Court fails to dispel doubts over TUPE staff transfers and insolvencies

Uncertainty over whether TUPE applies to employees who switch employers when insolvent businesses are rescued persists despite a Court of Appeal decision in the long-running case of Oakland v Wellswood.

This concerned Oakland, the general manager of Wellswood Limited, a Yorkshire fruit and vegetable wholesaler. Wellswood is referred to as Oldco in the various Employment Tribunal and Employment Appeal Tribunal rulings. Wellswood/Oldco ran into financial difficulties and a major customer, Gilbert Thompson Leeds Ltd, set up a new company, Wellswood (Yorkshire) to acquire Wellswood/Oldco once it went into administration.

This duly happened in 2006 and Oakland and four other Wellswood/Oldco employees joined the new company Wellswood (Yorkshire). Less than a year later, Oakland was dismissed and brought a claim for unfair dismissal.

The main focus of the case at Employment Tribunal was whether Oakland’s contract had transferred under TUPE 2006 regulations bearing in mind that Wellswood/Oldco had gone into administration. Wellswood (Yorkshire) contended that Oakland’s employment contract had not transferred as Wellswood/Oldco was the subject of bankruptcy or insolvency proceedings.

Last year the Employment Tribunal ruled that buyers of a business in administration, under a pre-arranged sale (known as a pre-pack), did not have to take on the failed company’s employees. Although Oakland appealed against that ruling, it was upheld by the Employment Appeal Tribunal.

Oakland appealed to the Court of Appeal, which heard the case in July 2009. The full judgment has only just been published.

It showed that the appeal was based on section 218 of the Employment Rights Act (ERA) 1996, rather than TUPE. The ERA provides that where a business is transferred from one person to another, the period of employment of an employee in the business at the time of the transfer counts as a period of employment with the transferee. Therefore, the transfer does not break the continuity of the employment.

The Court of Appeal held that section 218 of the ERA operated to give Oakland the necessary service to bring an unfair dismissal claim without any need to rely on TUPE. The Court held that it could not give a binding ruling on whether or not administration necessarily excludes the application of TUPE, although it said it was a strongly arguable point.

Commenting, Paul Cotton, partner at law firm Eversheds, said: “Given the dramatic rise in insolvencies, it is imperative that the law is clear in its application to failing companies. Without such clarity, potential buyers of insolvent businesses must act as if they will be acquiring employees, which will depress the price they might pay, or, more significantly, may deter buyers from bidding at all – to the obvious detriment of the insolvent company’s creditors and employees.

“There is real confusion about whether buyers of businesses in administration, including so-called pre-pack sales, have to take on the failing company’s employees.”

He added that the “current confusion sustains uncertainty at a time it can least be afforded, a point which was not lost on the Court of Appeal which regretted that it could not provide the clarification needed”.

Law firm DLA Piper said “it would be advantageous for buyers of insolvent businesses if pre-pack administrations did fall within regulation 8(7) of TUPE, as this would provide more flexibility over which employees to take on and on what terms”.

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