1. This paper focusses on six key issues concerning the scope and effect of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE). They are:

2. Reviewing the decision of the European Court of Justice in Rask v ISS Kantineservice A/S [1993] IRLR 133 in the Industrial Law Journal, Paul Davies wrote:

3. The continuing confusion is illustrated by three recent decisions of the Employment Appeal Tribunal (EAT). In Whitewater Leisure Management Ltd v Barnes and others [2000] IRLR 456, an Appeal Tribunal presided over by Mr Justice Burton upheld a tribunal’s finding that TUPE did not apply when there was a change in the employer responsible for managing a leisure centre. The tribunal so found because (1) no material assets were transferred from the old to the new employer and (2) the majority of the workforce did not transfer. According to Mr Justice Burton, the tribunal had applied the correct test. This was a labour intensive service and where, in such a case, no tangible or intangible assets were transferred, the key question was whether the staff remained substantially the same.

4. A very different approach was followed in two cases decided by Appeal Tribunals presided over by Mr Justice Lindsay. In RCO Support Services and Aintree Hospital Trust v UNISON and others [2000] IRLR 624, the EAT held that a tribunal had been entitled to find that there was a TUPE transfer when there was a change in the contractor responsible for providing cleaning and catering services to an NHS Trust even though none of the existing staff were taken on by the new contractors. And in Argyll Training Ltd v Sinclair and another [2000] IRLR 630, the Appeal Tribunal dismissed an appeal against a finding that there was a transfer when a training contract changed hands notwithstanding the refusal of the incoming contractor to take over the one employee who worked in the service. Mr Justice Lindsay expressed a willingness to approach both cases on the basis that "there can be both an undertaking and a transfer of it notwithstanding that neither significant assets nor a majority of the workforce moves over".

5. The issue which lies at the heart of this debate is whether the decision of the European Court of Justice (ECJ) in Suzen v Zehnacker Gebaudereinigung GmbH Krankenhausservice [1997] IRLR 255 was intended to change the criteria for determining whether the transfer of a service contract constitutes the transfer of an economic entity.

6. In both the decisions cited above, Mr Justice Lindsay accepted that Suzen provides "a powerful argument" that TUPE can not apply where neither significant assets nor a major part of the workforce are transferred. To see the force of that argument, one need look no further than the answer which the ECJ gave to the question which had been referred to it by the German Court. It was in the following terms:

Mr Justice Lindsay was, however, troubled as to whether the EAT could "safely rely on Suzen" in the light of the Court of Appeal’s decision in ECM (Vehicle Delivery) Service Ltd v Cox [1999] IRLR 559.

7. In ECM, Lord Justice Mummery suggested that "nothing was said" by the ECJ in the Suzen case which cast doubt on the correctness of the interpretation of the Directive adopted in the Court’s earlier decisions in Spijkers v Gebroeders Benedik Abbattoir [1986] ECR 1119 or Schmidt v Spar und Leihkasse der Fruheren Amter Bordesholm Kiel und Cronshagen [1994] IRLR 302. Whilst it is correct to say that the general principles enunciated by the Court in Spijkers emerged unscathed from Suzen, it is difficult to justify the assertion that subsequent interpretative rulings were not qualified.

8. To analyse the true effect of Suzen, it has to be compared with the Court’s judgment in Dr Sophie Redmond Stichting v Bartol and others [1992] IRLR, which was the first decision to apply the Directive in the context of service providers. In Dr Sophie, the Court said that the critical question to be answered in deciding whether there was a transfer when one service provider replaced another was "whether the functions performed are in fact carried out or resumed by the new legal person with the same activities or similar activities". The influence of that decision on the ruling in Schmidt emerges clearly from paragraph 17 of Schmidt, where the Court said:

9. Against that background, the willingness of the Court in Suzen to make clear that there is an important distinction between the transfer of an activity and the transfer of an economic entity is impossible to reconcile with its earlier pronouncements.

10. Although the Court of Appeal in Betts v Brintel Helicopters Ltd [1997] IRLR 361 interpreted Suzen as heralding a "change of emphasis", its subsequent decision in ECM appears to leave little scope for applying the principles which Suzen apparently endorsed. It should, of course, be borne in mind that ECM was a case in which the incoming contractor had deliberately refused to employ the existing workforce in order to avoid the application of TUPE. But in RCO Support Services, Mr Justice Lindsay rejected the contention that the reasoning in ECM is confined to cases involving TUPE avoidance. He suggested, probably correctly, that if Lord Justice Mummery had thought that motive was the distinguishing feature of the ECM case, he would have said so.

11. There are undoubtedly attractive policy reasons for taking a restrictive view of the effect of Suzen. They were clearly expressed in the following passage from the judgment in RCO Support Services:

12. However, the fact remains that Suzen itself was such a case. And whilst it remains the ECJ’s last word on the question, it seems doubtful whether there will be a sufficient consensus as to the correct answer to make it possible finally to lay this issue to rest.

13. It is becoming increasingly common for contract-awarding bodies to make fundamental changes to a service at the time of re-tendering. Services are frequently re-packaged, either in terms of the geographical area covered by the contract or in terms of the services required. In either case, the change in service specification may make it difficult to contend that the economic entity which existed under the old contract has transferred to the incoming contractor.

14. The difficulties of showing that the economic entity survives geographical subdivision will be increased by the decision in Whitewater Leisure Management Ltd v Barnes and others [2000] IRLR 456, in which it was held that, without their senior management, a team of employees was unlikely to constitute an economic entity.

15. In so holding, the EAT was applying the guidance given by the ECJ in Francisco Hernandez Vidal v Gomez Perez [1999] IRLR 132 on the meaning of the concept "economic entity". In that case the Court said that a group of workers and assets which facilitates an economic activity will not constitute an economic entity unless it is "sufficiently structured and autonomous". If, as the Whitewater decision suggests, the requisite degree of autonomy can only be established where the relevant team includes dedicated senior managers, the scope for applying TUPE to contracts for services will be much diminished.

16. Where fundamental changes in the nature of a service make it impossible to argue that a recognisable economic entity will transfer to the incoming contractor, the outgoing contractor may be unable to avoid liability to the affected staff unless it can assert that the termination of its contract with the contract-awarding body is itself a TUPE transfer.

17. This approach has so far found little favour with the EAT, which has in general taken the view that the recipient of a service cannot be treated as a party to a TUPE transfer unless it assumes day-to-day responsibility for the operation of the service. This approach was recently confirmed in Argyll Training Ltd v Sinclair and another [2000] IRLR 630.

18. However, the EAT has not yet been asked to consider the point in a case where decisions taken by the contract-awarding body in the context of re-tendering cause the economic entity to lose its identity. In Landsorganisationen i Danmark v. Ny Molle Kro [1987] ECR 5465 the ECJ said:

It is at the very least arguable that where the steps taken by a contract-awarding body to restructure a service bring about a fundamental change in the nature of the undertaking in which employees work, the body in question can be regarded as assuming the responsibilities of an employer towards the relevant employees even though it does not itself take over the day-to-day operation of the service.

19. Regulations 5(4A) and (4B) of TUPE provide that an employee's contract will not transfer under TUPE if s/he informs either the transferor or the transferee that s/he objects to becoming employed by the latter. But they also state 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 not therefore entitled to any compensation).

20. Regulation 5(5) provides that regulation 5(4A) is without prejudice to any right of the employee arising apart from TUPE to terminate the contract without notice if a substantial change is made in working conditions to the employee’s detriment.

21. In University of Oxford v Humphreys and another [2000] IRLR 183, the Court of Appeal held that where an employee objects to the transfer of his or her contract of employment because s/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).

22. A particularly perplexing feature of this decision is the Court of Appeal’s refusal to accept that the liability for a constructive dismissal which occurs because the transferee is threatening to change terms and conditions passes to the transferee in accordance with the Litster principle. The practical consequences of the Court’s refusal to do so are unfortunate, to say the least. The transferor may incur substantial liabilities as a result of matters which are entirely outside its control i.e the transferee’s intentions in relation to terms and conditions. And the unscrupulous transferee will have every incentive to contrive pre-transfer resignations so as to give itself the opportunity to recruit new staff on different terms and conditions at the expense of the transferor.

23. It is understood that the decision is under appeal to the House of Lords. In the meantime, the prudent transferor will obtain indemnities from the transferee which cover the risk of constructive dismissal claims.

24. The Court of Appeal has held that since the object of regulation 5 is simply to ensure that the benefit and the burden of the employee’s contract devolve on the transferee, it must not be applied in a way which increases the burden on either party - see Morris Angel & Son Limited v. Hollande [1993] IRLR 169. It follows that if the literal transposition of a term would impose wider obligations than those originally contemplated by the parties, the term in question must be construed purposively, so that it has the same effect post_transfer as it did pre-transfer.

25. In the Morris Angel case this principle was applied to a restrictive covenant which prevented the employee from soliciting or doing business with "any customer of the Company". Read literally in the post-transfer situation, this would have been unreasonably wide, since the employee had not had any dealings with the transferee’s own customers. However, the Court of Appeal was prepared to construe the covenant as limited to customers of the transferred business.

26. A change in the employer’s identity may also affect the way in which bonus, commission or profit share arrangements operate. It is suggested that where replication of the transferor’s scheme would be impossible, or would produce different levels of remuneration because the criteria on which the scheme is based operate in a different way post-transfer, the transferee’s obligation is to provide a scheme which generates comparable levels of remuneration.

27. In Unicorn Consultancy Services Ltd v Westbrook and others [2000] IRLR 80, the EAT held that the liability to pay profit related pay was capable of transferring under regulation 5. The EAT was careful to emphasise that:

28. The Appeal Tribunal nevertheless went on to say:

29. Another form of term which may be linked to the identity of the transferor is one which ties the employee’s terms and conditions to a sector-wide collective agreement. In Whent and others v T Cartledge Ltd [1997] IRLR 153, the EAT was asked to decide whether a private sector transferee was bound by changes in terms and conditions of employment which had been negotiated after the transfer within the local authority collective bargaining to which the old employer belonged. It held that since the contracts of employment of the transferred employees expressly incorporated the relevant collective agreement, the transferee was obliged to implement changes negotiated after the transfer even though it was not represented in the negotiating machinery.

30.

31. The issue which has arisen in Daby and others v South Bank University is whether the principle in Whent applies when employees covered by the Whitley agreements transfer from the NHS into the private sector. The respondent contends that a different approach is justified because pay rates negotiated under Whitley are only effective if approved by the Secretary of State for Health. Under the relevant regulations, the Secretary of State has no power to control the terms and conditions of employees outside the state health service. An employment tribunal is presently considering whether to make a reference to the ECJ.

32. In Angus Jowett & Co. Ltd v. National Union of Tailors and Garment Workers [1985] ICR 646 the EAT held that liability for a failure to consult in accordance with s. 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 does not transfer under regulation 5.

33. The EAT recently returned to this question in Kerry Foods Limited v Creber and others [2000] IRLR 10. An Appeal Tribunal presided over by Mr Justice Morison pointed out that Angus Jowett was decided at a time when the obligations to consult under the 1992 Act and under regulation 10 TUPE were to consult with trade unions on a collective basis. As a result of the infraction proceedings against the UK Government, the ECJ had made it clear that these obligations are designed to protect the rights of workers as individuals. It followed that it was no longer possible to say that liability for a failure to consult does not arise in connection with an individual worker’s contract of employment.

34. The EAT said:

35. The Court of Appeal will hear an appeal in the Kerry case in February 2001.

36. There is currently some confusion concerning the interrelationship between regulations 8(1) and 8(2) of TUPE. In Warner v Adnet Ltd [1998] IRLR 394, the Court of Appeal rejected the argument that regulations 8(1) and (2) are mutually exclusive. According to the Court, it was implicit in regulation 8(2) that the principal reason for a dismissal could be both the transfer and an economic, technical or organisational (ETO) reason.

37. But the decision of a different division of the Court of Appeal in Whitehouse v Charles A Blatchford & Sons Ltd [1999] IRLR 492 points to a somewhat different approach. In Whitehouse, the Court of Appeal held that where an employee is dismissed solely by reason of a transfer, then he must be taken to be unfairly dismissed. But if, in addition, there is an ETO reason, it is for the tribunal to decide whether that is the principal reason for dismissal.

38. The appellant in Whitehouse had been dismissed at the time of a change in contractor because the contract-awarding body had insisted that the number of technicians employed on the contract should be reduced. However, the evidence showed that a reduction in the workforce would have been required whoever had won the contract. In those circumstances, the Court of Appeal concluded that the transfer was simply "the occasion" for the appellant’s dismissal and not the reason for it.

39. The approach indicated in Whitehouse was applied by the Employment Appeal Tribunal in Kerry Foods Limited v Creber [2000] IRLR 10. The apparent tension between Warner and Whitehouse is one of the questions which will be considered by the Court of Appeal when the Kerry case comes before it in February 2001.

40. The appeal in Kerry raises another issue concerning the true meaning of regulation 8(2), namely whether an ETO defence can succeed in a case where the transferor dismisses employees in advance of the transfer for an ETO reason which relates to the way in which the transferee intends to conduct the business after the transfer.

41. The proposition that the transferor can "borrow" the transferee's ETO is arguably supported by the wording of Regulation 8(2), which states that the automatic unfairness principle will not apply if the reason for dismissal is "an economic, technical or organisational reason entailing changes in the workforce of either the transferor or the transferee before or after a relevant transfer".

42. However, the counterargument is to say that the transferor can only justify transfer-related dismissals by reference to its own ETO and cannot rely on reasons which relate to the way in which the transferee intends to run the business. This is supported by dicta in Whitehouse v Charles A Blatchford & Sons Ltd [1999] IRLR 492 and also by the EAT’s decision in BSG Property Services v Tuck [1996] IRLR 134.

43. Permitting the transferor to borrow the transferee's ETO undermines the protection conferred by TUPE in several respects. In particular: