Mr Smith was the sole director of Friction Dynamics Limited (Friction). Following an application by Mr Smith, joint administrators were appointed. They immediately dismissed the entire workforce as there was no money to pay them.
Subsequently, Friction’s production line and customers were taken over by Dynamex Friction Limited (Dynamex) which also took on 60 of Friction’s former employees. Dynamex was set up by an ex-Friction employee with support from Mr Smith who later acquired a controlling shareholding. Friction’s parts and machinery were sold to Ferotec Realty Limited (Ferotec).
Ferotec was controlled by Mr Smith and already owned Friction’s premises. Claims were brought by employees fired by Friction’s administrators, for unfair dismissal and failure to conduct collective redundancy consultation.
The key issue was the reason for the dismissals. Had Mr Smith involved administrators in Friction just to free himself of employment liabilities, having arranged for the business to continue under another name? If so, the dismissals (which automatically followed the appointment of the administrators) were transfer-related and the timing and order of events were stage-managed to by-pass the operation of the Transfer of Undertakings (Protection of Employment) Regulations (TUPE).
Alternatively, were the dismissals unconnected with the transfer, and made simply because the administrator had no money to pay wages? If so, neither the employees nor any connected liabilities transferred to Dynamex or Ferotec.
The Employment Tribunal (ET) decided that there was no collusion between the administrator and Mr Smith and the employees had been dismissed for an economic reason. Liability for the employees’ claims therefore fell to the DTI (now the Department for Business, Enterprise and Regulatory Reform) as Friction was insolvent liability did not pass under TUPE to the new employer.
The Employment Appeal Tribunal (EAT) disagreed, but the Court of Appeal has now restored the ET’s decision. It held that when an ET is determining the reason for a dismissal, what counts is the thought process of the decision maker. Here, the decision maker was the administrator, who had dismissed the employees because there was no money. The reason for the dismissals was therefore not the prospective TUPE transfer, but a straightforward lack of cash. The Court of Appeal saw nothing to suggest that the dismissals were designed to make the business more saleable, nor that they were engineered specifically to avoid employee liabilities. The administrator had not acted at the behest of or in collusion with Mr Smith or Dynamex.
Where employees are dismissed before a TUPE transfer, the reason for dismissal is crucial as it determines whether the transferor is liable, or whether the employment liabilities pass to the transferee. This judgment confirms that it is the thought process of the person who makes the dismissal decision which must be analysed.
In this case, the new employer was not held liable. But remember that in TUPE transfers, the transferee employer can find itself liable for dismissals made before the transfer, for a reason connected with the transfer, even if the transferee played no part.
Jonathan Hearn, legal director, DLA Piper