Reduction in force: options for businesses in Italy and the EU

Practical Law UK Articles 5-503-3899 (Approx. 12 pages)

Reduction in force: options for businesses in Italy and the EU

by Luca Failla, LABLAW

The information and consultation process

At the European level, a large number of Directives set out the information and consultation procedure with workers' representatives when considering and implementing a merger, transfer of business, cessation of an activity and/or a reduction of staff (see box, EU legislation on information and consultation).

Businesses and multinational groups with branches and operations in the EU must refer, from an operational point of view, to Council Directive 2009/38/EC on the establishment of a European Works Council (EWC Directive), which replaced and modified Council Directive 94/45/EC on the establishment of a European works council. The EWC Directive provides specific obligations concerning the information and consultation process where there are circumstances that notably affect the interests of employees and where, for example, there is a need for the delocalisation or closure of businesses and factories. Provisions made under the EWC Directive are without prejudice to the information and consultation procedures referred to in:

Council Directive 98/59/EC on collective redundancies (Collective Redundancies Directive).
Council Directive 2001/23/EC on safeguarding employees' rights on transfers of undertakings, businesses or parts of businesses (Transfer of Undertakings Directive).

These Directives specify the procedures which must be carried out in due time so as to permit the employees, or their representatives, to exercise genuine influence over the decision-making process of the enterprise.

In relation to industrial relations, more than 700 European businesses and groups of businesses falling within the scope established by the EWC Directive have established a European Works Council (EWC).

These Directives also provide for the involvement, at the employer's expense, of the workers' representatives (by the creation of either an EWC, or procedures outlining how information must be communicated to the employees), as well as the consultation of the employees in enterprises and groups of enterprises in the EU.

The regulations have a particular impact on:

Community scale undertakings, meaning any undertaking with at least 1,000 employees in the EU member states and a minimum of 150 employees in each of a least two member states.
Community scale group of undertakings, meaning a group of undertakings with:
- at least 1,000 employees in the EU member states;
- at least two group undertakings in different member states; and
- at least one group undertaking with a minimum of 150 employees in one member state and at least one other group undertaking with a minimum of 150 employees in another member state.

The EWC Directive represents an institutional response to business globalisation at the EU level. Although incomplete, it sits alongside similar previous ad hoc initiatives from trade unions and can, at least in part, reduce the social effects of a delocalisation of production.

The employer's global headquarters must commence a phase of negotiation (of up to three years) with a special body representing the workers (special negotiating body). This negotiation evaluates whether a written agreement can be reached on the operational means for providing information and consultation with workers, by creating either an EWC, or a procedure outlining the communication of information and the consultation process with the employees.

If three years pass from the start of the negotiations and no agreement is reached then the EWC Directive provides subsidiary requirements. These requirements are set out by the legislation of the individual member state to achieve the objective of the EWC Directive, that is, to improve the right to information and the consultation process with employees in the EU.

The Italian government enacted Council Directive 94/45/EC on the establishment of a European Works Council in 2002, through Decree 74 of 2002 (and provided to enact Directive 2009/38/CE through an agreement with trade unions signed on 12 April 2011).

In particular, Decree 74 of 2002 specifically refers to companies employing at least 1,000 employees in the EU and, at the same time, at least 150 employees in two different EU countries. It states that businesses meeting this criteria must implement an EWC (Comitato Aziendale Europeo). This EWC consists of representatives of the employees of the various companies. It has the right to be informed and consulted by the employer on matters relating to the state of business and other labour issues relating to the business activity.

To implement the Statute for The European Company, as set out in Council Directive 2001/86/EC supplementing the statute for a European company, and Council Directive 2003/72/EC supplementing the Statute for a European Co-operative Society, the Italian government implemented Decree 188 of 2005 and Decree 48 of 2007. These decrees refer to the involvement of employees in the affairs of European public limited companies (Societas Europaea), and in the affairs of European Co-operative Societies.

Decree 74 of 2002 also outlines, under these Directives, the rules of negotiation and information procedures, in addition to their relation to other internal rules regarding information and consultation duties in a Community scale undertaking or a Community scale group of undertakings.

Transfers of undertakings

Another option for organisations experiencing difficult times is to sell the whole, or part, of the business. The legal rules for safeguarding employees' rights with the transfer of undertakings or parts of a business apply. In particular, Directive 2001/23/EC on safeguarding employees' rights on transfers of undertakings, businesses or parts of businesses (Transfer of Undertakings Directive), which replaces and consolidates Council Directive 77/187/EEC and Council Directive 98/50/EC, applies to any transfer of an undertaking, part of an undertaking or business to another employer, as a result of a legal transfer or merger.

The meaning of transfer

The current version of the Transfer of Undertakings Directive implements principles set out by the European Court of Justice (ECJ) case law. These apply employees' rights to a change of employer and maintenance of an economic entity's identity, from a transferor to an acquiring entity. Transfers which do not involve selling the property of an enterprise are also covered by the Transfer of Undertakings Directive.

In particular, there is a transfer (within the meaning of the Transfer of Undertakings Directive) where there is a transfer of an economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary.

Article 2112 of the Italian Civil Code, which reflects the laws and regulations in the Transfer of Undertakings Directive, has been modified over the years in relation to the legal definition of a transfer of undertaking or a part of it.

Currently, the Italian definition of a transfer of undertaking stresses the importance of being an organised economic entity before the transfer that, by being transferred through whatever means, maintains its own identity (see box, Italian definition of a transfer in Article 2112).

The emphasis on the terms of pre-existing conditions and the autonomy of the economic activity is based on concerns (of the Italian employment courts and tribunals) that operations should be proper transfers of undertaking, and not measures to subtly dismiss employees without the relevant procedures.

On the other hand, Article 2112, as modified by Legislative Decree 276 of 10 September 2003, also sets out the safeguarding of employee rights in a transfer of part of an undertaking. In this instance, Article 2112 specifies that the transfer must occur as a functionally autonomous part of an organised economic activity, identified as such by the transferor and the acquiring entity at the date of the transfer.

As a practical matter, the actual functions, facilities, and/or services of an activity to be transferred could be defined during the negotiations between the transferor and the acquiring entity, provided the final result of the transfer is an organised economic activity.

Consequences of transfer

When a transfer of undertaking, or a part of it, occurs, the transferor's rights and obligations arising from the employee contracts and/or from employment relationships are automatically transferred to the acquiring entity.

Article 2112 provides that all employees working in the business being transferred are automatically transferred, on completion, to the new employer, with all of their rights preserved. In contrast, if the conditions set out in Article 2112 do not apply, the consent of the employees involved is required to transfer their employment relationship to the new employer.

Both European and Italian rules ensure that the actual transfer of undertaking itself does not alone constitute grounds for dismissal.

The Transfer of Undertakings Directive ensures that the acquiring entity must continue to observe the terms and conditions agreed in any collective agreement, on the same terms applicable to the transferor under that agreement, until the date of the termination or expiry of the collective agreement, or the entry into force or application of another collective agreement.

In this instance, Italian Article 2112 appears stricter than the EU provision concerning the application of collective agreements. Any national, regional and/or corporate collective agreements applied by the transferor are only replaced by the acquiring entity's collective agreements if they are of the same level. If no collective agreement is applied by the acquiring entity, then Italian law provides that the labour agreements of the transferor will continue to apply to the transferred employees until their term expires.

Transfers in bankruptcy or similar proceedings

The Transfer of Undertakings Directive also envisages a transfer of undertaking where the transferor is subject to bankruptcy or analogous insolvency proceedings to liquidate its assets, under the supervision of a competent public authority. Here, an EU member state can provide that the transferor's debts, arising from any employment contracts or employment relationships, are payable before the transfer or before the opening of insolvency proceedings, and are not transferred to the acquiring entity, provided that such proceedings give rise, under the law of that member state, to protection that is at least equivalent to that provided by Directive 80/987/EEC on the protection of employees in the event of the insolvency of their employer.

Alternatively, a member state can provide the acquiring entity, transferor or person(s) exercising the transferor's functions, and the employees' representatives, agreed alterations, as far as current law or practice permits, to the employees' terms and conditions of employment, in order to safeguard employment opportunities by ensuring the survival of the undertaking, business or part of it.

Article 47 of Italian Law 428/1990 implements this dispensation from the general rule on the safeguarding of employee rights (provided by Article 2112), and provides rules if a declared crisis situation and an agreement with the employees' representatives on safeguarding employment occurs. This agreement could also provide that the transfer does not relate to the employees that had already been made redundant, as they remain the responsibility of the original employer.

The ECJ has declared (in Commission of the European Communities v Italian Republic Case C-561/07, 11 June 2009) that Article 47 has failed to fulfil its obligations, as the Italian system also allows for this dispensation, in addition to the hypothesis of bankruptcy or other analogous proceedings, where there are critical difficulties processed by the public administrative authority but not subject to judicial review. In short, there are cases where court intervention to confirm a crisis situation is not required under Italian law. In contrast, the Transfer of Undertakings Directive should make the option of court intervention mandatory, according to the ECJ.

Article 47 has been amended under Decree Law 135/2009 (following the ECJ declaration in Case C-561/07). Article 2112 now covers employees whose work relationship does not cease in cases where public administration supervision is necessary for enterprises in a state of bankruptcy, provided that all parties have reached an agreement related to the employees. However, this is only for cases when the total or partial maintenance of occupation of a business activity in trouble is under the control of the public administration.

Information and consultation for transfers of undertakings

EC law also emphasises the importance of the information and consultation phase for the transfer of undertakings. The Transfer of Undertakings Directive provides a list of the information that the transferor and the acquiring entity must provide to the employees' representatives. It stipulates that both the transferor and the acquiring entity must provide the affected employees with information in good time, before the transfer is actually carried out.

Companies implementing a transfer of undertaking have a duty to fulfil the consultation and information procedure provided by Article 47. If the transfer of an undertaking (or a part of it) affects more than 15 employees, the transferor and the acquiring entity must give the employee representative bodies (for example, staff representatives, if any, and the trade union associations which executed the bargaining agreement) written notice of the transfer (Law 428/1990). If there are no such employee representative bodies, notice is given to the relatively more representative trade union associations.

The consultation and information requirements must be met by the transferor even if the acquiring entity is directly related to the controlling company. The written notice to the employees' representative bodies must be given at least 25 days before either:

The execution of the deed giving rise to the transfer.
A binding agreement between the parties.

The information to be sent to the employees' representative bodies should state:

The scheduled date of the transfer (at least the expected date).
The reasons for the planned transfer.
The economic, legal and social consequences of the transfer for the employees involved.
The measures, if any, that the acquiring entity will adopt towards the employees after the transfer.

Within seven days from receiving the notice, the staff representatives and/or the trade unions can request, in writing, a joint consultation between the transferor and the acquiring entity. In this case, the transferor and the acquiring entity can start consultations with the requesting parties within the following seven days. Reaching an agreement between the parties is not required. If the joint consultation is unsuccessful and an agreement is not found, the consultation is deemed to be over ten days after it commenced.

Any breach of the information and joint consultation procedure requirement is considered anti-union behaviour under section 28 of the Workers' Statute (Law 300/1970). Consequently, the transferor and the acquiring entity can be sued in the competent labour court by the trade unions.

Collective dismissals in the EU

When an employer is contemplating multiple dismissals, Directive 98/59/EC on collective redundancies (Collective Redundancies Directive) obliges businesses operating in the EU to enter into compulsory consultations with worker representatives. The Collective Redundancies Directive replaced and consolidated Directive 75/129/EEC as amended by Directive 92/56/EEC.

The Collective Redundancies Directive adopts two criteria concerning the concept of collective redundancies:

Qualitative. Dismissals for reason(s) not related to individual workers and not necessarily related to the employer's will. In this way, the ECJ has deemed that the Collective Redundancies Directive also applies to events such as bankruptcies and expropriations.
Quantitative. The number of redundancies in a certain period of time, depending on the size of the establishment.

The following are the key principles set out in the Collective Redundancies Directive:

The termination of an employment contract on the initiative of the employer is assimilated to collective dismissals, provided that there are at least five redundancies.
There is a distinction between procedural steps before the workers' representatives and before the competent public authority.
The designation of the competent public authority.

Therefore, when a collective dismissal occurs, the employer must consult the workers' representatives in good time with a view to reaching an agreement to avoid, or reduce, the number of workers affected, and to mitigate negative consequences. However, during the consultation phase, the employer is not obliged to reach an agreement with the employees' representatives.

The employer implementing the dismissals must inform the competent public authority and the workers' representatives about a number of relevant issues, such as the:

Reasons why the dismissals are necessary.
Number of workers employed and affected.
Time period involved.
Criteria for the redundancies.

The projected collective redundancies must take effect no less than 30 days after notification. This procedure also applies to businesses (or groups of businesses) where the headquarters are located in countries outside of the EU, provided that the affected employees are working in factories or companies in the EU or the European Economic Area, which satisfy the obligations set out in the Collective Redundancies Directive. When considering collective dismissals in the EU, employers must also take into consideration, and verify, specific national rules in the individual member states.

Managing excess workers in Italy

Many European countries provide different ways to manage excess workers, allowing for a certain flexibility concerning redundant employees and the support of those workers' salaries.

Temporary social cushions (Cassa Integrazione Guadagni)

In Italy, for example, when a business requires a temporary or permanent reprieve from excess staffing, based on their expected or unexpected production figures, there are two main flexible instruments at their disposal.

CIGO (Cassa Integrazione Guadagni Ordinaria (Ordinary Wage Supplementation Funds)). This is used within industrial sectors when temporary events, which are not related to the employer's will, or specific temporary business events, affect the relevant market in ways which require the suspension of the economic activity. In particular, CIGO has the function of integrating wages lost by employees, especially those in the industrial sector, following a reduction in their working hours or the suspension of work. In this instance, the relationship between the employer and the employee is maintained with the hope of a future upturn in work. If the employer intends to access CIGO, he must implement the information and consultation procedure with the workers' representatives, and communicate the predicted suspension time required and the number of employees involved.

CIGS (Cassa Integrazione Guadagni Straordinaria (Special Wage Supplementation Funds)). This is used when employers need a permanent reprieve from excess workers. CIGS is also a form of intervention in support of workers' salaries. However, unlike CIGO, it supports the employer in cases of economic crisis, restructuring or reorganisation, bankruptcy, or the closure of a business. Generally, only companies in the industrial sector employing more than 15 employees can request CIGS. By law, other types of companies can also request CIGS, for example companies:

In the trade sector, with more than 200 workers.
In the tourism sector, with more than 50 employees.
Providing security services, with more than 15 workers.

Further access to CIGS is provided by law each year.

Employers must also implement an information and consultation procedure with the workers' representatives.

If CIGO or CIGS are used, indemnities are paid by the state to the workers to support their incomes, through the main public Social Security Institute (INPS). The value of the indemnity is equal to 80% of the employees' salary but the limits, which are communicated by INPS, change every year.

In light of the global economic crisis, Italy witnessed a dramatic rise in the use of CIGO and CIGS. Fortunately, however, there appears to now be a reduction in both requests for CIGO and CIGS, and the hours that enterprises have requested. For example:

In January 2010 there were 80 million authorised hours for CIGS, but enterprises used only 34 million hours.
In January 2011, decreasing from the figures for 2010, there were 60 million authorised hours for CIGS, but enterprises used only 20 million hours.

Dismissals in Italy

CIGO and CIGS are used when there is the possibility of an upturn in business. There are other situations where an upturn in business is not possible and employers must make permanent job cuts. If a company realises that it is unable to use its employees profitably then a permanent RIF (for example, through restructurings, reorganisations or the closure of the business), through individual and collective dismissals, is required.

Only the individual dismissal procedure (regulated by Italian Law 604/1966 as amended by Law 108/1990) applies to businesses operating in Italy with fewer than 15 employees. Further, if a company makes fewer than five redundancies, it can also operate the individual dismissal procedure.

For individual dismissals to be recognised as fair they must be justified, that is, the reason for the redundancies must be connected to the manufacturing activity, the organisation of work or to the normal functioning of work. The notification of the dismissal must be served in writing, stating the grounds on which it is based. The employee or the employees involved are entitled to receive the notice period or a payment instead of it.

On termination, the employee will also receive:

The TFR (Trattamento di Fine Rapporto) which is a mandatory severance payment.
Pro rata additional monthly instalments awarded by the applicable collective agreement.
A payment instead of unused holidays.

Consequences of an unfair individual dismissal

If the dismissed employee has been working for an employer with fewer than 15 employees and if the tribunal finds that the dismissal was unfair, the employer can opt for either:

Re-engagement, which means putting the dismissed employee into a similar job with a new employment contract.
Payment of compensation of at least two and a half months, and up to six months', salary package, in accordance with the decision of the employment tribunal. A possible higher compensation can be provided by the employment tribunal's decision, taking into account the length of service of the dismissed employee.

For employers with more 15 employees, if the tribunal finds that a dismissal was unfair, the consequences set out in section 18 of the Workers' Statute apply (see below, Collective dismissals in Italy).

Collective dismissals in Italy

If an employer with more than 15 employees intends to dismiss at least five employees within a period of 120 days, then the collective dismissal procedure is mandatory.

The procedure provides stringent objective limits on the reduction of personnel. In fact, Law 1991/223 only recognises justified redundancies that are supported by a proven necessity for the reduction and/or transformation of the working activity. Based on this, as interpreted by case law, grounds for redundancies include the closure of a business, closure of departments and plants, and/or the cessation of a specific activity in Italy.

In other words, no dismissal of Italian employees can be deemed justified purely on the basis of the (alleged) existence of an economic crisis affecting the foreign headquarters or foreign related company (for example, situated in the US or Japan). To comply with the information and consultation procedures in Italy for collective dismissals, a written notice must be provided to the representatives, containing the following information:

The reasons for making employees redundant.
The technical, organisational or manufacturing reasons which make it impossible for the redundancies to be avoided completely or in part (by adopting measures such as using part-time employees and reducing hours).
The number, rank and job descriptions of the redundant employees and of the remaining workforce.
The timetable for the redundancy plan.
Possible measures to address the consequences of the redundancy plan.
The method of calculating the various types of remuneration to which the employees are entitled which are not provided for by law or under a collective agreement.

Within seven days of receipt of the written notice, the representatives must request, in writing, a meeting with the employer to discuss the possible means of avoiding or reducing the number of proposed redundancies.

If the company could benefit from CIGS (see above, Managing excess workers in Italy), then the employer must pay an additional special contribution to INPS. The contribution is an amount equal to nine months of mobile indemnity (indennità di mobilità), which is an unemployment benefit payable by INPS to the dismissed employees. Part of the contribution is payable on delivery of the initial letter to the unions, with the rest payable in instalments. If the employer reaches an agreement with the unions on the redundancies (see below), the amount payable to INPS is reduced to only three months of unemployment benefit.

The consultation must be completed within 45 days. If there are fewer than ten workers involved in the redundancy, then the consultation need only last 23 days.

The employer must send a written notice to the regional and provincial labour offices recording the agreement reached or, if there is no agreement, the reasons for this. If the parties are unable to reach an agreement, then the negotiations continue before the regional labour office (or the Ministry of Employment, if the potential collective dismissals involve units in different regions). The negotiations at this stage cannot last longer than 30 days (or 15 days, if there are fewer than ten employees). The employer cannot terminate the employment of the redundant employees until the end of the consultation period.

Possible social plans during the consultation procedure

During the consultation process, the parties also discuss possible ways to employ all or part of the redundant workforce in different ways in the organisation, or social measures to alleviate the consequences of redundancy. For example, they could agree on:

CIGS.
Secondments and transfers.
Part-time contracts.
Outplacement. The employer can agree to pay compensation to an outplacement company, which is favoured by the dismissed employees, allowing for professional retraining and re-induction into the workforce.
A lump sum offered to the employees to be made redundant as an incentive to leave.
Professional training for the retraining of excess employees, possibly through public financial grants.

Dismissals at the end of the procedure

At the end of the procedure the employer must notify, in writing, all of the employees to be made redundant about the termination of their employment relationship.

The employees to be dismissed must be selected in accordance with the criteria drawn up during the consultation process. If the parties cannot agree on the criteria, then the criteria provided for by law (family circumstances, length of service, and technical, productive and organisational needs) must be applied. The employer must draw up a list of all those employees to be dismissed, setting out the information provided by law (for example, name, rank, family responsibilities, and a detailed description of the selection criteria applied). This list must be provided to the regional labour office, the regional commission of employment and to the relevant labour associations.

On termination of the employment relationship, the employer must pay the compulsory termination payments as the due indemnity in lieu of notice, TFR, monthly supplementary instalments, and so on. When the employees are actually dismissed, they will be entitled to the payment of a mobile indemnity.

Consequences of violating the collective dismissal procedure

If the employer does not comply with all of the steps in the collective dismissal procedure, then all of the dismissals are ineffective, that is, null and void (Law 223/1991). If the selection criteria are violated, then the dismissals are unfair. As a result of a legal challenge from the employee involved, and if the tribunal finds that the dismissal was unfair, the employer must (section 18, Workers' Statute):

Reinstate the unfairly dismissed employee. In this case, the employee can convert the right to be reinstated into the payment of an allowance equal to 15 months' salary.
Pay the employee an indemnity, equal to the salary due between the date of the dismissal and the date of the effective reinstatement, with a minimum of five months' salary.

EU legislation on information and consultation

Council Directive 94/45/EC on the establishment of a European works council provided the first outline for rules on the information an employer must provide to its employees and the involvement of its employees through a European works council (EWC).

Subsequently, Council Directive 2002/14/EC on informing and consulting employees established a general framework for informing and consulting employees in the EU, in enterprises with at least 50 employees.

Council Directive 2001/86/EC supplementing the Statute for a European Company, and Council Directive 2003/72/EC supplementing the Statute for a European Cooperative Society, added regulations relating to the involvement of employees in negotiations.

Italian definition of a transfer in Article 2112

Article 2112 of the Italian Civil Code, as amended by Legislative Decree 18 of 2 February 2001 and Legislative Decree 276 of 10 September 2003, defines a transfer of undertaking as "any transaction which, as a consequence of a contractual assignment or merger, determines a change in the legal ownership of an organised economic activity, pre-existing to the transfer and which maintains its identity within the ambit of the transfer, regardless of the formalities adopted to execute the transfer, including life tenancy and lease of undertaking. The provisions of such Article shall apply to a transfer of a part of an undertaking as a functionally autonomous part of an organised economic activity identified as such by the transferor and the acquiring entity at the date of the transfer."

Contributor details

Luca Failla

LABLAW

Image 1 within Reduction in force: options for businesses in Italy and the EU

T +39 02 30 311 321
F +39 02 30 311 421
E [email protected]
W www.lablaw.com

Qualified. Italian Bar Association, 1994; the Italian Supreme Court, 2005

Areas of practice. Labour and employment law; pension schemes.

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