Current regulation and background of the WOVOF

The WOVOF has a long history that can be summarised as follows.

The rules on a transfer of an undertaking are included in Sections 7:662 et seq. of the Dutch Civil Code (DCC) and are based on the European Directive on the protection of employees' rights in the event of a transfer of undertaking (Directive 2001/23/EC, the Directive).The main rule in case of a transfer of undertaking is that all employees who belong to the undertaking will be transferred to the transferee by operation of law (read: automatically), while retaining their rights and obligations under the existing employment agreement.

The law currently provides for one exception to this main rule, namely in case of a bankruptcy. The rules on transfer of undertaking do not apply in case a transfer of an undertaking occurs after bankruptcy (a restart) (Section 7:666 DCC). The acquirer may therefore determine if, and if so, which employees will be taken over and under what conditions. This exception is based on Article 5(1) of the Directive, which stipulates that the protective rules of the Directive do not apply if the transfer takes place in bankruptcy proceedings or in similar proceedings that are aimed at liquidation.

The position of employees in a restart after bankruptcy has been subject to discussions for a long time. In the Smallsteps ruling of 22 June 2017, the European Court of Justice (CJEU) ruled that the rules that protect employees in case of a transfer of undertaking do apply in case of a so-called pre-pack, because such a procedure is not aimed at liquidation but rather at continuation of the company. In a pre-pack, a 'silent administrator' prepares a restart of the company prior to the bankruptcy, in order to arrange a smooth transition. Following this ruling, a number of trade unions pleaded for the application of the protection rules in case of transfer of undertaking in bankruptcy. The WOVOF fulfilled this request. An internet consultation of (an earlier version of) the WOVOF took place in 2019. Thereafter, the legislative process was put on hold, pending the answers to preliminary questions submitted by the Dutch Supreme Court to the CJEU on 29 May 2020 in the Heiploeg case.

Currently, the legislative process has been resumed. As a result of the earlier consultation, a number of changes have already been made. Given the time that has passed, it was decided to consult again. The main aspects of the WOVOF are discussed below.

All employees will in principle transfer

The starting point of the WOVOF is that in case of a transfer of undertaking in bankruptcy, in principle all employees of the bankrupt employer are transferred to the acquirer by operation of law. The acquirer is obliged to offer the employees a new employment agreement under the same terms and conditions of employment that applied to them before the bankruptcy was declared.

There is one important exception to this main rule. If there are objective business economic circumstances that necessarily lead to redundancies, the acquirer does not have to offer employment agreements to all employees. This gives the acquirer flexibility to take necessary measures to ensure the continued long-term existence of the company, which is also in the interest of creditors and employees. Whether the aforementioned objective business economic circumstances exist must be assessed over a period of 26 weeks after the transfer.

Dismissal order

If, due to the aforementioned business economic circumstances, the acquirer cannot make an offer to all employees of the bankrupt company, it must be determined which employees will and which employees will not be made an offer. This is determined on the basis of transparent selection methods set out in the WOVOF, namely (i) a mirroring method, or (ii) an alternative objective selection method based on a business plan.

The reversed balancing principle closely follows the so-called ‘balancing principle’ (in Dutch: afspiegelingsbeginsel) that applies when positions are made redundant due to business economic reasons. In short, employees with interchangeable positions are categorised into age groups, after which, for each age group, the employees with the longest tenure are the first to be offered employment with the acquirer.

The alternative objective selection method gives the acquirer more freedom. The acquirer has to draw up an alternative objective selection method based on a business plan prepared by him, which has to be approved by the supervisory judge (in Dutch: rechter-commissaris). Approval is subject to two requirements: (i) the acquirer must make it sufficiently plausible that using the proposed selection method is necessary to achieve efficient business operations after the transfer and (ii) the proposed selection criteria must be transparent, proportional, objective and non-discriminatory.

If it turns out after the transfer that the selection method was not applied correctly, the employee can request the subdistrict court to order the acquirer to still offer the employee an employment agreement, or to pay fair compensation to the employee.

Furthermore, if, within 26 weeks, a vacancy arises for the work that was carried out by employees to whom no offer was made, the acquirer must offer those employees employment, in accordance with the order of dismissal previously used.

What will transfer?

As mentioned, the acquirer must make the employees an offer based on the same terms and conditions of employment that applied to them before the declaration of bankruptcy. Amending employment conditions is only possible in consultation with the trade unions, if this proves to be necessary to maintain employment in the company. However, it is not possible to adjust terms and conditions of employment laid down in a collective labour agreement which is declared generally binding (in Dutch: algemeen verbindend verklaard).

A non-competition clause limits the employee’s possibilities to find a new job after the end of the employment agreement. In order to maximise the chances of a successful restart, there may be a legitimate interest in enforcing a non-competition clause in case of bankruptcy. After all, interested parties may withdraw if certain employees – especially those who possess company-sensitive information – are free to join a competitor. However, if a restart is not successful, or if, in the case of a restart, not all employees are offered employment with the acquirer, it is important that the employees who lose their job can find work elsewhere as soon as possible. For this reason, the WOVOF regulates that the non-competition clause lapses on the moment that the employment agreement ends as a result of termination by the administrator and if, in the event of a restart, no offer is made to the relevant employee.

Debts arising from the employment agreements with the bankrupt employer do not transfer to the acquirer. This concerns debts that already exist at the time of the transfer and relate to the period before the transfer. Examples include overdue salaries, accrued but untaken holidays and unpaid holiday allowance. It may also include bonuses that are due for the previous financial year, but only become payable in the spring of the following year after the annual accounts have been adopted.

Employee participation

The WOVOF increases the right of advice of the works council (WC). A paragraph is added to Section 25 of the Works Councils Act (WCA), which stipulates that the administrator must ask the WC for advice on any proposed decision that requires the WC’s advice within the meaning of Section 25 paragraph 1 WCA, to the extent such decision will be taken in the context of the continuation of the bankrupt undertaking or in the context of the transfer of the undertaking (or part thereof). During bankruptcy, the administrator must be able to make a decision quickly. It is therefore up to the administrator to determine the period for rendering advice, but this period may not be shorter than three days. If a deviation is made from the advice of the WC, the administrator does not have to suspend its decision with a one month waiting period. In relation hereto, Section 26 WCA, pursuant to which the WC can lodge an appeal with the Enterprise Chamber (in Dutch: Ondernemingskamer), does not apply during bankruptcy. Instead, the WC can lodge an appeal against the administrator’s decision with the supervisory judge. If the decision relates to a transfer of undertaking under the new legislation, the supervisory judge must hear the WC before deciding on giving consent to the sale of the undertaking and take the WC’s objections into account.

Concluding

It is possible to respond to the draft bill until 22 July 2024. Currently, 4 responses have been submitted. There is a possibility that certain items of the draft bill will be amended after the internet consultation. Thereafter, the draft bill (whether or not in amended form) will be submitted to the Dutch House of Representatives (in Dutch: Tweede Kamer). After the draft bill has passed in the House of Representatives, the draft bill still needs to be adopted by the Dutch Senate (in Dutch: Eerste Kamer). It will therefore still take some time before the bill enters into force.

We will of course continue to monitor developments closely. If you have any questions following the above news blog, please feel free to contact us.