
The principle of continuity also prohibits employers from engineering artificial terminations to avoid the automatic transfer of employment. Pre-transfer dismissals aimed at excluding employees from the scope of the transfer are generally treated as unlawful if they are causally linked to the impending transaction.
Courts therefore examine the temporal and substantive connection between dismissals and transfers, assessing whether termination decisions were genuinely motivated by independent business reasons or merely designed to strip the undertaking of its workforce prior to transfer. This anti-avoidance function is critical in preserving the effectiveness of the continuity principle.
6. The Transferee as Legal Successor
Through continuity of employment, the transferee employer assumes the role of legal successor, stepping into the legal position of the transferor with respect to employment relations. This succession is not symbolic but fully operative, encompassing liability for past conduct, ongoing obligations, and future compliance.
The successor status reinforces legal certainty for employees and third parties alike. It ensures that employment rights are not diluted through fragmentation of responsibility and that accountability follows economic control.
7. Normative and Social Significance
Beyond its technical effects, the principle of continuity of employment carries substantial normative weight. It affirms that work is not merely a contractual exchange but a social relationship embedded in human dignity, economic dependence, and long-term expectations. By preserving continuity in the face of economic change, the law acknowledges that employees should not bear disproportionate risks arising from decisions over which they have little or no control.
In this sense, continuity of employment functions as a stabilizing force within market economies, moderating the disruptive potential of corporate mobility while allowing enterprises to reorganize within a legally disciplined framework.
IV. Protection Against Dismissal in the Context of Transfers
Another essential dimension of transfer of undertakings law is the protection against dismissal. Dismissals motivated solely by the transfer itself are typically prohibited. The transfer cannot serve as an autonomous justification for termination, as this would defeat the very purpose of the protective regime.
However, the law does not impose absolute job immutability. Dismissals may still occur for legitimate reasons unrelated to the transfer, such as economic, technical, or organizational grounds requiring workforce adjustments. The critical legal question is whether the dismissal is causally linked to the transfer or to independent business necessities.
This distinction often gives rise to litigation, as employers may restructure operations post-transfer to achieve efficiency gains. Courts therefore scrutinize the timing, rationale, and proportionality of dismissals, seeking to prevent disguised transfer-related terminations while preserving managerial prerogatives.
V. Collective Rights and Collective Agreements
The transfer of undertakings regime extends beyond individual employment contracts to collective labor relations. Collective agreements applicable at the time of transfer generally continue to bind the transferee employer, at least for a defined period or until replaced by a new agreement.
This continuity protects employees from a sudden erosion of collectively negotiated working conditions, such as wage scales, leave entitlements, and workplace rules. At the same time, it raises complex issues when the transferee operates under a different collective bargaining framework or belongs to another sector.
Balancing stability and adaptability in this context remains one of the more challenging aspects of transfer law, particularly in highly unionized or regulated industries.
VI. Information and Consultation Obligations
Modern transfer of undertakings regimes typically impose procedural obligations on both transferor and transferee employers. Employees or their representatives must be informed of the planned transfer, its timing, reasons, and legal, economic, and social consequences. Where applicable, consultation must take place regarding measures envisaged in relation to the workforce.
These obligations reflect a broader trend toward participatory labor governance. While employees do not hold veto power over business transfers, transparency and dialogue are viewed as essential to mitigating uncertainty and preventing conflict. Failure to comply with information and consultation requirements may expose employers to sanctions or liability, even where the transfer itself is legally valid.
VII. Complex and Contemporary Applications
In contemporary economies, the application of transfer of undertakings law has become increasingly complex. Outsourcing and service provision changes, platform-based business models, and fragmented production chains challenge traditional notions of what constitutes an “undertaking” and when identity is preserved.
Courts are often required to assess whether the mere replacement of a service provider amounts to a transfer, particularly where assets are minimal and the workforce is the primary operational resource. In labor-intensive sectors, such as cleaning, security, and care services, employee continuity may be decisive, whereas in capital-intensive industries, asset transfer may carry greater weight.
These developments illustrate the adaptive character of transfer of undertakings law, which must continuously respond to evolving economic structures without diluting its protective purpose.
VIII. Conclusion
The law governing the transfer of undertakings embodies a fundamental normative choice: economic transactions should not be allowed to undermine the stability and dignity of employment relationships. By prioritizing continuity over formalism, it ensures that workers are not treated as expendable variables in corporate restructuring.
At the same time, the regime does not freeze economic activity or prohibit business reorganization. Instead, it imposes legal discipline on change, requiring that flexibility be exercised responsibly and transparently. As labor markets continue to evolve, the transfer of undertakings remains a vital legal mechanism for maintaining social cohesion within dynamic economic systems.
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