Judgment of the Supreme Court dated 14 March 2017 on fraudulent acts related to objective dismissals carried out during a transfer of undertakings as per article 44 of the Workers Statute.

The judgment dated 14 March 2017 declares as unfair the objective dismissal of an employee five months after his employer entered into an asset sale and purchase agreement by which it transferred its business to another company in the sector. It considered that the dismissal was unfair as it was agreed by both companies, within the framework of the transaction, to avoid the transferee being subrogated to the entire workforce of the transferor company.

This ruling of the Supreme Court by unification of doctrine deals with the dismissal of an employee for justified economic reasons, namely, continued losses and a decrease in activity and turnover of the company over recent years. Five months prior to the dismissal, the employer had entered into an asset sale and purchase agreement with another company in the sector by which it transferred the legal and commercial relations with its clients, including the client portfolio, lease agreements for the company’s offices and the employment contracts of the employees that were listed in an annex to the agreement (the entire staff except for 7 employees, one of which was the plaintiff).

The employee filed a claim for unfair dismissal against the two companies and Social Court nº 11 of Barcelona declared that the dismissal was fair on considering that there were sufficient grounds to prove the economic reasons alleged by the company. The acquiring company was acquitted, as it was considered that the plaintiff was not entitled to claim against the company since there was no existing employment relationship with them.

Following an appeal against the decision, the Superior Court of Justice of Catalonia revoked the judgment declaring the dismissal as unfair, having considered that the asset sale and purchase agreement implied a transfer of undertakings as per article 44 of the WS, which would oblige the acquiring party to be subrogated to the employment contracts of the entire workforce, including that of the plaintiff. Contrary to this provision, in the annex to the agreement both companies had agreed to the exclusive transfer of part of the workforce, and the transferor company subsequently proceeded to the dismissal of the employee not included in this annex. In the Court’s view, the parties used a coverage rule (article 52.c) of the WS which regulates dismissals for economic, technical, organizational or production reasons), to avoid the labour consequences arising from article 44 of the WS, thereby engaging in a fraudulent act as contemplated in article 6.4 of the Civil Code. On this basis, it declared the dismissal as unfair and the two companies involved as liable.

An appeal for unification of doctrine was filed before the Supreme Court against this ruling, alleging a contradiction with the Judgment of the Superior Court of Justice of Catalonia of 6 June 2013, which declared the dismissal of another seven employees who had not been subrogated within the framework of the operation in question as lawful. In this judgment, it was considered that no actual transfer of undertaking affecting the employee existed, since only part of the activity was transferred pursuant to the asset sale and purchase agreement together with the material elements and workforce assigned exclusively to that activity, from which the employee was excluded. It was considered that there was no evidence of a fraudulent act by the parties to the detriment of the employee of the transferor company, who was dismissed due to an existing economic situation prior, mainly, to the sale and purchase agreement for part of the activity to which he was not ascribed.

The Supreme Court begins its explanatory presentation by considering that the asset sale and purchase agreement involved the transfer of the entire business of the transferor company which would require application of the employment guarantee to all of the employees in accordance with article 44 of the WS. On the basis of the foregoing, it is understood that the parties agreed that the transferee would be subrogated to the entire workforce, except for 7 employees, avoiding the application of this provision, which is a mandatory rule which cannot be modified by the parties, thereby circumventing the workers’ rights. Accordingly, it ratifies the dismissal being deemed as unfair and the liability of the two companies involved in the aforementioned fraudulent act.

One final reflection: Would the ruling have been different if the objective dismissal for economic reasons had occurred prior to the transfer of the company?

In principle, in order for the subrogation effect of article 44 of the WS to occur, the employment contracts of the employees of the transferor company must be valid at the time of the transfer. Notwithstanding the foregoing, this general rule would also give rise to exceptional cases of fraud, that is to say, when it is proven that the transferor and transferee companies fraudulently agreed to the transfer of the company, in whole or in part, free from the labour burdens linked to the same, proceeding to dismiss the employees that were not transferred prior to the transaction. In these cases, the so-called “Lazarus effect” would apply, which consists of employment contracts that are “dead“, being reinstated by way of a judicial declaration subsequent to the existence of the transfer of undertakings.