In Germany, the term "outsourcing" is not legally defined. In essence, an outsourcing is where certain services are no longer provided by a business but are contracted to a third party. Usually, this is done to either save costs or to allow for more flexibility within the business.

Directive 2001/23/EC on safeguarding employees' rights on transfers of undertakings, businesses or parts of businesses (Transfer of Undertakings Directive) has been incorporated into German law in section 613a of the German Civil Code (Bürgerliches Gesetzbuch (BGB)). A transfer of business occurs where a business, or a part of a business (an economic unit) is transferred to another legal entity and the transferred business unit keeps its identity. In such case, the employments assigned to the transferred economic unit transfer as well.

According to the consistent case law of the German Federal Labour Court (Bundesarbeitsgericht) (BAG) and the Court of Justice of the European Union (CJEU), in order for a deemed transfer of a business to occur, the following essential elements must be satisfied:

To determine whether the conditions for a transfer have been satisfied, an overall assessment is necessary, in which all aspects of the individual case must be taken into account. According to the case law of the CJEU, which the BAG has adopted, the following are relevant when making such determination:

Even when all characteristics are present in this respect, the three main factors outlined above must still be satisfied. In particular, a mere succession of functions is not sufficient to justify the applicability of section 613 a of the BGB. Against this background, there is agreement that economic activity per se should not be understood to be an economic unit. Therefore, the mere continuation of the same or similar activities (succession of functions) would not be adequate to assume there has been a transfer of a business or part of a business.

This also applies to the initial outsourcing of services, the awarding of a contract to an external company or the termination of such outsourcing (see below).

A change of supplier or service provider can also only trigger a transfer of business from the current supplier/service provider to the new supplier/service provider if the above criteria are met. However, that is rarely the case, since, in most cases, the subsequent supplier does not take over assets or personnel from the other. Many suppliers also use shared service organisations for multiple customers. All of this lowers the probability of section 613a of the BGB being applicable.

A termination of an outsourcing contract can also only trigger a transfer of business from the supplier back to the customer if the insourcing of the outsourced services meets the criteria described above.

Where there is a transfer of business by operation of law, the employment contracts of the employees of the acquired business or business unit are transferred with all rights and obligations to the transferee, and all terms and conditions of the employment contract continue to apply.

Any terms and conditions contained before the transfer in collective bargaining agreements (CBAs) (concluded with a union) and works agreements (concluded with a works council) will be either be superseded by the (future) collective bargaining agreements or works agreements of the acquiring legal entity on the same subject matter (based on a subject group comparison) or, subordinately, converted to become part of the employment relationship of the transferring employees and cannot be changed by agreement with the employee to their detriment prior to expiry of one year after the transfer has occurred.

The length of service is not affected by a transfer of business by operation of law. The employment relationship, including the already completed years of service, therefore continues unaltered.

The same rules as discussed above apply to employee benefits (that is, they are transferred to the new employer). If the new employer cannot provide the previous employee benefits in the same manner as the previous employer, the new employer is obliged to provide a similar and equivalent employee benefit to the employee.

The same rules as discussed above apply to pensions rights (that is, they are transferred to the new employer). If the new employer cannot provide the previous pension benefits in the same manner as the previous employer, the new employer is obliged to provide a similar and equivalent pension benefit to the employee.

If there is no transfer by operation of law, the customer and the service provider are, subject to the employee's consent, essentially free to agree the terms upon which the employees will transfer. (A transfer against the will of the employee is not possible (outside of a merger scenario)).

However, legal provisions (particularly in the public sector) may require the parties to transfer the affected employees on the same conditions as if section 613a of the BGB would be applicable (as well as section 131, paragraph 3 of the German Antitrust Law (Gesetz gegen Wettbewerbsbeschränkungen (GWB)) for the procurement of public contracts for passenger rail transport services). Even where there are no such legal restrictions, the parties often nevertheless agree to offering conditions that are substantially comparable to or the same as within the applicable regime in the case of a transfer by operation of law (to convince the employees to agree to the corresponding transfer).

It should also be noted that the involvement of the works council or a union can lead to the service provider being subject to a contractual obligation to offer conditions comparable to the statutory regime.

As a result of a transfer of a business, the transferee is not obliged to adapt the working conditions of the transferring employees with those of its existing employees. Conversely, there is also no obligation to harmonise the terms and conditions for the transferring employees. The different groups of employees would in particular not be considered comparable in light of the general principle of equal treatment.

However, if harmonisation is desired, the regular statutory rules contained in the BGB and the German Dismissal Protection Act (Kündigungsschutzgesetz (KSchG)) regarding a change of employment conditions apply to the terms and conditions of the individual employment contract of a transferring employee. Therefore, harmonisation can be achieved with the consent of the transferring employee or, it may be necessary to terminate the employment contract, and re-engage the employee with altered employment conditions. If the KSchG applies to the employment relationship, the contract is terminated and the employee is re-engaged on different terms, there needs to be sufficient reason for this to happen. The aim to harmonise employment conditions alone does not justify a termination of the existing employment contract.

Any terms and conditions contained before the transfer in CBAs (concluded with a union) and works agreements (concluded with a works council) will be either be superseded by the (future) collective bargaining agreements or works agreements of the acquiring legal entity on the same subject matter (based on a subject group comparison) or, subordinately, converted to become part of the employment relationship of the transferring employees and cannot be changed by agreement with the employee to their detriment prior to expiry of one year after the transfer has occurred.

As there is no legal requirement to harmonise the working conditions of the two different groups of employees, there are no direct legal risks but only operational problems and challenges if no harmonisation takes place. For example, the two groups of employees (the transferring and existing employees) with different remuneration and working time regimes may lead to employer/employee consultations (and legal actions, which would be burdensome and costly for the company) and may require some practical co-ordination.

The statutory dismissal (protection) rules contained in the BGB and the KSchG apply irrespective of an outsourcing. Therefore, the employer must have a sufficient recognised reason for making the dismissal in connection with the outsourcing.

Dismissals are therefore possible provided they are made for personal, behaviour-related or operational reasons (for example, due to a substantial change to the business as defined in section 111 of the German Works Constitutions Act (Betriebsverfassungsgesetz (BetrVG)). To justify a dismissal by the service provider, an operational reason must originate from the business of the transferor or transferee. Furthermore, the customer may, for example, make dismissals at the customer's business for reasons connected to the outsourcing of services to the service provider.

If a dismissal is to be made in connection with the transfer of business, it should be further noted that any dismissal solely due to the transfer of business (where the dismissal does not have any other justification according to the KSchG) will be null and void. However, the right to terminate the employment contract for reasons other than solely the transfer of business (especially for operational reasons) remains unaffected. The following may for example, justify a dismissal for operation reasons:

The transferor is responsible for dismissals and their legality prior to the transfer, as at this stage only the transferor has a contractual relationship with the employee(s). In this situation, the employer (as transferor) must observe the general regulations on dismissal from the BGB and the KSchG.

If a dismissal is found to be invalid, the employment relationship with the affected employee remains in place. Liability in connection with any invalid dismissals made before the transfer can, therefore, also arise for the transferee after the transfer. Specifically, these may involve claims for remuneration claims by employees terminated prior to the transfer date.

According to section 613a, paragraph 2 of the BGB, the transferor will be jointly and severally liable with the transferee in relation to any obligations arising from section 613a, paragraph 1 of the BGB if these arose prior to the transfer date and fall due before the expiry of one year after the transfer date. For obligations falling due after the transfer date, the previous employer (the transferor) will be liable only to the extent corresponding to the part of their assessment period that has elapsed at the time of the transfer. As far as both are liable as just described, the transferor and transferee owe the remuneration in such a way that each of them is obliged to pay the whole remuneration, but the employee is entitled to demand the performance only once (joint and several debtor). Therefore, the employee may demand performance from each of the debtors in whole or in part (at their discretion). Both debtors remain obligated until the entire performance has been effected. The employee may, therefore, bring a claim against the transferor and the transferee.

The transferor and the transferee can, however, choose to apportion their liability internally by way of contractual arrangement.

After the transfer, the transferee is responsible for any terminations, as following the transfer date the contract will exist only between the transferee and the employee. When making any dismissals, the new employer (the transferee) must observe the general regulations on dismissal from the BGB and the KSchG. They are solely liable towards the employee for any dismissal they issue.

According to section 613a, paragraph 2 of the BGB, the transferor will be jointly and severally liable with the transferee in relation to any obligations arising from section 613a, paragraph 1 of the BGB if these arose prior to the transfer date and fall due before the expiry of one year after the transfer date. For obligations falling due after the transfer date, the previous employer (the transferor) will be liable only to the extent corresponding to the part of their assessment period that has elapsed at the time of the transfer. Consequently, they will not liable for dismissals issued by the transferee.

The transferor and the transferee can, however, choose to deviate from the legal position when apporting their liability internally by way of contractual arrangement.

There is no statutory entitlement to redundancy pay.

However, depending on the type of restructuring measure planned, any co-determination rights of the works council, if one exists at the time, must be complied with. If the transfer is, for example, connected with a substantial change to the business (as defined in section 111 of the BetrVG), the employer is obliged to carry out a negotiation process with the aim of concluding a "reconciliation of interests" (Interessenausgleich) which describes the planned measures, and a social plan setting out the compensatory measures with the competent works council (if one is established).

The reconciliation of interests "defines" the terms of the restructuring (for example, the time frame, scope and so on). Standard provisions in a social plan include:

Statute does not provide a formula for calculating the fund, nor does it provide criteria on how to distribute the overall social plan funds to individual employees. However, a usual formula would look more or less as follows:

Depending on the industry sector, the employers' economic situation and the parties negotiating power, the factor usually varies from 0.5 and 1.5.

Independently, since the social plan does not prevent the employees from claiming unfair dismissal in court, it is often advisable for employers to arrange for agreements with the works council which limit the risk of unfair dismissal claims. The funds for such agreements must be taken into account when negotiating the funds for the social plan.

However, if no works council exists when the dismissals are issued, there is in principle (and in any event according to statute) no right to severance or compensation under German law. The sole exception is a right to payment of severance if the employer has offered this in the dismissal note to prevent the employee from filing a dismissal protection claim. In this case, entitlement to such a severance payment only arises if the employee does not file a claim for unfair dismissal. The employer is, however, not obliged to make such an offer.

Furthermore, there may be (voluntary) collective agreements (CBAs, works agreements or social plans) in place which provide for a severance.

Secondments in connection with an outsourcing are very likely to be regarded as an assignment of employees to a third party, which requires a permit under section 1 of the German Act on the Assignment of Employees (Arbeitnehmerüberlassungsgesetz (AÜG)), and is limited to a timeframe of 18 months per individual employee. Without this permit, such an assignment can be permissible within a group of companies if this is intended to be a temporary situation. Violations are, among other things, punished with administrative fines and may also result in criminal liability or exclusion from participation in procurement procedures. Furthermore, for the service provider, there is the risk that an employment relationship may be deemed to exist between the customer and the seconded employees.

There is no statutory requirement to provide information between the transferee and the transferor in relation to any employees. However, prior to the conclusion of a contract between the transferor and the transferee, the transferee usually receives full disclosure about the employment history, employment terms and conditions and personal data in relation to any potentially transferring employee in order to calculate potential risks and costs. Nevertheless, the requirements of the General Data Protection Regulation ((EU) 2016/679)(GDPR) and the German Federal Data Protection Act (Bundesdatenschutzgesetz (BDSG)) must still be complied with in this context, so that information is typically provided step-by-step, depending on the status of the contract negotiations and the probability of realisation.

Under section 26, paragraph 1 of the BDSG, the personal data of employees can be processed either:

Accordingly, a transfer of the personal data to the transferee can only be made, if necessary, successively before the transfer or completely after the transfer. The only exception is where the employee has specifically consented to the processing of their data (Article 6, paragraph (1)(a), GDPR).

The transferor or the transferee must notify employees affected by a transfer in writing prior to the transfer. The employee must be informed about:

Transferring employees can object to the employment relationship in writing within one month after receipt of the required notification (section 613a (6), BGB). Their objection can be made to the previous employer (the transferor) or to the new owner (the transferee).

The requirement to provide their objection in written form will be complied with if the employee signs the objection with their name in wet ink, or by their notarially-certified initials (section 126, paragraph 1, BGB).

In the case of a timely and effective objection, the employment relationship remains with the previous employer. The objection will have retroactive effect to the time of the transfer, even if it was declared afterwards.

However, termination for operational reasons is not excluded in this scenario. Such terminations are, on the contrary, even common in these circumstances because, in the aftermath of the transfer of the business, there is no longer a role into which the objecting employee can be employed.

An objecting employee will not automatically be further represented by the previous (or any other) works council. They are, therefore, not necessarily entitled to be included in a social plan. Consequently, there is in principle (or, in any event, according to statute) no right to severance or compensation under German law. The sole exception is a right to payment of severance if the employer has offered this in the dismissal note (to prevent the employee from filing a dismissal protection claim). Entitlement to severance payment in this case only arises if the employee does not file a claim for unfair dismissal. The employer is, however, not obliged to make such an offer. In practice, corresponding offers are still usually made, or termination agreements are concluded that provide for a certain severance payment. The aim is to "buy off" the employee to avoid the effort and costs associated with dismissal protection proceedings.