Sponsored briefing: The fate of employment contracts in M&A transactions under Turkish law

M. Efser Karayel-Keßler of Matur & Ökten & Karayel Keßler explores the legislation affecting employment relationships when a company’s legal structure changes and where this means employees face unequal treatment

Changes to the legal structure of companies regularly have an impact on employment relationships. These usually lead to changes in employment conditions, dismissals or early retirements , or cause a change in the identity or form of the employer. This particularly applies to asset deals, mergers, demergers and company-type changes.

Such big-scale transactions affect a large number of employment contracts, and accordingly a large number of employees. In contrast to investors, employees are not in a position to minimise their risks in various ways, such as holding shares in other companies. The financial situation of the new employer and its strategic plans play a very important role in the future of the employees. They are directly affected by the restructuring of their employer company and the measures taken within that scope.

‘The financial situation of the new employer and its strategic plans play a very important role in the future of the employees.’
M. Efser Karayel-Keßler, Matur & Ökten & Karayel Keßler

The transfer of employment relationships in the event of transfer of a business, wholly or partially, is regulated in general in Article 6 of the Turkish Labour Code (the TLC). According to Article 6/I of the TLC, if a business or part of a business is transferred to another entity through a legal transaction, the existing employment contracts shall pass to the transferee together with all rights and obligations on the date of transfer. This general provision does not grant employees the right to refuse the transfer of employment. Neither the transferor nor the transferee employer can terminate the employment contracts solely based on the transfer of the business, as the transfer itself does not constitute a rightful reason for termination (see Article 6/V of the TLC).

Article 6/II of the TLC stipulates that the transferee is obliged to act according to the date of the employee’s first commencement of work for the transferor employer, when determining the employee’s rights that are based on the length of service. According to the following paragraph (Article 6/III), the transferee and transferor employers shall jointly and severally be liable for any claims by employees arising from the employment contract for two years starting from the date of transfer. This means that if the employee cannot receive his/her receivables from the transferor employer within two years, (s)he will no longer be able to claim rights from the transferor employer. However, since there is a ‘joint responsibility’, the employee will still be able to demand the receivables from the transferee employer after this two-year period.

On the other hand, Turkish legislators established special regulations in the Turkish Commercial Code (TCC) in 2012, regarding the fate of employment relationships in the events of mergers, demergers and company-type changes. Articles 158/IV, 178 and 190 of the TCC constitute special provisions in comparison to the above-explained Article 6 of the TLC. The said TCC provisions exclude the application of Article 6 of the TLC in the case of mergers, demergers and type changes. Legal certainty and transparency as well as the protection of employees are better guaranteed under the TCC provisions.

Article 178 of the TCC determines the fate of employment relationships in the context of demergers, while Articles 158/IV and 190 of the TCC make a reference to the application of Article 178 in the case of merger and type-change transactions.

When we compare Article 6 of the TLC to Article 178 of the TCC, common points in both provisions are:

• the employment contracts in the transferred business pass to the transferee automatically, together with all rights and obligations as required by law; the transferee employer has no right to avoid taking over the labour relations; and
• the transferor and the transferee are jointly liable for the receivables that the employees are entitled to under both provisions.

Aside from these, there are many fundamental differences between Article 178 of the TCC and Article 6 of the TLC, as below:

• In contrast to Article 6 of the TLC, which stipulates that the transfer does not constitute a ground for rightful termination for the employee, Article 178/I of the TCC grants employees the right to reject the transfer of the employment relationship. If the employee makes use of such right of refusal, the employment relationship ends in accordance with Article 178/II on expiry of the statutory notice period. Until then, the transferee and the employee are bound by the employment contract and obliged to perform their obligations thereunder.
  It is worth mentioning that while the employees of the transferor can reject the transfer of the employment relationship, the employees of the transferee have no right of refusal, as their employment relationships have not transferred, although their working conditions may also be affected by the transaction.
• In addition, Article 178/V of the TCC grants the employee an additional right to security for his/her claims arising from the employment contract, whereas Article 6 of the TLC does not cover this right. The explanatory memorandum of the TCC points out that the provision of Article 333 of the Swiss Code of Obligations served as a model when drafting Article 178 of the TCC. There is no equivalent to this provision in Article 6 of the TLC.
• Pursuant to Article 178/IV of the TCC, the employer cannot transfer the rights arising from an employment relationship to a third party, unless otherwise agreed or dictated by the circumstances. According to this provision, the transferor and the transferee are jointly and severally liable for the employee’s claims, which became due prior to the transfer or which fell due between that juncture and the date on which the employment relationship could normally be terminated or was terminated following the refusal of transfer.

‘An analogous application of Article 178 of the TCC to asset deals is strictly rejected in the legal doctrine, although it contains more favourable conditions for the employee than Article 6 of the TLC.’
M. Efser Karayel-Keßler, Matur & Ökten & Karayel Keßler

On the other side, an analogous application of Article 178 of the TCC to asset deals, which are transfers in the form of ‘transfer of the assets of commercial enterprise’, is strictly rejected in the legal doctrine, although it contains more favourable conditions for the employee (such as the right to reject) than Article 6 of the TLC. De lege lata, when a commercial enterprise is purchased in this form in Türkiye, all employment contracts belonging to that enterprise are automatically transferred to the purchaser by law in accordance with Article 6 of the TLC. In this case, the employees have no right of refusal and the transfer of business in itself does not entitle the employee to terminate the employment relationship. The transferor and the transferee are jointly and severally liable for any claims of the employee which became due prior to the transfer, provided the responsibility of the transferor is limited to two years from the date of transfer.

Article 11/III of the TCC states that in the case of a purchase of a commercial business via a ‘transfer of the assets of commercial enterprise’, the written transfer agreement does not have to contain a list of employment contracts. If a merchant owns several commercial entities, it can therefore be much more difficult in such an asset deal to determine which employee is staffed under which business, especially if the employee has worked for the employer’s commercial entities equally due to his/her position. In order to avoid ambiguities and potential conflicts between parties, it is advisable to draw up a list of employment relationships taken over in the transfer agreement.

It is important to note that, regardless of the transaction type, companies or legal entities involved in the process are obliged to inform their employees about any transaction that may have any kind of effect on the employees.

As a result, it can be said that the Turkish legislators are determined to improve the rights of employees in mergers, demergers and restructurings, however failed to do so for transfers in the form of ‘transfer of the assets of commercial enterprise’ and thus caused unequal treatment of employees. It is not clear why the Turkish legislators wanted to treat employees differently in this manner. This unequal treatment of employees in various M&A transactions must be eliminated through comprehensive new legal arrangements.