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.