What Happens to Employees During a Business Transfer? A Case Study
When one company takes over another, whether through a merger, acquisition, or management agreement, it’s not just the business that’s affected. Employees, too, face big changes that can impact their contracts, rights, and day-to-day work.
In Malta, specific laws protect staff during these transitions but understanding how they apply in real-life situations can be tricky. In this case study, we break down what really happens behind the scenes when a business is transferred and what it means for the people who keep it running.
Background
Company A (the “transferor”) employs 25 employees, all of which hold a care work role or senior care work role as part of their employment with the company. Company A has entered into a service agreement with Company B (the “transferee”) for the latter to take over its operations and the management of its employees.
The Law
Article 38 of the Employment and Industrial Relations Act (Chapter 452 of the Laws of Malta; the “Act”) stipulates that “when a business or other undertaking is taken over, in whole or in part, by a person (the “transferee”) from any employer (the “transferor”), any employee in the employment of the transferor on the date of transfer of the undertaking shall be deemed to be in the employment of the transferee and the transferee shall take on all the rights and obligations which the transferor has towards the employee.”
This provision primarily establishes two (2) key rules:
1. First, any employee employed by the transferor, as Company A as the original employer, on the date of the transfer will be considered as being employed immediately by the transferee, as Company B as the new employer.
2. Second, the transferee inherits all the rights, duties and obligations that the transferor holds towards the employee, as though he is the employer.
Furthermore, and by virtue of the Transfer of Business (Protection of Employment) Regulations (S.L.452.85; the “Regulations”) a legal “transfer” is defined to mean a “transfer of an undertaking which retains its identity as an organised group of resources having the objective of pursuing an economic activity”. Thus, a legal transfer can include not only a merger or acquisition of a company, or joint ventures but also any agreements which two companies decide to enter into for the management of the operations of their business.
Note that the Employee (Information and Consultation) Regulations (S.L.452.96), which regulates the elections, role and duties of the employee representative/s, would not apply in this case study since it only is applicable to those undertakings which employ fifty (50) employees and over, from the 23rd of March, 2008.¹ Therefore, companies which employ less than fifty (50) employees are not required to adhere to this subsidiary legislation.
The Rights and Obligations of the Parties
In this scenario, Company B has been assigned the responsibility of managing and operating Company A, thereby creating a transfer of business. Consequently, the rights and obligations arising from the relevant legislation apply to the parties involved in the transfer. The parties include the transferor, the transferee and the employees.
1. Retention of terms and conditions of employment
Once the transfer of business takes place, the contract of employment of every employee employed by the transferor retains its effect as if it was originally made between the employee and the transferee. As a result, all the terms and conditions specified in the employment contract that pertain to the employee continue to be in effect. Here, it is presumed that no terms of the employee’s employment may be unilaterally amended by the transferee as this would place the employees at a disadvantage. Additionally, because the transferee assumes the role of the employer, “all the transferor’s rights, powers, obligations and liabilities under or in connection with any contract of employment [of the employee in question] shall be transferred to the transferee.” ²
However, the transferor retains the duty to effect payment and/or settle all dues owed to the employees affected by the transfer, regarding the employment relationship, including for any pro rata annual leave entitlement, payment of wages, pro rata bonuses and weekly allowances due up to the end of the relationship with the transferor.³
2. Providing information on the transfer
Irrespective of the size of the workforce, the transferor must provide information about the conditions of employment of every employee to the transferee and to the employee in question.⁴ This shall always include a copy of the contract of employment and/or written statement indicating the terms and conditions of the employee’s employment, emphasising the necessity of an adequately drawn up contract of employment.⁵ This information shall be provided to the transferee within five (5) working days either from the date of identification of the transferee or else by the date of the transfer of business, whichever date is earlier. 
3. Avoiding termination
The law makes it clear that the transfer of the business does not in itself constitute a good and sufficient ground for any dismissal of employees by the transferor or the transferee. Therefore, it is assumed that upon a transfer of business, all employees have the right to retain their position within the employment structure of the transferee. Yet, this does not limit the transferor to terminate any employment relationship on the basis of “economic, technical or organisational reasons entailing changes in the workforce.” ⁶
Notwithstanding this rule, the law provides an added layer of protection to the employee. It clarifies that if the transfer of business involves a substantial change in the working conditions to the detriment of the employee, resulting in their termination, the employer shall be regarded as being responsible for their termination.⁷
4. DIER notification
For the purposes of article 7 of the regulation, the Director responsible for employment and industrial relations (the “DIER”) must be provided with a written statement including the following information in relation to the transfer:
(a) the date or proposed date of the transfer;
(b) the reasons for the transfer;
(c) the legal, economic and social implications of the transfer for the employees; and
(d) the measures envisaged in relation to the employees.⁸
This written statement shall be provided to the DIER at least fifteen (15) days either before the transfer of business is carried out or else before the employees are directly affected by the transfer, whichever date is the earliest.
Lastly, any individual who contravenes the regulations is considered guilty of an offence and may be liable to a fine of one thousand, one hundred and sixty-four euro and sixty nine cents (€1164.69) for every employee who was affected by the transfer.⁹
How AE Legal Can Help
Navigating legislative changes in employment law can be challenging. At AE Legal, we provide expert guidance to both employers and employees, offering tailored advice to ensure compliance and promote a safe, fair workplace. Contact us today for a free consultation.
[1] Article 1 (3) of the Employee (Information and Consultation) Regulations; S.L. 452.96 of the Laws of Malta; [2] Article 3A of the Regulations; [3] Article 3A provisos; [4] Article 4 proviso of the Regulations;
[5] In this regard, kindly note that it is essential that all rules specified in the Transparent and Predictable Working Conditions Regulations (S.L.452.126 of the laws of Malta), are adhered to, namely with respect to what written information must be provided to the employee;
[6] Article 5 (2) of the Regulations and its proviso; [7] Article 5(3) of the Regulations; [8] In accordance with article 38 (2) of the Act; [9] Article 9 of the Regulations.
