Cross-border M&A into Italy: How to approach employment issues

In the case of cross-border mergers and acquisitions involving Italian companies, one of the main legal issues concerns the mandatory procedures for informing and consulting the unions under Italian law.

Except in the case of a pure and simple transfer of shares that does not change the ownership of the employment relationship, a merger between companies is normally qualified as a transfer of business or one of its branches. In this case, similar to the provisions which apply under European Union legislation, Italian law provides that the employees concerned automatically pass from one company to the other, but requires the companies involved to communicate in advance to the trade unions the reasons for the transfer and the main effects for the employees. If requested by the relevant trade union, this communication is followed by a consultation procedure lasting a total of 25 days.

The first problem is therefore a procedural one. While omitting this consultation would not prevent the business agreement between the two companies, in the event of a court action brought by the union for omitting the procedure, it may prevent the transfer of employees from one company to the other. This would force the companies involved to step back and carry out the omitted consultation, thereby slowing down the company's plan.

It is therefore necessary to plan for the communication and consultation phase in good time.  However, the potential employment issues in the case of a merger or takeover do not end there.

In addition to the procedural requirements, it is essential to accurately plan the boundaries of the transferred company or business branch with sufficient clarity in order to avoid uncertainty about the quantity and type of personnel transferred. Depending on the economic and employment prospects offered by the two different entities, employees might challenge (or claim) belonging to the transferred company or branch. Blurred definitions of what constitutes the transferred business can result in further complications in this respect.

Another common problem in the case of international mergers is the economic treatment of employees affected by the merger. The transfer from one company to another may sometimes involve a change in the collective bargaining applicable to individual employment contracts, with significant implications, for example, on pay, working hours, or benefits. It is therefore important, in the case of transferring employees from one company to another, to provide for coordination between the rules applicable to them, in order to avoid disputes regarding which rules apply.

Where there is a proposed dismissal of part or all of the employees in question, the procedural process can be more protracted. In this situation, there is an obligation under Italian law to inform and consult with trade unions, which can also be mediated by public institutions and can last up to 75 days.

In addition to the predictable conflict that this process entails, with risks of strikes, production stoppages and potential negative media coverage with related reputational damage, planning is also important here. Layoffs cannot be decided by the company arbitrarily but must follow certain objective selection criteria. This means that the selection of workers to be made redundant cannot be made before the transfer of the business, but only after the merger, so as to verify overlaps between identical job positions and the resulting excess jobs to be cut.

In the international context in which we operate, there can be an additional cultural complication: clients who instruct us to manage their mergers and acquisitions in Italy may be from jurisdictions where labor legislation is less protective and therefore may not be accustomed to managing the situations described above. Moreover, the timelines for concluding such transactions are often shorter, partly because they are conditioned by different kinds of strategic and financial variables.

Final thoughts

Where a client intends to carry out a merger or acquisition involving an Italian company, we advise them not to consider the employment relationship of the employees involved merely a side issue of their business transaction. Because of the legislation to protect workers and the timeframes and costs that this potentially entails, it is essential to:

• plan for the expected time required to carry out the mandatory communication and consultation procedures;
• have a clear understanding of the perimeters of the transferred company and of the workers involved; and
• understand the legal and economic consequences on labor relations and the possible consequences on the overall number of the workforce employed.

Consulting an employment lawyer from the beginning of the M&A process can save time and money.