Thomas Linden, Matrix Chambers

PREVIOUS SPEAKERS:

Thomas Linden,
Matrix Chambers

ILS, Annual Conference 2004

Title: "The Transfer of Undertakings (Protection of Employment) Regulations 1981; The UK Out of Step With Europe?"

Introduction

This paper looks at three aspects of the Acquired Rights Directive ("ARD") and the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("TUPE"). First, the caselaw on the concept of a relevant transfer. Second, the operation of the law of unfair dismissal in the context of a relevant transfer and, third, the scope for agreeing changes to terms and conditions. If there is a theme it is that, ironically, the 1981 Regulations, and the interpretation placed on them by the UK Courts, go beyond what is strictly required by the ARD.

The concept of a relevant transfer

The legislation

TUPE has its origins in Council Directive 77/187 EEC. Originally, Article 1.1 provided, so far as material, as follows:-

"This Directive shall apply to the transfer of an undertaking, business or part of a business to another employer as a result of a legal transfer or merger."

By Directive 98/50/EC, Article 1.1 was amended to provide, so far as material, as follows:-

"(a) This Directive shall apply to any transfer of an undertaking, business or part of an undertaking or business to another employer as a result of a legal transfer or merger.

(b) Subject to subparagraph (a) and the following provisions of this Article, there is a transfer within the meaning of this Directive where there is a transfer of an economic entity which retains its identity, meaning and organised grouping of resources which have the objective of pursuing an economic activity, whether or not that activity is central or ancillary.

The amendments introduced by Directive 98/50 were said in recital (4) to this Directive to be by way of clarification in the light of the caselaw of the European Court of Justice ("ECJ") and not to be intended to alter the scope of the ARD as interpreted by that Court. These amendments now form part of a consolidated Directive 2001/23/EC.

TUPE does not define the concept of a "relevant transfer". Rather, reg. 3(1) provides that the 1981 Regulations apply to

"A transfer from one person to another of an undertaking situated immediately before transfer in the United Kingdom or a part of one which is so situated"

and reg. 2 defines "undertaking" as "includes any trade or business".

The caselaw of the ECJ

The Two Stage Approach

The caselaw of the ECJ, and indeed the domestic caselaw, provides that there should be a two stage approach. First, the national court should examine the position prior to the alleged relevant transfer and determine whether there was an identifiable economic entity carried on by the would be transferor. If there was, it should consider, secondly, the position after the transaction in question and ask whether the economic entity has been transferred and has retained its identity.

The Concept of an Economic Entity

As to the first stage, in Suzen the ECJ held that:-

"The term entity thus refers to an organised grouping of persons and assets facilitating the exercise of an economic activity which pursues a specific objective".

As noted above, the amendments to the ARD introduced by Directive 98/50 reflect this definition in that the term economic entity is said to mean:

"an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary".

Has the Entity Transferred? The Multifactorial test

As to the second stage question, the starting point is the decision in Spijkers, where the ECJ held as follows at paragraphs 11-13 of its judgment:

"11. The decisive criterion for establishing whether there is a transfer for the purposes of the Directive is whether the business in question retains its identity.

12. Consequently, a transfer of an undertaking, business or part of a business does not occur merely because its assets are disposed of. Instead it is necessary to consider in a case such as the present, whether the business is disposed of as a going concern, as would be indicated inter alia, by the fact that its operation was actually continued or resumed by the new employer, with the same or similar activities.

13. In order to determine whether those conditions are met, it is necessary to consider all the facts characterising the transaction in question, including the type of undertaking or business, whether or not the business's tangible assets, such as buildings or movable property, are transferred, the value of its intangible assets at the time of the transfer, whether or not the majority of its employees are taken over by the new employer, whether or not its customers are transferred, the degree of similarity between the activities carried on before and after transfer and the period, if any, for which those activities are suspended. It should be noted, however, that all those circumstances are merely single factors in the overall assessment which must be made and must therefore not be considered in isolation. It is for the national courts to make the necessary factual appraisal, in the light of the criteria for interpretation set out above, in order to establish whether or not there is a transfer in the sense indicated above".

The Activities Test

The Spijkers multifactorial approach has consistently been referred to in the subsequent caselaw of the ECJ. In Schmidt, however, the ECJ appeared to suggest that there could be a relevant transfer where all that had occurred was a continuation or resumption of the economic activities of the undertaking in question.

The facts in Schmidt were that a bank employed a single cleaner to clean one of its branches but decided to contract out the cleaning. The successful contractor offered Frau Schmidt the job which she declined because she believed that her hourly rate of pay would be lower. The questions for the ECJ were as to whether an undertaking’s cleaning operations could be treated as part of its business despite the fact that they were ancillary to it main purpose and, if so, whether this was the case even if the cleaning operations were undertaken by a single employee. The ECJ answered both questions in the affirmative. However, it went on to make observations on matters which were not in fact raised in the questions from the referring court and, in particular, at paragraph 17 it said this:

"Thus, in this case, where all the relevant information is contained in the order for reference, the similarity in the cleaning work performed before and after the transfer, which is reflected, moreover, in the offer to re-engage the employee in question, is typical of an operation which comes within the scope of [the ARD] and which gives the employee whose activity has been transferred the protection afforded to him by that Directive".

This passage was widely interpreted as meaning that all that was required was the continuation or resumption of the relevant economic activities and therefore gave rise to what is sometimes referred to as "the activities test".

Suzen and the retreat from Schmidt

Schmidt was received with hostility in some Member States, and in particular in Germany and France. Moreover, the whole question of the application of TUPE in "contracting out" situations was politically live at the time because the Commission was in the process of carrying out a review of the functioning of the Directive. It was against this background that the German courts re-referred the issue to the ECJ in Suzen and put questions which specifically referred to Schmidt and sought guidance as to its implications. A full Court was convened and the Advocate General reminded the Court of the need for a definitive statement which specified more clearly than in the previous caselaw what the governing criteria were.

Suzen concerned a situation where a contract to clean a school had been withdrawn from one company and awarded to another. It was therefore a so-called "second generation contracting out" case, but this gives rise to no difference in principle. In giving its judgement, the ECJ made it clear that the mere fact that a putative transferee carried on the same economic activities as the putative transferor was not enough. There had to be a transfer of "a stable economic entity", being "an organised grouping of persons and assets facilitating the exercise of an economic activity which pursues a specific objective".

There remained the question whether an "economic entity" could consist simply of a workforce. The Court acknowledged that a transfer of the workforce itself might in appropriate cases constitute the transfer of an economic entity and said, at paragraph 21, that:

"Since in certain labour intensive sectors a group of workers engaged in a joint activity on a permanent basis may constitute an economic entity, it must be recognised that such an entity is capable of maintaining its identity after it has been transferred where the new employer does not merely pursue the activity in question but also takes over a major part, in terms of their number and skills, of the employees specially assigned by his predecessor to that task. In those circumstances ... the new employer takes over a body of assets enabling him to carry on the activities or certain activities of the transfer or undertaking on a regular basis". (emphasis added)

In its answer to the questions put by the referring court, the ECJ said that the ARD could not apply where:

"There is no concomitant transfer from one undertaking to the other of significant tangible or intangible assets or taking over by the new employer of a major part of the workforce, in terms of their numbers and skills, assigned by his predecessor to the performance of the contract."

Thus, arguably Suzen in effect decided that:

(1) For there to be a relevant transfer there must be a transfer of an economic entity.

(2) An economic entity is an organised grouping of persons and assets etc.

(3) If no persons or assets transfer it follows that no economic entity has transferred and that therefore there has been no relevant transfer.

On this basis, arguably Suzen did not depart from the multifactorial approach of Spijkers but did lay down a necessary but not sufficient test which has to be satisfied if a transfer of an undertaking is to be established. Having considered all the relevant circumstances, it must be possible to say that there has been a transfer of an organised grouping of resources. In essence this amounts to no more than a requirement that there has to be a transfer of an undertaking, and not just a transfer of an activity previously carried on by an undertaking.

The Case law of the ECJ Post Suzen

Suzen now represents the established orthodoxy of the ECJ. In subsequent cases the Court has simply reaffirmed, and often repeated verbatim, the principles established in Spijkers and Suzen and has told the national court to make an assessment on that basis.

Perhaps the most striking of the post Suzen cases is the Oy Liikenne case, which concerned the alleged transfer of a contract to provide bus transport on identified routes. Although a significant number of the employees of the putative transferor's undertaking had transferred to the alleged transferee, the Court held that the ARD could not apply because the undertaking in question was asset based and the assets, namely the buses, had not transferred. Arguably this illustrates that, whilst a multifactorial assessment remains appropriate, it is necessary to establish that there has been a transfer of an economic entity which, in turn, requires that there must have been a transfer of an organised grouping of resources.
In Oy Liikenne, the Advocate General said this:

"50. Two conditions must therefore apply in order for the identity of the undertaking to have been maintained after the transfer.

51. First, the transferee must carry on the same economic activity as was carried on by the transferor before the transfer, or a similar activity. This first condition can be defined as "identity of the activity".

52. Secondly, there must have been the transfer of the means necessary to undertake the activity in question, or the means required to operate it, having regard to the nature of the entity transferred. This second condition could be defined as "identity of the entity"." (Emphasis added)

Arguably, the decision of the ECJ in Abler is based on the same analysis. In Abler a hospital contracted out its staff and patient catering services to Sanrest. The catering operation included a kitchen and cafeteria provided by the hospital and it also provided water, energy and equipment. The role of the contractor was to draw up menus, purchase, store, produce, portion and transport meals to various hospital departments, serve meals in the dining room, wash the crockery and clean the premises used. When the catering contract was re-tendered, it was awarded to Sodexho, which refused to take over Sanrest’s materials, stock and employees. However, it did occupy the hospital kitchen, as Sanrest had done, it took over the equipment provided by the hospital and it was supplied with water and energy in the same way.

7.4 Sodexho argued that there had been no transfer of an undertaking as it had refused to take over any of Sanrest’s employees. However, the ECJ held that this fact was not sufficient to preclude the application of the ARD in a sector such as catering, where the activity is based essentially on equipment. Since Sodexho had been required to take over the kitchen etc and the hospital catering equipment, the ARD was potentially applicable. This was the case even though the tangible assets did not belong to Sanrest but were provided by the hospital.

7.5 Arguably, Abler is consistent with the analysis of Suzen set out above because the ECJ does not appear to have questioned the premise of Sodexho’s argument i.e. that if the undertaking had been properly characterised as labour intensive the fact that the employees did not transfer meant that the undertaking was not transferred. Rather, the approach of the Court was to accept this premise but to analyse the case as being asset intensive. In other words, the ECJ appears to have regarded the position as being analogous to taking over assets which were inherently business assets, such as a canteen, restaurant or farm.

7.6 Obviously, however, the ECJ’s point about ownership is important. It will frequently be the case that a contractor will be asked to use the client’s premises and equipment. The argument is also often made that since these assets were not owned by the outgoing contractor they were not part of its undertaking, and therefore cannot be regarded as any part of any undertaking transferred from the outgoing to the incoming contractor. The Abler decision suggests that this reasoning will be rejected in future cases.

The UK caselaw

Pre-Suzen

8 Under the influence of Schmidt, the Court of Appeal (CA) in England and Wales Initially adopted an "activities" approach in Dines v Initial Healthcare Services Ltd, which concerned the transfer of a hospital cleaning contract. Dines was in turn followed by the Employment Appeal Tribunal ("EAT") in Council of the Isles of Scilly v Brintel Helicopters and Kelman v Care Contract Services Ltd and by the High Court in Betts v Brintel Helicopters. The effect of this line of authority was that in almost all contracting out cases there would be a relevant transfer because, whatever happened to the assets or the workforce, essentially the same economic activities would be continued or resumed by the new contractor.

Post Suzen: Betts

With respect, the response of the UK courts to the Suzen decision has been confused and contradictory.

In Betts v Brintel Helicopters the CA applied the analysis of Suzen outlined above. Betts concerned the loss by one contractor (Brintel) to another (KLM) of a contract to supply helicopter transport services to Shell Oil Rigs in the North Sea. In the High Court where the case was heard before Suzen was handed down, Scott-Baker J (as he then was) held that there was a relevant transfer, notwithstanding that there had been no transfer of employees or significant assets, essentially on the basis that the economic activity in question had been continued or resumed.

In the CA, however, this was overturned. Kennedy LJ, giving the judgment of the Court, said this at page 807F:

"I accept that the decision in Suzen does represent a shift of emphasis, or at least a clarification of the law, and that some of the reasoning of the earlier decisions, if not the decisions themselves, may have to be reconsidered."

The essence of his decision was that since the Betts case was concerned with an asset-based undertaking, and since no assets had transferred, the entity in question had not transferred. Moreover, he reached this conclusion notwithstanding that KLM had deliberately decided not to employ any of the displaced Brintel employees, because it took the view that to do so would increase the risk of a finding of relevant transfer. Kennedy LJ's view was that even if all of the employees had transferred, he would have reached the same conclusion since the key question was whether or not significant assets had transferred. In this regard, his reasoning was essentially the same as that of the ECJ in the subsequent case of Oy Liikenne and, on one view, Abler (discussed above).

ECM

In contrast, in ECM (Vehicle Deliveries) Ltd v Cox one contractor (Axial) lost to another contractor (ECM) a contract to deliver cars for Volkswagen. Notwithstanding that ECM did not take on any of Axial's assets or employees, and notwithstanding the decision in Betts, the EAT and then the CA upheld a finding by the Employment Tribunal ("ET") that there had been a relevant transfer.

The CA held that the ET had carried out the multifactorial assessment required by Spijkers and that there were facts which were capable of justifying a finding that an economic entity had been transferred, notwithstanding the absence of the transfer of any assets or of the workforce. The facts which it appeared to have in mind were essentially that the customer was the same and the basic work was the same. In order to meet a submission that the ET's approach was illegitimate post Suzen, the CA analysed the effect of Suzen in order to seek to show that it had made no change to the pre-existing law, at least so far as relevant to the instant case. It held that "the importance of Suzen has ... been overstated".

A feature of the ECM case was that the ET had found that the main reason why ECM had not taken on the employees in question was that they were asserting rights under TUPE. The EAT inferred from that finding that ECM had hoped that by not taking on the employees it might defeat any such claim. In any event it held that a transferee "ought not to be able to control the extent of his obligations by refusing to comply with them in the first place". The CA did not adopt that general proposition or explicitly draw any inference from the ET's findings. But it did hold that the ET "was entitled to have regard, as a relevant circumstance, to the reason why those employees were not appointed by ECM".

10.3 As the EAT recognised in RCO v UNISON and Others, Betts and ECM pull in different directions. Betts clearly recognises that a change of direction is effected by Suzen while ECM seeks to minimise it. Although ECM did not explicitly adopt an "activities approach", the reasoning of the ET which the CA had endorsed seems to have come very close to doing so.

ADI

In ADI (UK) Ltd v Willer the CA suggested a third possible approach to the Suzen case. Here, ADI gave up the contract to supply security services for a shopping centre in Shrewsbury and a new contract was awarded to Firms Security Ltd ("FS"). No assets or employees transferred. Both the ET and the EAT held that there had been no transfer but the CA, by a majority, held that the case should be remitted to the ET for further findings of fact as to the alleged transferee's reasons for not taking on any of the ADI workforce.

The reasoning of the CA in ADI can be summarised as follows:

It unanimously accepted that, contrary to ECM, Suzen requires a transfer of an economic entity and therefore more than a transfer of activities.

However, it was conceded by Counsel for FS that, since security services are labour intensive, there would have been a relevant transfer if the employees had in fact been taken on by FS. Counsel for FS also apparently conceded that if FS's motive for not taking on the employees was "to avoid the operation of the Regulations" then the Court should find that there was a transfer. May LJ considered the point briefly at paragraphs 35 and 36 of his judgment and accepted that this concession was correct but gave no explicit reasons for doing so. Dyson LJ held that FS's reasons for not taking on the employees were relevant, but unlike May LJ he did not hold that they would necessarily be decisive. He gave his reasons at paragraphs 40-58.

Since the ET had not made the necessary findings on FS's reasons, the majority held that the case would have to be remitted.

In a powerful dissenting judgment, however, Simon Brown LJ (as he then was) held that the reason why the transferee did not take on the workforce was irrelevant.

RCO

RCO v Unison and Others, concerned contracting out of hospital cleaning and catering support. No cleaners transferred and only one catering assistant did so. Notwithstanding this, the CA upheld the ET’s finding that there were relevant transfers. In doing so, it accepted:

"That it has become clear from Suzen and later judgments that the Court of Justice now interprets the Directive as setting limits to its application in contracting out cases, which were not expressly identified in Spijkers or in Schmidt and other earlier judgments of the Court of Justice in particular, the mere fact that the putative transferee carries on the same activities or supplies the same services as the putative transferor has done does not by itself support the conclusion that an entity retains its identity. It’s not correct to treat that single circumstance as determinative in favour of a transfer. Indeed, there may be no scope for the application of the Directive in a case where, although the same labour intensive activities are continued or the same services are supplied by a new contractor, none of the workforce has been taken on".

Moreover, at paragraph 36 of his judgement, Mummery LJ said this:

"I am inclined to accept the submission of RCO that a subjective motive of the putative transferee to avoid the application of the Directive and TUPE is not the real point".

Notwithstanding this, however, the CA went on to hold that the ET was entitled to find that there had been a relevant transfer in both the cleaning and the catering support cases. Essentially, its reasoning was that it was inconsistent with the Spijkers multifactorial approach for the fact that no employees had transferred to be decisive. Moreover, it held that although the transferee's motive for not recruiting the transferor's workforce was "not the real point" the transferee's reasons for not doing so were a relevant circumstance.

With respect, however, the CA did not address RCO's central proposition that the economic entities in question were organised groupings of employees and that, accordingly, unless the employees transferred it could not be said that the economic entities had transferred.

RCO was given permission to appeal by the House of Lords and the hearing was due to take place in June this year. However, shortly before the hearing the case settled.

Fairhurst

Finally, the approach of the CA in relation to the second stage question has fed through into the analysis of the first stage question. In Fairhurst Ward Abbotts Ltd v Botes Building Ltd the applicants were employed by an outgoing contractor which supplied building maintenance services for the whole area of a local authority. The area was then partitioned into two areas and re-tendered whereupon the two areas were offered to two different contractors. The question was whether it could be said that part of the undertaking carried on by the outgoing contractor had been transferred to each of the incoming contractors. One of the incoming contractors argued that this could not be so because, prior to the re-tendering, neither of the areas had been an identifiable economic entity as defined in Suzen and in the amended ARD.

The CA held that it was sufficient for the purposes of TUPE that part of an economic entity became identified for the first time as a separate economic entity when the transfer separated the part from the whole. It was not necessary for the particular part transferred itself to exist as a discrete and identifiable economic entity before the date of the transfer. The ET was therefore entitled to find as a fact that part of the outgoing contractor’s undertaking had been transferred to each of the incoming contractors.

This conclusion is consistent with the essentially purposive approach adopted by the CA. However, arguably it is inconsistent with the definition of a relevant transfer in Article 1.1(b) of the ARD which contemplates transfer of an economic entity. Arguably, unless there is an economic entity identifiable prior to transfer it cannot be said that one has transferred and reference to "part of" an undertaking in Regulation 3(1) TUPE is not intended to suggest a different approach where the question is whether part of an undertaking, as opposed to the whole undertaking, has transferred.

The Position in the EAT

As one would expect, the EAT has tended to follow the line of the later CA cases, rather than the Suzen/Betts analysis. Perhaps the most stark example of this is P&O Trans European Ltd v Initial Transport Services Ltd it held that there was a relevant transfer in a case involving a contract for the transport of petroleum products, notwithstanding the fact that no assets had been transferred. This holding seems to run contrary to the conclusion of the ECJ in Oy Liikenne but the EAT held that this case did not lay down any new principle.

Unfair Dismissal

The underlying principle

It will be recalled that the principle which underpins the ARD and TUPE is that the rights of employees under national law are to be safeguarded in the event of a transfer of an undertaking or part of an undertaking in which they are employed.

Emphasis is placed on the fact that it is existing rights under national law which are safeguarded in order to highlight the point that the ARD and TUPE do not prevent change in the workplace. Under UK employment protection legislation the employee has a certain degree of protection against change, but the law does not prevent the employer from introducing change altogether. The position is the same under the ARD/TUPE.

The fact that rights are safeguarded in the event of a relevant transfer is emphasised because the ARD/TUPE does no more than this. The position of the employee in law, as opposed to in fact, must be the same as it would have been had no transfer taken place, but by the same token the employee should not gain greater rights than s/he would otherwise have had.

These points are encapsulated in the following passage from the speech of Lord Slynn in Wilson and others v St. Helens Borough Council:

"In my opinion, the overriding emphasis in the European Court’s judgments is that the existing rights of employees are to be safeguarded if there is a transfer. That means no more and no less than that the employee can look to the transferee to perform those obligations which the employee could have enforced against the transferor. The employer, be he transferor or transferee, cannot use the transfer as a justification for dismissal, but if he does dismiss it is a question for national law as to what those rights are."

At paragraph 71 of his speech, Lord Slynn said this:

"The object and purpose of the Directive is to ensure in all Member States that on a transfer an employee has against the transferee the rights and remedies which he would have had against the original employer. To that extent it reduces the differences which may exist in the event of a change of employers as to the enforcement by employees of existing rights. They must all provide for enforcement against the transferee of rights existing against the transferor at the time of transfer. It seems to me that the Court has clearly recognised that the precise rights to be transferred depend on national law. But neither the Regulations nor the Directive nor the jurisprudence of the court create a Community law right to continue employment which does not exist under national law".

Lord Slynn’s remarks were based on, amongst other things, paragraph 17 of the ECJ's judgment in the Daddy's Dance Hall case which itself was based on the judgment of the Court in the Mikkelsencase and was endorsed in the Rask and the Ny Molle Kro cases:

"The Directive is intended to achieve only partial harmonisation, essentially by extending the protection guaranteed to workers independently by the laws of the individual Member States to cover the case where an undertaking is transferred. It is not intended to establish a uniform level of protection throughout the Community on the basis of common criteria. Thus, the Directive can be relied on only to ensure that the employee is protected in his relations with the transferee to the same extent as he was in his relations with the transferor under the legal rules of the Member State concerned".

As will be seen below, arguably whilst this principle has determined the outcome of various arguments which have been put before UK courts, in some cases it appears that they have not kept it firmly in mind. Arguably, nor has Parliament.

Implementing the underlying principle

The First Rule: contracts of employment preserved

In broad terms, the underlying principle is enacted in the form of three rules. Article 3.1 of the ARD and reg. 5 provide that contracts of employment existing at the time of the transfer are not terminated by the transfer. Rather, they are enforceable as if originally made between the employee and the transferee ("the first rule").

The Second Rule: no dismissal on grounds of the transfer

The second rule is enacted by Article 4.1 ARD and reg. 8. This is that the contracts of employment of affected employees shall not be terminated on the grounds of a relevant transfer. Arguably, the first and second rules are "two sides of the same coin". Existing contracts of employment are automatically preserved in the event of a relevant transfer, and this rule cannot be defeated by the expedient of terminating them if the reason for doing so is the transfer itself.

The Third Rule: no waiver of TUPE rights

The third rule has developed through the case law and seeks to underpin the first and second rules. This is that employees may not waive their rights under the ARD/TUPE. This is so even if overall the result is that the employees are better off although, of course, they are entitled to object to transfer. This rule is discussed in Daddy's Dance Hall and its scope will be explored below. It will be suggested that its object is to prevent employers from prevailing on employees to forego their right to preservation of their contracts of employment in the event of a relevant transfer.

The Scope of the Second Rule

Article 4.1 of the ARD

The first sentence of Article 4.1 provides as follows:

"The transfer of an undertaking, business or part of a business shall not in itself constitute grounds for dismissal by the transferor or the transferee."

Importantly, however, the second sentence of Article 4.1 also provides that:

"This provision shall not stand in the way of dismissals that may take place for economic, technical or organisational reasons entailing changes in the workforce."

Arguably, the purpose of the ARD, is therefore to prevent dismissal on the grounds of a relevant transfer, but to permit dismissals on other grounds. The question which an ET ought to be required to determine is whether the reason for dismissal was the transfer itself, in which case it is impermissible, or whether it was some other reason which is permissible under national law.

This analysis is consistent with the expression "grounds for dismissal". Under our law the grounds or reason for a decision are the factors which operated on the mind of the decision maker. In the context of discrimination law it is well established that, for example, a decision will only be held to have been taken on the grounds of sex if the gender of the applicant operated on the mind of the decision maker Moreover, as Cairns LJ put it in the Abernethy case

"A reason for dismissal is a set of facts known to the employer or beliefs held by him which cause him to dismiss the employee".

This analysis is also consistent with the principle that the effect of the ARD is merely to require the preservation of legal rights under national law. The general position is that a dismissal of an employee which is permissible under national law absent a relevant transfer ought to be permissible notwithstanding a relevant transfer. The employee ought to be no better off as a result of the relevant transfer. The exception enshrined in Article 4.1 is where the reason for dismissal is the transfer itself. It is intended to prevent the defeating of the automatic transfer principle by the simple expedient of dismissal, but it does not prohibit dismissals for other reasons, albeit in the context of a relevant transfer.

What follows from this is that the concept of "an economic, technical or organisational reason entailing changes in the workforce" ("an ETO reason") ought not to be given an overly technical meaning. Under Article 4.1 at least, the statement that the reason for dismissal was an ETO reason is merely a way of saying that the reason was not the transfer itself. As will be seen below, however, because of the difference between the scope of Article 4.1 and reg 8, this has not always been recognised by the courts.

Regulation 8

Reg. 8(1) provides, so far as material, as follows:-

"Where, either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated for the purposes of Part X of the 1996 Act ... as unfairly dismissed if the transfer or a reason connected with it is the reason or principal reason for his dismissal." (emphasis added)

Reg. 8(2) provides, so far as material, that:

"(2) Where an economic, technical or organisational reason entailing changes in the workforce of either the transferor or the transferee before or after a relevant transfer is the reason or principal reason for dismissing an employee -

(a) paragraph (1) above shall not apply to his dismissal; but

(b) without prejudice to the application of s.98(4) of the 1996 Act ... the dismissal shall for the purposes of s.98(1)(b) of that Act ... be regarded as having been for a substantial reason of a kind such as to justify the dismissal of an employee holding the position which that employee held."

Thus, reg 8(1) creates an additional category of potentially automatic unfair dismissal under Part X of the 1996 Act. If the dismissal is not automatically unfair because it does not fall within reg. 8(1), the employer’s reason for dismissal is treated as "some other substantial reason" for the purposes of s.98(1)(b) if it is an ETO reason. If, of course, the reason for dismissal is misconduct or incompetence or redundancy etc the reason for dismissal may fall within s.98(2)(a)-(d). It is then for the ET to determine whether the dismissal was fair for the purposes of s.98(4) of the 1996 Act.

On the basis of the analysis of Article 4.1 set out above, however, the reg 8 goes beyond what is necessary and is in any event a flawed piece of drafting:

Following the pattern of the other automatic unfair dismissal provisions in the Employment Rights Act 1996 it ought merely to provide that an employee will be regarded as unfairly dismissed "if the reason (or, if more than one, the principal reason) for the dismissal is the transfer of an undertaking".

Instead, the words "or a reason connected with it" mean that reg 8(1) may be engaged where the ground for dismissal is not the transfer itself, but is merely connected to it. This in turn has given rise to uncertainty about how close the connection has to be between dismissal and transfer.

Further confusion is created by the fact that reg 8(2) clearly contemplates that a reason connected with the transfer may nevertheless be an ETO reason. This has given rise to questions about the relationship between regs 8(1) and (2) and the perception that an ETO reason must be a concept in itself given that it has to be a legitimate transfer connected reason. For this reason, the case law has debated the scope of the concept of an ETO reason rather than seeing it as merely the converse of dismissal on the grounds of the transfer.

How close must the connection be?

Obviously, in every case it will be a question of fact as to the employer’s reason for dismissal. This will require the employer to appear at the ET and explain what operated on its mind in coming to the decision to dismiss. However, there has been some controversy in the authorities as to the closeness of the connection between dismissal and the relevant transfer which is required in order for reg. 8(1) to apply. This question comes into sharp focus where the dismissals take place before it has been agreed that an undertaking will be transferred. The issue is whether the fact that the transferor dismissed with a view to making the business more attractive to a potential purchaser is sufficient to support the conclusion that the reason for dismissal was the transfer or a reason connected with it.

In a number of cases e.g. Harrison Bowden Limited v. Bowden and Morris v. John Grose Group Limited the EAT has said that reg 8(1) may apply even if the transferor did not at the time of the dismissal have a particular transaction or prospective transferee in mind. In the Morris case the EAT said that there had to be a relevant transfer for reg 8(1) to apply but the test is "whether a transfer to any transferee who might appear, or a reason connected with such transfer, was the reason or principal reason for the dismissal".

In Ibex Trading Co Limited v. Walton, on the other hand, emphasis was placed on the definite article in reg 8(1) and it was said that the specific transaction which actually occurred must have been in contemplation at the time of dismissal. However, the EAT recognised the need for ETs to be alert to the possibility that one potential transferee may drop out and be replaced by another "at the last minute".

In Michael Peters Limited v. Farnfield the EAT said that it saw no significance in the use of the definite article in Regulation 8(1) and viewed Ibex Trading as "not inconsistent" with the Bowden case.

On the analysis set out above, this debate need not arise in the same way. The true question is whether the transfer was the reason or principal reason for dismissal in the sense that it operated on the mind of the employer in deciding to dismiss. This test would be likely to require that the actual transfer was in prospect at the time of the dismissal and that it operated on the mind of the employer i.e. an approach much closer to Ibex Trading Co Limited v. Walton.

Reg 8(2) a subset of Reg 8(1)

As a result of the fact that reg 8(1) catches cases in which, although the transfer is not the reason for dismissal "a reason connected with it" is, there is also a divergence of view in the CA as to whether regs. 8(1) and 8(2) are mutually exclusive, or whether reg. 8(2) cases are a subset of reg. 8(1) cases.

In Warner v Adnet the CA subscribed to the subset theory, holding that ETs should ask, first, whether a dismissal fell within reg. 8(1). If it did, they should then ask whether reg. 8(1) was disapplied because, for example, the reason connected with the relevant transfer was an ETO reason.

In Whitehouse v Blatchford on the other hand, the CA took the view that in the light of Article 4.1 the question for the ET was whether the dismissal fell within reg. 8(1) because it was on the grounds of a relevant transfer, or whether it did not because there was some other substantial reason for dismissal. The same dismissal could not fall within both regs. 8(1) and (2). The CA’s approach was based on the analysis of Article 4.1 set out above.

The DTI Consultation paper of September 2001 proposes to clear up this difficulty by enacting that the Warner v Adnet approach is the correct one. However, this may miss the point. On the basis of the analysis set out above, the correct approach might be simply to amend reg (1) so that it reads as follows and then delete reg 8(2).

"Where, either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated for the purposes of Part X of the 1996 Act ... as unfairly dismissed if the transfer ……………..is the reason or principal reason for his dismissal."

The Concept of an ETO

Much anxious thought has been given to the scope of the concept of an ETO reason. If reg 8 had reflected Article 4.1 accurately, however, this may have been unnecessary because under the ARD the essence of the ETO reason is that it is a catch-all expression to describe the fact that the transfer itself was not the ground for dismissal. However, the "or a reason connected with it" formulation has led to the view that the concept of an ETO reason has more content than that because it has to displace another reason connected to the transfer. There are various cases on the scope of an ETO reason, but this point needs to be kept firmly in mind in considering them.

For example, the cases of Wheeler v. Patel, Gateway Hotels Limited v. Stewart and Ibex Trading, make the point that the ETO reason must relate to the conduct of the business itself rather than reflect a desire to make it more saleable. However, arguably this is essentially a way of saying that there must be a reason for dismissal other than the transfer itself.

It may be helpful to illustrate the point by reference to the facts of Patel.

In this case a shopworker was sacked by the vendor of a shop, shortly before sale. The decision was taken at the request of the purchaser. The EAT held that the word "economic" in the phrase "an economic, technical or organisational reason entailing changes in the workforce" in reg 8(2) was to be construed usdem generis with the adjectives "technical" and "organisational". It therefore was to be given a limited meaning and had to relate to the conduct of the business. It did not include broad economic reasons for the dismissal, such as the achievement of an agreement for the sale of the shop.

As is apparent from the reasoning of the EAT, they regarded the question as being one of construction of the word "economic". However, as the CA recognized in the case of Whitehouse v Blatchford a simpler solution would have been to recognise that because the vendor was selling the shop and dismissed at the request of the purchaser, he was unable to identify any reason for dismissal other than the transfer itself. In other words, the dismissal fell squarely within the Article 4.1 principle and there was no need to "construe" reg. 8(2).

The Berriman v. Delabole Slate Limited case has also been regarded as establishing a test for an ETO reason whereas arguably it was decided on the wrong basis. Here, the CA held that a mere desire to harmonise terms and conditions would not be an ETO reason. The employer’s purpose had to be to bring about a change in the numbers or functions of the workforce. Otherwise, the reason could not be said to "entail changes in the workforce". It has been thought to follow from this that any change which results in a reduction in the requirement for employees is capable of justifying a dismissal because it entails changes in the workforce. Redundancy is therefore a classic ETO reason, as one would expect.. Similarly, any reorganisation which changes the functions of the workforce in such a way as to justify a dismissal of the employees also "entails changes in the workforce". Another classic example is Porter v. Queen’s Medical Centre where a change in the way in which the relevant neonatal and paediatric services were to be provided justified the transferee’s view that the whole of the affected workforce should be dismissed and invited to apply for jobs in the new organisation.

However, Berriman could have been decided on a different basis. The picture before the CA was somewhat clouded by the fact that the allegation was constructive, rather than actual, dismissal and there were therefore inherent difficulties in analysing the reason for dismissal. However, it appears that on the facts Mr Berriman was never offered his existing terms and conditions. There was therefore no compliance with reg 5. This, in itself, amounted to a constructive dismissal and the employer was unable to advance any reason for failing to offer Mr Berriman his existing terms and conditions other than its desire to harmonise terms and conditions. The tribunal did not find, for example, that there were substantial business reasons for the desire to harmonise terms. In other words, on the industrial tribunal’s findings, there was no reason advanced by the company which was distinct from the transfer itself and was capable of justifying Mr Berriman’s dismissal under ordinary unfair dismissal principles. The CA could have analysed the case on this basis, rather than proceeding to (over) analyse the words of reg 8(2) with a particular focus on the word "entailing changes in the workforce". In other words, arguably the CA was wrong to regard the case as turning on a point of construction, as opposed to the fact that the company had not established a reason for dismissal which was permissible under national law.

Changing Terms and Conditions in the Context of a Relevant Transfer

The Background

It will be recalled that the Wilson and Meade & Baxendale cases appeared to give rise to two questions. First, to what extent can changes in terms and conditions be agreed with employees who are protected by TUPE ("the Wilson question"). Secondly, if agreement cannot be achieved, can change be imposed by the transferor dismissing the protected employees and re-engaging them on new terms and conditions? ("The Meade & Baxendale question").

In relation to the Meade & Baxendale question, the House of Lords held that the CA had been wrong to hold that a dismissal falling within reg 8(1) is a nullity and change therefore could not be achieved by this route. Lord Slynn noted the point which he had made when he was Advocate General to the ECJ, and which the ECJ had accepted, namely that the remedy in the event of a transfer-related dismissal is "for the Member States to determine". It followed from this that the real question in the case was whether, on its proper construction, reg 8 contemplated that transfer-connected dismissals would be ineffective in non ETO cases. Lord Slynn held that plainly reg 8 contemplated the opposite. Its very purpose was to provide the employee with an unfair dismissal claim in the event of a transfer-related dismissal, which claim would succeed if no ETO could be established and/or if the dismissal was unfair for the purposes of Section 98 (4) Employment Rights Act 1996.

Unfortunately, the analysis of Lord Slynn in relation to the Wilson point was less conclusive than on the Meade & Baxendale point. Essentially, the legal question posed in the Daddy’s Dance Hall and Rask cases is "what does "by reason of the transfer itself" mean?" Does it mean that any agreement which is for reasons connected with the transfer is invalid, or does it mean that an agreement is only invalid if the reason for it is the transfer and no other reason? If the transferee accepts that there is a relevant transfer, and that the employees are therefore entitled to be transferred on their existing terms and conditions, but then enters into entirely voluntary agreements with the transferred employees, are the agreements "by reason of the transfer itself" or are they by reason of the employees’ consent?

In the Wilson case, the ET had held that the transferred employees were bound by the terms which they had agreed with St Helen’s Borough Council because the reason for the Council seeking to bring about change was analogous to an "ETO reason" for the purposes of reg 8 (2) of the 1981 Regulations. This had been overruled by the EAT on the grounds that the decisions of the ECJ in Daddy’s Dance Hall and Rask precluded variations to terms and conditions which were "by reason of the transfer itself". In the view of the EAT the analogy with reg 8 (2) was not appropriate where no dismissal had taken place. The reason for the variations was therefore the transfer itself, and thus they were not binding. The CA had then overruled the EAT on the basis that, on the ET's findings, there had been dismissals for an ETO reason rather than consensual variations.

In the House of Lords, the CA's conclusion, although not its reasoning, was upheld. Although it was not strictly necessary to do so, Lord Slynn considered the consensual variation argument and accepted St Helens’ submission that, whatever the width of the prohibition on transfer-related variations to terms and conditions, the ET was entitled to find on the facts that the transfer of the undertaking did not constitute the reason for the variation. Although there is some guidance in the speech of Lord Slynn, the crucial questions were not conclusively answered. What can be said on the basis of Wilson is that if there is a reason for the agreement or variation which can be described as economic or organisational, an ET will be entitled to find, as the ET in Wilson did, that the transfer did not constitute the reason for the variation. According to Lord Slynn, this is so "whether or not the ETO defence can strictly be relied on" by which he presumably meant "despite the fact that there was no dismissal". However, Lord Slynn does not appear to have precluded the possibility of an ET being entitled to find on the facts that the transfer was the reason for dismissal, despite the existence of economic or organisational considerations which led the employer to seek change.

At the other end of the spectrum, Lord Slynn did not accept the argument that a variation is only invalid if it is agreed "on or as a part of the transfer itself". He held that:

"the variation may still be due to the transfer and for no other reason, even if it comes later. However, it seems that there must, or at least may, come a time when link with the transfer is broken or can be treated as no longer effective".

Unfortunately, this issue was left open, and his Lordship indicated that if the appeal had turned on it, he would have referred the matter to the ECJ.

The scope for consensual variations of contract in the context of a relevant transfer therefore remained uncertain after Wilson. Arguably, the passage cited above and one or two other passages indicate that Lord Slynn accepted that the ET must be satisfied that there was no reason for the variation other than the transfer before it can hold that an agreement is not binding. Clearly, however, even if this is what Lord Slynn meant, the lower Courts and tribunals would not be bound by it, given that his remarks were obiter, and given that he himself would have sought the guidance of the ECJ. Where the employer believes that it has ETO reasons for introducing changes, Lord Slynn gives some encouragement to employers, but it appears to be the case that the question is one of fact for the ET. Thus, there remain considerable risks in relation to the consensual variation approach and his Lordship's observation that
"It may be difficult to decide whether the variation is due to the transfer or attributable to some separate cause".
appears to underline this point.

The Right Answer?

In Daddys Dance Hall the ECJ said this at paragraph 17 of its judgment:-

"Since by virtue of Article 3.1 of the Directive the transferee is subrogated to the transferors rights and obligations under the employment relationship, that relationship may be altered with regard to the transferee to the same extent as it could have been with regard to the transferor, provided that the transfer of the undertaking itself may never constitute the reason for that amendment".

As far as the question whether there has been agreement is concerned, it is a matter for the national court to decide, according to national law, whether the employee has agreed to a variation of his or her terms of employment and/or waived such rights as she/he would otherwise have had. However, the difficult question is as to the application of the rule against amendments by reason of the transfer itself.

The starting point is to consider the purpose of the ARD. As has been noted above, its aim is only to ensure that the employee is protected in his relations with the transferee to the same extent as he was in his relations with the transferor under national law. The right of the affected employee in the event of a relevant transfer is therefore no more and no less than to preservation of his entitlements under national law at the moment of transfer. This is underpinned by Article 4.1 which forbids dismissal by reason of the transfer itself.

Against this background, arguably the employee waives his or her rights if s/he accepts that s/he will not transfer under his existing terms and conditions of employment. The employee who does transfer under his or her existing terms and conditions of employment but immediately or subsequently agrees to vary those terms has not waived his rights under the ARD. By the same token, the employee who is transferred on his or her existing terms and conditions but immediately or subsequently agrees to a variation or waiver of his rights under the contract does not do so by reason of the transfer itself. Rather, s/he does so by reason of the agreement to vary and/or waive or for some other reason.

On this basis, arguably the rule against variations by reason of the transfer should be read narrowly. An amendment is not by reason of the transfer unless there is no reason for it other than the fact of transfer. There is some support for this proposition in the following passage in the judgment of the Court in the Ny Molle Kro case at paragraph 25:

"The purpose of the Directive is to ensure, as far as possible, that the contract of employment or employment relationship continues unchanged with the transferee, in order to prevent the workers concerned from being placed in a less favourable position solely as a result of the transfer."

The word "solely" was taken from paragraph 26 of the judgment of the Court in the Danmols Inventar case and suggests that the approach of the national court should be to ask whether the reason for the amendment was the transfer and no other reason. A similar argument was accepted by the EAT in Ralton v Havering College of Further and Higher Education, albeit obiter, and further support for it has been provided by the EFTA Court decision in Viggosdottir: "An employee cannot waive the rights conferred upon him by the mandatory provisions of Directive 77/187".

This analysis also fits with the factual context in which the ECJ was addressing the issues in the relevant cases:

In Daddy’s Dance Hall Mr Tellerup does not appear ever to have been offered employment on his existing terms and conditions. He began a new contract at the point of transfer and the second question for the ECJ was whether he was entitled to waive the rights conferred upon him by the ARD "at that point" if he was not placed in a less favourable position overall. The case therefore genuinely concerned a waiver of the automatic transfer principle in circumstances where no alternative was offered to the employee, rather than acceptance of the transfer principle followed by a consensual variation.

Similarly, in Rask case the variation in the timing of the pay of the employees was imposed unilaterally at the point of transfer. The ECJ was therefore not addressing a case in which the automatic transfer principle had been respected and there was a subsequent consensual variation.

On the facts of Daddy’s Dance Hall and Rask, then, there was conduct falling squarely within the terms of reg 12 of TUPE in that the agreement on which the transferee sought to rely had the effect of contracting out of reg 5. Reg 12 provides, so far as material, as follows:

"Restriction on contracting out

Any provision of any agreement (whether a contract of employment or not) shall be void in so far as it purports to exclude or limit the operation of regulation 5, 8 or 10 above or to preclude any person from presenting a complaint to an [employment tribunal] under regulation 11 above."

If this is the right analysis, it follows that the proposal in the DTI Consultation paper of September 2001 to make it clear that variations for ETO reasons are permissible, may also miss the point. The clarification ought to provide that the only impermissible variations are those which amount to a waiver of the employee’s rights under regs 5, 8 and 10.

Martin v Southbank University

It is less clear whether this analysis fits with the ECJ’s approach in Martin, Daby and Willis v South Bank University. Here, the applicants in the proceedings before the Croydon Employment Tribunal, were employed as nursing lecturers at the Redwood College of Health Studies. Their employment was governed by the terms and conditions of the General and Nurses and Midwives Whitley Council (GWC) and they were members of the NHS pension scheme. One of the GWC conditions of service provided for an immediate payment of an enhanced retirement pension plus other payments in the event of their employment ceasing work on grounds of redundancy, in the interests of the efficiency of the service, or upon organisational change.

Redwood College became part of South Bank University (SBU). Staff who transferred were offered the terms and conditions of employment of SBU but they could, instead, remain on their existing terms and conditions if they wished. SBU notified staff that they would not be able to remain in the NHS pension scheme and offered them three options: (1) to leave their NHS pension benefits where they were and join the Teachers Superannuation Scheme (TSS); (2) to transfer their benefits from the NHS scheme to the TSS; or (3) to leave their NHS benefits where they were and make their own arrangements.

None of the applicants accepted the terms and conditions of employment of SBU. However, they joined the Teachers' Superannuation Scheme (TSS) and applied to transfer their existing NHS pension benefits into the TSS scheme. One of the 3 was not able to do this because she was over 60 at the time of the transfer of the undertaking but the other 2 were successful.

In 1996/1997 the Department for Education and Employment proposed changes which would have meant that some of the cost of the early retirement of academic staff would fall on SBU. The Vice Chancellor of SBU wrote to all academic staff aged over 50 advising them that early retirement may not be available after 31 March 1997 and giving them the opportunity to apply to take early retirement before that date. The terms which were offered were TSS terms. 2 of the applicants applied for and were granted early retirement on TSS terms, which they accepted. The 3^rd remained in SBU’s employment. The applicants alleged that they were entitled to the more favourable early retirement package available under GWC terms and conditions.

The relevant question for present purposes was whether, by joining TSS and/or transferring their benefits from the NHS scheme to TSS and/or accepting early retirement on TSS terms, the applicant had entered into binding variations of their GWC terms, or whether any agreement which they may have reached was void under the Daddy’s Dance Hall principle. The Advocate General suggested that the ECJ should hold that:

Whether the transfer of an undertaking is the reason for a change must be assessed in the light of all the circumstances of the individual case. Proximity of the change to the transfer of the undertaking, adaptation of conditions to bring them into line with the conditions of employment of the employees already employed before the transfer of the undertaking or proposed legal changes with implications for the distribution of the financial burden of early retirement rules can be indications which should be taken into account in assessing whether the transfer of an undertaking was the sole or main reason for a change. (emphasis added)

Provided the change in conditions of employment is permissible under national law and the transfer of the undertaking is not the reason, or at least not the main reason, for the change, the agreement between employee and employer to vary conditions of employment is valid. (emphasis added)

However, the ECJ actually held as follows:

Article 3 of Directive 77/187 precludes the transferee from offering the employees of a transferred entity terms less favourable than those offered to them by the transferor in respect of early retirement, and those employees from accepting those terms, where those terms are merely brought into line with the terms offered to the transferee's other employees at the time of the transfer, unless the more favourable terms previously offered by the transferor arose from a collective agreement which is no longer legally binding on the employees of the entity transferred, having regard to the conditions set out in Article 3(2).

Where, in breach of the public policy obligations imposed by Article 3 of Directive 77/187, the transferee offered employees of the entity transferred early retirement less favourable than that to which they were entitled under their employment relationship with the transferor and those employees accepted such early retirement, it is for the transferee to ensure that those employees are accorded early retirement on the terms to which they were entitled under their employment relationship with the transferor.

Arguably this solution would appear to focus on the argument that the original reason for the change in the terms of the scheme was the transfer itself, so that any subsequent offer of early retirement in accordance with the new scheme could then be said to be by reason of the transfer itself. It is not clear what the implications of this reasoning will be, but one way of looking at the Martin case is that, at the point of transfer, the applicants were not offered their entitlement to automatic transfer of the relevant pension benefits. Any agreement at this stage would therefore amount to a waiver of the automatic transfer principles and would therefore be void. The formal position was therefore that South Bank University was in breach of contract from the point of transfer onwards and it could only rely on a subsequent agreement to accept less generous benefits if the agreement was, in effect, a compromise of the applicants’ breach of contract claims. Although two of the applicants had agreed to take early retirement on the TSS basis and had done so unconditionally, the agreements with them had not been expressed as being in full and final settlement of any claim they might have and they were therefore free to pursue the matter. If this is the right analysis, it is consistent with the understanding of the Daddy’s Dance Hall principle contended for above.

Matrix Chambers
THOMAS LINDEN
Gray's Inn
London WC1R 5LN

tomlinden@matrixlaw.co.uk

10 September 2004

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