When to consult on collective redundancies

Timing the consultation process when collective redundancies are in the offing is tricky to say the least. John Charlton examines the impact of the recent ruling in the Woolworths saga and looks forward to an important decision from the European Court of Justice (ECJ).

Life is seldom fair. Something that 3,000 former Woolworths staff will be acutely aware of following a recent employment tribunal ruling that the UK’s biggest collective protection award be made to more than 24,000 of their former colleagues.

The 3,000 employees worked at establishments that employed fewer than 20 staff and fell outside the requirement of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULR(C)A) that collective consultation is required when an employer plans to dismiss 20 or more employees. The tribunal ruled in Usdaw v WW Realisation 1 Ltd (formerly Woolworths) that the administrator, Deloitte, had not fulfilled collective consultation duties adequately and ex-employees who worked at establishments employing 20 or more staff were entitled to protective awards.

These were set at 60 days’ gross pay capped at a maximum per week of £400. The Insolvency Service (IS), which runs the Redundancy Payment Service (RPS), will calculate and administer the payouts that will come from the National Insurance Fund.

Stephen Simpson, senior employment law editor at XpertHR, says that the tribunal’s ruling “should be a reminder to companies that, if they go into admin­istration, this is not an automatic excuse not to consult with employees.

“It also shows that companies in administration should not wait until all possible buyers have been ruled out before beginning consultation, as it will then be too late to consult meaningfully.”

Costs and comparisons

The IS estimates that £26.4 million will be payable to qualifying ex-Woolworths staff, comfortably busting the 2011/12 RPS budget of £9.2 million. Ironically, the IS is “committed” to cutting the RPS budget by 25% by 2015. In 2010/11, the RPS processed 9,900 protective awards.

quotemarksCompanies in administration should not wait until all possible buyers have been ruled out before beginning consultation.”

Stephen Simpson

Shop workers’ union Usdaw plans to take the case of the 3,000 to the Employment Appeal Tribunal (EAT). National officer John Gorle says: “We will be appealing the judgment and it is likely this case will be combined at the EAT with our outstanding appeal against the judgment involving former employees of Ethel Austin made redundant in spring 2010.”

Ethel Austin was a clothing retail chain that went into administration in February 2010. In a similar judgment to the Woolworths one, a Liverpool tribunal found that staff at establishments employing fewer than 20 workers did not qualify for protective awards.

The law on when to start consultations on collective redundancies, and who is covered, is something of a grey area, especially as it is affected by the European Collective Redundancies Directive (ECRD).

Commenting on the case, Roger Tynan, employment partner at Maclay Murray & Spens, says: “If Usdaw appeals the Woolworths decision, a higher domestic court may decide that TULR(C)A does not comply with the ECRD, which could ultimately lead to a revision of TULR(C)A. This may happen if a higher court decides that workplaces affected by fewer than 20 redundancies should benefit from collective consultation.”

He adds that it is “likely” that Usdaw may win a case on this point, “particularly having regard to European Court of Justice jurisprudence which emphasises that a broad definition should be given to ‘establishment’ and that employees should not be deprived of protection under the ECRD.”

Kate Hodgkiss, employment partner at DLA Piper, also questions whether the Woolworths result is consistent with the ECRD. “From the point of view of the affected employees, it does seem arbitrary that their entitlement to a protective award should depend on their individual location when the situation and decisions which led to their redundancy were entirely at a national level.”

She adds: “It’s unsurprising that the tribunal’s decision was that Woolworths had breached its collective consultations obligations. Insolvency practitioners struggle to balance the requirements of employment legislation, their duties under the Insolvency Act 1986 and the commercial reality that an insolvent company does not have the money to continue trading whilst employment law obligations are complied with.”

Cases in point

For employers, the case highlights the legal swamp that awaits them should they fail to abide by regulations on when to start consulting with employees and their representatives should collective lay-offs be on the agenda. Should they consult when these start being considered, when significant thought has been given to considering them, when actual plans are in train, or when they are finalised?

As Hodgkiss says: “The law in this area is extremely confusing for employers. Many commentators consider that TULR(C)A does not adequately implement the ECRD in several respects.”

For example, she adds, there are possible incom­patibilities in definitions of collective redundancy, and while TULR(C)A says that collective consultation is required where the employer is “proposing” to dismiss 20 or more employees, the Directive refers to the employer “contemplating” dismissal. “The UK courts have held that a proposal means more than a mere contemplation of the possibility of redundancies.”

quotemarksThe safest approach is to start talking to employee representatives as early as possible when redundancies become a possibility.”

Kate Hodgkiss
DLA Piper

For example, in 2007 the EAT, in UK Coal Mining v National Union of Mineworkers, ruled that employers were obliged to consult staff representatives about reasons for decisions leading to redundancy. In practice this means that consultation should take place before the employer takes the decision to make redundancies.

Other key cases include Keskusliitto and others v Fujitsu Siemens Computer and MSF v Refuge Assurance. In the former, the ECJ ruled that the duty to consult is triggered where an employer is compelled to contemplate or plan for redundancies as a result of a strategic decision, in this case taken by a parent company.

In the latter, the EAT dismissed an argument by union MSF in 2002 that the duty to consult when collective redundancies were possible was triggered by nothing more than a contemplation of collective redundancies.

Another case that may well have an important bearing on the timing and process for announcing and handling consultations is USA v Nolan (see box).

Consultation timings

Commenting on how employers should decide when to consult on collective redundancies, Charles Newman, consultant at DAC Beachcroft, says: “The obligation is to consult in good time and a minimum of 30 to 90 days. If employers are cautious, they’ll follow the UK Coal Mining ruling and start consultations early.

“To be safe they should start consulting about a provisional decision that might lead to redundancies before they take a final decision. That might mean a longer consultation period.”

Basically, employers that propose dismissing 20 or more employees at one establishment through redundancy must complete a 30-day consultation period. This rises to 90 days in cases of 100 or more redundancies.

Hodgkiss says: “The safest approach is to start talking to employee representatives as early as possible when redundancies become a possibility, particularly if there is a recognised union or a standing body with authority to consult on redundancies. It may be possible to put in place confidentiality agreements so that information can be shared but not disseminated more widely at an early stage. This is obviously far more difficult where the employer needs to elect employee representatives.”

If employers fail to follow due process, they may face the penalty of a 90-day protective award for each employee affected. There is, says Tynan, a “special circumstances” defence available to employers that deviate from prescribed and accepted consultation timings and procedures. “It has a very limited scope,” he adds, “and the mere fact of insolvency does not amount to special circumstances. In the context of insolvency, the Court of Appeal has spoken of ‘sudden disaster’ falling upon a company, making it necessary to close the business, being capable of being a special circumstance but not a ‘gradual run-down’ of a company.”

Possible good news for employers is that the Government, through the Department for Business, Innovation and Skills, recently put out a call for evidence on the consultation period and process. This may lead to more employer-friendly Regulations.

Newman says DAC Beachcroft surveyed its public and private sector clients on this and “some 80% wanted the 90-day period reduced to no more than 45 days”. Not a sentiment likely to be shared by the Woollies 3,000.

USA v Nolan

The European Court of Justice’s (ECJ) ruling in this long-running case should, hopefully, bring more clarity to the vexed question of when employers should begin the collective redundancies consultation process.

The case concerns the closure of a US military base in Hampshire in 2006 and raised several issues including when the consultation process should start.

Mrs Nolan represented affected workers on the Local National Executive Council (LNEC) and, although closure was announced in April 2006, consultations with the LNEC did not start until June 2006.

The case has been heard at the employment tribunal, the EAT and the Court of Appeal, and partly centres on when the collective consultation process should begin. The USA argued that no employer was obliged to consult with employees about a proposed decision that will lead to redundancies, and that the obligation only arises after the decision has been made.

Commenting on this, Hodgkiss says: “Clear guidance on this issue would be welcomed. The risk for employers is that if they do not carry out consultation prior to making a decision which leads to redundancies, any consultation after the decision is made may be regarded as not meaningful since the opportunity to avoid redundancies will have been lost.”

Tynan says: “If the ECJ takes the view that consultation is triggered as soon as the employer is contemplating adopting a strategic plan, the impact in the UK may be limited since the EAT effectively took this view in the UK Coal Mining case.”

The ECJ decision is expected to be made public in summer 2012.

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