Transfer of Employee Rights and Claims in Company Spin-offs

August 2019 Merve Bakırcı
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Introduction

Turkish Commercial Code No. 6012 (“TCC”) governs the provisions in relation to company spin-offs, where a company transfers certain assets, or a part of its business, to another company, or to a company that shall be newly established by way of the spin-offs.

Spin-offs may be regarded as a restructuring model, and companies choose to utilize spin-offs for different reasons and in different ways. For instance, a company may choose to make a spin-off transaction due to risk management, marketing, financial or economic reasons, and may choose to use a partial or full spin-off[1]. In a full spin-off, all assets and business of the company are divided and transferred to the transferee, and the shareholders of the transferor company acquire the shares[2]. The transferor company ceases its legal existence, and the transferee company enjoys its legal existence with the transferred assets or businesses. In a partial spin-off, some of the assets and business of the company are divided and transferred to the transferee[3]. In this case, the transferor may preserve its legal existence, only without the transferred assets or businesses.

Having said this, due to the nature of spin-off transactions, both partial and full spin-offs require the transfer of certain assets, businesses, agreements and employees so that the transferee may utilize its trading functions. For the purposes of this newsletter article, we will focus on the transfer of employees and, therefore, their rights and claims, under cases of either full or partial spin-offs.

Transfer of Employees in Spin-offs

Spin-offs are fundamentally different in nature compared to acquisitions or mergers. As mentioned previously, in spin-offs, certain assets, contracts and employees are automatically transferred to the transferee company. Accordingly, in spin-offs, any rights, benefits and claims that transferred employees may have against the transferor company are also transferred to the transferee company. Therefore, it is crucial for the transferor company to select the employees to be transferred.

Transfer of Employees in Spin-offs Pursuant to Labor Law No. 4857

Due to the specific restructuring nature of spin-offs, and with the aim to protect the employees under such transactions, both Labor Law No. 4857 (“Labor Law”) and the TCC have specific provisions in relation to the transfer of employees’ rights.

Accordingly, Article 6(1) of the Labor Law stipulates that “when, due to a legal transaction, the establishment or one of its sections is transferred to another person, employment contracts existing in the establishment or in the section transferred on the date of the transfer shall pass on to the transferee with all the rights and obligations involved”. As observed, pursuant to this Article, the transferee company is under an obligation to acquire the transferred employees’ rights and obligations under any type of transaction that includes the transfer of employees. In such a case, all rights of the employee shall continue considering the date upon which he/she first commenced working for the transferor company. This specific protective provision under the Labor Law is only natural, since an employee who has been working at a company for over 15 years should not be regarded as newly employed in the transferee company. Accordingly, in such a case, that employee may lose benefits, such as seniority, severance payments, and holidays within the company. The protection is so important that if the transferee company fails to meet its obligations with regard to the transferred employees, the transferor company shall also be jointly liable for employees’ claims as to wages, bonuses, holidays and related payments accrued prior to the transfer for two years pursuant to Article 6(3).

On the other hand, according to Article 6(4), “provisions as to joint liability shall not be applicable in cases where the corporate legal personality status ceases to exist as a result of a merger, participation, or where the corporate type is changed”. The Article outlines specific transaction types, whereby the joint liability for two years provision shall not apply and it is arguable that under all of the specific transaction types listed in the Article (mergers, participations, and changes of corporate type), the transferor company no longer exists and, accordingly, there is no legal personality that could be jointly liable with the transferor. To that end, although it is not a transaction type listed under the article, it can be argued that the joint liability for two years rule shall not apply in full spin-offs, since the transferor does not exist anymore to share the lability with the transferee. On the other hand, considering the protective nature of the provision, under partial spin-offs, it can be argued that the joint liability for two years rule may still be applicable, since it was not opted out specifically as a transaction type, which falls outside the scope of the joint liability rule for 2 years under Article 6. In any event, as will be explained below, an employee may rely on the TCC provisions, which state that the transferor and the transferee shall be jointly liable, without any time limitation, for the employee’s rights.

Transfer of Employees in Spin-offs Pursuant to TCC

In addition to the Labor Law, as mentioned above, the TCC has specific provisions that regulate employee rights in case of spin-offs. Therefore, confusion as to which shall apply may arise, in practice. However, it can be argued that the provisions of the TCC shall prevail for spin-offs in the case of conflicting provisions since the Labor Law provisions regulate the transfer of employees under different types of transactions, whereas the TCC provisions, in relation to the transfer of employees, are specifically aimed at instances of spin-offs, and are aimed to protect employees affected by spin-off transactions[4].

To that end, pursuant to Article 178(1), in full or partial spin-offs, “the employee contracts shall be transferred to the transferee with all the rights and obligations arising until the transfer date, unless the employee objects.” As is clearly observed, the TCC has a specific provision that allows the employees the opportunity to object to the transfer of their employee contracts. In such a case, the employee’s contract shall be terminated at the end of the notice period.

In addition, under Article 178(3), the TCC stipulates that the previous employer and the transferee shall be jointly liable for the employee’s claims/amounts due prior to the spin-off, or due to the termination of the contract on the objection of the employee. As observed, different from the Labor Law, the TCC does not limit the joint liability rule to two years which, arguably, provides the employees with added protection. However, due to the reasons explained, above, it can be argued that this provision shall also not be applied to instances of full spin-offs.

Rights and Obligations to be transferred

Both the Labor Law and the TCC refer to the transfer of rights and obligations of the employee, and opt out to define these rights and obligations. It may be argued that wages, bonuses, overtime wages, holidays and relevant payments, shall be considered as the rights of employees to be transferred. In addition, payments that have accrued due to the termination of the employee’s contract, such as payments in lieu of notice and severance payments, are also in the nature of the rights of the employees to be transferred. There is no clear provision that stipulates the right to severance payment arises if the employee objects to the transfer, pursuant to Article 178(1). However, it may be argued that considering the aim of the provisions, which is to protect the employees, and that the TCC has provided a specific right to object to the transfer, the employee should not lose any rights if he/she so objects.[5]

Conclusion

The Labor Law and the TCC both have provisions in relation to the transfer of employees’ rights and claims under spin-off transactions. However, considering that the TCC provisions are designed specifically to regulate such transfers in relation to spin-offs, and offer a higher level of protection to the transferred employees, it can be argued that the TCC provisions shall apply if there is a conflict between the Labor Law and the TCC provisions. To that end, it may be argued that wages, bonuses, overtime wages, holidays and relevant payments, payments in lieu of notice, as well as severance payments, shall be transferred to the transferor and, in the event of partial spin-offs, the transferee company shall also be liable for such claims with the transferor concerning partial spin-offs. Under full spin-offs, on the other hand, the transferee will be solely liable for claims by the employees, since the transferor loses its legal existence as a result of the transaction.

[1] Helvacı, Mehmet: Anonim Ortaklıkların Bölünmesi, Istanbul, 2004, p. 9-14.

[2] TCC, Artcile 159(1)(a).

[3] TCC, Article 159(1)(b).

[4] Süzek, Sarper: İş Hukuku, Istanbul, 2013, p. 202.

[5] Süzek, p. 205; Y9HD, E: 2015/28060, K:2018/22719.

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