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Eyes front when changing service providers – recognize a transfer of business


In general, a transfer of business refers to a situation where a business operation is transferred to another employer and the operation in question remains effectively same or similar post-transfer. Transfers of business come with significant employment law effects, most notably the automatic transfer of affected employees to the new employer with their old terms of employment. However, it may sometimes come as a surprise that also changes in the service provider line-up of a service with links to the public sector are easily viewed as a transfer of business.

The Finnish Supreme Court’s recent decisions (KKO 2018:64–66) are a good reminder for companies and public administration units dealing with service purchase agreements that the tentacles of transfers of business reach far and wide. In all of those cases, the Supreme Court ruled that a transfer of business had occurred when a public administration unit had either taken back a service it had previously entrusted to a private service provider or when the unit had changed its service provider. Contrary to the rule of automatic transfers of employees, no employees had been transferred to the new employers. Instead, they were dismissed by the former service providers at the end of term of the employers’ service agreements – a move that resulted in the Supreme Court sentencing the new employers to pay compensation for illegal terminations of employment relationships.

The Supreme Court established in all of the cases that transfers of business had taken place since the services had remained sufficiently similar after the changes in the service provider set-up:

- the operations continued in the same facilities with the same equipment as before, essentially uninterrupted and with the same content and clientele;
- despite no significant tangible or intangible assets or staff had transferred, the facilities and equipment that moved over to the new employers were essential to the nature of the transferred operations; and
- although the services taken back to the public administration no longer pursued profit, they were still of economic interest as they competed with profit-oriented services.

The services provided by municipalities and cities, federations of municipalities, and other public administration units are typically defined by law, both in terms of content and clientele. The services are often also arranged in premises owned or administered by public administration units. The above-mentioned precedents of the Supreme Court show well how easily a transfer of business may arise when changing the manner or the line-up of providing these types of services, even if little assets or staff transfers to the new service provider. When reorganizing services, care should be taken from an employment law perspective to prevent unexpected risks. This is worth bearing in mind especially when preparing for large-scale changes, such as the anticipated future reforms of social and healthcare services.

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