The affect of employment law is increasingly being felt in connection with insolvency proceedings. A recent example is the shop workers' Union, Usdaw, winning compensation worth up to £67 million for over 24,000 former employees of Woolworths made redundant following the company's collapse at the end of 2008.
Another area which is hitting the judicial spotlight is the application of the Transfer of Undertakings (Protection of Employment) Regulations 2006, known as "TUPE", to insolvency proceedings. With increasing insolvency activity, it is important that insolvency practitioners keep up to date with emerging TUPE case law. These developments are considered below.
Although these cases are from Great Britain, they will have persuasive effect on the interpretation of Northern Irish legislation and could therefore be applied in this jurisdiction.
£67 MILLION PROTECTIVE AWARD FOR FORMER EMPLOYEES OF WOOLWORTHS
It has recently been reported that Usdaw has won compensation worth approximately £67 million for more than 24,000 former Woolworths employees made redundant when the company collapsed at the end of 2008.
Woolworths went into administration on 27 November 2008 and by early January 2009 the administrators had closed all of Woolworths' stores, offices and distribution centres and made nearly 30,000 people redundant in the process.
Usdaw made a claim on behalf of its members for a Protective Award after the administrators failed in their legal duty to consult with the union before making redundancies. After many months of legal wrangling, the Employment Tribunal finally heard the case involving members employed in England, Scotland and Wales in late November 2011 (a similar case was heard in Northern Ireland in 2009 when the Tribunal also made a protective award).
The tribunal found the administrators had failed in their legal obligations to consult with Usdaw and awarded its members compensation of 60 days' pay, capped at £330 a week, the maximum payable in these circumstances. Usdaw says the award excludes some 3,000 former employees who worked in smaller stores where fewer than 20 redundancies were made.
An employer proposing to make collective redundancies is required to consult in advance with representatives of the affected employees and the consultation must be completed before any notices of dismissal are issued. A complaint of failure to consult may be made to a tribunal and if upheld, the tribunal can make a protective award of up to 90 days' gross pay per employee. The obligation to consult is currently limited in UK law to situations where 20 or more employees are to be made redundant at one establishment within a 90-day period.
As Woolworths was in administration at the time of the redundancies, responsibility for the compensation payments rests with the Government's Redundancy Payments Office (RPO) in England. Caps will therefore be applied to the amount of compensation awarded. The RPO is to write to all former Woolworths employees entitled to receive compensation, enclosing the form that needs to be completed and returned to the RPO before they can process payment.
AUTOMATIC UNFAIR DISMISSAL LIABILITY UNDER TUPE CAN PASS TO A BUYER DESPITE THE BUYER NOT BEING IDENTIFIED
If an employee is dismissed in connection with a TUPE transfer, that dismissal will be automatically unfair if it has something to do with the transfer, unless certain exceptions apply. In the recent case of Spaceright Europe Ltd v Baillavoine the Court of Appeal said that a dismissal could be for a reason connected with a transfer even though no prospective transferee (buyer employer) had been identified at the time of the dismissal.
Mr Baillavoine was the Chief Executive Officer and majority shareholder in a business that started to have financial difficulties in February 2008. By April the position had worsened and on 23 May, it went into administration. He was dismissed by the administrators on the grounds of redundancy on the same day.
One month later the business was sold (this was a relevant transfer under the TUPE regulations) and Mr Baillavoine made a claim against the purchasers for automatic unfair dismissal, on the basis that his dismissal was for a reason connected with the transfer.
The Court of Appeal held that Mr Baillavoine had been automatically unfairly dismissed. The Court of Appeal's view was that the sole or principal reason for the dismissal was connected with the relevant transfer, and was not an economic, technical or organisational reason ("ETO reason") as it did not entail changes to the workforce and did not relate to the conduct of the business as a going concern as the business was always going to need a Chief Executive Officer. The Court of Appeal held that Mr Baillavoine was dismissed to enable a purchaser to acquire the business and assets without the continued employment of its Chief Executive (with a salary of £120,000 per annum). Liability for Mr Baillavoine's dismissal therefore passed to the transferee.
TUPE EXEMPTIONS DO NOT APPLY TO ADMINISTRATION PROCEEDINGS
After more than two years of legal uncertainty, the Court of Appeal in Key2Law (Surrey) LLP v De'Antiquis and others has confirmed that administrations cannot be "insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor" for the purpose of attracting the regulation 8(7) exemption from TUPE.
Under regulation 8(7) of TUPE, in circumstances where there is a "relevant transfer" involving a transferor which is "subject to bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor", then regulations 4 and 7 of TUPE will not apply. Regulations 4 and 7 of TUPE are the provisions which operate to automatically transfer employees from the transferor to the transferee and which prohibit dismissals connected with the transfer.
Therefore, where regulation 8(7) applies, there is no automatic transfer of employees under TUPE, meaning that the transferee can acquire the insolvent business and its assets without also necessarily taking on the business' employee related liabilities.
In this case the claimant worked for a law firm that entered into administration and she was dismissed. A few days later the administrators entered into a management contract for some of the business of the firm with Key2Law, with a view to managing existing client work so that the revenue could be realised. The claimant then brought claims against Key2Law and others on the basis they were now liable under regulations 4 and 7 of TUPE following the transfer.
The Employment Appeal Tribunal followed a 'fact-based' approach to determine whether or not the administration proceedings could be classified as 'analogous insolvency proceedings' and so benefit from the disapplication of TUPE. They found that the appointment could not be so considered and allowed the claims to proceed. On appeal the Court of Appeal went further and decided that administration proceedings could never benefit from the disapplication available under regulation 8(7) of TUPE, rejecting the Employment Tribunal's 'fact-based' approach in favour of this 'absolute' approach. The Court of Appeal has followed the case of OTG Limited -v- Barke & ors, where the Employment Appeal Tribunal had adopted an 'absolute' approach, whereby all administrations, including pre-pack administrations, fall outside the scope of Regulation 8(7). Under this absolute approach, where the sale by an administrator amounts to a relevant transfer under TUPE, regulations 4 and 7 of TUPE will always apply to the purchase of a business in administration.
NO SERVICE PROVISION CHANGE WHERE THE CLIENT CHANGES
The Employment Appeal Tribunal in Hunter v McCarrick has ruled for the first time that the service provision change provisions of TUPE cannot apply where the client to whom services are being provided changes at the same time as the change in service provider i.e. the activities carried out by different service providers before and after the transfer must be carried out for the same client.
Mr McCarrick was employed by Mr Hunter to manage a property portfolio for WCP Management Ltd ("WCP") on behalf of a client, Waterbridge Group Ltd ("WGL"). Aviva, the mortgagee, appointed receivers to control the properties and King Sturge to manage them. This meant that the services carried out by WCP on WGL's behalf ceased and were instead carried out by King Sturge on Aviva's/the receivers' behalf. When he was dismissed Mr McCarrick brought a claim against Mr Hunter, who argued that he did not have sufficient service as there was no TUPE transfer when the change of service providers and change of clients took place.
The tribunal disagreed with Mr Hunter, holding that TUPE applied, but the Employment Appeal Tribunal held that the tribunal was wrong. For regulation 3(1)(b)(ii) of TUPE (service provision change in Great Britain) to apply, 'a client' on behalf of whom the services were being carried out before the transfer had to be 'the client' for whom the services were being carried out after the transfer. Therefore, although the service provider may change, the services had to be provided to the same client and so TUPE did not apply.
Spaceright Europe Ltd v Baillavoine highlights that establishing an ETO reason can be important, particularly when purchasers are keen to limit their exposure to employment liabilities in asset purchase agreements. For the ETO reason defence to be available, the reason for dismissal must relate to an economic, technical or organisational reason of the underlying business itself (i.e. a reason connected to the day-to-day running of the business) which entails changes in the workforce and not to a desire to achieve a sale of the business as was the case here. The judgment in Key2Law (Surrey) LLP v De'Antiquis and others is welcome in that it gives us legal certainty in determining the application of regulation 8(7) of TUPE. However, its practical consequence is that purchasers must be prepared to assume all relevant employee related liabilities of a target business which has gone into administration.
Hunter v McCarrick is the first reported decision on the meaning of 'client' under the service provision change aspects of TUPE. It is worth remembering, however, that there are circumstances where a change of service provider could amount to a business transfer, if an economic entity was transferred and retained its identity. In Northern Ireland service provision change is governed by the Service Provision Change (Protection of Employment) Regulations (Northern Ireland) 2006.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.