Geoffrey Mead

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Geoffrey Mead Partner and Head of Employment Law Reed Smith Warner Cranston, London

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ILS ANNUAL CONFERENCE

14-16 September 2001

Title:
TUPE: Have we got the balance right?

INTRODUCTION

In considering whether we have got the balance right, I identify six issues for consideration. Most of these are ones which have been raised in cases decided in the last two years. The six issues are as follows:

When does TUPE apply? I consider recent case law which seeks to clarify when TUPE applies and in particular the implications of the decision of the Court of Appeal in ADI (UK) Ltd v Willer [2001] IRLR 542. This concerns the effect of a decision by an incoming contractor not to take on the staff of the outgoing contractor, when the reason for that decision is a desire to avoid the application of TUPE.

Do collective liabilities transfer? I consider whether liability under regulation 10 of TUPE transfers under TUPE. In particular, I look at the recent decision of the EAT sitting in Scotland which appears to contradict an earlier decision of the EAT sitting in England.

I consider two implications of the statutory requirement in TUPE that an employee (and all associated rights and liabilities) is transferred only if he is still employed "immediately before the transfer". I consider the problems this gives rise to in the context of dismissed employees, and the enforcement of restrictive covenants against employees who departed prior to the transfer.

I consider the concept of constructive dismissal, and in particular the recent EAT decision that says that an employee can claim constructive dismissal in a TUPE situation even if there is not breach of contract by his employer.

I consider the implications of the decision of the Court of Appeal in Oxford University v Humphreys [2000] IRLR 183, and ask whether the problems that it gives rise to can apply in the context of a decision by a transferee not to replicate the occupational pension rights enjoyed by the transferring employees.

I consider several respects in which the transferee does not precisely step into the shoes of the transferor at the time of the transfer. There are various ways in which the pre-transfer position is not exactly replicated after the transfer.

when does tupe apply?

The question of whether TUPE applies in any particular case is one for the Employment Tribunal to decide. It is a question of fact, and as long as the Tribunal has asked the right questions and not reached a conclusion which is perverse, their decision will not be overturned. Hence, two different Tribunals could legitimately reach different decisions in respect of the same facts. This in itself gives rise to some unpredictability. The two questions that the Tribunal must ask in determining whether there is a transfer are as follows:

Is there a stable and discrete economic entity, which is sufficiently structured and autonomous to amount to an undertaking?

Second, has there been a transfer of the stable economic entity from one party to another, whether directly or indirectly?

As was pointed out by Lord Justice May in ADI case:

"It is not necessary for there to be anything which would normally be described as a transfer of an undertaking between a first and subsequent employer. Speaking generally, the regulations can apply when work or services cease to be carried out by one organisation and begin to be carried out by another. The change can be effected by the person benefiting from the work or services [the client]. The Directive and the TUPE regulations have a general purpose of protecting the employment of the employees of the first organisation". See paragraph 20.

The cases have established that the mere loss of a service contract to a competitor cannot by itself indicate the existence of a transfer within the scope of the TUPE. Rather, the Tribunal must consider a range of matters in reaching their overall decision, the main factors being as follows:

The views of the parties at the time. If the parties have proceeded on the basis that there will be a TUPE transfer, this counts in favour of there being a transfer.

Whether there is a transfer of physical assets, and the value of any such assets.

Whether a major part of the workforce, in terms of numbers and skills, of the outgoing employer are taken on by the new employer.

Whether there has been a transfer of intangible assets and the value of such assets. This made include goodwill or a brand name.

Whether there has been a transfer of customers and clients.

The degree of similarity between the activities carried on before and after the supposed transfer.

The length of suspension of the activities, if any, over the period of the transfer.

The question of whether employees have been taken on by the new employer is a particularly different one. It assumed an importance after the decision of the ECJ in Suzen; [1997] IRLR 255. That case was concerned with the changeover of contracts for cleaning a school. The ECJ said there would not be transfer within the scope of the Directive unless "there was a concomitant transfer of significant tangible or intangible assets or the taking over by the new employer of a major part of the workforce in terms of their number and skills assigned by his predecessor, to the performance of the contract".

This implies that in determining whether there is a transfer, the Tribunal should consider whether the new employer takes into its employment the employees of the old employer. Some commentators have suggested that this approach is rather circular, in that if TUPE does apply, the new employer is obliged to take on the staff of the old employer. It can hardly be open for the new contractor to avoid TUPE simply by not taking on the staff. There has been concern that the rights of employees, particularly in contracting out and changeover of contractor situations, could be undermined by the simple expedient of the incoming contractor choosing not to take on the staff of the outgoing contractor.

Whether such a ploy can succeed was the central point at issue before the Court of Appeal in the ADI case. In this case, there was a changeover of contractors for providing security services in a shopping centre. The outgoing contractor had a group of nine employees assigned to work in the particular centre. ADI lost that contract and it is passed to a new company called Firm Security. Firm Security took on none of the nine employees, although FS were granted the right to use the control room, the monitoring room, clocking system and CCTV equipment, and their employees were allowed to use a locker room and staff canteen.

In this case, the EAT held that there was an economic entity but that that economic entity was not transferred. The case then went to the Court of Appeal which considered the relevance of the reason why the employees were not taken on by the incoming contractor. The Court held, by a majority, that where the reason why the incoming contractor does not take on the employees, is in order to avoid the application of TUPE, that contractor cannot rely on the fact that the employees were not taken on as a reason for showing that TUPE does not apply. Instead, for the purpose of answering the question as to whether TUPE applies, the Tribunal should proceed on the basis that the employees have in fact been taken on by the incoming contractor.

This is an extremely important but very difficult point. It will assume special importance in cases where the activity is labour intensive, rather than relying to any significant extent on physical assets. In such a case, in determining whether there is a TUPE transfer, there is particular weight attached to the question of whether employees go across. There will now be particular importance attached to the reason why they did not go across, if in fact they did not go across. If the reason why they were not taken on was a desire by the incoming contractor to avoid TUPE, then for the purpose of determining whether there is a TUPE transfer (such that they should have been taken on) they are treated as if they did in fact go across.

This seems to imply that there are "legitimate" and "illegitimate" reasons for not taking on the staff. If the reason that they are not taken on is a legitimate reason, then the fact of them not being taken on does indeed count against TUPE applying. If however, the reason they are not taken on is an illegitimate reason, then they are treated as is they have in fact been taken on.

The Court of Appeal does not go into any real detail as to what would be a legitimate reason and what would be an illegitimate reason in this context. However, the Court indicated that legitimate reasons would include, but not be limited to economic, technical, or organisational reasons entailing changes in the workforce of the transferee; see the judgement of May LJ at paragraph 36. This implies that if the incoming contractor already has in place a group of its own employees to whom it can assign the work under the transferring contract, than that would be a legitimate reason for not taking on the staff of the outgoing contractor.

If however, the reason for not taking on the staff of the outgoing contractor is that they are paid more than the market rate, than that would (probably) not be a legitimate reason. But what if they are simply not very good at their jobs? Although the case was decided on the basis what may be regarded as a laudable policy reason, namely protecting the rights of employees, it does give rise to a number of difficult questions, including the following:

How does one identify a legitimate reason and an illegitimate reason on the part of the incoming contractor for not taking on the employees of the outgoing contractor?

How does one distinguish between a case where (i) the incoming contractor decides not to take on the employees, in order to cause TUPE not to apply; (ii) the incoming contractor decides not to take on the employees, with the consequence that TUPE does not apply; and (iii) because TUPE does not apply, the incoming contractor does not take on the employees?

Assuming that the outgoing contractor knows whether the incoming contractor intends to take on its staff, how can it possibly know, in a situation where the staff are not going to be taken on, the reason for that. As this will go the question of whether there is a transfer or not, it means that the outgoing contractor will not know whether the to treat the forthcoming event as a transfer or as a redundancy situation.

Even after the event, how easy will it be to determine the reason why the incoming contractor has not taken on the staff of the outgoing contractor? The Court of Appeal in ADI said that there was no positive burden on the incoming contractor to establish the reason why they did not take on the workforce. This implies that there would be a burden on the outgoing contractor to establish the reason why the incoming contractor did not taken on the staff. How realistic is this?

What happens if the incoming contractor takes on a number of the employees of the outgoing contractor, but this does not represent a "major part in terms of the numbers and skills"? What is the position in respect of the employees who are not taken on? Perhaps it depends on why they were not taken on.

What happens if a major part of the workforce is in fact taken on, but they were offered and accepted employment at a lower salary than that which they enjoyed previously? Does the very fact of them being taken on mean that TUPE does apply, which means that they must be paid the same as they were previously? Note that the fact that a major part of the workforce was taken on is not conclusive evidence that TUPE applies. This is especially so if the activity in question is asset reliant; see Oy Liikenne [2001] IRLR 171.

Transfer of collective liabilities

As is well known, regulation 10 of TUPE imposes upon the transferor an obligation to inform, and in appropriate cases to consult with, appropriate representatives of those of its employees who will be affected by the transfer. The informing and consulting may be with either a recognised trade union or else, in cases where there is no recognised union, with elected or otherwise appointed representatives of the employees. In the event that the transferor fails to comply with this informing and consulting obligation, it can incur a liability under regulation 11 to pay an award to the employees in respect of whom there has been a failure to inform and consult. This much is clear.

However, what is more uncertain is whether that liability under regulation 11 is one that passes to the transferee upon completion of the transfer. There have been two recent, and conflicting decisions of the EAT on this point. In Kerry Food Ltd v Creber [2000] IRLR 10, the EAT held that liability for failure to comply with regulation 10 does indeed transfer across. They said that this was a liability in connection with a contract of employment, and therefore fell within regulation 5(2)(a). The EAT also said that it fell within the scope of regulation 5(2)(b) which referred to anything done before the transfer is completed and states that the transferee is, after the transfer, deemed to be responsible for that.

However, confusion has now arisen following the decision of the EAT sitting in Scotland in TGW v James McKinnon (Haulage) Ltd (EAT/103/01). In that case, the EAT (Lord Johnston presiding) was persuaded that liability under regulation 11 was a responsibility of the transferor employer that does not transfer to the transferee. The EAT said that if such liability did transfer, then the transferring employer would have no real incentive to comply with the obligation to inform and consult. With respect to the EAT in the McKinnon case, this conclusion is difficult to accept.

First, the attempt to distinguish the Kerry Foods case is somewhat unconvincing. Second, the provision in regulation 5(2)(b) to the effect that the transferee stands in the shoes of the transferor after the transfer, points strongly to the conclusion that this liability should go across. Third, the argument that if the liability goes across, the transferor has no incentive to comply with its obligations, is unconvincing in that could apply equally to any other obligations that the transferor owes to the employees, including, the obligation to pay their wages. Fourth, in the context of most transactions, there is some sort of warranty and indemnity arrangement between the contracting parties, under which the transferor ends up meeting the financial cost of any liabilities arising by reason of things which it did or failed to do prior to the transfer date. Such provisions will be familiar to all those who have ever been involved in drafting such agreements.

One point that the EAT in Scotland did not consider explicitly is an argument that the structure of TUPE itself implies that this liability is not one which passes across. Regulation 11(3) says that if the transferor is accused of failing to properly to inform and consult, and the allegation is that he failed to give the information required by regulation 10(3) (intentions of transferee post-transfer), then the transferee can be joined as a party to the proceedings. It has been suggested that this joining of the transferee as a party to the proceedings would be unnecessary if, per Kerry Foods, liability transfers across in any event.

However, this argument is not of overwhelming force, since there may be situations where a transfer is proposed, and this is triggers the obligation to inform and consult, but the transfer never actually completes, in which case no liabilities could go across. Nevertheless, a claim could still be brought against the transferor alleging a failure properly to inform and consult about the proposed transfer. In that situation, if the allegation was that the representatives were not told of the intentions of the transferee post transfer, the transferor will be assisted by the defence available under regulation 11(3).

Employment at the moment of transfer - some practical implications

Regulation 5(3) of TUPE provides that the transfer provisions in regulation 5(1) and (2) apply only in respect of people who are "employed immediately before the transfer". In the case of Litster v Forth Dry Dock Company Ltd [1989] IRLR 161, the House of Lords said that there must be implied into regulation 5(3) words indicating that where a person has prior to transfer, been unfairly dismissed by reason of the transfer (i.e., within regulation 8(1)) he is deemed to have been employed in the undertaking immediately before the transfer, at least for the purpose of transferring all liabilities, even though not for transferring an extant employment contract itself. That much is well established. However, there are at least two other problems which arise from the requirement that the employee be employed "immediately before the transfer", which problems are not solved by the Litster decision.

The first of these is where an employee has been dismissed prior to the transfer but not for any reason connected with the transfer, and hence not within the scope of Litster. The employee then exercises his right to appeal against the dismissal. In some cases of course, the employment contract states that in the event of there being an appeal, the employment remains alive pending the outcome of the appeal process. However, in many other cases, the employment comes to an end immediately but, if the appeal is successful, the employee is retrospectively reinstated into his employment. Assume a case where the employment does come to an end immediately, albeit with the possibility of retrospective reinstatement. What happens if a TUPE transfer occurs after the dismissal but before the appeal can be heard?

The employee in such a case is not employed "immediately before the transfer". What happens to his right of appeal? It is difficult to see, on the wording of TUPE itself, that the right to appeal goes across, for the simple reason that he is not employed immediately before the transfer. Therefore, any right to appeal must, on the basis of the wording of regulations be against the transferor. But what happens if the transferor has sold its entire business? Even if the appeal could in theory be heard, what is the transferor to do if the appeal is successful? The transferor is hardly in a position to give the employee a job, and it is difficult to see how the transferor can force the transferee to give a job to this individual.

However, this means that the employee will lose his chance to be reinstated. A more just solution would be find a way of holding the transferee responsible for hearing the appeal, and if appropriate, reinstating the employee. Although it is difficult to see how this could be done on the wording of TUPE, the Acquired Rights Directive does apply where there is a contract of employment or an employment relationship existing at the date of the transfer; art 3(1). Arguably there is still an employment relationship existing at the time of the transfer, and hence a case for saying that in order for the Directive to be complied with, a tribunal should adopt a purpose construction. This would, if adopted, mean that the transferee would be required to conduct the appeal, and if the appeal were successful, reinstate the employee.

The second difficult issue concerns the enforcement of restrictive covenants against employees who left the employment of the transferor prior to the transfer, but where the period of restriction has not expired by the time of the transfer. For example, suppose an employee with a valid 12 month post-termination restrictive covenant, resigns his employment effective 2 months before the transfer. Ordinarily, the restrictions would continue for a period lasting for 10 months beyond the transfer date. The important question is what happens to those restrictions following the transfer?

Assuming that the transferor has transferred its entire business, or at least that part in which the ex-employee was working, the transferor will have no real wish to enforce the covenant to protect a business which it no longer owns or operates. Further, in such circumstances, it may be difficult to persuade a Court that the transferor still had any legitimate interests to protect. The party with the interest to protect is the new owner of the business, namely the transferee.

It is however difficult to see that the transferee has any right to enforce the covenant as it has never been the employer of the employee. Again, if the Courts were able to adopt the broad notion of the existence of an employment contract or employment relationship at the time of the transfer, as a basis for determining what obligations and rights transfer, then the matter could be sorted out in that way, and the covenant could be enforced against the employee by the transferee. But this does involve stretching the words of regulation 5(3). Would the UK courts be able to do that?

constructive dismissal

In UK employment law, the term "constructive dismissal" is widely used, although is not a term actually contained in legislation. The statutory embodiment of the concept is in Section 95(1)(c) Employment Rights Act 1996, which provides that an employee is to be treated as having been dismissed if he terminates his employment contract "in circumstances in which he is entitled to terminate it without notice by reason of the employer's conduct". For over 20 years, it has been well established that for a constructive dismissal claim to succeed, the applicant must show that his employer has committed a fundamental or repudiatory breach of contract and that the employer has resigned in response to that; see Western Excavating Ltd v Sharp [1978] IRLR 27.

This straightforward assertion must now be qualified following the decision of the EAT in Rossiter v Pendragon Plc [2001] IRLR 256. In this case, the EAT held that in the context of a transfer of an undertaking, there is not requirement for there to be a breach of contract in order to give rise to an entitlement to resign and claim constructive dismissal under Section 95(1) (c) ERA. The Court said that if the transfer involves a substantial change in working conditions to the detriment of the employee, the employee can claim constructive dismissal regardless of whether that change constitutes a breach of contract. The Court said that Section 95(1)(c) does not explicitly provide that there must be a breach of contract by the employer and therefore it was possible to hold that no breach of contract was required.

This is a significant decision, and will assist employees in circumstances where the transfer does involve a substantial change in working conditions (Article 4(2) of the Directive), but does not involve a breach of contract. There is however, a requirement for a close causal link between the transfer and the change in working conditions; this is indicated by the use of the word "involves" rather than some other form of words which allows for a looser causal connection. However, it may embrace cases where the transferee requires employees to work in a different place (within the scope of a contractual mobility provision) or indeed for the employee to carry out different types of work (within the scope of his contract).

Of course, it is well established that if a contractual right is exercised by an employer in a capricious manner, this would in itself be a breach of the obligation to maintain trust and confidence, which can ground a claim for constructive dismissal. However, the Pendragon case goes further and says that even though an employer may be acting perfectly lawfully in introducing changes following transfer, nevertheless, the employee may be entitled to resign and claim compensation for constructive dismissal. This means that the transferee employers in particular, must be more careful about changes that they introduce following a transfer, and cannot simply reply upon an express contractual right to do so.

Objecting to the transfer - some further implications

This section identifies two main questions for consideration. The first concerns the implications of the decision of the Court of Appeal in University of Oxford v Humphreys [2000] IRLR 183. Regulation 5(4A) and (4B) of TUPE provides that an employee's contract will not transfer if he informs either the transferor or the transferee that he objects to becoming employed by the transferee. Further, they provide that where the right of objection is exercised, the employment will terminate automatically by operation of law, the consequence being that the employee is not treated as having been dismissed by the transferor and is therefore not entitled to compensation. Regulation 5(4A) is without prejudice to any right of the employee arising apart from the TUPE regulations to terminate the contract without notice if a substantial change is made in working conditions to his detriment.

In the Humphreys case, the Court of Appeal held that where an employee objects to the transfer of his contract of employment because he knows that the transferee intends to make substantial and detrimental changes in terms and conditions, the exercise of the right to object can be regarded as a constructive dismissal by the transferor. The Court also held that liability for the relevant dismissal rests with the transferor, and does not transfer to the transferee under regulation 5(2). This has a somewhat unusual result that the transferor incurs a legal liability by reason of the proposed conduct of the transferee after the transfer.

In many cases, the proposed conduct of the transferee will involve a breach of contract. However, following the Pendragon case, it is established that this need not be the case in order to claim constructive dismissal. One possible implication of these two cases taken together is that where the transferee intends to withdraw an occupational pension entitlement enjoyed by transferring employees, that those employees can object to the transfer and claim constructive dismissal against the transferor. This is even though occupation pension rights are explicitly excluded from the scope of rights which transfer under TUPE.

The practical implication for transferors is that they will wish to seek from the transferee an indemnity, under which the transferee agrees to meet any legal liabilities that arise by reason of employees objecting to the transfer where that objection is based upon substantial and detrimental changes to the position of transferring employees. This indemnity should not be limited to circumstances where the conduct of the transferee would involve the breach of contract, but should be broad enough to embrace a withdrawal of an occupational pension.

A second difficult issue regards the right to object in the context of restrictive covenants. If an employee does object to being transferred, that serves to automatically terminate his employment at the moment of transfer. In most circumstances the employee does not make any great gain from exercising the right to object as this is not treated as a dismissal, and he is not entitled to compensation.

However, if the employee wishes in any event to leave the employment, but might ordinarily be held to a lengthy contractual notice period (or be placed on garden leave) then the transfer may provide the ideal opportunity to escape from having to serve that notice period. Those acquiring a business where the value of the business resides substantially in the employees who work in it should be keenly aware of this. They may find that the value of the business is substantially diminished if all or indeed any of the key employees jump ship before the transfer is completed, especially if he joins a competitor.

A related issue concerns the effect of objection to transfer on any post-termination restrictive covenants which may be found in the contracts of the employees of the transferor. This is a similar issue to that canvassed earlier in this paper; paras 4.5 - 4.7. Assuming that those restrictions are otherwise valid, is it open to either the transferor or the transferee to seek to enforce them against employees who have exercised their right to object to being transferred?

It is clear that such an employee is immediately released from his contractual notice period, but it is not quite so clear that he secures (or indeed ought to secure) an immediate release from post-termination restrictive covenants. It is suggested that the transferee will not be able to enforce the covenants. This is because, even if it is the case that the employee is still employed "immediately before the transfer", the explicit provision of regulation 5(4A) is to the effect that in those circumstances, regulations 5(1)-(2) do not apply.

THE EFFECT OF A TRANSFER MORE GENERALLY

It is often asserted that when there is a TUPE transfer, all that really changes in the legal relationship between the employer and employees is that the identity of the employer is different. This is reinforced by regulation 5(2) which says, in effect, that the transferee steps into the shoes of the transferor. However, there are a number of respects in which this is not the case. The principal ones are as follows:

It is not a breach of contract for the transferee employer to withdraw, upon the transfer, the occupational pension rights enjoyed by the transferring employees. Absent the transfer, it would be a breach of contract for the employer to do that. But query whether it may amount to a constructive dismissal following the Pendragon case.

In a non-transfer situation, an employer may be able to dismiss fairly an employee if the dismissal is on account of the refusal of the employee to accept new terms and conditions of employment; see St John of God Care Services v Brooks [1992] IRLR 546. However, in a transfer situation, if the reason for the introduction of the new terms is connected with the transfer, then that dismissal will automatically be unfair; see Berriman v Delabole Slate [1985] IRLR 305. This is because the so called ETO defence is not available where there is merely a desire to change the terms on which employees are engaged rather than alter the composition of the workforce.

In the ordinary course, an employer can enter into a legally binding agreement with employees to change their terms of employment. This is so even if the change is to the detriment of the employees, as long as any consent which they give is genuine. However, in a transfer situation, if the changes are being proposed because of the transfer, then the change is ineffective even if the employee has agreed to it; see Meade & Baxendale v British Fuels Limited [1998] IRLR 708.

In a transfer situation, both the transferor and the transferee must inform, and where necessary consult with representatives of their employees, in respect of the transfer and the implications of it. That is, there must be informing and consulting in respect of employees who may be affected by the transfer. This means that if any employees of the transferee are affected by the forthcoming transfer, there must be informing, and where necessary, consulting, with the representatives. In the normal course, the statutory obligation to consult with representatives arises only where there are to be collective redundancies; s188 TULRCA. The effect of TUPE is that the transferee is required to inform and consult with its own employees in respect of changes of a type which would not ordinarily trigger the obligation to inform and consult.

As has been noted above, the position of an ex-employee is anomalous in the TUPE context. The ex-employee who is appealing against the decision to dismiss him may find him self without a remedy where a TUPE transfer occurs before his appeal is heard. Further, a transferee may find it difficult to enforce a post-termination restrictive covenant against an employee who ceased to be employed prior to the transfer, but whose period of restriction lasts (or would ordinarily last) beyond the transfer date.

Geoffrey Mead,
Head of Employment Department
Reed Smith Warner Cranston

Pickfords Wharf
Clink Street
London
SE1 9DG

Tel: 0207 403 2900
Fax: 0207 403 4221

gmead@reedsmith.co.uk

DISCLAIMER: This document is for general guidance only. All liability is excluded for actions taken or not taken in reliance on these guidelines. Specific advice should be obtained in each specific case.

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PREVIOUS SPEAKERS: Geoffrey Mead Partner and Head of Employment Law Reed Smith Warner Cranston, London

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PREVIOUS SPEAKERS:
Geoffrey Mead Partner and Head of Employment Law Reed Smith Warner Cranston, London