Key points
- Article L.1224-1 of the French Labour Code (Code du travail) requires all current employment contracts to be maintained in the event of a transfer of undertaking, including the sale of a business (fonds de commerce).
- The transfer takes place automatically, without the employee’s consent or a new contract, and length of service and working conditions are maintained.
- It applies where an autonomous economic entity is transferred that retains its identity and whose activity is continued, a characterisation assessed case by case.
- The rule is mandatory (d’ordre public): neither the seller, nor the buyer, nor the employee can derogate from it, and the buyer does not choose which contracts are kept.
- Dismissals decided before the sale and linked to the transfer call for careful examination of the real reason and the timing.
The question comes up in almost every takeover of a business: must the buyer keep the employees in place, or can it build its own team? There are two issues at stake. For the buyer, it means anticipating a payroll it has not always chosen. For the seller, it means knowing whether it can reduce headcount before the sale. The answer rests on a long-standing, protective rule of French employment law: Article L.1224-1 of the Labour Code, which provides for employment contracts to be maintained in the event of a transfer of undertaking. In principle, this rule leaves the buyer no freedom to pick and choose. Its conditions of application must still be met, which requires a precise analysis of the transaction.
Every situation is different and depends on the nature of the transaction as well as on how the acquired activity is organised. The analysis below sets out the applicable framework, not advice tailored to a specific case.
The principle: employment contracts transfer automatically
Article L.1224-1 of the Labour Code lays down a clear rule: “Where a change occurs in the legal situation of the employer, in particular by succession, sale, merger, transformation of the business, or incorporation of the undertaking, all employment contracts in force on the day of the change continue between the new employer and the staff of the undertaking” (unofficial translation).
The sale of a business falls within the scope of this provision. Employment contracts in force on the day of the sale continue automatically with the buyer. The transfer takes place automatically: it requires neither the employee’s consent nor the signature of a new contract. Length of service, job classification and the terms of the employment relationship are in principle maintained.
The condition: transfer of an autonomous economic entity
The automatic transfer does not apply in every case. According to settled case law, Article L.1224-1 applies when an autonomous economic entity is transferred that retains its identity and whose activity is continued or taken over.
Such an entity is defined as an organised grouping of persons and tangible or intangible assets enabling the exercise of an economic activity pursuing its own objective. The sale of an operating business, with its customers, equipment, premises and staff, often matches this definition. But the characterisation remains factual: not every transfer of isolated assets necessarily triggers the provision. The assessment is made case by case, in the light of the reality of the activity transferred.
A mandatory rule that cannot be set aside
Where its conditions are met, Article L.1224-1 binds everyone. Neither the seller, nor the buyer, nor the employee can derogate from it by a clause in the sale agreement. Where an autonomous economic entity is transferred, the buyer therefore cannot select the contracts it wishes to keep.
This automatic effect protects jobs: it prevents the change of employer from serving as a pretext for terminating contracts. The counterpart for the buyer is the need to integrate the existing workforce into its takeover plan and to measure the cost upfront.
What happens to dismissals decided before the sale?
The question of what happens to the employees does not disappear if dismissals are contemplated before the sale. The seller remains the employer until the sale and, as such, retains its management powers. Even so, the protective purpose of Article L.1224-1 leads to careful scrutiny of terminations whose cause is linked to the transfer itself.
This interplay is delicate and depends closely on the circumstances: the real reason for the dismissal, the timing, the link with the sale. It calls for case-by-case analysis and cannot be settled by a general rule. A misjudgement exposes the parties to a dispute before the labour court (conseil de prud’hommes).
Points to watch
- Contracts transfer automatically where an autonomous economic entity is transferred: the buyer does not choose the employees.
- Whether there is an autonomous economic entity is a question of fact: it must be checked before signing.
- The workforce taken over, its length of service and current commitments weigh on the economic balance of the takeover.
- Dismissals before the sale that are linked to the transfer call for specific analysis: their lawfulness is assessed case by case.
- Current contracts must be audited (disputes, leave, staff representatives) before the transaction.
When should you consult a lawyer?
A lawyer’s assistance is useful to check, before signing, whether the transaction entails the transfer of an autonomous economic entity, to audit the contracts taken over and to anticipate the employment cost of the takeover. These questions lie at the crossroads of a sale of a business and employment law (in French) advice, whether to make the transfer legally sound or to handle a dispute relating to the employment contracts.
Each matter deserves its own analysis: the solution depends on the facts, on how the acquired activity is organised and on the applicable case law.
What the law says
Not all contracts follow the business in the same way. Employment contracts continue automatically: under Article L1224-1 of the Labour Code, “where a change occurs in the legal situation of the employer, in particular by succession, sale, merger, transformation of the business, or incorporation of the undertaking, all employment contracts in force on the day of the change continue between the new employer and the staff of the undertaking” (unofficial translation). The buyer has no choice: it takes over the employees attached to the business.
For other contracts (suppliers, service providers, subscriptions), the rule is the reverse: assigning a contract requires, in principle, the consent of the other contracting party (Article 1216 of the French Civil Code). The buyer is therefore not obliged to take them over, unless a specific statutory provision applies, for example insurance of the property, which continues automatically for the benefit of the buyer, who may nevertheless terminate it (Article L. 121-10 of the French Insurance Code (Code des assurances) (in French)). Hence the importance of auditing current contracts before the takeover.
Official sources
- Article L1224-1 of the Labour Code, continuation of employment contracts: Légifrance (in French)
- Article 1216 of the Civil Code, assignment of contract: Légifrance (in French)
Every situation is different. To audit the contracts of a business and make their takeover legally sound, our fonds de commerce sale and purchase lawyers assist you.
For assistance: fonds de commerce sale and purchase lawyer.
