What are the employment implications of the transfer of a business?

Colombian labor legislation provides automatic transfer of employees or “substitution of employer”, when three requirements are met (i) change from one employer to another, due to an agreement, sale, transfer or any other cause, (ii) the business continues, which means that the scope of the business developed by the former employer keeps all of its essential activities, and (iii) the continuation; the employees that were hired in connection with the development of the business keep on providing their personal services as agreed with seller.

Article 69 of the Colombian Labor Code provides as general rule that the former and the new employer will remain jointly and severally liable for all labor obligations related to the existing labor contracts until the transfer date. Nonetheless, the new employer is responsible for the obligations that arise after the substitution takes place, including all labor and social security obligations to which the employees are entitled to.

Employment agreements will continue to operate on the same terms and conditions unless new working conditions are negotiated between the employees and the new employer, in this case new employment agreements or amendments to them should be entered into by the parties.

Prior to the substitution process, the former employer may terminate any or all of its employment agreements (paying all the pending salaries, social benefits and legal indemnities). Nevertheless there are certain legal provisions that require having a dismissal approval from the Labor Ministry when the number of employees is 10 or more.

Regarding the Colombian Integral Social Security System, the new employer must join the social security entities to which the transferred employees are affiliated, report the change of employer and make the corresponding payments on a monthly basis.

Law allows for the parties (former and new employer) to agree on the payment of all accrued social benefits to each and every employee, (either made by the former or the new employer) without the employees being able to contest. However, the employment agreement keeps on running particularly on the seniority that is used to calculate the indemnity due by the employer to employee upon a dismissal without cause.

There is no legal obligation to notify or request an authorization from the employees. However, it is usual that the former employer deliver its employees a written communication informing (i) the date of the substitution of the employer, (ii) name of the new employer for all legal purposes, and (iii) a clarification mentioning that the seniority for all legal effects (such us the payment of social benefits, vacations or legal indemnities). The prior communication allows the employees to decide whether to accept the change or resign before the substitution of employer takes place.

On the other hand, it’s a common practice to have a labor transfer or substitution agreement executed between the former and the new employer.

Finally what usually happens is that the new employer executes new employment agreements with the employees, or amends the existing agreements in some of its terms and conditions, including new responsibilities or new compensation conditions.