PONTIGNANO 2000
 
THE EMPLOYER
 
 
REPORT OF GROUP TWO:
 
THE IMPLICATIONS OF CORPORATE LAW AND GROUP STRUCTURES FOR LABOUR LAW
 
 

FACILITATOR: Christophe Vigneau

 

RAPPORTEUR: Richard Hobbs, Elsa Peskine;  TEAM: Diamond Ashiagbor, Luca Calcaterra, Claire Kilpatrick, Elena Signorini, Charlotte Villiers

Special Thanks: Eva Kocher, Magda Nogueira Guastavino

  INTRODUCTION
 

1. REASONS FOR GROUP CORPORATE STRUCTURES
 

Commercial enterprises can be organised by way of different corporate structures. For example, there may simply be a single corporate entity, or there may be a ruling parent company that controls several subsidiary companies. Alternatively, there may be a network of companies perhaps linked together commercially or contractually.
 

The development of a group corporate structure may be a response to various commercial factors such as: business expansion and diversification (e.g. Virgin has several subsidiary commercial activities – air travel, trains, financial services and drinks among them); the need for specialisation and efficient productive processes (e.g.. a car manufacturer may have a network of subsidiary component manufacturers); the need to raise capital finance; the need to reduce taxation liabilities and the need to develop relationships with new business partners.
 

Therefore the avoidance of labour law protections is not necessarily the primary motive for the development of a group corporate structure. It must also be borne in mind that within the group corporate structure each company is a legal entity within its own right. Corporate legal structures should thus not be too easily disregarded so as to extend liabilities for labour law protections from one separate legal entity to another. In other words there must be strong overriding reasons to lift the veil of incorporation that separates each of the legal entities within the group.
 

2. THE NEGATIVE EFFECT OF GROUP CORPORATE STRUCTURES FOR LABOUR LAW

 

However, the protections offered by labour law can be seriously impeded by the existence of a group corporate structure. The most common definition of the employer in our legal systems is "the other party to the employment contract". However, none of our legal systems recognise corporate groups as legal entities in such a way as they could become parties to the employment contract. This creates difficulty in identifying the employer and enforcing labour law rights against the most appropriate party.
 

Also, a threshold number of employees are required before some labour law protections can be enforced against an employer. So, a group corporate structure could be arranged to create several small entities, each of which individually does not employ the threshold number of employees; labour law protections could thus be avoided.
 

The law therefore has to strike a balance between the need to respect corporate law structures and the need to enforce labour law protections. We have identified two concepts that we believe underpin the legal solutions to this problem. First, we have identified a concept of Economic Unity. By this we mean that the law examines whether the separate legal entities in reality form a common economic space. If so, liability for labour law protections may extend may extend within that economic space from one corporate entity to another. This concept is discussed more fully in the first part of the report. In the second part of the report we discuss the concept of Social Unity. By this we mean that the law looks at the place of work as a social space. By virtue of entering this social space workers are entitled to certain basic rights such as health and safety and the right not to be discriminated against.
 

 

 THE CONCEPT OF ECONOMIC UNITY
 

Using the concept of Economic Unity the law looks beyond the formal corporate law structure to the economic reality of corporate relationships, so as to establish links between the separate legal entities in a group corporate structure. It is evident that different kinds of economic relationships or linkages may be deemed to form a common economic space, within which labour law protections may be extended from one separate corporate entity to another. We will now discuss these different kinds of relationship in more detail.

 

1. FINANCIAL / CAPITAL RELTIONSHIPS

In the UK the concept of Economic Unity is perhaps most evident in the notion of Associated Employers. This is defined in S231 Employment Rights Act 1996 and requires either that one company has control in another or that two companies are linked because they have a common third party in control of them both. The notion of control can be flexible, and may include cross guarantees for liabilities, although most commonly it refers to the notion of cross shareholding. The important point is that it seems to refer mainly to the capital structure that links the separate companies within the group. The most important consequence of this is that the numbers of employees in associated companies can be aggregated together when certain labour law protections call for a minimum threshold number. Also, if an employee is transferred between associated companies there is deemed to be continuity in employment rather than a break in the employment contract. This is important because employees need to achieve a minimum length of service before they can rely on some labour law protections.
 

German law also recognises capital linkages between companies in a group. The Aktiengesselscaft defines associated companies, ruling companies and subsidiary companies on the basis of shareholdings. If a parent company is able to take profits out of its subsidiary, and does this in a fraudulent or abusive manner, the courts may lift the veil of incorporation where employers have a financial claim against the subsidiary company. If the subsidiary is unable to meet its liability, the employee can then call upon the parent company for repayment of the debt. This may happen especially in pensions cases, although such situations may be rare. However, this is a very specific example; it must be emphasised that thresholds and comparators for labour law rights are calculated on the basis of the enterprise.
 

French law provides a statutory definition of the Group based on the idea of a dominant shareholding for the purpose of establishing Group Works Councils.

Also, one notion of Economic Unity used in Spain is the juridical notion of "caja unica". Although two companies may be separate legal entities they will be deemed to be a unique economic box if one enterprise uses or shares in the capital or profits of the other. This is relevant to labour law because the capital could be "stolen" to avoid liabilities to workers. By establishing the unique economic box, the worker can claim against all the workers in a group, or just the richest one.

 

 

 2. COMMERCIAL RELATIONSHIPS
  Under Italian lawL1369/1960 the activity of supplying services or products can be considered to be part of the economic process of the company that takes the benefit of those products or services. In effect then this is recognition of commercial dependence between the two companies. If this is found to be the case then the employee of the supplier can ask to be treated equally with the employees of the beneficiary company. There is deemed to be joint liability for social security and for obligations under a collective agreement.

 

 3. ASSET RELATIONSHIPS

 

This is perhaps most evident in the Spanish law notion of the "unique assets based organisation". Although two enterprises may be formally separate legal entities, if they share the same equipment, say for example office computers, they will be deemed to be the same enterprise. This will be sufficient to establish joint liability so the worker can sue either company for enforcement of his labour law rights.
  4. LABOUR RELATIONSHIPS

 

Spanish Law recognises the concept of the "plantilla unica" or the uniqueness of staff. The main example of this is where a worker may be hired by one of the enterprises, usually with a permanent contract, but his services are regularly used by two or more enterprises in the group, although he may have no formal contract of employment with those other enterprises. In such a case the court has said that there is joint liability and the worker can sue any of the companies in the group to protect his labour law rights.

 

In some cases the Italian Supreme Court has maintained that if a worker is working at the same time for different members of the group and it is impossible to distinguish clearly who is the main employer, then the companies will be jointly liable (Solidarity) and the worker can decide against which company he wishes to enforce his claim.

 

In the UK there have been cases where individuals offer their services via shell companies that they have set up for that purpose. Courts have disregarded the corporate structure if they feel it is a sham arrangement, and have said that if the true relationship is that of employer and employee, simply putting a different, corporate, label on the relationship does not change this.

 

French law recognises the concept of the Joint Employer whereby two employers may be deemed to have authority over a worker. In this situation either or both employers may be found liable to the worker. This notion is especially relevant to unfair dismissal law.

 

It is important at this point to distinguish this labour relationship from the concept of Social Unity that is discussed in the next part of the report. The labour relationship is described here as an economic unity because it views labour as a factor of production, and the labour relationship is used to establish the link between the different enterprises in the group. It is necessary to establish this link because the worker is trying to shift his claim for labour law rights from the legal entity that is formally his employer, to another legal entity in the group that may be in a stronger financial position to satisfy the workers claim. In the concept of Social Unity we say that certain rights exist because the worker has entered the workplace, and he does not necessarily have to establish that another legal entity in the group is his "real" employer before he can claim these rights.
 

 

 SUMMARY

 The law strikes a balance between corporate law and labour law by examining the reality of economic relations between companies. There is a greater tendency to pierce the veil of incorporation where there is evidence of a sham arrangement deliberately designed to avoid labour law protections.
 It may be that collective labour law will provide a useful tool for dealing with group corporate structures. In Italy there are developments in collective agreements to consider the notion of the group as an economic entity (see especially the Banking Sector). At the European level, a good example of defining employment rights according to economic unity is the European Works Council Directive.