Transfer of a business pursuant to Section 613a of the German Civil Code (BGB)

When does a transfer of undertaking take place?

What is required is the transfer of a long-term economic entity which retains its identity following the change of ownership. Article 1(1)(b) of Directive 2001/23/EC, on which Section 613a of the German Civil Code (BGB) is based, defines this as an organised pooling of resources for the purpose of carrying out a principal or ancillary economic activity. Whether the identity is retained is assessed on the basis of all the circumstances of the individual case.

The relevant criteria stem from the judgment of the European Court of Justice of 18 March 1986 – Case 24/85 (Spijkers): the nature of the business, the transfer of tangible assets, the value of intangible assets, the transfer of the core workforce, the transfer of the customer base, the similarity of the business activities before and after the transfer, and the duration of any interruption. No single criterion is decisive; they must be weighed up according to the specific nature of the business.  In a production business characterised by its assets, machinery, plant and premises are usually the decisive factors; in such cases, a transfer may take place even without any transfer of staff. Conversely, in a service-based business with few physical assets, the transfer of a substantial proportion of the staff – in terms of both numbers and expertise – whom the predecessor specifically deployed for this activity may suffice, whilst the mere continuation of the activity by another contractor (functional succession) and the mere succession of a contract do not constitute a transfer of undertaking.

The contractual designation as a contract of sale, a service contract or a contract for work and materials is not relevant. What is decisive is the actual continuation or resumption of business activities; the mere possibility of an unchanged continuation is not sufficient.

Which transactions typically trigger an audit?

Asset deal. Where individual assets, contracts or parts of the business are transferred, Section 613a of the German Civil Code (BGB) may apply if this results in the transfer of a functioning economic entity. The contractual description is irrelevant; what matters is the actual implementation.

Share deal. A mere change of shareholders does not constitute a transfer of business. The company remains the employer; Section 613a of the German Civil Code (BGB) does not apply.

Outsourcing, insourcing and re-tendering. If a function previously carried out in-house is transferred to a service provider or brought back in-house, or if a contractor changes, the decisive factor is whether a unit retaining its identity is transferred. The mere loss or acquisition of a contract is not sufficient; what is decisive is whether it is linked to a transfer of staff, customers or operating resources that preserves the identity of the unit.

Restructuring. More complex restructuring measures often have to be broken down into several legal entities. An employment relationship is only covered by a transfer of an undertaking or part of an undertaking if the employee was effectively assigned to the economic unit being transferred. Restructuring measures often have to be broken down into several entities. An employment relationship is only covered by a transfer of an undertaking or part of an undertaking if the employee was assigned to the transferring economic entity prior to the transfer. The Federal Labour Court expressly emphasised this allocation requirement in its judgement of 21 March 2024 – 2 AZR 79/23. Not every employee of a company therefore automatically forms part of the transferred part of the undertaking.

Restructuring. In the event of a merger, demerger or spin-off, the assets are transferred by operation of law. The effects under employment law remain unaffected by this. Section 613a(1) and (4) to (6) of the German Civil Code (BGB) continue to apply pursuant to Section 35a(2) of the German Transformation Act (UmwG); for demergers, this applies via the reference in Section 125(1) of the German Transformation Act (UmwG). Until the reform of the law on corporate transformations on 1 March 2023, this provision was numbered Section 324 of the UmwG; older model contracts and English-language literature often still refer to it.

Transfer of business following insolvency. Section 613a of the German Civil Code (BGB) also applies in the event of insolvency, albeit with a limitation of liability developed by the Federal Labour Court (BAG): the transferee is not liable for claims that had already arisen at the time of the opening of insolvency proceedings (insolvency claims); for claims arising thereafter (claims against the insolvency estate), they bear unlimited liability. Outstanding remuneration for the last three months prior to the insolvency event is secured by insolvency pay under Section 165 of the Social Code Book III (SGB III).

What happens to the employment relationships?

Under Section 613a(1) of the German Civil Code (BGB), the new owner assumes the rights and obligations arising from the transferred employment contracts that exist at the time of the transfer. Neither a new employment contract nor the employee’s consent is required for this. Length of service, remuneration, annual leave and other entitlements under individual contracts generally continue to apply.

Where rights and obligations are governed by the provisions of a collective agreement or a works agreement, they become part of the employment relationship with the new owner in accordance with Section 613a(1), second sentence, of the German Civil Code (BGB) and may not be amended to the detriment of the employee for a period of one year. This restriction does not apply if the acquirer has a different collective agreement or works agreement governing the same matters; in that case, the provisions of the new agreement replace the previous ones (Section 613a(1), third sentence, of the German Civil Code (BGB)). Furthermore, changes may be made before the end of the year if the collective agreement or works agreement is no longer in force, or if, in the absence of mutual binding by a collective agreement, the application of another collective agreement is agreed (Section 613a(1), fourth sentence, of the German Civil Code (BGB)).

In practice, the decisive factor is the preliminary question of whether a collective provision continues to apply to the acquirer under collective bargaining law or is merely transformed into the employment relationship in accordance with Section 613a(1), second sentence, of the German Civil Code (BGB). If it continues to apply collectively – because the business remains intact as a single entity and the acquirer is subject to the same obligations – it is subject to subsequent amendments. Transformed provisions, on the other hand, generally continue to apply in a static form and can only be amended by individual contract, within the one-year moratorium and at the earliest after its expiry. Reference clauses in employment contracts are transferred as part of the contract in any case and may bind the transferee regardless of the transferee’s own collective bargaining obligations. 

For certain obligations arising prior to the transfer, the previous and new employers are jointly and severally liable in their external relationship pursuant to Section 613a(2), first sentence, of the German Civil Code (BGB). The employee may hold both debtors liable within the statutory limits. The business purchase agreement may allocate the financial burden in the internal relationship between the seller and the buyer, but does not alter the statutory external liability towards the employees.

The seller’s continued liability is subject to two limitations. Under section 613a(2), first sentence, of the German Civil Code (BGB), the seller is jointly and severally liable only for obligations that arose prior to the transfer and become due within one year of the transfer. If such an obligation only becomes due after the transfer, the seller is additionally liable, pursuant to Section 613a(2), second sentence, of the German Civil Code (BGB), only on a pro rata basis, namely to the extent corresponding to the portion of the assessment period that had elapsed at the time of the transfer.

In the case of a transfer taking effect on 1 July, the transferor is therefore generally liable for only half of an annual bonus payment due in December. If the transferor ceases to exist as a result of a conversion, its continued liability ceases entirely (Section 613a(3) of the German Civil Code (BGB)). In the case of a demerger, this is replaced by the joint and several liability of the legal entities involved under Section 133(1) of the German Transformation Act (UmwG); for the legal entity to which the liability was not allocated in the demerger agreement, this liability is limited to five years under Section 133(3) of the German Transformation Act (UmwG), and to ten years in the case of pension obligations under the German Occupational Pensions Act.

Can an employee be dismissed on the grounds of a transfer of undertaking?

Under Section 613a(4), first sentence, of the German Civil Code (BGB), a dismissal by the previous or new owner is invalid if the transfer of the business is the underlying reason. The right to dismiss an employee on other grounds remains unaffected under Section 613a(4), second sentence, of the BGB. Article 4(1) of Directive 2001/23/EC also expressly permits dismissals on economic, technical or organisational grounds that entail changes in the field of employment. The law therefore does not protect against every dismissal occurring in the context of a transaction.

In practice, however, drawing this distinction is often difficult. If a post is made redundant on the basis of an independent organisational decision that has actually been implemented, a redundancy on operational grounds may be valid. If, on the other hand, the measure serves merely to remove employees from the entity prior to the transfer, there is strong evidence of an impermissible circumvention.

Buyers and sellers should therefore not plan personnel measures in isolation from the transaction plan. The timing, decision-making authority and operational justification must all be consistent.

Special case: the acquirer’s plan. Where a business is transferred out of insolvency, a redundancy on operational grounds is not automatically invalid simply because it is announced in the run-up to the transfer. It may be valid if it is based on a binding acquirer’s plan, which has already taken concrete form, under which the post is to be made redundant. Sections 125 and 128 of the Insolvency Code (InsO) facilitate this procedure: If a reconciliation of interests is reached between the insolvency administrator and the works council, accompanied by a list of named employees, it is presumed under section 125(1), first sentence, no. 1 of the Insolvency Code (InsO) that the dismissal of the named employees is necessitated by urgent operational requirements. The social selection may then only be reviewed for gross error and is not deemed to be grossly erroneous if it results in a balanced workforce structure being maintained or created (section 125(1), first sentence, no. 2 of the InsO).

Who is responsible for informing the employees?

The previous employer or the new owner must inform the employees concerned in writing prior to the transfer. Under Section 613a(5) of the German Civil Code (BGB), the date or planned date, the reason, the legal, economic and social consequences, and the measures envisaged with regard to the employees must be communicated.

The letter must be tailored to the specific transfer. According to established case law of the Federal Labour Court, the transferor and the transferee must inform the employee in such a way that they can form a clear picture of the identity of the transferee and the circumstances specified by law; they must be provided with a sufficient basis of knowledge to enable them to exercise or waive their right to object. It must identify the transferee in such a way that they are identifiable, specify the subject matter and timing of the transfer, and explain the reason in its economic essence. With regard to the legal consequences, the letter must set out the transferee’s succession under Section 613a(1) of the German Civil Code (BGB), the fate of collective agreement and company-specific provisions, the allocation of liability under Section 613a(2) of the German Civil Code (BGB) and protection against dismissal under Section 613a(4) of the German Civil Code (BGB). 

In addition, there must be an accurate reference to the right to object under Section 613a(6) of the German Civil Code (BGB), specifying the time limit, form, addressee and the consequences of an objection. The one-month objection period does not commence until proper notification has been received; neither a failure to provide notification nor notification with insufficient content triggers the start of the period. The individual notification is in addition to the information required to be provided to employee representatives under Article 7 of Directive 2001/23/EC, which is implemented in German law through the works council’s participation rights.

The buyer and seller jointly bear the risk of inaccurate information. The letter should therefore not be treated as a mere annex under employment law. The transaction structure, liability provisions, the situation under collective bargaining law and the planned integration must be sufficiently established before the letter is sent.

When does the objection period begin?

Under Section 613a(6) of the German Civil Code (BGB), an employee may object to the transfer of their employment relationship within one month of receiving the notification. The objection may be lodged with either the previous or the new employer, but must be in writing in accordance with Section 126 of the German Civil Code (BGB) and therefore require a handwritten signature. An email is therefore not sufficient. For the notification itself, however, the text form specified in Section 126b of the German Civil Code (BGB) is sufficient. An objection may be lodged even before the transfer takes place, as soon as the notification has been received.

The one-month period generally begins upon receipt of a notice that meets the statutory requirements. However, errors that are typically irrelevant to the employee’s decision-making process do not prevent the period from commencing. The Federal Labour Court expressly clarified this in its judgement of 21 March 2024 – 2 AZR 79/23. Not every legal inaccuracy therefore gives rise to an unlimited right of objection.

If, on the other hand, essential information is missing or key consequences are misrepresented, the period may remain open. A subsequent objection may then give rise to significant risks of the transaction being set aside. Under special circumstances, the right to object may also be forfeited; however, one should not rely on this when planning transactions.

What are the consequences of lodging an objection?

If an objection is valid, the employment relationship remains with the previous employer. This is not automatically to the employee’s advantage. If the seller has transferred the business and there are no longer any employment opportunities, the employee may face redundancy on operational grounds. The employee should therefore be aware of the financial situation of both employers and their own employment prospects.

For the seller, objections can lead to unplanned residual staff and risks of default on acceptance. The buyer must expect gaps in the planned organisation. The business purchase agreement should therefore set out the information process, responsibilities, financial consequences and how to deal with objections.

In principle, a dispute is neither divisible nor subject to conditions. It takes effect retroactively from the date of the transfer, meaning that the employment relationship has never retroactively ceased with the previous employer. Upon receipt of an objection, it must therefore be clarified swiftly which employer the employee is assigned to and how employment, remuneration and communication are to be continued.

How are employees assigned to a part of the business?

When a part of a business is transferred, only those employees assigned to that economic unit are transferred. It is not solely a question of which client someone last worked for or at which site they were based. What matters is their organisational affiliation prior to the transfer.

Factors such as reporting lines, cost centres, job profiles, team membership, length of service and actual collaboration are helpful. Employees with cross-functional roles, such as in IT, HR, finance or procurement, often cannot be easily assigned. A purely percentage-based allocation of their working hours may serve as an indication, but is no substitute for a comprehensive assessment.

The allocation should be documented and agreed between the buyer and the seller. Unclear lists can later lead to claims for protection of existing rights, remuneration claims or disputes over who is responsible for employing the individual.

Secure the allocation through a reconciliation of interests. If a conversion accompanies the restructuring and a reconciliation of interests is reached in accordance with section 112 of the Works Constitution Act (BetrVG), in which employees are assigned by name to a specific undertaking or part of an undertaking, the employment tribunal may only review the allocation for gross errors (Section 35a(1) of the Transformation Act [UmwG]; for demergers, see Section 125(1) of the Transformation Act [UmwG]). Outside the context of transformations, this privilege does not apply; in such cases, the sole determining factor is whether the organisational affiliation prior to the transfer can be substantiated.

What role do the works council and co-determination play?

The notification under Section 613a of the German Civil Code (BGB) is addressed to individual employees. In addition, participation rights under works constitution law may apply. Changes to the business may trigger negotiations on the reconciliation of interests and a social plan in accordance with Sections 111 et seq. of the Works Constitution Act (BetrVG). Any transitional or residual mandates of the works council must also be examined.

Transitional mandate (Section 21a of the Works Constitution Act (BetrVG)) If a business is split, its works council remains in office and continues to manage the affairs of the parts of the business previously assigned to it, provided that these parts are eligible for a works council and are not incorporated into a business in which a works council already exists (Section 21a(1), first sentence, of the Works Constitution Act (BetrVG)).In this context, the works council must appoint election committees without delay. The transitional mandate ends upon the announcement of the election results for a newly elected works council, at the latest six months after the split takes effect. This period may be extended by a further six months by collective agreement or works agreement (Section 21a(1), third and fourth sentences, of the Works Constitution Act (BetrVG)). Where undertakings or parts of undertakings are merged, the works council of the undertaking with the largest number of eligible voters shall exercise the transitional mandate (Section 21a(2) of the Works Constitution Act (BetrVG)). Both provisions also apply expressly where the demerger or merger takes place in connection with a disposal of the undertaking or a conversion under the Conversion Act (Section 21a(3) of the Works Constitution Act).No transitional mandate arises if the original undertaking retains its identity following the spin-off; in that case, the existing works council retains its full mandate without restriction for the continuing undertaking. The transitional mandate merely closes the gap in protection that arises when part of the workforce falls outside the remit of the existing works council.

Residual mandate (Section 21b of the Works Constitution Act) If the undertaking ceases to exist as a result of closure, demerger or merger, the works council remains in office in accordance with Section 21b of the Works Constitution Act for as long as is necessary to exercise the associated rights of participation and co-determination. The residual mandate presupposes a functional link to the tasks triggered by the dissolution of the workplace organisation. It is not a full mandate. It may extend beyond the end of the regular term of office and only ends when there are no longer any outstanding matters for negotiation.

Operational changes and mass redundancies. A mere change of ownership in itself does not constitute an operational change. Obligations to consult under Sections 111 et seq. of the BetrVG only arise when one of the measures specified therein occurs, such as closure, relocation, demerger, merger or a fundamental change to the organisation of the undertaking, and where the undertaking generally employs more than twenty employees eligible to vote (Section 111, sentences 1 and 3 of the BetrVG). If employment contracts are to be terminated in the course of the transaction, the thresholds set out in Section 17(1) of the Employment Protection Act (KSchG) must also be checked. Notification must be given to the Employment Agency before the notices of termination are issued.

The various channels of participation serve different purposes and must not be conflated. Proper notification of employees does not replace works council participation. Conversely, a reconciliation of interests does not trigger the individual objection period set out in Section 613a(6) of the German Civil Code (BGB).

In the case of cross-border groups, European works councils, group works councils or foreign employee representative bodies may also be involved. The timetable must take these parallel participation processes into account.

How should a transfer of business be prepared for in the context of a corporate acquisition?

Labour law due diligence should not be limited to employment contracts. The following aspects must be examined: the demarcation of business units, the allocation of staff, collective bargaining coverage and its continuing effect, works agreements, pension commitments, special protection against dismissal, outstanding disputes, and reference clauses to collective agreements, the static or dynamic nature of which may have significant consequences for the purchaser. Only on this basis can it be assessed which employment relationships are transferred by operation of law, which collective agreements are transformed or continue to apply under collective bargaining law, and which costs remain permanently with the purchaser.

In the purchase agreement, the parties should set out the information process, the drafting of the notification letter, the allocation of liability, communication with employees and the handling of objections. These agreements primarily have an internal effect; mandatory employee rights remain in force.

Practical integration begins before the transfer takes place. Access systems, payroll integration, data protection, managerial responsibility, work equipment and contact persons must be operational by the cut-off date. A legally completed transfer without operational preparation creates avoidable conflicts and strains the relationship of trust with the newly acquired workforce.

The timetable is crucial. Notification must be received before the transfer; the one-month period specified in Section 613a(6) of the German Civil Code (BGB) only begins once it has been received. Anyone who allows less than one month between the notification and the effective date will only become aware of any objections after the transaction has been completed and bears the risk of unplanned rejections. In practice, the notification letter is therefore drafted as an annex to the purchase agreement, sent immediately after signing, and the consequences of objections are regulated through exemptions or a purchase price adjustment.