So far, so bad

The law on transfer of undertakings has taken more confusing turns,
especially in relation to dismissal. Sue Nickson explains how matters stand

The Transfer of Undertakings (Protection of Employment) regulations 1981,
known as Tupe, incorporated into UK law the rights of staff on the transfer of
a business contained in the Acquired Rights directive 1977.

This is an extremely complex area of the law, in which organisations have
encountered further difficulties by the differing approaches of the European and
UK courts and cases such as Suzen, Whitehouse and Kerry Foods that have bucked
established trends. In such an environment, organisations need to be fully
informed and make use of the protection of indemnities and warranties to ensure
they avoid falling foul of the regulations, particularly in relation to unfair
dismissals and the costly consequences that can follow.

So what is an undertaking and when is there a relevant transfer? An
undertaking is defined as including any trade or business. Case law shows that
this can also include charities and professional practices. Tupe can also cover
the transfer of part of an undertaking – that is, a division or unit of an
organisation that is self-contained and operates autonomously.

What is a transfer? Regulation 3(1) confirms that a relevant transfer for
the purposes of applying Tupe is a "transfer from one person to another of
an undertaking situated immediately before the transfer in the United Kingdom
or a part of one which is so situated."

When looking at whether there has been a transfer of an undertaking or part,
the basic test is whether the undertaking retains its identity and is carried
on by the transferee. The Spijkers case (Jozef Maria Antonious Spijkers v
Gebroeders Abattoir CV and Alfred Benedik en Zoinen BV, 1986, 2 CMLR 486) set
out the factors to consider when answering this question, and they include:

– The type of undertaking

– Whether tangible assets transfer

– The value of intangible assets

– Whether the majority of employees transfer

– Similarity between activities before and after the transfer

– The duration of any suspension in activities

These factors should be considered together as an overall assessment of the
situation. The application of this test by both the European Court of Justice
and the UK courts in attempting to follow the ECJ’s thinking has varied over
time. The ECJ took a narrower approach to the Spijkers test, particularly in
the Suzen case (Suzen v Zehnacker Gebaudereinigung GmbH Krankenhausservice,
1997, IRLR 255), where the ECJ stated that the Acquired Rights directive did
not automatically apply to a change of contractors. As a result of this
decision it seemed that there would only be a transfer if there was a transfer
of significant tangible or intangible assets or a taking over by the new
employer of a major part of the workforce, in terms of numbers and skills.

Since 1997, there have been a lot of cases heard by both the ECJ and the UK
courts, and while the ECJ appears to have maintained its position set out in Suzen,
the UK courts have, more recently, taken a less restrictive view. In the main,
recent cases have been based on the premise that whether employees transfer is
just one of the several Spijker factors that need to be considered, and is not
decisive in itself.

Even where there has been a careful analysis of whether there is an
identifiable stable economic entity which has transferred or is capable of
transferring, in some cases there will be no definitive conclusion as to
whether there is a transfer for Tupe purposes. This is simply because of the
lack of clarity in this area of the legislation. It is therefore advisable to
consider ensuring provisions are built into commercial deals which achieve the
company’s business objectives and protect its interests.

Who and what transfers? Regulation 5 provides that from the point of
transfer, all those employees who were employed by the transferor immediately
before the transfer and whose contracts of employment would otherwise have been
terminated by the transfer, automatically become employees of the transferee on
the same terms and conditions they had previously enjoyed. Regulation 5 makes
it clear that employees transfer on the same terms and conditions, except for
any terms relating to occupational pension schemes.

Varying such terms and conditions is problematic for the new employer, as
demonstrated in the case of Wilson and others v St Helens Borough Council,
1998, 3 WLR 1070 HL, which decided that a variation of an employee’s terms and
conditions for a reason connected with the transfer was ineffective. This
followed a previous ECJ case known as the Daddy Dance Halls case, which
precluded even consensual variations.

Any variations must therefore be for operational or efficiency reasons other
than the transfer, so that any resulting claim for unfair or constructive
dismissal will be subject to the normal unfair dismissal rules and will not be
"automatically" unfair as discussed in the panel, right. Allowing for
a time lapse between the transfer and the changes may minimise the inference
that the changes are transfer-related.

Regulation 5 also provides for "all the transferor’s rights, powers,
duties and liabilities under or in connection with any such contract" to
be transferred to the transferee "on the completion of a relevant
transfer". The extent of this regulation again emphasises the need for a
potential purchaser to carry out detailed enquiries before any purchase,
providing protection wherever possible via warranties and indemnities.

Dismissals

Regulation 8(1) and 8(2) are the relevant regulations.

Regulation 8(1) states: "where either before or after a relevant
transfer, any employee of the transferor or transferee is dismissed, that
employee shall be treatedÉ as unfairly dismissed if the transfer or a reason
connected with it is the reason or principal reason for dismissal."

Regulation 8(2) states: "where an economic, technical or organisational
reason entailing changes in the workforce of either the transferor or the
transferee before or after a relevant transfer is the reason or principal
reason for dismissing an employee, paragraph 1 above shall not apply to his
dismissal; but without prejudice to the… [test of fair dismissal], the
dismissal shall… be regarded as having been for a substantial reason of a kind
such as to justify the dismissal of an employee holding the position which that
employee held."

There are several important issues that arise from these two regulations.
First, is a dismissal for a transfer-related reason effective? It was
established by the House of Lords in the cases of Meade v British Fuels and
Baxendale v British Fuels, 1998, 1998, ICR 1141 HL, that dismissals for reasons
connected with transfers were effective although potentially unfair.

Second, in what circumstances will the transfer or a reason connected with
it be the reason or principal reason for the dismissal? Many of the cases that
have looked at this area have involved insolvency and have found that it is not
necessary for a transferee to have been identified at the time of a dismissal
for it to be connected with the transfer.

Alternatively, there has been case law that establishes that the fact that
there had not been an offer to purchase the business at the time of the
dismissals means the dismissals could not be for a reason connected with the
transfer. Recently, however, in the case of Morris v John Grose Group, 1998,
1998, ICR 655, the EAT has shown a preference for the former of these two
approaches.

What amounts to an ETO? The concept of "economic, technical or
organisational reason" has been taken from the Acquired Rights directive.
Its precise meaning is uncertain, but what is clear is that the ETO reason must
"entail changes in the workforce" and reasons such as redundancy and
business reorganisations have been held to amount to ETO reasons.

Many questions arise from this concept, such as what is the position of a
transferee or transferor who argues that a dismissal was at the insistence of
the other party? Also, can the employer argue that they had to dismiss the
employee, otherwise the sale would not have gone ahead?

Before the case of Whitehouse v Blatchford & Sons, 1999, IRLR 492 – the
Whitehouse case – it was well established in cases such as Wheeler v Patel and
another 1987, ICR 631 and IRLR 211, that a dismissal to achieve a sale or an
increased price for an undertaking is not an ETO, and that instead an ETO
reason must be one that relates to the actual conduct of the business.

The Whitehouse case significantly widened the interpretation of the ETO
reason. In that case the transferor, a hospital, made it a condition of
awarding the contract that the transferee, the incoming contractor, would
reduce the number of employees by one to reduce the price of the contract. When
an employee was subsequently dismissed by the contractor, the EAT held that
dismissal was for an ETO reason. In other words, despite previously well
established case law, an ETO reason had been found where the incoming
contractor had reduced the price by dismissing one of the employees, with the
clear motive of obtaining the contract.

Sue Nickson is a partner in the employment law unit at Hammnond Suddards

The state of play

The current position can be summarised as follows:

– If the main reason for a dismissal is the transfer, then the dismissal
will be automatically unfair.

– If the main reason for the dismissal is an ETO reason, then the dismissal
is potentially fair, subject to the usual principles of fairness being adhered
to.

– If an employee is dismissed by the transferor and the main reason for the
dismissal was an ETO reason rather than the transfer itself, the dismissed
employee’s remedy will be against only the transferor and not the transferee.

Tupe could now apply to transfers within a group

Following a potentially alarming ECJ ruling at the end of 1999, companies
planning to reorganise workforce structures in their group will be concerned to
hear that all the Tupe rules, including the duty to consult trade unions or set
up elections for employee representatives, could apply to transfers of staff
within the group. The costs of not observing the rules are high. Since November
1999, companies failing to consult in this way can now be fined up to 13 weeks’
uncapped pay for each employee affected.

The ECJ, in Allen v Amalgamated Constructions Co, Times Law Review, 10 Dec
1999, decided that the Acquired Rights directive could apply to a transfer
between subsidiary companies in a group which were distinct legal persons with
separate employment relations with their staff, even if the companies had the
same ownership, management and premises and were engaged in the same work.

The facts are rather complex. When AMCO’s subsidiary ACC won a drivage
contract from a colliery owner, it subcontracted the work to another subsidiary
company, AMS, to take advantage of lower labour costs. Certain ACC staff were
dismissed and re-employed by AMS on worse terms and conditions. When the
subcontract was cancelled, ACC carried out the drivage work and re-engaged the
employees on worse terms than their previous employment with ACC, but better
than AMS.

The employer argued that Tupe would not apply because all its subsidiaries
in effect had the same employer. The ECJ rejected the argument and said the
directive would apply where, following a legal transfer or merger, there was a
change in the natural or legal person responsible for carrying on the business
who, by virtue of that fact, incurred the obligations of an employer towards
employees of the undertaking. This would apply regardless of whether ownership
of the undertaking was transferred.

Since the directive covered any legal change in the person of the employer,
if other conditions were also met it could apply to a transfer between
subsidiary companies in a group. The fact the subsidiaries shared the same
ownership, management and premises made no difference.

To assess whether there had been a transfer, the decisive criterion was
whether the entity in question retained its identity – that is, was its
operation actually continued or resumed? The term "entity" referred
to an organised grouping of persons and assets facilitating the exercise of an
economic activity which pursued a specific objective. It was for the employment
tribunal to decide whether the drivage work carried out by the ACC was
organised in the form of an economic entity before ACC subcontracted the work
to AMS.

While it has always been appreciated that Tupe applies to transfers of
business within a group, the significance of this decision lies in the
potentially wider application of Tupe to group organisations which, on the face
of it, appear only to involve transfers of staff between group companies. The
decision may also affect share sales which, technically, are not caught by
Tupe.

Tactics such as hiving off staff into a subsidiary prior to selling a
company’s shares are unlikely in the future to avoid Tupe applying. Employers
must be constantly wary about Tupe implications when reorganising their
workforces within the group.

Tupe’s regulations on dismissal

What is the relationship between regulations 8(1) and 8(2)? The traditional
approach to the relationship between these regulations has been as follows:

Is the transfer or a reason connected with it the reason or main reason for
dismissal?

If the answer is no, Tupe does not apply and the fairness of the dismissal
will be governed by the normal rules. If the answer is yes, consider the next
question.

Is the dismissal for an "economic, technical or organisational reason
entailing changes in the workforce" – the ETO reason?

If the answer is no, the dismissal is automatically unfair, and a dismissed
employee with the requisite one-year qualifying period can bring an unfair
dismissal claim. If the answer is yes, go to the next question.

Is the dismissal procedurally fair in accordance with the normal standards
of reasonableness required by the Employment Rights Act 1996?

If the answer is no, the dismissal is unfair. If the answer is yes, it is
fair.

This traditional approach that regulations 8(1) and (2) are not mutually
exclusive had been followed until the Whitehouse case mentioned above. In this
case, however, the Court of Appeal found the reduction in the number of staff
would have taken place whether the incoming contractor had won the contract or
not, and therefore the transfer of the undertaking was the occasion for the
reduction but was not the cause or the reason for the reduction. This implies
that the dismissal is either for a reason connected with the transfer within
regulation 8(1) or for an ETO reason contained within regulation 8(2) and
cannot be both. 

Despite the controversy the Whitehouse case has attracted, the Court of
Appeal’s approach has been followed in the case of Kerry Foods v Creber and
others, 1999, EAT 1379/97 and 939/98. In this case, a family-owned sausage
company got into financial difficulties. A receiver was appointed and staff
were dismissed shortly before the business was sold to Kerry Foods.

On appeal, it was held that there was a Tupe transfer and that the main
reason for the dismissals was the transfer as opposed to any ETO reason. The
court further concluded the following:

– All dismissals are effective in terminating the employment relationship,
as previously mentioned and established in Wilson v St Helens Borough Council,
1998.

– A dismissal by the transferor by reason of the transfer will be
automatically unfair.

– Such dismissed employees will have a right of action in respect of the
dismissal against the transferee, as stated in the Litster case – Litster v
Forth Dry Dock & Engineering Co, 1989, ICR 341 – and therefore called the
Litster principle.

– If an ETO reason is the main reason for the dismissal, regulation 8(1)
will not apply and neither will the Litster principle.

It is only when regulation 8(1) applies that the Litster principle also
applies. Therefore if the reason for the dismissal is an ETO reason but the
dismissal is still unfair, the position in the last point above applies and the
employee will only be able to recover from the transferor. The court reached
this conclusion on the basis that the Litster principle is not relevant to the
fairness of the dismissal, but only when looking at the reason for dismissal.

If the transferee dismisses, then the employee’s remedy is against the
transferee. The transferee can dismiss by reason either of the transfer or for
an ETO reason.

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