Collective redundancies prior to a business transfer: key takeaways from the Supreme Court Judgment of 5 March 2025
In scenarios such as the termination of a service contract or administrative concession, it is not uncommon for the outgoing company to consider terminating its workforce contracts just before the transfer of activity, invoking collective redundancy on the grounds of an alleged cessation of operations.
At first glance, this might appear to be an efficient solution: contract termination based on cessation of activity, severance of employment relationships, and an apparent release from future obligations.
However, this strategy entails significant legal risks for both the outgoing and incoming companies. In this regard, the Supreme Court is clear: what matters is the substantive continuity of the business activity—regardless of the legal form used. Even if the employment terminations occur before the new company formally takes over, the effective continuation of services may constitute a transfer of undertaking.
Collective redundancy and business transfer according to the Supreme Court
In its recent judgment of 5 March 2025, the Spanish Supreme Court reaffirmed that if the elements of a business transfer are present, the incoming company may be exposed to substantial liabilities. These include litigation, joint liability, and unexpected collective labour disputes, simply by maintaining the continuity of service provision.
This principle is particularly relevant in labour-intensive sectors such as cleaning, where personnel are deemed an essential element of the activity. In many cases, the obligation to take on existing staff arises not only from the functional reality but also from explicit provisions in applicable collective agreements—making it a legally binding requirement for the new contractor.
This article analyses the legal implications of such pre-transfer dismissals, the latest judicial doctrine, and the necessary precautions for both outgoing and incoming employers to avoid unintended consequences.
Key aspects of the Supreme Court Ruling of 5 March 2025 on collective dismissals
The Supreme Court judgment of 5 March 2025 (Case No. 4728/2023) considered a case involving a change of contractors, where the outgoing company had implemented a collective redundancy process just days before the operational handover.
Although the dismissal procedure had followed the formalities of Article 51 of the Workers’ Statute, the Court held that:
The true purpose of the redundancy was not a genuine economic or production-related cause, but rather to avoid the obligation of staff transfer due to the end of the service contract.
The redundancies occurred immediately prior to a de facto business transfer, with uninterrupted service delivery.
The dismissals were declared unfair (improcedentes), obliging the employer to reinstate the employees or pay compensation.
This ruling underscores a key warning: if a collective redundancy conducted prior to a business transfer is not based on genuine operational needs and is solely intended to avoid staff subrogation, it may be ruled unlawful or even null and void, with binding consequences for both the outgoing and incoming companies.
This reinforces existing Supreme Court case law, including judgments of 14 February 2014 (Case No. 148/2013) and 20 December 2024 (Case No. 155/2024), in which collective redundancies were nullified due to the absence of a legitimate objective cause, with incoming employers being ordered to reinstate affected staff.
Legal safeguards for employers in collective redundancy scenarios
The problem does not lie in the use of collective redundancy as a legal tool, but in its purpose and justification. To avoid future liabilities, it is essential to:
Provide objective and verifiable justification for the redundancy (economic, technical, or organisational grounds).
Avoid close timing between the redundancy and the business transfer, which may suggest bad faith.
- Refrain from using redundancy solely to deliver a “clean slate” workforce to the incoming contractor.
Ensure a genuine consultation period, supported by full and accurate documentation.
Poor planning can turn an ostensibly lawful business decision into a complex employment dispute with serious legal and financial consequences. Failing to assess the effects of a business transfer in the context of a collective redundancy can leave the incoming employer saddled with unforeseen employment liabilities.
What the incoming company should consider in business transfers involving redundancies
These scenarios carry a high legal risk for the new service provider. Even if the new contractor was not involved in the prior redundancy process, it may still face legal proceedings in which employees claim:
The existence of a business transfer.
That the prior dismissals were unfair or null and void.
That the incoming employer is legally obliged to subrogate staff with retroactive economic and employment effects.
Joint liability for employment-related debts and social security obligations.
Collective challenges or widespread labour unrest.
As a result, the new employer may be compelled to:
- Assume employment contracts.
- Pay compensation and back pay.
- Recognise continuity of service and regularise contributions.
Face penalties or financial claims.
Therefore, companies involved in service handovers, restructurings, or re-tendering processes must adopt a legally robust and preventive approach.
Conclusion: extreme caution in transactions involving collective redundancies and business transfers
Accurately assessing the impact of any termination measures prior to a potential transfer of undertaking, avoiding decisions with purely instrumental aims, and properly documenting the grounds for dismissal are essential steps.
Ultimately, the increasingly stringent judicial stance requires maximum caution in these types of transactions. Otherwise, they may escalate into complex, prolonged, and costly legal battles. For this reason, obtaining specialised legal advice is not just advisable—it is a strategic necessity.
Do you need advice? Access our area related to collective redundancies prior to a business succession: