Reallocation of public subsidies in the non-profit sector: when do employment contracts follow?
In Belgium, many non-profit associations operate with the approval and subsidies granted by public authorities. When an authority withdraws its approval from one association and grants it to another, the latter may pursue the same mission with many of the same employees of the first association. This raises two practical questions:
- Do the employment contracts automatically transfer to the new association, or do they end with the old one?
- In the latter case, is the former association liable for compensatory notice indemnities?
The answers depend on the rules governing transfers of undertakings. According to Directive 2001/23/EC and the collective labour agreement No. 32bis, when an undertaking or part of one is transferred to a new one, the employment contracts are transferred to the new undertaking on the same terms. This ensures that the transfer itself does not remove or reduce the rights that employees derive from their contracts.
This regime applies when three conditions are met: (i) a change of employer, (ii) a legal transfer or merger, and (iii) the transferred undertaking retaining its identity. The first condition is rarely disputed. However, the second and third conditions are more contentious, including when a public authority withdraws approval from one association and grants it to another. The Court of Cassation addressed this situation in its judgment of 15 May 2023 (S.21.0021.F).
The facts of the case and the judgment of the Labour Court of Liège
The case concerned a non-profit youth care association that was approved and subsidised by the French Community. Following an inspection report by the administrative authority, the association was placed in voluntary liquidation and lost its approval on 31 August 2016. The following day, a newly created association, set up by a province and two municipalities, took over the youth care activities with its own approval from the French Community.
Several elements pointed towards continuity:
- Same activity and structure: both associations provided youth care through three types of service, i.e. educational reception and support, emergency reception and specialised reception with a particular pedagogical project. There was no interruption of the service provision despite the transfer.
- Same staff: a substantial proportion of the employees moved to the new association on the same pay and with their seniority. Only the director, who was excluded from the new project, and those who declined the transfer did not follow.
- Same beneficiaries: all or a substantial proportion of the young people cared for by the first association transferred to the second.
Other elements pointed in the opposite direction:
- No assets were transferred: no buildings or equipment were moved. The activity moved to a new site owned by the province.
- No transfer of approval: the first association's approval was withdrawn, not transferred. The new association obtained its own approval based on a new educational project that did not include some of the specific features of the former one.
- Lack of management continuity: the former director, who set the educational line that staff were contractually bound to follow, was not transferred.
In its judgment of 25 March 2020 (2018/AU/72), the Labour Court of Liège rejected the application of the transfer rules. While accepting that the two associations were closely linked, the Court held that the activity had lost its identity. In its view, the activity rested on three pillars: the staff, a site dedicated to housing young people, and an operating procedure tied to the approval of the French Community. Only part of these pillars had passed to the new association, i.e. the staff (without the director) and the young people. The Labour Court held that the missing elements (the site, the assets and the approval) were part of the foundation of the activity, not merely of the way it was organised. It therefore considered that there was no transfer and thus that the employment contracts were not transferred from the first association to the second one.
As a practical consequence, the Labour Court held that the employment contracts had ended with the first association and that the latter consequently owed a compensatory notice indemnity.
The judgment of the Court of Cassation
In its judgment of 15 May 2023, the Court of Cassation quashed the Labour Court’s judgment.
For the Court of Cassation, the notion of a “transfer” should be interpreted in light of the European Court of Justice's case law and Directive 2001/23/EC. The Court recalled that:
- a unilateral decision by a public authority does not preclude a transfer: this applies in particular where the authority stops subsidising one legal entity and instead subsidises another; and
- identity is assessed as a whole: all the facts characterising the operation must be taken into account, including the type of undertaking, whether buildings and equipment are transferred, the value of intangible assets, whether the essential part of the workforce is taken over, whether customers follow, how similar the activities are before and after and how long the interruption lasts.
In the present case, the two associations had continued to provide youth care organised into three services of the same type and under similar approvals. This activity was provided by the same care workers, who were employed on the same terms and who provided support to essentially the same young people. Housing and educational support were therefore still provided by essentially the same staff to essentially the same young people under the same type of approval.
Based on these findings, the Court of Cassation concluded that the missing elements were not sufficient to rule out a transfer. The French Community’s withdrawal of the approval and granting of a separate one showed a unilateral decision by the authority which does not preclude a transfer. It was also not decisive that the director had not been taken over, that housing had moved to another site, or that no tangible assets had been transferred. The functional link between the elements of the care activity remained, even with a different educational approach, premises and assets.
Therefore, the Court of Cassation held that the employment contracts were transferred to the new undertaking and that the former association did not owe any compensatory notice indemnity to the transferred employees.
Key questions and takeaways
The Court of Cassation supports a flexible interpretation of the transfer rules. Read together with the case law of the European Court of Justice, the judgment of the Court of Cassation answers five important questions:
- Does a unilateral decision of a public authority to reallocate subsidies exclude a transfer of employees? No, a decision to withdraw an approval or a subsidy from one body and grant it to another can trigger a transfer. What matters is that the person responsible for running the activity and bearing the obligations of an employer changes (see CJEU, 19 May 1992, Redmond Stichting, C-29/91).
- What is the applicable test for assessing whether an undertaking is transferred? The test is whether the transferred undertaking retains its identity. What matters is the continued operation, under the new employer, of an organised group of resources pursuing an objective. This is assessed as a whole, and the weight of each factor depends on the type of activity (see CJEU, 18 March 1986, Spijkers, C-24/85).
- Does the team constitute an entity in people-based activities? Yes, in care, education or social work, a team can constitute an economic entity in itself. If the new employer takes over a significant proportion of the team's numbers and skills to provide the same service, a transfer is likely, even without assets. The opposite can also be true when the activity relies mainly on equipment: taking over that equipment may be decisive, even if the staff does not follow (see CJEU, 11 March 1997, Süzen, C-13/95).
- Do new premises, management or a new project necessarily break continuity of service and prevent the transfer of an undertaking? No, in certain cases, a change of director, a move to new premises and a new educational project do not prevent a transfer because the functional link remains, i.e. the same staff serving the same beneficiaries within the same type of approved service (see CJEU, 13 September 2007, Jouini, C-458/05).
- Is continuing the same mission enough to apply the regime on transfers of undertakings? No, an entity cannot be reduced to the activities it performs. Its identity also depends on its workforce, how work is organised, and the resources available to it, where relevant. If an authority withdraws approval from one association and grants a similar mission to another association that carries it out with its own staff and resources, without taking over an organised team or significant assets from its predecessor, the legal regime will likely not apply. The same applies where what is passed is a one-off project rather than a stable activity (see CJEU, 19 September 1995, Rygaard, C-48/94).
In short: when a public authority moves an approval or subsidy from one association to another, the employment contracts may well follow the activity. Are you a non-profit taking over a subsidised mission? Check the transfer rules before you rehire anyone or pay any compensatory notice indemnity.
This news is not a legal advice or a legal opinion. You should seek advice from a legal counsel of your choice before acting upon any of the information it contains.