Employment Law in M&A — the Overall Picture
Mergers and acquisitions in Georgia raise not only corporate questions but serious employment-law issues: what happens to employees' contracts when a business or a part of it passes to a new owner, who answers for obligations accrued before the deal, and under which rules the workforce may be reduced afterwards. This page explains these questions on the basis of three provisions of the Georgian Labour Code — the grounds for termination of an employment contract, the termination procedure, and the special regime governing the transfer of an undertaking. Every conclusion below rests on the exact wording of the Code, so you will find what the law actually provides, not generic advice.
One detail deserves emphasis at the outset: a transfer of an undertaking is not, by itself, a ground for terminating employment contracts. The law expressly prohibits the transferor and the transferee from terminating contracts on the ground of the transfer alone, which eliminates the most common mistake made when planning M&A transactions. Post-deal restructuring remains possible, but only on statutory grounds and following the statutory procedure.
The Labour Code defines a transfer of an undertaking as the transfer, by transaction or by operation of law, of an enterprise, a business, or a part of either to another employer. The definition expressly covers the transfer of an economic activity in which its identity and/or essential similarity is preserved and which presupposes an organised grouping of resources for carrying out principal and ancillary economic activities. This wording captures the typical M&A structures — asset sales, carve-outs of business divisions, relocations of operating activity — and brings them within the transfer regime.
Two parties are distinguished. The transferor is a natural person, legal person, or association of persons which, as a result of the transfer, loses its status as employer with respect to the undertaking or the transferred part. The transferee is the person that acquires that status. In employment terms the deal therefore changes the employer, and this change does not require the employees' consent — rights and obligations pass by force of law.
What Happens to Employment Contracts Upon Transfer
Rights and obligations arising from employment relationships in force on the date of the transfer pass to the transferee by virtue of the transfer. The new employer takes over not only current obligations but also historical exposure — for example, accrued untaken leave and other claims that arose before the transfer. Failure of the transferor to notify the transferee of these rights or obligations does not prevent their transfer, nor does it prevent the transfer of employees' rights against the transferor or the transferee.
If a collective agreement applied to the undertaking, the transferee must honour its terms until the collective agreement expires or is terminated early, or until a new collective agreement enters into force. This obligation runs for one year from the date of the transfer, and the terms bind the transferee in the same way as they bound the transferor. If the transferred business retains its autonomy, the employees' association representing the affected employees keeps its pre-transfer status and function for the same term and under the same conditions.
There is also a key limitation: neither the transferor nor the transferee may terminate employment contracts on the ground of the transfer. This does not exclude termination on the redundancy ground — economic, technological or organisational changes making a reduction of the workforce necessary — but only where the corresponding preconditions are observed. Where a contract is terminated because the transfer entails changes in working conditions to the detriment of the employees, liability for the termination falls on the transferee.
Grounds for Termination During Post-Deal Restructuring
If the new owner plans to reduce headcount after the deal, the general statutory list of termination grounds applies. It includes: economic, technological or organisational changes making a reduction of the workforce necessary; expiry of the fixed term of the contract; completion of the work provided for in the contract; the employee's voluntary departure on the basis of a written statement; written agreement of the parties; mismatch between the employee's qualifications or professional skills and the position or work; gross violation of duties imposed by the individual employment contract, collective agreement, and/or internal labour rules; repeated violation of such duties where a disciplinary measure has already been applied within the last year; prolonged incapacity for work; a court decision declaring a strike unlawful that has entered into force; death of a party; commencement of liquidation of the employer as a legal person; and any other objective circumstance justifying termination.
Restructuring typically engages the first ground — economic, technological or organisational change. Prolonged incapacity is a ground only if the contract does not provide otherwise, where it exceeds 40 consecutive calendar days or, within 6 months, an aggregate of 60 calendar days, and the employee has used the statutory leave. For the repeated-violation ground, a disciplinary measure must already have been applied to the employee within the last year.
The Code also fixes core prohibitions. Termination is inadmissible on a ground other than those listed; on discriminatory grounds; during the protected period following the employee's notification of pregnancy; due to call-up or service in military or alternative labour service or reserve service; or while the employee serves as a juror — in each case with narrow statutory exceptions tied to the employee's own conduct or circumstances rather than the employer's economic interests.
Termination Procedure — Notice, Compensation and Disputes
Where the employer terminates the contract on the redundancy, qualification-mismatch, prolonged-incapacity or other-objective-circumstance grounds, it must give the employee at least 30 calendar days' prior notice in writing and pay compensation of at least 1 month's remuneration. A shortened option exists: notice of at least 3 calendar days, in which case the compensation rises to at least 2 months' remuneration. When the employee leaves on their own initiative, they must give the employer at least 30 calendar days' prior written notice.
The dispute mechanism is precisely regulated. Within 30 calendar days of receiving notice of termination, the employee may demand written substantiation of the ground; the employer must respond within 7 calendar days. If it fails to substantiate in time, the employee may challenge the decision in court within 30 calendar days, and in that event the burden of proving the factual circumstances rests on the employer. Where substantiation is provided, the 30-day court deadline runs from its receipt.
If the court declares the termination decision void, the employer must, by court decision, reinstate the person in the former workplace, provide equivalent work, or pay compensation in an amount determined by the court. In addition to reinstatement or compensation, the employee may claim compensation for forced idleness from the date of termination until enforcement of the court decision, though the court must take into account any compensation already paid by the employer under the notice rules.
Information and Consultation Duties
The transferor and the transferee must supply the employees' association with the following information: the date of the transfer, its reasons, its legal, economic and social consequences for the employees, and information about the measures to be taken with respect to the employees. Where no association exists, this information must in any event be provided in advance to the employees and/or their representatives.
The deadlines are fixed precisely: the transferor supplies the information 30 days before the date of the transfer; the transferee — within a reasonable period, but no later than 30 days before the day on which the transfer affects the employees' working conditions. If either party plans measures affecting the employees, it must hold consultations with the employees' representatives at least 30 days in advance, with a view to reaching agreement. Note that this regime does not apply to a transfer of an insolvent undertaking under the Law on Rehabilitation and Collective Satisfaction of Creditors.
Frequently Asked Questions
Can an employee be dismissed merely because the company is being sold?
No. The law expressly prohibits the transferor or the transferee from terminating an employment contract on the ground of the transfer. Dismissal is possible only on statutory grounds and following the statutory procedure — for example, redundancy with 30 days' notice and compensation.
Does accrued annual leave pass to the new employer?
Yes. All rights and obligations arising from employment relationships in force on the transfer date pass to the transferee by force of law. The transferor's failure to inform the transferee about them cannot stop the transfer.
How much is the redundancy compensation?
Two options exist: with notice of at least 30 calendar days — at least 1 month's remuneration; with notice of at least 3 calendar days — at least 2 months' remuneration. These are minimum thresholds; a higher amount may be fixed by contract or agreement.
How do I challenge an unlawful dismissal?
Within 30 calendar days of the notice, demand written substantiation; the employer must respond within 7 calendar days. You may then apply to the court within a further 30 calendar days. If the employer fails to substantiate, the burden of proof shifts to it.
What happens to the collective agreement after the transfer?
The transferee must observe its terms until it expires, is terminated early, or is replaced by a new collective agreement, but this obligation lasts for one year from the transfer date.
How We Help on Legal.ge
The Legal.ge team handles employment disputes and provides legal support for M&A transactions: reviewing transfer structures, documenting the information and consultation procedures for employees and their representatives, calculating notices and compensation, and protecting appeal deadlines. Whether you are selling a business, have been dismissed, or are advising the acquiring side — contact us for an assessment of your situation grounded in the specific applicable norms.