TUPE and “pre-pack” administrations

So-called “pre-pack” (or back to back) administrations are controversial because they often leave behind them a trail of destruction as far as creditors, and particularly unsecured creditors, are concerned.

They typically arise in situations where a company is in serious financial (generally cash flow) difficulties and provide a way for the business to survive, albeit (or at least it should be the case) in the hands of different owners. they are often used for management buy-outs.

Although such arrangements tend to favour secured lenders such as banks, the same cannot be said for unsecured (e.g. trade) creditors, who can often be left with a measly dividend of as little as 2 or 3p in the £. They are therefore often seen as unfair but, in fact and as long as the procedure is not grossly exploited, they are consistent with the Cork Report of 1982 which did much to shape modern insolvency law and practice and which has at its heart the promotion of a “rescue culture”.

But what about the employees? Does TUPE come to the rescue? For years, there was uncertainty, as the result of a number of conflicting judgments. In 2012 the Court of Appeal, in Key2Law (Surrey) LLP v De’Antiquis (Key2) held that the exemption from TUPE that can arise in other insolvencies (such as liquidations) does not apply to administrations because their objective (even if it is in the short term) is to secure the survival of the business as a going concern. Consequently, all employees will transfer to the buyer in the usual manner (although there is some relaxation of the rules taking into account the insolvency, such as limited contract variations).

The Court of Justice of the European Union has now weighed in on the matter in its decision (on a referral from the Netherlands) in the case of Federatie Nederlandse Vakvereniging and others v Smallsteps BV.

Is a person on long term sick leave assigned in the event of a TUPE transfer?

Since the TUPE regulations were revised in 2006 there has been an obligation for transferors to disclose details of the workforce to transferees. This normally takes the form of a schedule detailing the employees, their job titles and main duties and any specific contractual rights. Disclosure also extends to detailing those on sick leave and any outstanding grievances or disciplinary matters. Employers also need to be careful to adhere to data protection requirements, as emphasised by the Information Commissioner. This is normally achieved by anonymising the information.

The general view is that the disclosure requirement extends to the entire workforce (in the event of a full transfer), or at least that part of the workforce that is subject to the proposed transfer. The technical definition set out in TUPE is “an organised grouping of employees. If this grouping has as its principal purpose the carrying out of services for a particular client, this is often referred to as a service provision change. But what of employees on long term sick leave? Do they form part of the workforce?

In BT Managed Services Limited v Edwards and Ericsson Limited Mr Edwards was employed by BT Managed Services (BTMS) as a field operations engineer. His employment commenced in 1994 with Orange and he was TUPE transferred to BTMS in July 2009. He worked on a domestic network outsource (DNO) contract providing operational maintenance for Orange and EE mobile phone networks. It was accepted that the team was an organised grouping of employees situated in Great Britain which had as its principal purpose the carrying-out of activities (the DNO contract) on behalf of a client (Orange) and therefore fell within the scope of Regulation 3 of TUPE.

In May 2006 Mr Edwards commenced long term sick leave as the result of a variety of ailments including a cardiac condition which meant that he could not undertake the strenuous work required of members of the team. There were unsuccessful attempts to provide him with less strenuous work and he was regarded as permanently incapacitated from the commencement of his sick leave. He last worked in January 2008 but remained an employee so that he could enjoy the benefits available under the employer’s permanent health (PHI) scheme. Once benefits under the insurance scheme expired BTMS continued to pay him (as an expense of the DNO team).

In December 2012 the DNO contract transferred to Ericsson following a tender exercise and the service provision change took place in June 2013. At the time of the change it was accepted that there was no prospect of Mr Edwards ever returning to work. It was held in the Employment Tribunal that he was not assigned to the grouping transferred pursuant to Regulation 4 of TUPE “because he did not contribute to the economic activity of the grouping”. It is worth noting that Regulation 4 does not include any express requirement that an employee must contribute to the economic activity of the grouping so the decision was based on the Tribunal’s interpretation of the Regulation.

Employment Judge Davies found that Mr Edwards had ceased to be a part of the grouping in 2010.
…it was essentially by default that such contact as there was with him and such steps as required to be taken in relation to him, were done by the same managers; that he continued to have the [operational unit code] for the DNO contract; and that costs associated with his employment were attributed to that contract. However, in view of the other factual circumstances, that did not mean that he was as a matter of fact still assigned to the organised grouping of resources and/or employees.

What seems to me central is the decision made in 2010. as the findings of fact…make clear, an essentially pragmatic decision was taken by Mr Hunt and Mr Gilmour to keep the Claimant permanently absent to continue to receive PHI payments.

…he was not assigned to the grouping. It was not contemplated that he would thereafter provide any work or carry out any of the activities under the DNO contract. What was contemplated was simply that he would remain on the books to continue to receive his PHI payments at no cost to BTMSL.
In the Employment Appeal Tribunal BTMS said that the Tribunal should not have treated the question of where Mr Edwards would have been required to work as one of the criteria to be taken into account in determining whether he was assigned to the grouping. Mr Edwards would have been required to work in the DNO team if he was able to do so so he was assigned and the question of whether he was able to do so was irrelevant.

what is an “organised grouping of employees” for the purposes of TUPE?

We TUPE aficianodas have a fond recollection of Mrs Schmidt, a cleaner in a German bank who, in 1994, was found to be a “stable economic entity capable of preserving its (her) identity” following a TUPE transfer (Christel Schmidt v Spar- und Leihkasse der früheren Ämter Bordesholm, Kiel und Cronshagen (Case C-392/92, (1994)).

Fast forward to 2015 and the matter of a single worker has again been considered, this time in the Court of Appeal case of Rynda (UK) Limited v Ailien Rhijnsburger, handed down on 13 February. Rynda owns a large portfolio of properties across Europe. Drivers Jonas LLP acted as agent to manage the properties. In May 2009 Ms Rhijnsburger was engaged by Drivers Jonas on a six months’ fixed term contract to manage the properties in the Netherlands. In October 2009 her role expanded to become an Associate, Asset and Property Management, Europe Group.

In April 2010 Drivers Jonas LLP merged with Deloitte LLP to become Drivers Jonas Deloitte LLP (DJD). In autumn 2010 DJD decided to pull out of managing properties and notified Rynda Group accordingly. Rynda decided to pass the property management duties to Rynda Real Estate Management Limited (REM) which subsequently became Rynda (UK) Limited. Another straightforward, easy to follow TUPE case!

At the end of 2010 Ms Rhijnsburger moved from DJD to REM and took up the post of Senior Asset Manager on 1 January 2011. In effect she did exactly the same job as before. In September 2011 she was dismissed and brought an employment tribunal claim for unfair dismissal. One of the questions for the tribunal was whether her employment commenced on 1 January 2011 or whether she could carry forward her prior employment with DJD for the purpose of calculating continuity, in which case her employment commenced in May 2009. The tribunal held that there was a relevant transfer, as did the Employment Appeal Tribunal.

re-engagament after TUPE transfers

Last month I reported on the latest TUPE changes and took the opportunity to revisit some key TUPE principles. The decision of the Court of Appeal in Hazel & Anor v The Manchester College. The specific questions considered were whether it was automatically unfair to dismiss transferred employees who accepted jobs on new terms, albeit under protest, after transfer and whether, having found that it was, an employment tribunal could order that they should be engaged on the old terms by way of a remedy.
The facts leading up to the case were that two employees, Christine Hazel and Mandy Huggins were lecturers employed by the prison education service, based at HMP Elmley in Kent. In August 2009 they were TUPE transferred when the services were outsourced to The Manchester College, following a successful bid to take over the prison contracts. The following year the College started a cost saving restructuring process. As part of that the lecturers were offered new terms and conditions, which included pay cuts as part of a harmonisation of terms. The reasons given included the general economic situation facing the further education sector, changes in the funding allocation machinery and the discovery of “hidden costs” in Offender Learning. The College provided notification to the DWP of a possible 300 redundancies. They were warned that they might be dismissed if they did not agree, but they would be offered re-engagement on the new terms. After consultation, they agreed all the changes save for the pay reductions which were 18.5% for Mrs hazel and 13.2% for Mrs Huggins.
On 30 September 2010 they were sent notices of dismissal, effective 28 December 2010. On 20 October they accepted the new terms under protest and “without prejudice”. They continued working after 28 December but at the reduced pay level. They brought employment tribunal proceedings claiming unfair dismissal notwithstanding that they were still working for the same employer but based on the termination of the existing contract as they were entitled to (see Hogg v Dover College).
It was Employment Judge Corrigan, sitting in the Employment Tribunal in Ashford in July 2011, who raised the possibility that TUPE might also apply, with reference to the 2009 transfer. Faced with having to acknowledge that there was a TUPE transfer it was then submitted on behalf of the College that the dismissals were for an economic technical or organisational reason entailing changes in the workforce. However this argument failed so the dismissals were automatically unfair. At a remedy hearing re-engagement orders were made which meant that their pre-dismissal rates of pay were reserved.
Appeals to the Employment Appeal Tribunal concerning both liability and remedy failed.
The College maintained its appeal to the Court of Appeal.

what are the practical effects of the new TUPE changes?

How much difference will the new changes to TUPE (The Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014) actually make? For TUPE aficionados the changes are no doubt very interesting but, bearing in mind that I have already commented on the changes in general terms I will confine my observations to those most likely to be of significance for those dealing with transfers.
Guidance recently issued by the Department for Business, Innovation and Skills and commenting specifically on the new changes is also a handy general reference for those dealing with TUPE transfers. For instance, there is a useful reminder that TUPE applies to “relevant transfers”, i.e. (i) when a business, undertaking or part of one is transferred from one employer to another as a going concern or (ii) when a client engages a contractor to do work on its behalf, or reassigns such a contract (including bringing the work “in house”). The second scenario is generally referred to as a “service provision change”. Further, the guidance restates the maxims of TUPE transfers:

the identity of the employer must change (e.g. share takeovers are not covered);
asset only sales are generally not covered;
the transfer must be of an economic entity that retains its identity following the transfer;
for this purpose “economic entity” means “an organised grouping of resources which has the objective of pursuing and economic activity, whether or not that activity is central or ancillary”; and
in the event of the transfer of part of a business the resources (including employees) do not need to be used exclusively in the transferring part of the business and by no other part.

So, what of the changes?
The first important one is a reinforcement of an existing principle concerning service provision changes – the activities carried out must be fundamentally the same before and after the transfer for TUPE to apply.
The provisions allowing for a transferee to start consultation before the transfer with the transferor’s consent have been tweaked to make it clear that if the transferee changes his mind about wanting to consult early and cancels his request he cannot then revive it.
Protection from dismissal and adverse contract changes in the event of a transfer (the core purpose of TUPE) will not apply in certain circumstances where the sole or principal reason for dismissal or a contract variation is an economic, technical or organisational (ETO) one entailing changes in the workforce. Those who have dealt with TUPE transfers will no doubt be aware that the “ETO defence” may turn an automatically unfair dismissal to a potentially unfair dismissal. Accordingly, this change takes the application of ETO reasons a little further.

TUPE changes

Draft regulations for the forthcoming TUPE reforms have been published. The changes they are intended to make are:

– To allow a transferee to start collective consultation with representatives of employees due to be transferred about planned redundancies before the transfer takes place, if the transferor agrees. This will require a good deal of co-operation between the two if the consultation is to be meaningful, and if a sale is not yet a “done deal” a seller may be reluctant to allow it.
– Providing that variations connected with the transfer will be deemed void if the transfer is the reason for the variation – but not variations for a reason “connected with” the transfer. This is apparently a narrowing of the scope of the regulations, and variations will also be allowed if there is an “economic technical or organisational” (ETO) reason entailing changes in the workforce, or an otherwise void variation is permitted by the employment contract. It remains to be seen whether vague, “catch-all” variation clauses will be found to be effective in such a situation. Courts and tribunals have in the past been reluctant to accept that employers can use very wide general variation clauses to make unilateral fundamental changes in employment terms (See for example SmithKline Beecham plc v Johnson). There is also the challenge presented of drafting a variation clause allowing for a variation which would be void in law (because the reason for the variation is the transfer), were it not for that clause’s existence.
– Making a similar change to the provisions on unfair dismissal, so that dismissals will be unfair if the reason for the dismissal is the transfer itself, but not if the reason is merely “connected with” the transfer. There will no doubt be a good deal of litigation about when a reason is the transfer and when it is just connected with it.

another TUPE update

Not only is TUPE one of the most difficult areas of employment law, it is also one of the most volatile in terms of frequently changing rules and conflicting decisions. Last month I reported a watering down of TUPE reforms and the result of the Government’s review of TUPE has now been published, setting out its plans for those reforms which are going ahead. The headline omissions are:

– The provisions expressly applying TUPE to service provision changes (SPCs) are not to be repealed (although they will be tweaked – see below). This will no doubt be a relief to service providers who will not be lumbered with staff they have taken on from predecessors under TUPE if they now lose a contract, and a disappointment to TUPE lawyers who fancied a bit of extra litigation work!
– The obligation to provide employee information prior to a transfer will stay, but transferors will have 28 days to do this rather than the current 14.

The following changes will be made, and it is difficult to take issue with them as measures to help businesses:

– The definition of a SPC will be restricted to situations where the activities before and after transfer are “fundamentally or essentially the same” (in line with Metropolitan Resources Ltd v Churchill)
– Specifying that a change in location of the business falls within the scope of the defence to automatic unfair dismissal allowed for economic, technical or organisational reasons.

“dynamic” contractual rights and TUPE

As aficionados of the European Court of Justice (CJEU) will tell you, it’s rare that the full judgement of the court does not follow the opinion of the Advocate General, but Mark Alemo-Herron and Others v Parkwood Leisure Ltd is just such a case. The icing on the cake is that the court held that a narrow interpretation should be taken of the Acquired Rights Directive and that it should not be taken to permit the transfer of “dynamic” contractual rights, that is, contractual rights which vary according to collective negotiations. The facts which gave rise to the decision are pretty typical: the London Borough of Lewisham outsourced its leisure services to Parkwooda and Mr Alemo-Heron and his colleagues, whose contracts incorporated the National Joint Council collectively negotiated terms and conditions, were transferred to Parkwood, who as a private sector undertaking could not participate in the NJC.
In holding that a member state would not be allowed to insist on a the transfer of dynamic terms, the CJEU commented that protection of employee rights was not the sole purpose of the Acquired Rights Directive. The ARD, it said,
seeks to ensure a fair balance between the interests of those employees, on the one hand, and those of the transferee, on the other. More particularly, it makes clear that the transferee must be in a position to make the adjustments and changes necessary to carry on its operations
Permitting a dynamic interpretation would saddle such a private sector employer with terms and conditions it could not influence and seriously reduce its contractual freedom “to the point that such a limitation is liable to adversely affect the very essence of its freedom to conduct a business”
Meanwhile the Government has announced a significant watering down of its proposed TUPE reforms.

yet another TUPE round up!

The Advocate General has given his opinion in the case of Alemo-Herron & Ors v Parkwood Leisure Ltd supporting the proposition that employees transferred under TUPE can continue to benefit from “dynamic” collectively agreed terms and conditions post transfer.
Next, the DWP has launched a consultation on the amendment of the Transfer of Employment (Pension Protection) Regulations 2005 on the pension contributions a transferee must make following a business transfer. The current regulations say that ‘relevant contributions’ must be made and that the amount contributed must equal the employee’s contributions subject to a maximum of 6% of basic pay. The reason for the change is that the regulations do not make it clear that the pension scheme member is entitled to choose their own rate of contribution. The proposal is that members will be able to choose their own contribution, which the employer must match, up to the 6% cap. Transferees will also be able to satisfy their obligation to protect pension contributions by keeping up contributions equivalent to those made before the transfer.
I also reported, in brief, last month, the consultation on changes to TUPE 2006 to removed so-called “gold plating”. In a bit more detail, the proposals are

settling TUPE claims

Two recent cases have considered the effect of compromise agreements in TUPE cases where claims are made against more than one employer.
In Optimum Group Services Plc v Muir the Employment Appeal Tribunal looked at the situation in which an employee with a claim arising out of a TUPE transfer reached a settlement with one transferee (in a case where he was claiming against the transferor and a number of other potential transferees), while carrying on against other respondents. At the tribunal hearing he did not disclose the settlement, which the Employment Tribunal decided should not be deducted from the compensation he was awarded. It included a compensatory award of £23,668.84, after applying a 50% deduction to reflect the possibility he would have been made redundant in any event.
The Employment Appeal Tribunal overturned this decision, remarking that the compensatory award “should not over compensate the claimant. To do so could hardly be said to be just or equitable“. It ordered the claimant to disclose the £20,000 he had received under the compromise agreement, and ruled that it should be deducted from the figure he could recover for loss of earnings. It did, however make it clear that under Norton Tool Co Ltd v Tewson, notice pay would continue to fall outside the principle that there should be no double recovery of loss of earnings.
Lady Smith summarised the principles governing the award of compensation as follows: