Transfer of Undertaking in Turkey: Effects on Employment Contracts

Transactions such as the sale or lease of a business, the transfer of a line of activity to another company or a change of contractor under a service procurement contract frequently have a direct effect on the employment relationships of those working at the workplace concerned. Under Turkish law, this situation is governed by Article 6 of Labour Law No. 4857 and Article 428 of the Turkish Code of Obligations (TBK), and where a workplace or part of it is transferred on the basis of a legal transaction, the employment contracts pass automatically to the transferee. For mergers and demergers of companies, Article 178 of the Turkish Commercial Code (TTK) lays down special rules, whereas in the case of conversion only a more limited reference is made to that provision. The circumstances in which a transfer is deemed to have taken place, who is liable for which debts and for how long, and whether employment contracts may be terminated on account of the transfer are matters of close concern both to the parties to the transaction and to the employees.

Contents

• What is a transfer of undertaking and when does it occur?
• When is a transfer of part of a workplace recognised?
• Do share deals, asset deals and changes of subcontractor constitute a transfer of undertaking?
• How do employment contracts pass to the transferee?
• Which debts are the transferor and the transferee employer liable for?
• What is different in mergers, demergers and conversions?
• Can the employee object to the transfer?
• Can an employment contract be terminated on account of the transfer?
• What happens to the collective labour agreement?
• What should be considered during the transfer process?
• Conclusion

What is a transfer of undertaking and when does it occur?

Under Article 6 of the Labour Law, where a workplace or part of a workplace is transferred to another person on the basis of a legal transaction, the employment contracts existing at the workplace on the date of transfer pass to the transferee together with all rights and obligations. The type of legal transaction on which the transfer is based is not decisive; a sale, a lease, a usufructuary lease, a donation or a change of hands of a service procurement contract may produce this result. Since the law defines a workplace as the unit in which tangible and intangible elements and employees are organised together for the purpose of producing goods or services, a transfer requires that this organised whole, rather than individual assets, changes hands.

In the case law of the Court of Cassation (Yargıtay), the fundamental criterion for a transfer of undertaking is that the economic entity passes to the transferee while retaining its identity. In this assessment, the type of business, whether movable and immovable assets have been transferred, the value of intangible assets, whether the majority of the employees continue to be employed by the transferee, whether the customer base has been transferred, the degree of similarity between the activities carried out before and after the transfer and, where activities have been suspended, the length of that suspension are considered together. As none of these criteria is decisive on its own, the existence of a transfer is assessed separately in each specific case.

When is a transfer of part of a workplace recognised?

Article 6 of the Labour Law covers the transfer not only of an entire workplace but also of part of it. For a transfer of part of a workplace to be established, the transferred part must be a unit that serves a specific purpose within the workplace, has its own work organisation as well as employees and operating resources assigned to it, and is distinguishable in economic and organisational terms. For example, the transfer of a manufacturing company's logistics unit, together with its vehicles, warehouse and personnel, to a logistics company may meet this description.

By contrast, merely having a particular activity, such as cleaning or accounting, performed by another company without transferring the organised structure belonging to that activity does not, as a rule, constitute a transfer of undertaking. This distinction is of practical importance because it determines whose employment contracts pass to the transferee, since only the contracts of employees employed in the transferred part pass automatically to the transferee. As it may be disputed to which part employees working in more than one part belong, this should be clearly determined at the preparatory stage of the transaction.

Do share deals, asset deals and changes of subcontractor constitute a transfer of undertaking?

In a share deal, the employer status remains with the company whose shares change hands. As the party to the employment contracts does not change, there is no transfer of undertaking within the meaning of Article 6 of the Labour Law, and the employees' employment relationships continue unchanged. In an asset deal, by contrast, the outcome depends on the scope of the elements transferred. If the entire business or a part of it that retains its economic identity is transferred, the employment contracts pass to the transferee by operation of law, whereas the transfer of individual machines, inventory or a trademark alone does not result in a transfer of undertaking.

In the case law of the Court of Cassation, a change of contractor under service procurement contracts is also treated as a transfer of undertaking. Where an employee working on the same job at the principal employer's workplace continues to work without interruption despite the change of subcontractors, and the employment contract has not been terminated on the date of transfer, the employee's length of service and employee receivables are assessed according to the rules on transfer of undertaking. For this reason, in service procurement tenders and changes of contractor, the contracts should clearly regulate who bears the obligations remaining from the periods of previous contractors.

How do employment contracts pass to the transferee?

In a transfer of undertaking, the employment contracts pass to the transferee by operation of law, without the need for a separate agreement or the employee's consent. The transferee employer takes over the employee's wages, fringe benefits, working conditions and the rights accrued up to the date of transfer as they stand. Under Article 6(2) of the Labour Law, the transferee employer is obliged to take as the basis, for rights dependent on length of service, the date on which the employee started work with the transferor employer; this rule has consequences in particular for severance pay (kıdem tazminatı), notice periods, annual leave entitlements and job security.

A transfer of undertaking must be distinguished from the transfer of an individual employment contract to another employer. Under Article 429 TBK, an employment contract may be transferred permanently to another employer without a transfer of undertaking only with the employee's written consent. It is seen in practice that employees are frequently moved between group companies in this way, while transfers carried out without the employee's written consent subsequently become the subject of disputes.

Which debts are the transferor and the transferee employer liable for?

Under Article 6(3) of the Labour Law and Article 428(3) TBK, the transferor and the transferee employer are jointly liable for debts that arose before the transfer and are payable on the date of transfer. Unpaid wages, overtime pay and similar receivables fall within this scope. The transferor employer's liability for these debts, however, is limited to two years from the date of transfer, and at the end of this period the employee may pursue pre-transfer receivables only against the transferee.

With regard to severance pay, Article 14 of former Labour Law No. 1475, which is still in force, contains a special rule. Accordingly, in the event of a transfer of a workplace, the employee's length of service is calculated on the basis of the total periods of employment with the transferor and the transferee, and both employers are liable for the accrued severance pay; however, the transferor employer's liability is limited to the period during which it employed the employee and to the wage level on the date of transfer. According to the case law of the Court of Cassation, the two-year limitation does not apply to severance pay. For payment in lieu of notice (ihbar tazminatı) and pay for unused annual leave, which fall due upon termination, the employer at the date of termination is, as a rule, liable according to the case law of the Court of Cassation.

A similar protection is provided in respect of social security. Under Article 89 of Law No. 5510 on Social Insurance and General Health Insurance, if a workplace is taken over together with its assets or liabilities, the new employer is also jointly and severally liable for the former employer's debts in respect of premiums, late payment penalties and late payment interest, and contractual provisions to the contrary are invalid vis-à-vis the Social Security Institution (SGK). Any allocation of liability and indemnification provisions agreed between the parties therefore have effect only in their internal relationship.

What is different in mergers, demergers and conversions?

Mergers, demergers and conversions of companies also affect the employment relationships of employees; however, the Turkish Commercial Code lays down special rules for these transactions. Under Article 178 TTK, in a full or partial demerger the employment contracts pass to the transferee together with all rights and obligations arising up to the date of transfer, unless the employee objects. If the employee objects, the employment contract ends upon expiry of the statutory notice period. The former employer and the transferee are jointly and severally liable for the employee's receivables that have fallen due and for those that will fall due up to the date on which the contract would end in the normal course or as a result of the objection, and the employees may also request that these receivables be secured.

Under Article 158(4) TTK, this provision also applies to mergers. In the case of conversion, by contrast, under Article 180 TTK the company converted into the new legal form is the continuation of the former company and retains its legal personality, and Article 190 TTK refers to Article 178 only with regard to debts arising from employment contracts. For this reason, the question of whether, in particular, the employee's right to object applies in a conversion must be assessed differently from mergers and demergers.

Article 6(4) of the Labour Law, for its part, provides that the provisions on the joint liability of the transferor and the transferee do not apply where a legal entity ceases to exist through merger, absorption or conversion. The relationship between this provision and the special rules of the Turkish Commercial Code is disputed in legal literature, particularly with regard to the liability of the transferor and the transferee. Consequently, in restructurings under company law, the transfer of employment contracts, the employee's rights to object and to request security, and liability for past employee receivables must be examined separately according to the type of transaction.

Can the employee object to the transfer?

Unlike Article 178 TTK, Article 6 of the Labour Law and Article 428 TBK do not grant the employee a right to object to the transfer of undertaking. The law also expressly provides that the transfer does not constitute just cause for termination by the employee. Consequently, the mere change of employer does not entitle the employee to terminate the employment contract with immediate effect and claim severance pay, and an employee who refuses to accept the transfer and leaves is, as a rule, treated as having resigned.

Nevertheless, where the transferee employer wishes to make a material change to working conditions after the transfer, Article 22 of the Labour Law applies. If the employee does not accept in writing a change notified in the proper manner, the change is not binding on the employee; however, where the relevant conditions are met, the employer's right to terminate on the basis of the change remains reserved. In situations constituting just cause under Article 24 of the Labour Law, such as non-payment of wages, the employee may terminate the employment contract with immediate effect. Experience shows that changes made after the transfer to the remuneration system, the place of work or the job description give rise to disputes far more often than the transfer itself.

Can an employment contract be terminated on account of the transfer?

Under Article 6(5) of the Labour Law, neither the transferor nor the transferee employer may terminate an employment contract solely because of the transfer of the workplace or part of it. This prohibition is intended to prevent the transfer from being used as a ground for termination and also covers terminations effected by the transferor employer prior to the transfer. However, the law reserves the right of the transferor or transferee employer to terminate where economic or technological reasons or changes in work organisation so require, as well as the right of the parties to terminate with immediate effect for just cause.

In terminations made in the course of a restructuring after the transfer, the provisions on job security in Articles 18 et seq. of the Labour Law and, where the relevant conditions are met, the provisions on collective dismissals in Article 29 apply. The burden of proving that the ground for termination is genuinely based on an operational decision and that termination is a last resort lies with the employer. Provisions in the transfer agreement stating that the transferee will not take over certain employees, on the other hand, do not prevent the statutory transfer, and such clauses can have effect only with regard to the allocation of liability between the parties.

What happens to the collective labour agreement?

If a collective labour agreement applies at the transferred workplace, Article 38 of Law No. 6356 on Trade Unions and Collective Labour Agreements comes into play. Where a collective labour agreement is in force at workplaces of the transferee employer that fall within the same line of business (işkolu), the rights and obligations arising from the collective labour agreement applied at the transferred workplace continue as provisions of the employment contract. Where no collective labour agreement applies at the transferee's workplaces, the rights and obligations arising from the collective labour agreement at the transferred workplace continue as provisions of a collective labour agreement until a new collective labour agreement is concluded.

If a workplace without a collective labour agreement is taken over by an employer that is party to an enterprise-level collective agreement, the workplace falls within the scope of that enterprise-level collective agreement. When unionised workplaces are transferred, therefore, not only the individual employment contracts but also the collective agreement regime to be applied should be examined in advance.

What should be considered during the transfer process?

The first step in a transfer of undertaking is to determine whether the transaction results in a transfer within the meaning of Article 6 of the Labour Law and which employees belong to the transferred workplace or part. At the legal due diligence stage, employment contracts, wages and fringe benefits, unpaid employee receivables, accumulated length of service, unused annual leave, pending lawsuits and debts owed to the Social Security Institution should be reviewed, and in doing so the transfer of employees' personal data must comply with the personal data protection legislation.

Under Article 11 of Law No. 5510, where a workplace employing insured persons is transferred to another employer, the new employer is obliged to submit the workplace registration notification to the Social Security Institution within ten days following the date on which it took over the workplace. The transfer agreement, for its part, should expressly regulate how employee receivables and premium debts arising up to the date of transfer are to be allocated between the parties, how they are to be reflected in the purchase price and what indemnification obligations the transferor has. Informing employees about the transfer in a timely and clear manner also helps to prevent post-transfer disputes, even though no notification is required by law.

Finally, under Article 6(6) of the Labour Law, the provisions of this article do not apply where a workplace or part of it is transferred to another person as a result of the liquidation of assets due to bankruptcy. By contrast, the mere fact that concordat (konkordato) proceedings are under way or that the company has entered into ordinary liquidation is not sufficient for this exception in Article 6(6) of the Labour Law to apply; in these cases, the legal nature of the transfer and the other applicable provisions must be assessed separately.

Conclusion

Where a workplace or part of it is transferred on the basis of a legal transaction, the employment contracts pass to the transferee together with all rights and obligations without the employee's consent being required, and the transferee employer must take the employee's original start date as the basis for rights dependent on length of service. The transferor and the transferee are jointly liable for pre-transfer debts, the transferor's liability being limited, as a rule, to two years, while for severance pay the special rule in Article 14 of Law No. 1475 applies. Whereas special protective provisions such as the employee's right to object and to request security are provided under Article 178 TTK for company mergers and demergers, only a more limited reference is made to that provision in the case of conversion; Article 6 of the Labour Law, for its part, precludes the transfer from serving on its own as a ground for termination.

For this reason, when an asset deal, a transfer of a line of activity, a corporate restructuring or a change of contractor is being planned, the consequences of the transaction for the employees and the allocation of liability between the parties should be assessed at the outset, and the transfer agreement should be structured in line with that assessment.

GEMS Schindhelm advises on transfers of undertaking, including determining the scope of the transfer, employment law due diligence, drafting transfer and service procurement contracts, and post-transfer restructuring processes. This article is for general information purposes only and does not constitute a legal opinion or legal advice; each transaction must be assessed separately according to the circumstances of the specific case and the legislation in force.