TUPE update: unwanted certainty?
In our briefing in September
2011, we reviewed recent developments in respect of the
operation of the Transfer
of Undertakings (Protection of Employment) Regulations 2006
("TUPE") in the context of administration. The purpose of
this briefing is to provide an update following recent
developments.
On 14 December 2011, the Court of Appeal gave
its decision in the case of
Spaceright Europe Ltd v Baillavoine the decision of the
Employment Appeal Tribunal ("EAT") being the subject of our
September briefing. The Court of Appeal, agreeing with the
EAT, held that the costs associated with a dismissal that is
connected with a business transfer will have to be paid by the
buyer of the business whether or not the particular transfer or
transferee was in existence or contemplation at the time of the
dismissal. The Court of Appeal therefore declined to follow
the competing 1994 EAT decision in
Ibex Trading v Walton where the EAT had held that a
transferee would only be liable if the dismissal was connected with
the actual transfer to that transferee.
What this meant in Spaceright was
that a buyer from the administrators a month after their
appointment was held to be responsible for the claim of a highly
paid Chief Executive Officer who was unfairly dismissed by the
administrators immediately following their appointment. The
fact that the administrators had not even started marketing the
business, much less indentified a buyer, at the time of the
dismissal did not mean that that the dismissal was not connected
with the transfer. Rather it is simply a question of fact
whether or not there is a connection between the two events and in
this respect the fact that the employee was dismissed by
administrators who will generally be seeking to secure a transfer
of a business must be a strong indication that the necessary
connection exists.
However, it goes wider than this since
administration is simply a factor (albeit a compelling factor)
to be taken into account in establishing the necessary
connection. If an employee is dismissed pre-administration by the
original employer this may still be found to be connected with the
ultimate transfer so that the transferee will be liable under
TUPE. In this respect it is worth noting that if by contrast
the employee is dismissed post-transfer by the transferee then the
transferee will be solely responsible for the associated costs
since in these circumstances the Secretary of State will not be
responsible (as would otherwise be the case under TUPE) for certain
of the employee's pre-transfer claims subject to statutory limits;
see the decision of the EAT in Pressure
Coolers Ltd v Malloy (June 2011).
Another argument that was advanced by the
transferee buyer in Spaceright was that the evidence
suggested that the CEO had been dismissed because of the company's
dire financial situation rather than because of any transfer.
On the facts the Court of Appeal did not agree that this was the
case but in doing so they left the door open to administrators
being able to show that a particular dismissal was not transfer
related or, if it was, it was for "economic, technical or
organisational reasons entailing changes in the workforce" (a so
called "ETO reason"). In this context, the Court of Appeal
confirmed that making a business a more attractive proposition for
a seller is not an ETO reason rather for "an ETO reason to be
available there must be an intention to change the workforce and to
continue to conduct the business, as distinct from the purpose of
selling it".
The second issue which has again come before
the courts is the vexed question of whether an administration can
ever be "bankruptcy proceedings or any analogous insolvency
proceedings which have been instituted with a view to the
liquidation of assets of the transferor" (regulation 8(7) TUPE)
since if this is the case there will be no automatic transfer of
employees and any dismissals in connection with the transfer will
not be automatically unfair. In the controversial November
2008 case of
Oakland v Wellswood (Yorkshire) Ltd) the EAT took the view
that this was a fact based test and that a decision would have to
be made in every case as to whether or not the purpose of the
administration was a liquidation of assets, which would trigger the
exemption from TUPE, as opposed to "relevant insolvency
proceedings" being proceedings "not with a view to the liquidation
of [the transferor's] assets" (regulation 8(6) TUPE) which would
not trigger the exemption. In Oakland, there was a
pre-pack sale of the company's business and in these circumstances
the EAT concluded that there could by definition be no intention to
save the company (as opposed to its business) at the time when the
administrators were appointed as a disposal was pre-ordained.
When Oakland came before the
Court of Appeal in July 2009, this fact based approach was
criticised but as the Court of Appeal was able to dispose of the
appeal on a separate ground it felt unable to reach a definitive
view on the categorisation issue. However, the point soon
came back before the courts in a number of consolidated
appeals before the EAT, that were reported under the name of the
lead case,
OTG Ltd v Barke (decision given February 2011), where the
EAT rejected the approach in Oakland preferring an
"absolute approach" that would draw a "bright line" distinction
between administration on the one hand and liquidation on the
other. On this basis an administration could never be
"analogous insolvency proceedings" to bankruptcy so that any
business transfer would always be covered by TUPE. In
reaching this conclusion the EAT decided that an insolvency
procedure must be categorised by reference to its principal
objective rather that the use to which it can be put. In the
case of administration it is clear from paragraph 3 schedule B1
Insolvency Act 1986 that at the point when a company is placed into
administration the primary objective is the rescue of the company
and its business.
Against this background the Court of Appeal
has now considered the conflicting decisions of the EAT in
Oakland and Barke in
Key2Law (Surrey) LLP v De'Antiquis, which was one of the
other appeals consolidated with OTG Ltd v Barke before the
EAT. Given the views expressed by the Court of Appeal in
Barke, it is perhaps unsurprising that in its judgment in
Key2Law the Court of Appeal chose to adopt the absolute as
opposed to the fact based approach holding that it is
"necessary to focus not on the reasons that led to the making
of the particular order but … rather on the purpose of the
procedure that is triggered by its making". Accordingly
there is now a clear decision to the effect that on administration
a business transfer will always be covered by TUPE.
It is clear, however, that even if
administration is always classified as "relevant insolvency
proceeding" this does not mean that TUPE will always apply where
there is a transfer by administrators since TUPE only applies where
there is a "transfer of an undertaking, business or part of a
business … to another person where there is a transfer of an
economic entity which retains its identity" (regulation
3(1)(a) TUPE, emphasis added). Accordingly it remains unlikely
that a straightforward sale of equipment or other assets by
administrators would be a "relevant transfer" although, as is
always the case with TUPE, this will be a question of fact and
degree. Although logically this also means that a transfer by
a liquidator should always attract the TUPE exemption one could
envisage an Employment Tribunal taking a contrary view in
circumstances where the liquidator sells a going concern
business.
Taken together these cases provide some long
overdue certainty on the application of TUPE to companies in
administration but such certainty is bought at the expense of
arguments that were previously available for exemptions that might
have facilitated business sales by administrators. However if
as a matter of policy it is correct that such costs should not
transfer then we would suggest that this needs to be addressed by
amendment to TUPE rather than increasingly novel (some might say
desperate) interpretation of its provisions. In this respect
we hope that these issues will be considered by the Department of
Business Innovation and Skills
which has announce a 31 Jaunary deadline for submitting
evidence on the effectiveness of TUPE as part of its more general
review of employment law.
