Bulgaria: Outsourcing and the Acquired Rights Directive
We have often been asked by clients (and they dislike our conditional answers on the question) whether the award of a service contract to a contractor (outsourcing) or to a replacement contractor (second generation outsourcing), or a decision to in-source an activity in Bulgaria constitutes a transfer of economic entity under the EU Acquired Rights Directive (2001/23/EC) (“ARD”) and, consequently, triggers automatic ex lege transfer of the employees working for that entity. As well known, the ARD purpose is to ensure that the employment relationships of affected employees continue under the same conditions as would have applied if their employment have not been transferred.
What the Bulgarian labor law says about outsourcing
In contrast to UK and same as Germany, France and Spain, the Bulgarian ARD implementing legislation (the “Law”) does not contain a bespoke rule on service provision change. The closest wording to a service provision change is that the labor relationship with an employee is not altered in case the employer changes as a result of “transfer of activity from one enterprise to another, including when tangible assets are transferred” (Article 123, para 1, item 7 of the Labor Code). The interpretation of the Bulgarian Supreme Cassation Court (“SCC”) is that this provision relates to a transfer of undertaking, which retains its identity, which requires to be transferred both (a) the activity of the undertaking and (b) the related to that activity tangible assets. To put it simply, transactions with no transfer of tangible assets or when tangible assets are transferred, but the successor does not take over the activity of the transferor, are out of scope of the Law and does not trigger transfer of employees.
One may say that the above SCC’s position contradicts to the corresponding case law of the European Court of Justice (“ECJ”), nevertheless that this case law has evolved over the years and suffers from internal inconsistency.
The ECJ on the ARD in-scope outsourcing
The first Acquired Rights Directive (77/187/EEC) rules were designed for takeover of assets transactions and it was in the beginning of the 90-ties when the ECJ ruled that the directive’s provisions can also be applicable to outsourcing. The test that applies in determining if an outsourcing of services would be caught by the ARD is whether there is a transfer of an economic entity which retains its identity. Back in 1986 the ECJ set out a ‘multifactorial’ test to answer this question, stressing the need to consider all the facts characterizing the case, including, among others: (1) the type of business undertaking; (2) whether tangible assets are transferred; (3) whether the majority of employees transfer; (4) whether customers transfer; (5) the degree of similarity between the activities carried on before and after the transfer (Spijkers C-24/85).
In the period 1995 – 2007 the ECJ shifted to a more narrowed definition of the concept of transferred entity in the sense that the nature of the activities performed (the type of business undertaking) was considered as the decisive factor in the overall assessment. This means that if labor is the main factor in production (such as cleaning and surveillance), transfer will normally qualify as a transfer of an economic entity which retains its identity, if the new service provider not only continues the activities (which alone is not sufficient), but also takes over the majority, in terms of number and/or skills, of the employees who previously carried out the services. If an activity is not labor intensive since it is essentially based on assets and equipment (such as bus transportation, mining industry, catering), it is decisive, whether the transferee takes over the tangible assets needed for that activity. So, with respect to labor intensive activities the ECJ concluded that transfer of assets was not mandatory for the applicability of ARD; however, regarding asset reliant activities the ARD is not applicable, if those assets are not transferred.
This binary approach of the ECJ was criticized by commentators both for oversimplification of the issues and for its unfairness. It was said that the new service provider can avoid a transfer of employees by rejecting to take assets in the case of an asset reliant enterprise, or re-employ the workforce, in a labor-intensive enterprise. As a result, the application of the ARD became voluntary and its purpose to give employment protection in the event of change of employer was undermined.
In a relatively new ECJ decision of 2020 it was founded that bus operations are characterized by the physical assets of the business, but there were transfer of undertaking even though the busses had not been transferred to the new employer (Grafe and Pohle C-298/2018). In another recent decision, the ECJ holds that the transfer of most of the clients was an important factor for a transfer of undertaking to occur, but this factor is not, in itself, decisive as regards to classification of a ‘transfer’ (Jardan Dodic v Banka Koper C-194-18). Therefore, these may indicate a trend toward reassessing the old Spijkers multifactorial test and revival of the principle that no single feature may be solely conclusive.
Comment
It looks that the Bulgarian court practice is still focused on the takeover of assets transactions, as in the early days of the ARD predecessor. In its practice the SCC neither considers the Spijkers ‘multifactorial test, nor the division of asset intensive and labor-intensive businesses; instead, it holds that the cumulative transfer of activity and tangible assets are conclusive to have a transfer of an economic entity which retains its identity. This position is prone to the same criticism for a ‘voluntary’ ARD application as toward the ECJ’s binary approach: if the new service provider rejects to take the tangible assets, no employees will be transferred ex lege and the intended employee protection will be compromised.
Having said that, it should be kept in mind that in the real life, depending on the factual circumstances, an automatic transfer may not be welcomed by the employee if it has reasons to prefer its current employer.
Now we come to the core reason why we are not able to give a straightforward answer to the client’s question if ARD applies in certain cases. Since all rulings by the ECJ are binding on all Member States' authorities, including national courts, it could be reasonably expected that any moment the SCC may reassess its interpretation of the Law and accept the ECJ current position on the transfer of economic entity in relation to outsourcing. Though, the acceptance of the Spijkers multifactorial test has its own drawbacks related to uncertainty and anxiety among employees and employers whether a specific situation is covered by the ARD or not. Because the answer depends on the ex post judgment of the court.