When
does Tupe apply to outsourcing situations? There are few more complex and
volatile areas of employment law, and a recent decision by the European Court
of Justice may only add to the confusion. Christopher Mordue looks at the
repercussions
The
Government is required to make amendments to Tupe by 17 July 2001. It also had
the option of making some additional changes to perhaps clarify this very
complex area of the law.
Unfortunately,
with a general election underway these are now not expected to happen in the
near future. Meanwhile, however, the ECJ’s recent decision in Oy Liikenne Ab v
Liskojarvi and another, 2001, IRLR 171, is out of step with both previous
European decisions and the prevailing trend in domestic case law.
The
case
Following
a competitive tendering exercise, there was a change of bus operators for a
number of routes in Helsinki. The new operator engaged 33 of the previous
operator’s 44 drivers, but on different terms and conditions of employment. The
drivers sought to maintain their previous employment terms, arguing that there
had been a transfer of an undertaking.
In
a surprise ruling, the ECJ held that there had been no transfer of an
undertaking at all under the Business Transfers Directive (which Tupe implements
in the UK). This was because the outgoing contractor’s operation was heavily
dependent on the use of significant assets, which had not been transferred. The
new contractor had purchased 22 new buses and only leased two of the previous
operator’s vehicles on a short-term basis. Because of this, the absence of any
significant asset transfer was fatal to the argument that the directive applied.
Determining
Tupe
Both
European and domestic case law accepts that all forms of outsourcing can amount
to transfers of undertakings, but there is no presumption that they will. The
first stage in determining whether the Directive or Tupe applies is to identify
an undertaking or "economic entity" in the hands of the outgoing
service provider. This is described as an "organised grouping of persons
and/or assets facilitating the exercise of an economic activity which pursues a
specific objective". The main point of note here is that an "economic
entity" can exist without significant assets, the classic example of such a
"labour-intensive" undertaking being contract cleaning operations. Â
Oy
Liikenne does not depart from previous case law on this point but, crucially,
it’s at the second stage of the test that the nature of the undertaking may be
decided, that is, whether the economic entity in question has actually
transferred and retained its identity.
This
is the controversial issue, on which the ECJ has formulated a number of tests
over the years.
For
example, in Spijkers v Gebroeders Benedik Abattoir CV, 1986, ECR 1119, the
existence of a transfer was said to be a question of fact, to be determined by
a national court or tribunal, which examined all the circumstances of the case.
This included:
–
The type of undertaking or business concerned
–
Whether there were tangible or intangible assets
–
Whether customers or employees were transferred
–
The degree of similarity between the activities carried on before and after the
alleged transfer and
–
The period, if any, to which those activities were suspended.
However,
these factors are not to be considered in isolation, so no one factor is
conclusive in itself.
The
difficulty in the outsourcing context is that several of these factors are
bound to be present. The same activity will be carried on, albeit in different
hands, for the same customer and usually without any significant interruption
in service provision. Does this mean that the directive (and therefore Tupe)
will always apply? Or, if there are other factors that point against a transfer
– such as the non-transfer of assets or employees – how should national courts
and tribunals, carrying out their factual appraisal, balance these competing
factors?
Other
definitions of Tupe
Spijkers
was not an outsourcing case, but subsequent ECJ cases on outsourcing, continue
to refer to Spijkers and appear to give predominance to certain factors from
the Spijkers case. For example, Schmidt, in 1993, [1994] IRLR 302 appeared to
make the continuation of the same activity in different hands the conclusive
indicator of a transfer of an undertaking. This approach meant that the
directive and Tupe would always apply in an outsourcing context.
But
in Ayse Suzen, 1997, IRLR 255, a different and more restrictive test was
applied: there could be no transfer of an undertaking without the transfer of
either significant assets or a transfer of the major part (in terms of numbers
or skills) of the previous service provider’s workforce. This approach has been
confirmed in a whole series of subsequent ECJ decisions.
Absence
of asset transfer
Oy
Liikenne appears to take this reasoning further. In this case the directive did
not apply, despite the transfer of the major part of the previous contractor’s
workforce.
The
absence of an asset transfer was conclusive. Under Oy Liikenne, the nature of
the undertaking appears critical. If the operation of the undertaking involves
the use of significant assets, there will be no transfer of that undertaking
unless those assets themselves transfer. In a sense, this is a logical
approach, because you identify the elements that give the undertaking its
identity, and then determine whether these have been transferred.
Adopting
this approach in the case of labour intensive undertakings – in which there are
no assets to transfer – produces a result consistent with that of Suzen, which
is that the entity is characterised by the workforce and will transfer if a
major part of that workforce is engaged by the new contractor.
However,
this approach gives decisive importance to only one of the Spijkers factors,
despite the warning in Spijkers that no one factor should be considered in
isolation.
Asset-reliant
undertakings
Oy
Liikenne refines the Suzen approach in the case of asset-reliant undertakings.
Interestingly there is support for this approach in Betts v Brintel Helicopters,
1997, IRLR 361, a Court of Appeal case heard immediately after Suzen, in which
the economic entity in question depended on significant assets. Neither employees nor assets transferred on
the change of contractor and neither limb of the Suzen test was met. But the
Court of Appeal went further, commenting that a transfer of employees would not
have affected the outcome – the identity of the undertaking lay in assets and
only a transfer of those assets would have triggered Tupe.
Domestic
decisions
Recent
domestic decisions have seen Betts and Suzen completely out of favour. The EAT
and the Court of Appeal have consistently challenged the restrictive approach
in Suzen. Perhaps the key decision in this competing line of authority is ECM v
Cox, 1999, IRLR 559, in which the Court of Appeal held that Tupe could apply
notwithstanding the absence of a transfer of employees or assets.
A
tribunal was entitled to ask why employees had not transferred. If this was due
to the new service provider trying to avoid Tupe, the tribunal could consider
the position as if employees had transferred – closing the loophole created by
a literal interpretation of Suzen. But ECM goes further – the whole approach in
Suzen is rejected in favour of the wide-ranging factual line followed in
Spijkers.
Subsequent
EAT decisions continue this theme. The conflicting approaches in Betts and ECM
are resolved by the pragmatic solution of preferring ECM, on the grounds that
it is the latest decision of the Court of Appeal and so must overrule Betts.
The
most recent EAT decision – Cheesman v R Brewer Contracts, 2001, IRLR 144 goes
as far to say that Suzen should be ignored altogether.
The
EAT seems to be trying to take the law out of this area and promote an entirely
fact based approach, leaving tribunals with no guidance as to how to balance
the presence or absence of the Spijkers factors. It also raises the prospect of
inconsistent decisions on the same basic facts. And, of course, a finding of
fact can only be challenged by appeal if it is perverse. The prevailing
judicial trend is in favour of Tupe applying and it would be a brave contractor
who tried to take on a contract on a non-Tupe basis.
Conclusion
In
this climate, it is difficult to predict the impact of Oy Liikenne. One can
expect that it will meet the same resistance as Suzen, although the reasoning
of cases such as Cox and Cheesman is perhaps now harder to sustain. Of course,
Oy Liikenne is directly relevant only to asset-reliant undertakings. Its impact
could be limited were tribunals to adopt a narrow definition of this concept
and continue to apply the existing UK approach in the case of labour intensive
undertakings.
Perhaps
the only certainty is that the controversy will continue, unless (or, being
optimistic, until) the Government’s long-awaited proposed amendments to Tupe,
provide a more straightforward or predictable test for the application of Tupe
in this vexed area.
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Unfortunately,
for the time being the employment rights of employees caught up in
outsourcings, and the liabilities of incoming and outgoing contractors, will
only be definitively decided by that most unsatisfactory method, litigation.         Â
Christopher
Mordue is an associate at Pinsent Curtis Biddle
