Tupe in Turmoil – Time to unravel the tangle of the regulations

Dr John McMullen, national head of employment law at Pinsent Curtis Biddle
laments the lack of clarity in Tupe law and urges the Government to make

This year was supposed to be one of clarity in the area of transfer of
undertakings. A consultation paper is still (in theory) due from the DTI and
new Regulations designed to improve the law on Tupe and also to transpose into
UK law the Acquired Rights Directive 98/50 (the implementation date was 17 July
2001) are also awaited. In the meantime, the case law on Tupe illustrates that
the law is far from clear and law reform is urgently needed.

The confusion commenced with the seminal European Court decision in Ayse Suzen,
1997, IRLR 255, which stated that, in the case of a labour-intensive function,
whether there will be a transfer depends on whether there is a transfer of
significant tangible or intangible assets or, failing that, a taking over by
the new employer of a major part of the workforce in terms of numbers and

The UK courts do not like the test – it is essentially circular. Whether
employees have the right to transfer should not depend no whether they do
transfer. But it seems that the British Courts are at odds with the ECJ on
these matters. In particular, in ECM v Cox, 1999, IRLR 559 the Court of Appeal
introduced a gloss to the Suzen test. If, in a labour-intensive function case,
the reason for not taking on employees was purely to get around Tupe, Tupe
should still apply even in the absence of assets and/or employees.

The recent European Court decision in Oy Liikenne Ab v Liskoj„rvi and
Juntunen, 2001, All ER 168, on the scope of the Acquired Rights Directive was
in stark contrast to the more liberal approach taken by British courts to the
question of whether a transfer of an undertaking has occurred.

The case arose after a competitive tendering exercise in Finland resulting
in a change of bus operators on a number of bus routes in Helsinki. Of 45
people employed by the outgoing contractor, 33 were taken on by the new
operator, albeit on less favourable terms and conditions. No vehicles or other
assets connected with the operation of the bus routes were transferred. The
outgoing contractor had used 26 buses but the new contractor leased only two of
these for two or three months whilst waiting for 22 new buses to be delivered.
Two of the bus drivers who had been re-engaged by the new operator brought a
case in the Finnish courts arguing that a transfer of an undertaking had taken
place and that they were entitled to be employed under the same terms and
conditions as they had previously enjoyed with the outgoing bus operator.

The ECJ judgment confirms that a transfer can, in principle, take place in a
situation where the Public Procurement Directive (EEC) 92/50 would otherwise
apply and even where there is no contractual link (as here) between transferor
and transferee. But the decision on whether there was a transfer on the facts
is unhelpful.

Looking at the case from the perspective of British courts, given a transfer
of a major part of the workforce, one might have concluded that there was a
transfer here. But the ECJ concluded that the Acquired Rights Directive did not
apply. The type of undertaking or business concerned must always be a factor
when deciding the test under the Directive or Tupe.

True, labour-intensive operations might be the subject of a transfer even
though no assets were transferred, but if the undertaking depended upon the use
of substantial assets such as plant and equipment, the provision of the service
could not fairly be regarded as an activity based essentially on manpower alone
and other factors had to be taken into account. So here, it was impossible to
run the bus routes without buses. As the buses were not (in the main)
transferred, there was no transfer even though most of the employees were taken

This is very odd. It is an unsatisfactory decision. Maybe the undertaking
was not "labour-intensive" but, as the court found,
"asset-reliant". The mere absence of asset transfer, however, surely
should not have been decisive. The European Court’s decision is redolent of its
jurisprudentially slipshod decision in Schmidt v Spar und Leihkasse der
frheren émter Bordesholm, Kiel und Cronshagen (Case C-392/92), 1994, IRLR 302.
What of the other factors in Spijkers (see above) that may have been present,
such as the circle of customers inevitably acquired, in addition to the
employees taken on? It appears that the ECJ failed properly to remit these
issues to the National Labour Court in Finland, much as it jumped to a
conclusion (the opposite way) on a transfer on limited facts in Schmidt.

The contemporaneous decision in the EAT in Britain, in Onyx (UK) Ltd v
Cheesman, 2001, IRLR 144 could not have been more different. In Cheesman, a
district council’s stock of let-out properties was originally maintained
in-house. After CCT, Onyx won a contract and ran it for three years. Upon
re-tender of the contract in March of 1998, the contract was lost by Onyx and a
new contract given to R Brewer Contracts Limited. No assets, tangible or
intangible, passed from Onyx to Brewer either directly or indirectly. The employees
were all dismissed and not taken on by Brewer.

An employment tribunal held that there was no transfer of an undertaking in
these circumstances. The case was appealed to the EAT before Lindsay J
(President). It is important to note that the case was remitted to an
employment tribunal for further consideration on the facts and the applicable
law, but the comments in the case made by Lindsay J are in line with the
independent approach being taken in British courts.

At first glance, the employment tribunal decision seems correct on the facts
and it is not abundantly clear that the tribunal had not asked the two basic
questions of whether there was an undertaking in the first place and then,
secondly, whether it was transferred. However, the very criticism of the EAT
was that the employment tribunal might not have asked those two questions
separately. This decision is, at first glance, apparently attractive in that it
helpfully summarises much of the European Court case law in a succinct fashion.
But in its result, it expresses a clear preference for British, conflicting
case law over and above binding European law.

(On the other hand, the EAT did not however find it an error of law for the
tribunal to fail to take a purposive approach in examining the motive of the
new employer in not taking on employees. No suggestion of ill motive, as in ECM
v Cox, had been raised by any party and the tribunal chairman was not therefore
at fault in not specifically investigating the idea in the absence of an
express complaint).

The fact of the matter is that British law has recently appeared completely
at odds with European law. European law as mentioned above, states in the Ayse
Szen case that there must, on a contract changeover, be a transfer of
significant tangible or intangible assets (if the function is asset-reliant, as
in Oy Liikenne) or, in a labour-intensive function, a taking over of a major
part of the workforce in terms of numbers and skills.

Put simply, the British courts have been ignoring this. It is true that
after Ayse Suzen the British Court of Appeal in Betts v Brintel Helicopters,
1997, IRLR 361 found there was no transfer on the changeover of a contract
providing helicopter services between Brintel and KLM on behalf of Shell. And
this was despite the fact that KLM refused to take the employees on because of
possible Tupe consequences.

Since then, the courts have pulled in a totally different direction. As
discussed above, in ECM v Cox, 1999, IRLR 559, Morison J at EAT level and
Mummery LJ at Court of Appeal level have held that it is permissible for
employment tribunals to examine the motive of the new employer in not taking on
the employees and not putting in a Tupe bid. If the motive is to get around
Tupe, the court said, Tupe will still apply.

So not only are British courts and tribunals at odds with Europe, even the
British courts give conflicting decisions between themselves.

The latest Court of Appeal case, ADI (UK) Limited v Firm Security Group
Limited, 22 June 2001, seeks to be definitive. But it is indicative of the
confusion about Tupe that all the court could manage was a majority decision.

In this case, ADI was a security contractor providing security services at
Darwin Shopping Centre, Shrewsbury. Nine employees were dedicated to the contract.
ADI itself terminated its contract and Firm Security took on the contract in
its place. No employees were taken on by Firm Security and no tangible assets
were transferred. The employment tribunal considered therefore that there was
no transfer of an undertaking.

The Employment Appeal Tribunal considered that it was clearly open to an
employment tribunal in the absence of taking over a major part of the workforce
or a transfer of significant tangible or intangible assets to conclude that
there was no transfer applying the Suzen criteria, and it declined to interfere
with the tribunal’s finding that there was no transfer. The case then went to
appeal before Lord Justices Simon Brown, May and Dyson.

In a nutshell, the majority of the Court of Appeal (Lord Justices May and
Dyson) confirmed the test in Suzen. They decided that, the parties having
conceded that the function of security services at Darwin Shopping Centre was a
discrete economic entity, had the employees been taken on, there would have
been a transfer. However, in applying Suzen, it was permissible to take into
account the motive of the new employer in not taking on the employees.

Thus, in such a case, where the employees are not taken on in circumstances
where if they were there would be a transfer, there will still be a transfer if
even though the workforce is not taken on, if it is established that the reason
or principal reason for this was to avoid the application of the regulations.
There is no positive burden on the person arguing against the transfer to
establish the reason for not taking on the workforce, failing which a transfer
should be found. Nor is such a reason limited to an economic, technical or
organisational reason.

There may be other legitimate possibilities for not taking on employees.
However, undoubtedly, in this case, if an employment tribunal at first instance
found that the principal reason for Firm Security Group not taking on the
employees was to avoid the 1981 Regulations, there would be a transfer and that
was the issue for the tribunal to consider.

Lord Justice Simon Brown disagreed. The conditions in Ayse Suzen had to be
followed without a gloss and if there were no assets and no employees, there
would be no transfer whatever the reason for it.

His reasoning is compelling. The whole basis of the interpretation in ECM v
Cox and by the majority of the Court of Appeal in ADI, is that Tupe must be
given a purposive interpretation in favour of employees to make it work. In
other words, the European Court has been at pains to stress that employees’
rights should be safeguarded in the event of change of an employer so that the
terms and conditions move to their transferee and are protected.

It is quite another thing, however, pointed out Lord Justice Simon Brown, to
deem there to be a change of employer. In other words, "it seems to be one
thing to say that Tupe, where it applies, must be construed purposively; quite
another to hold that it must be deemed to apply rather than an incoming
contractor be permitted to escape it".

Lord Justice Simon Brown’s judgment echoes the decision of the Employment
Appeal Tribunal in Brookes v Borough Care Services, 1998, IRLR 636 in which it
was held that an employer may quite legitimately choose to avoid Tupe by taking
over a business by virtue of sale of shares (which involves no Tupe transfer
because there is no change of employer rather than to take a business transfer,
which does.

Having said that, the majority of the Court of Appeal came out in favour of
making the application of Suzen subject to the "ECM point". It is
hard to disagree, however, with the comment of Lord Justice May to the effect
that "it is clear that the state of the European and domestic authorities
is unsatisfactory. I think the underlying reason for this is that there has …
been judicial emasculation of the concept of legal transfer …".

Your commentator renews his plea to the Department for Trade and Industry to
bring forward its proposals for the revision of the Tupe Regulations!

John McMullen is National Head of Employment Law at Pinsent Curtis Biddle
and author of Business Transfers and Employee Rights, the leading work on Tupe

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