Recent Posts - TUPE

September 3, 2018
by Jeffrey
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HMRC Policy change in enforcement of NMW obligations on transfer

In its recent Agent Update on page 4 HMRC have announced:

Changes in how National Minimum Wage (NMW) penalties apply to employers who have staff transferred under Transfer of Undertakings (Protection of Employment) (TUPE) rules
HMRC has changed its approach to charging penalties when enforcing NMW where there has been a transfer of staff from one employer to another under TUPE Regulations 2006 provisions.
Since 2 July 2018, where TUPE applies, all NMW liabilities, including the full penalty amount are applied to the new employer.
HMRC previously charged the former employers all, or part of the penalties where they were triggered by arrears that accrued before workers were transferred under TUPE provisions. Further information on TUPE can be found on the Acas website.

More on enforcement of the national minimum wage including penalties can be found on the GOV.UK website.

Link to Agent Update

August 31, 2018
by Jeffrey
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Nicholls v London Borough of Croydon EAT – 23 August 2018

The Issue

This case principally concerns Reg 3(5) and what amounts to “an administrative reorganisation of public administrative authorities or the transfer of administrative functions between public administrative authorities”.

The Background

This case concerns transfers that arose out of the reorganisation of public health provision in 2013, whereby certain public health functions that had been undertaken by the NHS were transferred to local authorities. Under provisions of the Health and Social Care Act 2012 the Secretary of State was empowered to put in place transfer schemes intended to govern the transfer of employees from the NHS to local authorities. It was considered that TUPE did not apply because of Reg 3(5) which provides that administrative reorganisations of public administrations or transfer of administrative functions is not a relevant transfer.

The transfer scheme introduced in relation to the transfer in this case did not replicate TUPE. First the provision which dealt with unfair dismissal (i.e. the equivalent of Reg 7(1)) was limited in time and covered dismissals up to 31 March 2015. The Claimants were dismissed after this date and therefore could not rely on the transfer scheme. They therefore had to bring their cases under TUPE. Furthermore, there was no equivalent to Reg 4(4) which renders variation to Ts and Cs void if the sole or principal reason for the variation is the transfer.

The Council resisted the claims on the basis that there was not a ‘relevant transfer’ for two reasons: First there was no transfer of an economic entity’ and second this was a transfer to which Reg 3(5) applied. Furthermore, even if there was a relevant transfer, Reg 4(1) only applied to employment contracts that would otherwise be terminated because of the transfer, and that because of the staff transfer scheme there was no risk of the claimants’ employment being terminated because of the transfer.

There were therefore two preliminary issues:

(1) whether there was ‘a relevant transfer’, and;

(2) if there was a relevant transfer whether the Claimants’ contracts of employment transferred.

The ET answered no to both of these questions.

The EAT Judgment

In a comprehensive judgment which will be required reading on the issue of transfers of public administrative functions, Lavender J, extensively reviewed the case law and held, in relation to the first issue (i.e. the economic entity/Reg 3(5)) issue):

First, the purpose of Reg 3(5) is to identify something that would not be a transfer in any event. I.e. something that was not an economic entity. (§20(5)).

Secondly, it is relevant to look at EU competition law which uses the same definitions as TUPE/the Directive (§20(3)). The aim of EU competition law in relation to state actors is to ensure that when the state is engaging as an economic operator it should not have the economic advantage of not having to apply the same rules as non-state actors. If the state acts as an economic operator then the Acquired Rights Directive and EU competition law will apply but not otherwise (§43) and (§46). These apply where the activities constitute an economic entity but do not apply where the activities fall within the less clearly defined category of ‘exercising public functions’ (§45).

Thirdly, it is necessary to consider the activities that are being undertaken by the state entity being transferred in the particular case; and then to determine whether those activities belong to the category of: (a) “exercising public powers”; or (b) carrying on an economic activity by offering goods and services on the market. (§26) and (§45).

Fourthly, the purchasing or commissioning of goods or services cannot in itself constitute an economic activity; but a body which supplies goods or services in a market is carrying on an economic activity, both in supplying those goods or services and in purchasing goods or services for the purpose of that supply (§42).

Fifthly, when considering the economic entity it is relevant to consider: (1) whether the activity consists of the provision of goods and services (as opposed, for example, to the mere acquisition of goods or services); and (2) whether there is a market for the relevant goods or services. (§48). There will be an economic activity even if goods or services are provided free of charge or without a view to making a profit provided the activity is in principle capable of being undertaken by a private undertaking with a view to profit (§49) and (§50). An entity undertaking such functions will be an undertaking even if: It is a public law entity; it is publicly funded; it acts in the public interest, and; it is pursuing statutory functions (§51).

Sixthly, the central concept underpinning Reg 3(5) is that the entity is exercising public functions which are not an economic activity (§52).

Seventhly, when considering this issue the court is to ask (see §55):

(1) whether the activity is necessarily carried out by public entities or is an essential function of the state;

(2) whether the activity is a core state activity;

(3) whether the activity has always been carried out by public entities;

(4) whether the activity involves the exercise of “prerogatives outside the general law” or “privileges of official power”;

(5) whether the activity involves the exercise of rights and powers of coercion;

(6) whether the activity is “a public service to which any idea of commercial exploitation with a view to profit is alien” or one which “cannot conceivably be carried out within a competitive system”;

(7) whether the activity has “an exclusively social function”;

(8) whether the activity is typically that of a public authority;

(9) whether the activity is carried out in the public interest or a service provided for the benefit of the whole community or intended to safeguard the general interests of the state or other public, and;

(10) whether the activity involves providing services in competition with those offered by operators pursuing a profit motive.

But none of these are a definitive statement of the necessary and sufficient conditions for finding that an activity involves the exercise of public authority.

Eighthly, it is necessary to have regard to the function under consideration and not the entirety of the state entity’s activities (§62) and (§63)

On the second issue the EAT was much briefer and held that it would be inconsistent with the Directive, and with the UK’s obligation to give effect to the Directive, if the words “which would otherwise be terminated by the transfer” in Reg 4(1) meant that the claimants could not rely on Reg 4(4) because of the transfer scheme. These words did not appear in the Directive and should not be read as preventing Reg 4(1) from applying in the present case.

Link to ET judgment

Link to EAT judgment

August 12, 2018
by Jeffrey
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Colino Sigüenza v Ayuntamiento de Valladolid ECJ – 08 August 2018

In this case the closure of an undertaking for a period of 5 months did not have the effect of preventing a transfer under the Acquired Rights Directive.

The Facts

CS was music teacher employed by a music school. The School was initially operated by a local authority but from 1997, after its operation was put out to tender, until 31 March 2013, it was operated by ME. ME managed the premises, the facilities and instruments and took on the staff. It operated the School on behalf of the local authority and was paid by them. There was a commercial dispute in 2013 which led to the local authority ceasing to pay ME in February 2013. As a consequence, on the 27 March 2013 ME dismissed all of the staff and closed the School with effect from the 31 March 2013. It returned the premises, instruments and facilities to the local authority. In August 2013 another contractor, In Pulso Musical, took over the school and commenced the operation of the School in September 2013 and continued to operate the School for the academic years 2013/14 to 2015/16.

CS claimed there was transfer of his employment from ME to In Pulso Musical. The Spanish High Court referred to the CJEU the question of whether there was a transfer where the activity ceased with effect from the 1 April 2013, two months before the end of the academic year 2012/13, and recommenced in in September 2013 at the start of the the new academic year 2013/14.

The CJEU Judgment

The CJEU held that there was a transfer. In doing so it restated the well-known principles for determining whether there is a transfer of an undertaking, in particular:

There is transfer when there is a change in the legal or natural person carrying out the undertaking; whether or not the ownership of tangible assets transfer.
The decisive criterion is whether the entity retains its identity as indicated by the fact that inter alia the operation is actually continued or resumed.
To determine whether that condition is met, it is necessary to consider all the facts characterising the transaction concerned, including the type of undertaking or business concerned, whether or not its tangible assets, such as buildings and 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 the transfer, and the period, if any, for which those activities were suspended. An overall assessment of all of the circumstances must be considered.
The degree of importance attached to each criterion will vary depending on the activity.
Where the activity is based essentially on manpower, the identity of an economic entity cannot be retained if the majority of its employees are not taken on by the alleged transferee.
However, in a sector where the activity is based essentially on equipment, the failure of the new contractor to take over the staff which its predecessor employed to perform the same activity is not sufficient to preclude the existence of a transfer of an entity which retains its identity

Applying those principles to this case the CJEU observed:

The local authority made available to the new contractor all the material resources which it had assigned to the former contractor.
As the activity was not an activity based essentially on manpower, the fact that they did not transfer was not determinative.
The fact that the ownership of assets did not transfer from one contractor to another was also not determinative.
Although the closure of the School for a temporary period was a factor to be taken into account, this was not determinative in a case where three months of the closure was during school holidays and the incoming contractor commenced the activity at the start of the new academic year.
Whether there was a transfer was matter for the national court to decide but it was not precluded by the 5 months cessation of activities in this case.

Comment

The underlying facts would have fulfilled a service provision change under TUPE. This does not exist in Spanish law nor under the Directive and that is why the CJEU looked at the matter from first principles. The central issue in the case (cessation of the operation of the undertaking or service for a period of time) is of importance to any kind of transfer

Link to CJEU judgment

February 22, 2018
by Jeffrey
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London Care Ltd v Henry EAT – 21 February 2018

This case is an illustration of the importance of identifying the pre-transfer ‘activities’ in a service provision change under Reg. 3(1)(b).

The Facts

The case concerned the provision of adult care packages. S provided residential services for the Council up to 2012. After 2012 it did so under a framework agreement with other providers but remained the major provider.

As at July 2016 S provided 168 care packages to service users. It divided up the geographical area covered by the contract with the Council into 4 districts. East 1, East 2, West and Central so that service users would tend to have the same carers visiting their home. By the date of the transfer each care package lasted on average 9 months. S terminated the contract in July 2016.

The Council proposed that 4 transferees would undertake the work that S had undertaken; PC, LC, KE and CW. The Council decided to allocate care packages to each of the providers based on post code (i.e. it did not follow the district allocation of S). In some cases all a carers’ work went to one of the new providers. In other cases that work was split between more than one of the new providers. S decided that if one provider had more than 50% of the work of a carer it would allocate the carer to that new provider.

The ET Judgment

The parties could not agree what the activity was.

The employees said the provision of adult homecare to individual service users, or clients, pursuant to spot contracts (i.e. standalone separate contracts for each service user), in accordance with individual service delivery agreements known as Care Plans.

S said the activity was the provision of a package of care to a number of service users within the Borough.

CW said the activity was the provision of the Adult Social Care Services but that the identity of the client on whose behalf of whom the services were carried out was not clear.

LC said that the determination of the identity of the clients for the purposes of Reg. 3(1)(b)(ii) must precede a determination of whether the conditions of Reg. 3(1)(b) and Reg 3(3A)(1) are met. It suggested three possibilities of the Council as client, the individual service user as a client, and both the Council and individual service users as client in combination. The activities was in general terms the provision of adult home care to individual service users.

The EJ held that the client was the Council. The relevant activity was the provision of adult homecare to individual service users in accordance with the care plans to a number of service users.

The effect was that the employees transferred to new providers as transferees.

The EAT Judgment

Two transferees appealed. Their case was that this was a fragmentation case and no employees should have transferred. They also appealed on the basis the judge erred on the issue of organised grouping.

The EAT (Supperstone J) allowing the appeal held:

That the EJ had not reached a clear conclusion as to what the activity was. She had rejected the argument that each care plan was an individual contract but beyond that it was not clear whether she held that the activity consisted of the entire contract with the Council, or a subset of it.
Fragmentation was an issue that should have been considered at the point the EJ considered whether the activities carried on by the subsequent contractor after the relevant date were fundamentally or essentially the same as those carried on by the original contractor. Here this issue was considered when considering whether there was an organised grouping. That was an error.
In rejecting the case for fragmentation, the EJ had held that the re-allocation of service users was based on postcodes. However, there was no evidence that one contractor took on the majority of the work; and in relation to a number of employees it was difficult to establish where the employment should transfer given that various service users went to different contractors. Whilst S’s work generally was organised on a regional basis, post-termination the Council-funded work was divided on the basis of both capacity and postcode.
The EJ erred on the issue of organised grouping. She had made no finding as to whether such a grouping existed, whether it was deliberately formed and if so that was deliberate or conscious.

Link to judgment

February 12, 2018
by Jeffrey
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Hare Wines Ltd v Kaur EAT – 17 October 2017

The issue in this case is whether an employee dismissed immediately before the transfer was automatically unfairly dismissed because the principal reason for the dismissal was the transfer (Reg 7).

The Facts

K was employed by R1, the transferor, which got into financial difficulty in late 2014. HW agreed to purchase R1’s business. At a meeting held just before the transfer, on 9 December 2014, K was dismissed by R1. She was told the reason was that the business was ceasing to trade. However, 6 or 7 other employees transferred from R1 to HW. HW’s case was that at the meeting held on the 9 December, two days before the transfer, K had objected to transferring.

The ET Judgment

The ET had to resolve a factual issue. HW said that at the meeting on the 9 December K had objected to the transfer by saying she was not happy working with HW. K’s case was that she had a strained relationship with a manager, C, and that C did not want her to transfer and hence HW also did not want her to transfer. The Tribunal resolved this factual dispute in favour of K. It held but for her dismissal on the 11 December she would have transferred and therefore the reason for the dismissal was the transfer.

The EAT Judgment

HW appealed on the ground that the ET erred in law in determining the reason was the transfer or gave insufficient reasons for this decisions. Essentially HW’s case is that reason for the dismissal was personal to K’s circumstances and therefore not related to the transfer.

The EAT (Choudhury J) dismissed the appeal for the following reasons:

Just because a reason is personal to the employee does not mean it is not because of the transfer. The regulations are designed to protect employees and caution should be exercised before introducing new categories of defence which may undermine this protection.
The proximity of the dismissal to the transfer is always a relevant consideration. P Bork International v Foreningen Af Arbejdsledere I Danmark
Where there were existing difficulties which were ongoing but these were only resolved at the point of the transfer by dismissal it is open to the Tribunal to conclude that the transfer is the reason.
The ET had not taken a ‘but for’ approach but has sought to identify the reason forth dismissal (see Smith v Brooklands College).

In short: “An issue affecting an employee’s conduct or competence, if suddenly acted upon at the point of transfer, is unlikely to be the sole or principal reason for the dismissal. An employer taking the opportunity to dismiss in such circumstances could reasonably be said to be motivated by the transfer, thereby making the transfer the principal reason for the dismissal. It will all, of course, depend upon the facts of individual cases”.

Link to EAT judgment

December 12, 2017
by Jeffrey
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Guvera Limited v Ms C Butler and Others EAT – 21 November 2017

It is not uncommon for a business to be acquired by a transferee over a prolonged period, or, in share sale scenario, for control of the business to be increased by a parent company over time such that the parent company is effectively the employer. This is particularly important for time limit issues and also in cases of insolvency. This case explores these issues in the context of a share acquisition.

The Facts

On 23 January 2015 BB (a subsidiary of G) bought shares in Blinkbox from Tesco. Mr de V, director of G in the UK, arranged the purchase and became to sole director of Blinkbox. It was clear that despite attempts to turn the business around, insolvency was now a prospect. G considered its options and was interested in purchasing Blinkbox’s assets and acquiring approximately 20 employees.

Mr de V left the business on 12 May 2015 at which point G took over the day to day control of Blinkbox. This continued until Blinkbox went into administration on the 11 June 2015. On 15 May 2015 54 employees of Blinkbox were made redundant. On the 18 May 2015 G announced to the remaining Blinkbox staff that they were now a part of G as opposed to the subsidiary.

The ET Judgment

The ET held that transfer had taken place on the 12 May 2015. The events after the purchase of shares could be divided into three periods:

From 23 January 2015 to the end of April 2015 the business remained with Blinkbox, under the directorship of Mr de V, who had been given 90 days to turn the business around.
From the end of April 2015 to 11 May 2015, when Mr de V resigned as director of Blinkbox. Insolvency was now a prospect for Blinkbox. G in considering its options, was interested in acquiring Blinkbox’s assets and approximately 20 employees. The ET found that there was no transfer during this period as the business remained “under the control of Blinkbox, Mr de V as its director and its own senior management team”.
The third period started on the 12 May 2015 when Mr Damien King, G’s Chief Technical Officer arrived at Blinkbox following Mr de V’s departure and took over day to day control. This period continued until Blinkbox went into administration on 11 June 2015.

The ET observed that:

A sale of the share capital in a limited company does not, as such, amount to a transfer of undertaking.
The fact that a company is wholly-owned subsidiary of another does not, of itself, mean that the parent controls the business of the subsidiary.
However, those principles do not preclude a scenario in which at the same time, or following, a share sale, there is also a transfer of undertaking from the company which was the subject of the share sale to another company in the group which it has joined as a result of the share sale.
It is a multi-factorial test and no single factor is decisive.

The ET held that there was a transfer at the start of the third period, when G assumed day to day control of Blinkbox in a way which went beyond the mere exercise of ordinary supervision and information gathering between parent and subsidiary. This crossed the legal line identified by the Court of Appeal in Millam. The announcement that took place on the 18 May 2015 was not announcing a change implemented on that day but rather making official what had already taken place.

G appealed on the ground that the ET misdirected itself on the law focussing on the degree of control said to be exercised by the G over the Blinkbox rather than focusing on the true question as to whether control had actually passed from the Blinkbox to the G. Further and in the alternative, a transfer based on ‘assuming control’ requires precise findings of fact as to the point of transfer and the degree of control that is exercised; the ET failed to identify with any precision the point of transfer and as a result erred as to the date the transfer took place.

The EAT Judgment

The EAT (Mr Justice Lavender) dismissed the appeal and upheld the ET’s reasons:

The ET had correctly recognised that the test for transfer was multi-factorial and had found that G assumed the rights or powers of an employer towards the employees. In addition, the EAT found the submission that there could be no transfer unless G also assumed the responsibilities of an employer unattractive and inconsistent with the policy underlying the Regs and the Directive. The EAT held that none of the cases to which it was referred establish that it is a necessary condition of a transfer that the transferee has assumed the obligations of employer towards the employees of the undertaking

Link to EAT Judgment

November 28, 2017
by Jeffrey
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Securitas v ICTS Portugal ECJ – 19 October 2017

This case raises the question of whether a service provision change amounted the transfer of an economic entity that retained its identity (i.e. an old style transfer within Art 1(1) – TUPE Reg 3(1)(a)). (In Portugal there is no service provision regulation similar to Reg 3(1)(b)).

Here a security company, ICTS, lost its contract to provide security guards to Securitas who sought to argue that the mere taking over of a contract could not amount to transfer. It had refused to take on the ICTS employees. It also sought to rely on the provision of a collective agreement which provided that if the employer lost a customer this would not amount to a transfer. The question also arose as to whether such a provision was void.

The ECJ Judgment

The ECJ held that there was no principle that a service provision change could never amount to the transfer of an economic entity that retained its identity. in particular:

(a) there was no requirement that the transferor and transferee had to be in a direct contractual relationship. A transfer could take place via a third party intermediary (i.e. a tender process).

(b) It was necessary to consider “all the facts characterising the transaction in question, including in particular the type of undertaking or business, whether or not its tangible assets, such as buildings and 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 the transfer, and the period, if any, for which those activities were suspended”.

(d) In assessing the facts, the type of undertaking or business concerned must be considered. The degree of importance to be attached to each criterion will necessarily vary according to the activity carried or the production or operating methods employed in the relevant undertaking, business or part of a business. In a sector where the activity is based essentially on manpower, the identity of an economic entity cannot be retained if the majority of its employees are not taken on by the transferee. Where, however, the activity is based essentially on equipment, the fact that the former employees of an undertaking are not taken over by the new contractor to perform that activity, as in the case in the main proceedings, is not sufficient to preclude the existence of a transfer.

(e) The fact that the tangible assets essential to the performance of the activity, taken over by the new contractor, did not belong to its predecessor but were merely provided by the contracting entity did not preclude the existence of a transfer. However, only the equipment that was actually used in order to provide the services, excluding the facilities that were the subject of those services, were be taken into consideration.

(e) Because the collective agreement contained a provision that prevented a transfer when the employer (ICTS) lost a customer and this provision did not permit any consideration of the factual circumstances it contravened Art 1(1) of the directive and was of no effect.

Link to the ECJ judgment

Comment

The point of principle in the case, namely whether, an SPC can amount to an old style transfer is unlikely to be of much interest given there are express provisions in Reg 3(1)(b) dealing with this. However, the case does provide a useful reminder that the requirements for old style transfers are broad and fact sensitive and this may be helpful in those cases in which the SPC requirements are not fulfilled.

September 6, 2017
by Jeffrey
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Xerox Business Services Philippines Inc Ltd v Zeb EAT – 01 September 2017

This is a rare case of an offshore transfer. At issue was whether the employee was entitled to transfer to Manila in the Philippines on his existing UK terms and conditions (‘Ts and Cs’).

The Facts

C was employed by the transferor (X UK) in its accountancy department. His place of work as stated in his contract was ‘Leeds or Wakefield’ and such other place as the employer might require him to work within reasonable commuting distance of his home. The accountancy department of X UK was offshored to the transferee, X Philippines, with effect from 1 October 2014. It was accepted that this was transfer to which TUPE applied. Employees were given a choice. They could object to the transfer and if they did they would receive a generous redundancy payment. If they did not object they would not transfer but would still be made redundant but only with the statutory minimum redundancy pay. X Philippines would have no requirement to carry out the transferring work in the UK after the transfer. Employees asked if they could transfer to the Philippines. They were told they could, but only on local (i.e. Philippines) Ts and Cs.

C said he wanted to transfer to the Philippines on his existing Ts and Cs. This was refused and X Philippines explained that if he was to transfer from his existing Ts and Cs this would defeat the purpose of the offshoring which was to reduce costs. (The UK salary was 10 times that payable in the Philippines). C was ultimately dismissed. and paid statutory redundancy pay.

The ET Judgment

C brought a claim for unfair dismissal. There were various procedural challenges but also C argued that he was not redundant. The ET agreed and held that redundancy was not the genuine reason for the dismissal. The work still needed to be done, albeit in Manila, and the real reason why C was dismissed because he wanted to remain on his existing terms. Secondly, the ET held there was an agreed variation to C’s place of work. It had been agreed that he could transfer to Manila. This was a variation which was permissible by Reg 4(5).

The EAT

The EAT (HHJ Richardson) allowed the appeal and held:

(1) There was no mutual variation. Following the transfer, X Philippines was required to employ C in Leeds or Wakefield. It was not required to employ him in Manila. C was only prepared to work in Manila if his existing Ts and Cs were honoured and therefore there was no agreement as to the terms on which C would be employed. Ordinary contractual principles apply to a reg Reg 4(5) variation (see Reg 4(5C)). It was not possible to separate the location of work provision from the other Ts and Cs because the offer put forward by the transferee was that an employee could transfer only if he accepted local Ts and Cs.

(2) There was a genuine redundancy situation. The ET erred by focusing on the position in Manila and did not apply the statutory test under section 139 of the Employment Rights Act 1996. The first question was whether, as a matter of fact, the requirements of the transferee’s business for employees to carry out work of a particular kind in the place where the employee was employed by the employer, had ceased. The ET did not specifically address this question but the findings of fact were only consistent with an answer that those requirements had ceased.

(3) Neither party in the ET had addressed Reg 7 of TUPE (i.e.whether the sole or principal reason for the dismissal was the transfer). The transferee had not raised it because it was not raised by C. Nevertheless the EAT held that it ought to be addressed by the tribunal in any TUPE unfair dismissal case because it is a core part of unfair dismissal law in such a case. Generally a genuine cessation or diminution of business or another form of genuine business reorganisation if it entails changes to the workforce before or after transfer will fall within Reg 7(2). If the sole or principal reason does fall within Reg 7(2), then the reason for dismissal will either be redundancy or some other substantial reason and the ET will go straight on to apply the test in section 98(4) of the ERA. The case was remitted to determine this issue.

Link to judgment

June 28, 2017
by Jeffrey
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Federatie Nederlandse Vakvereniging v Smallsteps BV ECJ – 22 June 2017

The ECJ considered the application of the Directive to pre-pack administrations. Four employees and their trade union brought proceedings after the employees were dismissed following a pre-pack.

Article 5(1) of the Directive provides that the automatic transfer provisions under Art. 3 and Art. 4 of the Directive; shall not apply to any transfer… where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of a competent public authority (which may be an insolvency practioner authorised by a competent public authority).

This is replicated in Reg. 8(7) of TUPE.

The Facts

The Estro Group operated 380 nurseries and employed 3,600 workers. It became insolvent and an arrangement was made whereby it would transfer a substantial proportion of its business to a newly created company, Smallsteps. An administrator was appointed on the 10 June 2014. A declaration of insolvency was made by the Court under Dutch law on the 5 July 2014 and on the same day the business, consisting of 250 of the 380 nurseries, was transferred to Smallsteps. The claimants worked in nurseries taken over by Smallsteps and were not offered contracts. They sought a declaration that their employment had transferred.

The Dutch court referred a number of questions to the ECJ but the principal issue was whether Art. 5(1) applied to pre-pack whereby the arrangement for the transfer of the business was made before the declaration of insolvency and carried out immediately after that. I.e. where there never any intention to enter liquidation.

The ECJ

The ECJ stressed that Art. 5(1) only applies to insolvency proceedings where they have been instituted with a view to the liquidation of assets of the transferor and they under the supervision of an insolvency practitioner. This has to be construed strictly as it deprives workers of the rights on transfer. This exclusion does not extend to the process of preparing for insolvency. Whilst in this case there was an insolvency procedure and the transfer did not take place until after the declaration of insolvency, the procedure was aimed at the continuation of the undertaking and not its liquidation. Therefore, Art. 5(1) did not apply.

A pre-pack procedure may be aimed both at maximising the return for creditors and ensuring the continuation of the undertaking, its operational character or the viability of its business. The ECJ held that although there may be some overlap of those two objectives within the aims of any given procedure, the primary objective of the procedure in this case was to ensure the continuation of the undertaking and therefore Art. 5(1) did not apply as the procedure was not instituted with a view to the liquidation of assets.

Comment

English case law has taken an absolutist approach looking at the character of the insolvency proceedings rather than the underlying intention (see Key2Law). It is possible, that this case may lead to a challenge to that approach, although that us unlikely because Key2Law held that Reg 8(7) will never apply to administration proceedings.

Link to Judgment

June 13, 2017
by Jeffrey
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ICAP Management Services Limited v Berry QBD – 6 June 2017

Postscript

My last post concerned this case when an interim injunction was refused. I noted the case raised interesting arguments in relation to the interaction between TUPE and restrictive covenants and, in particular, the right to object under Reg 4(8).

At the the trial of the action the employee’s claim failed because he could not establish that there was a transfer. The key issue that eventually crystallised was whether the employee’s employer had in fact in changed. This arose in the context of a share sale.

The High Court Judgment

In a helpful analysis the High Court (Garnham J) considered the legal issues under 4 headings:

i. By whom was the employee employed

The Court noted that in Albron Catering BV v FNV Bondgenoten that it was not necessary for the employee to be employed by the transferor. He could be a seconded employee who had in effect a ‘non contractual employer’. This would be the case if the employee was seconded on a permanent basis although they remained contractually employed by the seconding employer. Here the judge held the employee was never seconded in this manner.

ii. Need for a change in employer

As may thought to be self-evident, it is essential in order to establish a transfer that the employer must change. The Court noted this was clearly set out in the Directive and the Regulation as well as in both ECJ case law (Berg v Besselen (C-144/87) and CLECE SA v Martin Valor (C-462/09)) and domestic case law (Brookes v Borough Care Services [1988]).

iii. The significance of a share of shareholding

The Court noted that a change in the legal control of the employer does not itself transfer the business (Millman v Print (Factory (London) 1991 Ltd). However in some cases a change in share ownership may in reality mean there is a transfer of an undertaking.

iv. The indicia of transfer

The Court considered Millman, Jackson Lloyd Ltd v Mears Group plc and the ECJ case law referred to above and held that the fact that the transferred business has been integrated is a relevant factor but it is not the test. “[T]he critical elements of the test are whether the new party (i) has become responsible for carrying on the business, (ii) has incurred the obligations of employer and (iii) has taken over day to day running of the business. It seems to me that those elements of the test can be captured in more colloquial terms – “Has the new party stepped into the shoes of the employer?””.

The Court applied this test and held that there had been no change in the manner in which the business was operated before and after the share sale.

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