The principle of acquirer's liability

The acquisition of a company often involves considerable risks under labor and employment law. This is especially true if the acquisition of a company entails a transfer of undertaking within the meaning of sec. 613a of the German Civil Code (BGB), because then the acquirer "inherits" the existing employment relationships by operation of law. The acquirer of the business thus becomes - whether he wants to or not - the new employer with all the resulting rights and obligations and, last but not least, it is the resulting personnel costs that have a decisive influence on the purchase price to be paid for the business. High risks lurk if the old employer has promised its employees a company pension, because the acquirer is also liable for this in principle without limitation under the system of sec. 613a BGB.

 

German Federal Labor Court: Reduction of liability in the event of insolvency 

The principle of acquirer's liability for all occupational pension claims of the transferring employees is deviated from if a company is bought over whose assets insolvency proceedings have already been opened. In the case of a transfer of a business after the opening of insolvency proceedings, sec. 613a BGB only applies to a limited extent: In this case, too, the jobs are preserved by the transfer of undertaking. However, the acquirer is not liable for claims of employees that arose before the opening of insolvency proceedings.

For the transferring employees' occupational pension claims, this means that the acquirer of the business takes over the liability for pension expectations, but is not liable for the entire occupational pension. Rather, he is only liable for the part of the occupational pension based on the period of employment completed by the employee after the opening of the insolvency proceedings. However, the acquirer is not liable for the employees' pension claims based on the period of employment before the opening of insolvency proceedings; the Pension Security Association (PSV) is liable for these. This was recently confirmed once again by the Federal Labor Court (ruling of 26 January 2021, 3 AZR 139/17).

 

This result is not groundbreakingly new. Since 1980, the Federal Labor Court has consistently ruled that the principles of insolvency law take precedence over the rules of transfer of undertakings under labor law. Under insolvency law, the principle applies that all creditors of old claims must be satisfied equally, i.e., they must be served from the insolvency estate. It would not be compatible with this if the employees were to have a new debtor in the form of the purchaser as a result of the transfer of undertaking in the event of the unrestricted application of sec. 613a BGB. This would even be doubly unfair, because firstly, only the employees - in contrast to all other creditors - would have a solvent debtor, and secondly, if the purchaser were liable for old debts, this would further depress the purchase price for the company, which would additionally reduce the insolvency estate to the detriment of all other creditors. As a result, all other insolvency creditors would have to pay the occupational pension claims of the transferred employees. It is therefore understandable that the Federal Labor Court has put a stop to this undesirable outcome.

Due to regulations under European law, the Federal Labor Court saw itself obliged to submit the previous practice to the European Court of Justice for review. The wait was worth it, because even after the decision from Luxembourg and the implementation by the Federal Labor Court, it remains the case that the acquirer of an insolvent company is only liable for new debts.

 

Cause of dispute: Disadvantages for employees despite transfer of operations

But why do the courts now have to deal with the question of who pays for the occupational pension claims of the transferred employees? If the employee receives his/her pension from the PSV until the insolvency proceedings and from the acquirer for the period thereafter, everyone involved should be happy. 

 

Unfortunately, no...

 

In the following constellations, employees suffer an economic disadvantage due to the insolvency of their employer even in the case of a transfer of business to an acquirer:

 

  1. 1.    No vesting

The PSV is only liable for occupational pension entitlements that were legally vested when the insolvency proceedings were opened. The PSV is not liable for entitlements not yet vested and, in accordance with the above principles, neither is the new employer. The employee must therefore declare this part of the claim to the insolvency administrator, where there is usually little to be gained.

 

  1. 2.    Fixed writing effect

Many pension plans are final salary-based. This means that the basis of assessment for the company pension is the final salary drawn before retirement.

In the event of insolvency, however, the PSV is only liable on the basis of the employee's salary drawn prior to the opening of insolvency proceedings. This can be significantly lower than the (hypothetical) final salary, as subsequent salary increases are not taken into account (fixation effect). As a result, the total of the benefits paid by the PSV and the new employer is lower than the amount that the employee would have received as a company pension if the insolvency had not occurred. The employee must also declare this disadvantage to the estate in the insolvency proceedings. The acquirer as the new employer is off the hook here.

 

Conclusion

When an insolvent company is acquired, the employment relationships are transferred, but the acquirer is not liable for the employees' occupational pension claims that arose before the insolvency proceedings were opened.

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