Sue Nickson examines the way in which new rules on employee transferral will
affect takeovers, acquisitions and outsourcing deals
Protecting employees’ rights following a change in corporate ownership has
long proved a problematic area for agreement by those affected.
Before the Transfer of Undertakings (Protection of Employment) Regulations
1981 (the Regulations) came into force, the common law gave individual
employees the right to object to a change of employer in the event that the
business in which they were employed was sold.
This right stemmed from common law in which the contract of employment is
regarded as a strictly personal arrangement between the parties concerned. Just
as employees had a right under common law to choose whom they worked for,
similarly a purchaser of a business had a corresponding right to choose which
employees he engaged.
The Acquired Rights Directive
On 14 February 1977, the European Union introduced Council Directive No.
77/187 "on the approximation of the laws of the Member States relating to
the safeguarding of employees’ rights in the event of transfers of
undertakings, businesses or part of businesses." This is commonly called
the Acquired Rights Directive (ARD) and has two main objectives:
– when one employer proposes to transfer his business or part of it to
another employer, both the transferor and the transferee should inform and
consult with representatives of their respective employees affected by the
– when a transfer takes place, the contracts of employment of the employees
concerned should be transferred automatically from the transferor to the
transferee and their terms and conditions should be protected.
The Effect of the Regulations
The Regulations were implemented to give effect to the ARD and provide that:
– individuals who are employed by the transferor "immediately before
the transfer" automatically become the employees of the transferee from
the time of the transfer on the terms and conditions (with the exception of
those relating to occupational pension schemes) previously held with the
– the transferee inherits most of the transferor’s rights and liabilities in
relation to those individuals;
– collective agreements, made by or on behalf of the transferor with a trade
union recognised by the transferor, are inherited by the transferee;
– information must be produced to recognised trade unions or employee
representatives about the consequences of the transfer, and the transferee must
provide the transferor with sufficient information in this regard;
– in certain circumstances, it may be necessary for the transferor or the
transferee to consult with recognised trade unions or employee representatives
concerning the transfer; and
– dismissal of any employee for any reason connected with the transfer is
automatically unfair unless the reason is "an economic, technical or
organisational reason entailing changes in the workforce."
Proposals for Change
On March 12, 2001 the EC Council adopted the new Acquired Rights Directive
2001 which the UK was required to implement before July 17 of the same year.
However it was not until September 10 that the Government finally published its
"Transfer of Undertakings (Protection of Employment) Regulations 1981;
proposals for reform." However, It is clear from the content of this
consultation paper that the Government recognises the need for reform.
The main proposals can be summarised as:
– options for new rules as to when the Regulations apply, particularly in
contracting out cases;
– proposals for better protection of occupational pension rights;
– greater flexibility when applying the Regulations to insolvent businesses
to attract buyers;
– clarification of the phrase "economic, technical or
organisational" (ETO) and the protection against transfer-related
– allowing for transfer-related changes to the contract of employment where
made for an ETO derived reason;
– imposing a requirement that the transferor give the transferee details of
the rights and obligations being transferred.
The affect of each of these proposals deserves brief consideration.
When the Regulations apply
One of the main difficulties with the Regulations in their present form is
the task of identifying when they will apply, particularly in contracting out
Presently anyone seeking to decide whether a particular scenario will
constitute a transfer within the remit of the Regulations will have to assess
if there is an economic entity, and whether it has been transferred. This means
looking at the type of undertaking, assessing if assets or staff have been transferred,
and looking at the similarity of the activities before and after the transfer.
The way in which this test has been interpreted has varied over time
reflecting the mood swings of the European Court of Justice (ECJ) and the UK
courts’ attempts to follow the ECJ’s thinking. In earlier cases the ECJ
interpreted the test widely. However, in the case of Suzen v Zehnacker
Gebaudereinigung GmbH (Krankenhausservice 1997) the ECJ held that there would
only be a transfer of an undertaking 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.
The logical, if somewhat unfair, conclusion is that an employer can avoid
the Regulations by deliberately refusing to take on the employees of the
transferor. This gives considerable scope for abuse and therefore the UK courts
have generally been inclined to avoid this conclusion in order to give
employees rights against transferees.
The main line of attack has been to hold that the attitude of the parties is
a relevant factor and therefore should be taken into account. In the most
recent case on this issue, ADI (UK) Ltd v Firm Security Group Ltd, 2001, the
Court of Appeal held that if the reason or principle reason for not taking on
the employees were to avoid the Regulations, then it should be assumed that the
employees had transferred when assessing if the Regulations applied.
The tribunal will be expected to decide, as a question of fact, what the
principle reason for refusing to take on the employee is. This is clearly an
unacceptable situation as the Employment Appeal Tribunal pointed out in this
case: "It may be difficult if not impossible to differentiate betweenÉ a
decision not to take on any staff because it is desired to avoid… the
Regulations, decision not to take on any staff with the effect that the
Regulations do not apply, and a decision that, because it is not intended to
take on any staff the Regulations do not apply."
The proposal in the consultation paper is that the Regulations should apply
to all contracting out situations except in very exceptional circumstances. If
accepted, it will mean that the UK will be in the somewhat unusual position of
providing greater rights to employees than the European legislation requires.
Though generally all contractual terms and conditions are preserved
following a transfer one major exception relates to occupational pensions. An
employee’s accrued rights under a pension scheme are protected but there is no
right for pension scheme conditions to be transferred (though special rules
apply to contracting out from public authorities).
The consultation paper provides options for the Regulations to provide
protection to a degree of occupational pension rights on a transfer. While
there is no real detail as to what form this could take, it is possible that it
could require transferee employers to offer a scheme which is "broadly
comparable" to the scheme previously enjoyed by the transferred employees
in the future.
In order to help save an insolvent business and make it more attractive to a
potential purchaser the consultation paper proposes that the existing debts of
an insolvent company in relation to their employees should not pass with the
contracts of employment to the transferee. Such debts would instead be met from
the National Insurance Fund.
A further proposal is to allow employers and employee representatives to
agree changes to the terms and conditions of employment which are aimed at
ensuring the survival of the business and the preservation of jobs.
ETO dismissal reasoning
There has been considerable confusion in the past regarding the application
of the economic, technical or organisational statutory defence to a claim of
automatically unfair dismissal in a transfer situation.
This stems from the interpretation of Regulations 8(1) and 8(2). Regulation
8 (1) provides that a dismissal will be unfair if "the transfer or a
reason connected with it is the reason or principal reason for the
dismissal." Regulation 8 (2) provides an exception to this rule where
"an economic, technical or organisational reason entailing changes in the
workplace is the reason or principal reason for the dismissal."
It has been an issue in a number of cases as to whether these two
Regulations are mutually exclusive. Thus if the dismissal is for a reason
connected with the transfer, the tribunal cannot go on to consider the
Regulation 8 (2) but must hold that the dismissal is unfair (eg, Kerry Foods v
Creber, 2000). The alternative view is that Regulation 8(2) can be used as a
defence in the case of a dismissal which would otherwise be unfair under
Regulation 8 (1). (eg, Honeycombe 78 Ltd v Cummins and the Secretary of State,
2000). That is, if it is found that a dismissal is connected with the transfer,
the tribunal can go on to consider whether the employer had an economic
technical or organisational reason for the dismissal.
The Government’s proposal in the consultation paper is to make it clear that
a dismissal for an ETO reason is a defence to a claim of automatically unfair
dismissal where the employee has been dismissed for a transfer related reason.
This would confirm the decision position following the later decision of the
Employment Appeal Tribunal in the Honeycomb case.
Changes to terms and conditions
Since the cases of Wilson v St Helens Borough Council and British Fuels Ltd
v Meade and Baxendale in 1998 it has been almost impossible for a transferee to
change terms and conditions of employment if the reason for the change is
related to the transfer. The House of Lords held that the only way to make a
valid variation was to end the contract that had transferred and offer a new
contract on the varied terms and conditions. This would obviously leave the
transferee at risk of a claim that the dismissal was automatically unfair.
However the alternative that any agreement to vary terms was voidable would be
The consultation paper contains a proposal that would allow changes to terms
and conditions, even if transfer-related, if made because of an economic
technical or organisational reason. This would certainly be of considerable
assistance to companies taking over a business where the terms cannot be
continued in practice.
The protection afforded to an employee’s terms and conditions by virtue of
the Regulations may even provide greater rights in relation to dismissal
claims. In the case of Rossiter v Pendragon plc, 2001, the employee argued that
he had been constructively dismissed because his working conditions had been
substantially altered by the transferee after the transfer. The facts were that
the employer had used an express power to change the way in which his holiday
pay was calculated. He could not therefore show a fundamental breach of
contract as would normally be required in a claim for constructive dismissal. To
establish constructive dismissal in the context of a transfer, all he had to
show was that his terms and conditions had been substantially altered and this
became the issue at appeal. The Employment Appeal Tribunal held that his claim
This effectively means that there are two rights to claim constructive
dismissal, one under the normal process of showing a fundamental breach and
another under the Regulations. The latter does not require that there has been
a fundamental breach, just a substantial change in terms and conditions.
In another recent case, Ralton & Others v Havering College, 2001, the
Employment Appeal Tribunal had to decide whether the Regulations allowed an
employee to force the employer to reinstate his previous terms and conditions
following the expiry of a fixed term contract. The claim was dismissed on the
grounds that they had been given, and had accepted, new contracts that excluded
the advantageous terms contained in a statutorily transferred contract. It was
held that the transferred contracts had been terminated through expiry. The new
contracts were not linked and so were not variations. The employee could have
claimed unfair dismissal in that the contracts were not renewed on the same
terms and conditions but they had decided not do so.
Duty on information
The present situation is that even where it is accepted that the Regulations
apply, there is no duty on the party transferring to give information to the
transferee company about the rights or liabilities or otherwise that are
subject to transfer. This can place a company in significant difficulty when
assessing the commercial viability of a venture.
The consultation document has an option for transferors to be under a duty
to provide written notification to the transferee company of the rights and
obligations in relation to employees that are transferring, and to give further
notifications of any changes up to the date of the transfer.
The consultation paper recognises that the present legislation is unsatisfactory.
Where a transfer of a business or contract takes place one of the most
important issues for all concerned parties is to have certainty regarding the
legal consequences. The proposed changes could possibly be criticised for
placing further administrative burdens and regulations in the way of a business
looking to expand. This should be balanced against the positive effect that the
level of certainty would provide for businesses. Overall, most will welcome the
changes as providing much needed clarification.
Sue Nickson is a partner and national head of employment at Hammond