franchise business model may constitute ETO reason for
dismissal of employees following TUPE transfer
In the recent joined cases of Meter U Limited v Ackroyd
and Meter U Limited v Hardy, the Employment Appeals
Tribunal (EAT) considered whether changing the method of providing
services from an employed workforce to a franchise model could
amount to a legitimate reason for dismissing individuals following
a TUPE transfer.
Meter U Limited (Meter U) provided meter reading services by
means of franchisees; it did not directly employ any meter reading
staff. The franchisees were usually limited companies (typically
owned by individual meter readers). Following the submission of
successful tenders by one of Meter U's main customers, Siemens, to
Scottish Power, Siemens sub-contracted the meter reading work it
had won from Scottish Power to Meter U. In December 2009, service
provision changes under the Transfer of Undertakings (Protection of
Employment) Regulations 2006 (TUPE Regulations) occurred and the
claimants' employment transferred from their respective employers
to Meter U. The claimants' employers were companies who had
previously supplied meter reading services to Scottish Power before
losing the work to Siemens - G4S Utility Services (UK) Limited and
N Power Yorkshire Limited employed the claimants in the Hardy and
Ackroyd appeals respectively.
During the consultations carried out as required under the TUPE
Regulations, Meter U explained its business model to the
transferring employees, offering them the option to establish
franchises in order to continue providing meter reading services.
Only one employee chose to do so and Meter U terminated the
employment of all other transferring employees on grounds of
tribunal decision and grounds of appeal
The employment tribunals dealing with each set of cases
initially found that the claimants had been dismissed for a reason
relating to the TUPE transfer. Both tribunals held that Meter U had
not established "an economic, technical or organisational [ETO]
reason entailing changes to the workforce", as required by
regulation 7(2) of the TUPE regulations (although their reasons for
doing so differed), and the dismissals were therefore
In the Hardy case the tribunal found that there had been no
reduction in the number of meter readers required, therefore there
had been no change to the workforce and consequently no ETO reason
that would have allowed redundancies to be made by Meter U. The
tribunal held that the meaning of the word "workforce" in
regulation 7(2) must have been intended to encompass everyone
working for Meter U, whether as employees, franchisees or
otherwise. In the Ackroyd case, the tribunal took the approach that
the TUPE Regulations could not have been intended to have the
effect that employment rights would be lost in the circumstances
where only a franchise model was on offer after the transfer.
Meter U appealed both decisions. The central issue of the appeal
was whether the tribunals' interpretation of the word "workforce"
The EAT allowed the appeals, finding that Meter U's corporate
franchisees should not be included in Meter U's "workforce" and
that the dismissals were for an ETO reason entailing changes to the
workforce and were for redundancy.
The term "workforce" is not defined in either the TUPE
regulations or the European legislation from which it is derived,
although it was decided that on a common sense reading of the
relevant provisions it should not include limited companies. The
EAT stated that employees of corporate franchises are part of their
employer's workforce and not their franchisor's workforce. The
franchisees and their employees should not have been included in
Meter U's "workforce" when working out whether or not there was a
changed requirement for meter reading staff following the transfer,
as the franchisees were constituted as limited companies which are
separate legal entities and not employees.
A Court of Appeal decision in 1985 established that a change in
the identity of the individuals making up a workforce does not
constitute a change in the workforce itself, provided that the
overall number and function of the employees as a whole remain
unchanged. Applying that decision in the present cases, the EAT
found that a change from using individual employees to using
corporate franchises to provide meter reading services had led to a
reduction in the workforce and that (unless the franchise model was
a sham) the claimants' dismissals had been for reason of
redundancy. Since an ETO reason under the TUPE Regulations had been
established, the dismissal by Meter U of transferred employees who
opted not to become franchisees was not automatically unfair, but
was potentially fair by reason of redundancy.
The Ackroyd case has been remitted to its tribunal to determine
whether the claimants' dismissals were "fair" within the meaning of
the Employment Rights Act 1996 and the Hardy case remitted to
determine whether or not the franchise model was as sham and, if
not, whether the dismissals were "fair". It is worth noting that
neither tribunal originally found the model to be a sham; the
chairman in the Ackroyd said it was "clear that the franchise
business model has been in operation for many years and
documentation…gives a clear indication that [the] real position is
what it says it is." However, it will be interesting to see if the
tribunal does find Meter U's franchise model to be a sham.
The argument was put forward in the Hardy case that excluding
franchisees from the definition of "workforce" would pave the way
for "unscrupulous transferees" to implement a bogus franchise model
to enable the dismissal of unwanted employees following a transfer.
It is, however, well established that an individual's employment
status will be determined by reference to their duties and the
relationship with their "employer", rather than by reference to
their title or any other label which is given to that relationship.
Simply calling an employee a "franchisee" will therefore not be a
means of subverting the requirements of the TUPE Regulations.
On the other hand, businesses which do operate a genuine
franchise model may find themselves able to dismiss employees
legitimately following a TUPE transfer, since it is now confirmed
that a change in employment status from employee to corporate
franchisee can amount to an ETO reason – the transferred employees
being surplus to requirement and so able to be made redundant.
In both cases, the service provision changes arose as a result
of successful bidding in competitive tenders. It is possible that
the potential risks, costs and complexities associated with TUPE
transfers mean that, in certain circumstances, franchised
businesses can gain a competitive advantage in outsourcing
exercises over those which employ staff directly.
The decision may also assist franchised businesses acquiring
another entity whose staff perform the same or similar services to
its franchisees. Franchisors who insist that their franchisees
operate through limited companies are likely to find it easier,
following the acquisition, to reduce staff overheads without
breaching the requirements of the TUPE Regulations.