The unexpected employment cost of terminating a distributorship agreement

April 17, 2015

A recent Spanish Court of Appeal judgment provides an important reminder for suppliers and distributors that the employees of a terminated distributor can transfer automatically to the supplier under EU law.

The law in question is the EU Acquired Rights Directive (“the Directive”) (implemented into UK law by the Transfer of Undertakings (Protection of Employment) Regulations 2006, commonly known as “TUPE”).

The Spanish court had to consider the method for calculating any compensation to which a distributor may be entitled following the termination of its distributorship agreement.

The Court decided that there is no automatic right to compensation under Spanish law and, if such a payment is awarded, the purpose is not to compensate the distributor for its losses, but rather to reverse any unjust enrichment of the supplier. This requires an assessment of all the circumstances of the case. Any compensation must not be calculated simply by reference to the difference between the purchase price paid by the distributor and the resale price. It should also take into account that the supplier will incur the expenses of distribution. In particular, this may involve costs associated with employees of the former distributor who transfer from the distributor to the supplier by operation of the Directive and bring in tow employment-related costs and necessitating effective protections against employment-related liabilities.

TUPE will apply if there is a service provision change, such as where a supplier decides it no longer wishes to outsource distribution and brings its distribution activities back “in-house”. A distributor who has just lost a client in this way and may be facing a costly redundancy exercise may try to argue that all of its employees who were involved in the distributorship arrangements automatically transfer to the supplier. The supplier, however, wary of inheriting the distributor’s employees and potentially substantial employment-related liabilities, will resist the application of TUPE.

So, who is right?

When a supplier brings its distribution activities back “in house”, do the employees of the former distributor remain with the distributor or transfer to the supplier? TUPE appears to provide a straightforward answer: employees who are assigned to an organised grouping of employees whose principal purpose is carrying out the distribution business will transfer to the supplier. However, applying this test in practice can be challenging. The question of whether (and which) employees will transfer is highly fact-sensitive and requires careful analysis.

The first task is to identify whether there is an “organised grouping” of employees at the distributor whose principal purpose is performing the distribution services for the supplier in question. The distributor must be able to demonstrate that it has deliberately put together a group of employees (for example, as the supplier’s client team) to carry out the distribution services for that supplier. It is not enough that such a group exists simply as a matter of happenstance.

If this first hurdle is met, the second task is to determine which employees are assigned to the organised grouping. It can be tempting to apply a simple “time spent” test and conclude that all employees spending 50% or more of their time performing the distribution services are “assigned” for these purposes and will therefore transfer to the supplier when it takes the distribution activities back in house. However, whilst the amount of time that an employee spends performing the distribution services is a relevant factor, it is by no means conclusive.

The distributor must be able to show that it has deliberately assigned the employees to the organised grouping. This requires an analysis of each employee’s role within the distributor’s organisational structure, including a critical review of the employee’s contract of employment or job description. This will indicate whether the employee is principally engaged by the distributor to work on the distributorship agreement with the supplier, or whether they have other duties. Only those employees who are deliberately assigned to the organised group will be in scope to transfer to the supplier.

Accordingly, unless the distributor can show both that it deliberately organised its employees into a team to provide the distribution services and that each employee was deliberately assigned to that team, it may be difficult for it to argue that the employees will transfer to the supplier.

This might be good news for suppliers planning to bring distribution services back in-house. Equally, it is potentially bad news for distributors whose staff are not organised into specific client teams, and who may be faced with a costly redundancy exercise upon losing a contract. Distributors might consider whether it would be prudent to change their staffing arrangements, although in some cases the loss of flexibility will mean that this is not a viable option.


Related pages:

Employment for Professional Practices more

Employment law team more

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