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.