Christian Berg has a problem. As an employment lawyer who is of counsel to Squire Sanders’ Frankfurt office, Berg is working on a transaction involving the Japanese purchase of an enterprise that spans 18 jurisdictions, many of them in the European Union.

Naturally, the purchaser is thinking about cost efficiencies including mass layoffs, known as “collective redundancies” in the EU. And while the master purchase agreement remains unsigned and no formal decision has been made, Berg needs to consider whether the time has come for the vendor or the purchaser to consult with the affected workers councils (unions) about the justification for any job losses.

The EU’s Collective Redundancies Directive triggers the duty to consult at the point where the employer is “contemplating collective redundancies.” The intention is that employees’ representatives have meaningful input into any decision to terminate.

But the European Court of Justice’s (ECJ) September 2009 decision in Akavan Erityisalojen Keskusliitto AEK ry and others v. Fujitsu Siemens Computers Oy, hasn’t made Berg’s task any easier.

The court has ruled that employers must give notice to unions as soon as a strategic decision is made that causes the local employer or subsidiary to consider mass dismissals. “The difficulty is determining when that strategic decision has been made,” Berg says.

Complicating the issue is the court’s ruling that the subsidiary is responsible for giving notice even where the ultimate decision to effect redundancies lies with, or is made by, the parent company. While Berg, citing privilege, will not disclose whether his client is the purchaser or vendor, a conundrum exists in either case if Berg determines that the relevant strategic decision has already been made by the purchaser. The purchaser, after all, is in no position to give notice before the transaction closes, and it would hardly be in the vendor’s interest to do so either.

Obligation Uncertainty

Akavan arose Dec. 7, 1999, when the executive council of Fujitsu Siemens Computer (Holding) BV, or BV, proposed that the board close the operations of a Finnish subsidiary, Fujitsu Siemens Computer Oy (FSC). On Dec. 14, 1999, BV’s board supported the proposal although it made no specific decision about how and when it would effect the closure of the factory.

On that same day, the subsidiary FSC proposed employee consultations, which took place between Dec. 20, 1999, and Jan. 31, 2000. On Feb. 1, 2000, the FSC board decided to close most of the company’s operations in Finland. The company dismissed a majority of its employees on or after
Feb. 8, 2000.

The unions applied to the Finnish court for a declaration that FSC had failed to consult in time. They argued that BV’s board had made the final decision on Dec. 14, before the company engaged the employees, thereby depriving them of their right to weigh in about whether the layoffs were necessary.

FSC countered that alternative strategies were still up for discussion on Dec. 14. In the alternative, FSC submitted that it had made its own decision, as opposed to that of its parent, in February after the consultation.

Both the Finnish trial court and the court of appeal ruled in FSC’s favor. On further appeal, Finland’s high court referred the case to the ECJ, seeking a determination of when the obligation to consult arises in the context of decisions made within a corporate group.

The court ruled that the obligation to consult arises when a corporate group makes a strategic decision or change that compels the subsidiary to contemplate or plan for collective redundancies. The subsidiary had the obligation even when it was not promptly informed of the relevant decision by the parent company. Ultimately, the ECJ referred the case back to the Finnish court to determine from the facts whether the employer consulted in a timely manner.

“The bad news is that the consultation will now have to occur much earlier than in the past, when the duty to consult only arose after a company made a specific decision whose impact was known,” says Grant Petersen, an international labor and employment partner with Ogletree Deakins. “The good news is that the duty to consult does not arise until the corporate group has identified the specific subsidiary that will be affected.”

Careful Discussions

Still, Akavan leaves considerable uncertainty for multinationals with operations in the EU.

“This is an anti-avoidance case that doesn’t relieve the subsidiaries from liability arising from the decisions of the parent,” says Jonathan Exten-Wright, a partner at DLA Piper.

This leaves foreign parents with a number of challenges as to how they manage their EU subsidiaries, particularly in the context of strategic deliberations.

“If the parent is starting to make decisions, its actions could have extraterritorial impact in the sense of creating liability for subsidiaries,” Exten-Wright says.

The difficulty is that the meaning of “contemplating collective redundancies” remains elastic, even in light of Akavan.

“The decision almost goes so far as to say that mere discussion of strategic issues can give rise to consultation rights, perhaps even before the parent has something concrete to talk about with the subsidiary,” Petersen says.

Boards will have to be careful, then, that their discussions not be cast as decisions.

“Directors will have to ask themselves whether contemplating is the same as proposing or whether it means something that occurs sooner in the strategic process,” Exten-Wright says. “They may have to be careful about how they frame what they’re thinking about, at least to the extent their discussions appear in the minutes of meetings. In that sense, Akavan can be seen as inhibiting board discussions.”

Greater Gap

Arguably, the adjustment for U.S. parents will be even more difficult because Akavan widens the gap between U.S. and EU law. Even before the decision, U.S. law defined layoffs and the circumstances in which there is a duty to consult much more narrowly than in the EU.

“When the duty to consult does arise in the U.S., the duty goes only to the consequences of the layoff in terms of severance and the like, and not to whether the layoff should actually take place–which is the purpose of the consultation in the EU,” says Andrew Slobodien, a labor and employment litigator with Wildman Harrold.

But this much is clear: Although the remedies for failure to consult in a timely way vary throughout the EU, they can be severe. In Germany, for example, where unions have the right to veto layoffs in some cases, the failure to consult gives unions the right to apply for an injunction enjoining dismissals; if the dismissals have taken place, a court can invalidate them.

And in the UK, the failure to consult can give rise to a “protective award” over and above any severance payments. What is clear, then, is that multinationals should take Akavan very seriously.

“Unions throughout the EU, including the UK, are very astute about rights arising from the lack of proper consultation,” Exten-Wright says. “At the very least, they can certainly slow down the whole process, and in certain cases they can get a whole lot of extra money for their members.”