An interesting discussion has emerged on the web about employment issues arising from the sudden closure by News International of the News of the World.
It is a central tenet of employment law that contract terms can be both express (i.e. written in to a contract) and implied. Some key duties, such as a duty of faithful service, are implied into all contracts of employment, whether or not a written contact exists. Continue reading
A key element of the TUPE Regulations provides that, where either the new or previous owner of a business dismisses an employee for a reason connected with its sale or transfer, then that dismissal will be automatically unfair. The only way the employer can avoid that result is if he can show that the dismissal is for an “economic, technical or organisation reason involving changes in the workforce”.
So far, so good. However, the owner of a business is quite likely to “tidy it up” with a view to putting it up for sale, and this might include dismissing an employee some time before the business is actually transferred – perhaps, indeed, before a new owner has even been identified. In that situation, is the dismissal really for a reason connected with the transfer and is the employee still protected? It appears that the EAT’s definitive answer to that question is now “yes”.
Two different – and conflicting – lines of authority have previously existed. One required an actual transfer to be in existence (albeit not yet actually taken place) before TUPE’s protection could arise; the other considered that a prospective transferee need not even be in place yet. In Spaceright Europe Ltd v Baillavoine & Anor, (EAT 1 February 2011) the EAT has ruled that the second – more generous – line of authority is the one that should be followed.
A Mr Baillavoine was Chief Executive Officer of Ultralon Holdings Ltd (UHL). Various consultants were appointed over time and reviews of the companies’ viability carried out. In due course, on 23 May 2008, UHL and its subsidiary Ultralon Ltd (UL) went into administration: Mr Baillavoine was dismissed by the administrator. On 25 June 2008 the businesses of UHL & UL were sold to Spaceright – a TUPE transfer. Spaceright was run and owned by those same consultants.
Mr Baillavoine had lost his job, and shares he had in UHL were worthless. He was understandably suspicious, and claimed unfair dismissal. An employment tribunal ruled in favour of Mr Baillavoine. It concluded that he had been dismissed so as to enable a purchaser of the business to acquire the business and assets without his continued employment (his salary of £120,000 might also have presented a problem for a prospective purchaser of the business). His dismissal was therefore automatically unfair unless it could be shown to have been for an “economic, technical or organisation reason involving changes in the workforce” – which it couldn’t.
Spaceright appealed to the EAT but lost. Faced with the conflicting authorities mentioned above, the EAT clearly preferred the latter. It agreed with the original tribunal that TUPE applied even though at the time of Mr Baillavoine’s dismissal the sale of the business which eventually took place had not been agreed. As there was no “economic, technical or organisation reason involving changes in the workforce” for dismissing Mr Baillavoine it therefore followed that his dismissal was automatically unfair.
A leading article in the Times of 23 February 2011 was headed “The TUPE regulations are a barrier to open services that needs to be removed”. The Times was making the point that the TUPE regulations make it practically impossible for local councils to achieve efficiency savings by outsourcing functions but there are also serious implications for business.
A main effect of the TUPE regulations is that they automatically transfer contracts of employment of staff performing a particular function to any another enterprise which takes over that function. The regulations make it unlawful for the new operator to dismiss any of the transferred staff, to reduce their wages or otherwise impose less beneficial terms of employment (even if the staff agree, which they might well do if the alternative is redundancy). One effect is that it is practically impossible for a private enterprise taking on a staff intensive function from a local authority to do the job at lower cost. It is not hard to see that the end result of a well meaning attempt to protect employees can thus sometimes be to create even bigger problems than it solves.
Although not referred to, the Times article may have been prompted by a decision of the Employment Appeal Tribunal just a week earlier. That decision has effectively blocked what for a while appeared to be a loophole in the TUPE Regulations. The Regulations apply, of course, to commercial organisations as well as to local authorities and the possible loophole which has been blocked was one which could be relevant for them rather than for local authorities.
The new EAT decision is OTG Ltd v Barke and ors on 16 February 2011. The “loophole” which it has blocked was opened by a previous EAT decision (Oakland v Wellswood on 5 November 2008). The 2008 decision appeared to enable administrators of a company which was in difficulty to set up a “pre-pack administration” arrangement which would enable them to sell the business of the company as a going concern without TUPE being applicable. This was on the basis that use could be made of an exemption from TUPE designed to protect jobs when a company is put into liquidation. In 2008 the EAT had held that this exemption applied not only when a company is put into liquidation but also when administrators sell the business of a company as a going concern. For technical insolvency law reasons the point was a difficult one but the Court of Appeal later hinted that the 2008 EAT decision was probably a wrong interpretation of the law. The EAT has now, in February 2011, confirmed that.
The result is that “pre-pack” sales by company administrators are caught by TUPE in the same way as other transfers of undertakings.
While not knowing whether this result has had any part in the recent failure by administrators of the Cheshire based company Auto Windscreens to find a buyer for the business as a going concern, the fact that the possible TUPE loophole has now been blocked cannot have helped. It is reported that as a result over 1,000 staff are being made redundant (see BBC News 25 February 2011).
It is important to note that the TUPE regulations are there to implement an EU Directive and in one form or another TUPE has been in place for many years. The latest 2006 version is a possibly unfortunate example of “gold-plating” by Britain of EU requirements. Notwithstanding that, and notwithstanding a recent Government promise not to “gold-plate” EU Directives when transposing them into British law, the Government indicated in November 2010 that it had no plans to make any changes to TUPE. Whether a combination of matters such as the recent EAT decision noted above, the Times leading article and the redundancies at Auto Windscreens may cause the Government to think again is an open question.
The case noted here was at employment tribunal level only. It is therefore not legally binding as a precedent and anyway may well be subject of an appeal. Nevertheless it is sufficiently interesting to merit a mention in this newsletter. At its simplest (and it must be said at once that this is a considerable over-simplification) the case suggests that in appropriate circumstances it may sometimes be possible for an employer to engineer an arrangement which enables him to dismiss employees who he thinks are overpaid without those employees being able to claim unfair dismissal.
The case suggests that this can sometimes be done by making deliberate use of an exemption in the TUPE rules which is designed to save jobs when a business is in danger of collapse. The TUPE rules (Transfer of Undertakings (Protection of Employment) Regulations 2006) ensure that, as a general rule, when a business is sold the purchaser automatically takes on all staff employed in the business together with all liabilities associated with their employment; dismissing any of them is automatically unfair dismissal. However there is an exemption when a business is in trouble, in order to promote the ‘rescue culture’ and because saving some jobs would be better than losing them all. The effect of the exemption, when it applies, is first that the purchaser does not automatically take on staff and second that dismissing them is not automatically unfair dismissal.
The exemption applies only in very limited circumstances. In essence it applies where the vendor is the subject of insolvency proceedings or “any analagous proceedings which have been instituted with a view to the liquidation of the assets of the [vendor] and are under the supervision of an insolvency practitioner”.
In the case in question a management buy-out of a business was proposed. The managers did not want to take on all the staff. This of course would have happened automatically under TUPE if the deal had gone ahead as a normal straightforward management buy-out. Deliberately, in an attempt to avoid this result, the deal was set up in a special way. Instead of there being a normal management buy out, the vendor company was put into liquidation, a liquidator was appointed to wind it up, its business and assets were sold to a new company owned by the managers and a much reduced number of staff was taken on from the old company.
Staff who were not taken on brought unfair dismissal claims, mainly on the basis that the arrangement was a sham. While the Leicester employment tribunal which heard their claims towards the end of April 2010 agreed with the staff that some “failure to consult aspects” of their claims should proceed to a full hearing, it dismissed their main argument. The tribunal held that the fact that the management buy-out had been set up in the somewhat cumbersome way it was in a deliberate attempt to avoid the effects of TUPE did not make it a sham. Accordingly, the main basis of the unfair dismissal claims failed.
As noted above, the case was at employment tribunal level only and is therefore not legally binding as a precedent and anyway may well be subject of an appeal. Also the factual background was considerably more complicated than is apparent from the outline above and no arguments were raised to the effect that the anti-tax avoidance principle (known as the “Ramsay principle” after the 1981 tax case in which it was first propounded) under which the authorities can sometimes look straight through ‘artificial’ arrangements might apply in an employment law context. Clearly it would therefore be foolish to go too far in reliance upon the decision in this case. That said, the decision may be of interest not only to professional advisers but also both to some employers and their employees – and it will be particularly interesting to see what the EAT decides if the employees appeal.
The case emphasises the uncomfortable overlap between employment, insolvency and tax law which has existed for many years and in many guises. The problem is that each area of law evolves with its own statutes and case law and, as a result, conflicts can emerge. One of the main benefits of CLB Employment Solutions is that, as a part of Canter Levin & Berg Solicitors, we are able to consider such issues from all relevant perspectives.
Under the TUPE regulations, on acquisition of a business or undertaking employers automatically take on employees working in that business or undertaking. Their employment contracts “have effect after the transfer as if originally made between the person so employed and the [new employer]“. As a general rule the new employer cannot change the terms of those contracts. So what happens when the employment contracts provide for salaries to be as negotiated from time to time by the original employer (or an employer’s organisation) with a particular trade union?
The Court of Appeal has recently given a definitive answer to this question. A Mr Alemo-Herron and his fellow claimants worked for Lewisham LBC. Their terms and conditions of employment were subject to collective agreements made from time to time between Lewisham and the National Joint Council for Local Government Services (NJC). In 2002 their employment transferred under TUPE to a company called CCL and again in 2004 to Parkwood Leisure. CCL awarded pay increases in line with post-2002 NJC agreements and (without acknowledging any liability to do so) so did Parkwood in 2005. However, Parkwood refused to award pay increases in line with a 2007 agreement negotiated between Lewisham and the NJC.
Mr Alemo-Herron and other employees sued. When their case came before the EAT, they won. The EAT held that Parkwood was obliged to give effect to the pay increase agreed between Lewisham and the NJC in the 2007 collective agreement despite the fact that it was negotiated after the date of the transfer and despite the fact that Parkwood had nothing to do with the negotiations. The EAT reasoned that it was a contractual term that successive collective agreements would increase pay. There was no basis for discontinuing this practice, the TUPE regulations clearly applied and so the employees won.
Parkwood appealed to the Court of Appeal. The judges there took a different view. They considered that the relevant part of the TUPE regulations could be given either a “static” interpretation, as had been given by the EAT, or a “dynamic” interpretation. They favoured the latter. The Court of Appeal pointed out that in a similar case in 2006 the European Court of Justice had given a “dynamic” interpretation to the relevant part of the EC Acquired Rights Directive, pursuant to which the British TUPE regulations were made (Werhof v Freeway Traffic Services GmbH and Co KG ECJ 2006 in which the ECJ ruled that changes in a collective agreement between a worker’s organisation and the transferor employer made more than 12 months after what in the UK would be called a TUPE transfer were effectively not covered by the Acquired Rights Directive).
Although it is possible for British regulations to “gold plate” EC rules and thus provide employees with more protections than the minimum required by EC directives, the Court of Appeal found there was nothing to require the TUPE regulations to be interpreted in such a way in this case. Accordingly it followed the lead of the European Court of Justice (which, incidentally, pursuant to the recent Lisbon Treaty, is now technically called the “Court of Justice of the European Communities”). Overruling previous decisions to the contrary the Court of Appeal thus held in effect that if an employee’s employment is transferred to a new employer by reason of a TUPE transfer and his or her terms of employment incorporate terms of a collective agreement to which the new employer is not a party, the new employer does not need to give effect to subsequent pay increases agreed under that collective agreement.
So this time British employers, who traditionally worry about the impact of EU law on British employment law, will want to give at least two cheers for the European Court. It clearly paved the way for a decision by our Court of Appeal which employers will applaud.
This is the section in which to post news about transfers of undertakings (TUPE transfers) and related matters including law, procedure, recent decisions and anything else you think may be of interest.
