Outsourcing – a transfer of operations?

 Labor law consequences for employers when outsourcing constitutes a transfer of business.

Outsourcing – a transfer of operations?

One of the reasons for outsourcing is to increase efficiency. Under certain circumstances, outsourcing can also constitute a transfer of business. This then involves consequences under employment law.

What exactly is outsourcing?

The term outsourcing is a neologism that originated from the phrase “outside resourcing” at the beginning of the 1980s. The outsourcing usually aims to increase efficiency. Accordingly, outsourcing is a common approach when the company cannot carry out certain types of work in an economically feasible way and/or the company lacks the necessary expertise.

Whether outsourcing involves labor law implications then depends on the exact procedure:

“Traditional” outsourcing is not relevant under labor law. If the company outsources an area of work and this is then handled by an external company without transferring the company’s own staff or work equipment, this does not constitute a transfer of business (cf. BAG, decision dated August 14, 2007, Ref:. However, if the outsourcing eliminates jobs within the company, this may justify layoffs for operational reasons.

The situation is different when the company outsources entire areas, staff, and equipment to group subsidiaries, subsidiaries or to external companies. As a rule, this constitutes a transfer of business pursuant to Section 613a of the German Civil Code (BGB) and involves the corresponding consequences under labor law.

Transfer of business and its consequences

A transfer of business pursuant to Section 613a of the German Civil Code (BGB) must fulfill various prerequisites. Accordingly, outsourcing only represents a transfer of business if the economic unit of the transferred business or part of the business remains at the new company.

For example, this may be the case if

  • employees and work equipment are transferred to the new employer and
  • knowledge is transferred.

As a consequence, the company to which the employees are transferred also becomes their new employer.

In the process, the new employer assumes all rights and obligations from the previous employment relationship. Therefore, employment contracts, works agreements, as well as any collective bargaining agreements continue to apply. Remuneration claims and labor law measures (e.g. warnings) also remain unchanged.

Duty to inform, right to object and involvement of the works council

A transfer of business can have an enormous impact on the employees concerned, for example if their place of work changes. As such, it comes as no surprise that a transfer of business involves numerous considerations.

  1. The transferor and transferee are required to inform the affected employees about the details of the transfer of business in written form.
  2. Affected employees may also object to the transfer of employment in writing within one month. In this case, the previous employment relationship with the previous employer remains unchanged. However, the previous employer may then issue a dismissal for operational reasons if that particular position becomes redundant.
  3. A transfer of operations usually represents a change in operations in accordance with the Works Constitution Act (BetrVG). In this case, the works council has the right to information and participation and must be informed comprehensively and in good time by the employer (Section 111 sentence 1 BetrVG). Furthermore, it may also be necessary to negotiate a reconciliation of interests/social plan to mitigate possible economic disadvantages for the workforce. Nevertheless, the works council’s approval is not required for the transfer of business.

How should employers approach outsourcing?

The outsourcing decision is a business decision. Based on the rights of an established and exercised commercial enterprise (Section 12, Section 14 of the Basic Law (GG)), companies may freely decide on the transfer of business. Therefore, the works council cannot ultimately prevent the transfer. It can, however, delay and complicate the process.

In view of this, employers are well advised to proactively fulfill their duty to inform the works council, to listen to the works council’s arguments and suggestions and, if possible, to integrate these to ensure the smoothest possible transfer of business.

Summary of the key facts:

  • Outsourcing can constitute a transfer of business pursuant to Section 613a of the German Civil Code (BGB) if the workforce and operating resources are also “outsourced”, i.e. transferred to an external third party.
  • In the event of a transfer of business, the affected employees must be informed of the transfer of business by the employer in written form. Employees may object to the transfer.
  • Although the works council is entitled to information and participation rights as part of a transfer of business, it cannot ultimately prevent the transfer.