A Court of Session decision over the disputed redundancy by a Glasgow law firm of a senior solicitor has given rise to an important new interpretation of the TUPE Regulations which could cost companies millions of pounds in additional redundancy payments.
The decision makes redundancies on an economic, technical or organisational (ETO) basis before a transfer of undertaking unfair, and rules that such redundancies should take place only after the undertaking is transferred if the redundancies are to be made by the transferor for the transferee’s ETO reason. In effect, prior planning with consultation in advance of a TUPE scenario can only be that. No dismissals can be made by the transferring business on behalf of the company to which the employees are to be transferred even though that has been seen to be an attractive commercial option in the past. After transfer day, the dismissals can then be made by the transferee for his reasons, but there is likely to be an additional cost in terms of notice pay.
As indicated by the Court of Session, any company wishing to make a transfer should wait until the employees cross over to the new employer and the redundancy actually arises, even in the face of a 12 week notice period and, in the case of a redundancy based on factory or office relocation, a scenario where those employees who will not or cannot relocate will have no work to do during the notice period.
The background to the case is that on 1 January 1999, Robert Hynd, a solicitor specialising in corporate and education law, became an employee of Glasgow solicitors, Bishop & Robertson Chalmers. On 1 August 1999, that firm merged with Alex Morison, Edinburgh solicitors. The merged firm was called Morison Bishop.
In 2002, business issues arose as a result of which, in June that year, the partners decided to dissolve the firm and to arrange for two new firms to emerge, Morisons in Edinburgh and Bishops in Glasgow. The effective date for these changes was 31 July 2002, which was the financial year end of Morison Bishop. Mr Hynd was very definitely from the Glasgow end of the original practice and was likely to remain in the Glasgow end of the newly emerging practice. "Old regulations" TUPE applied (nothing turns on the new regulations except that some of the regulation numbers are different).
The Glasgow partners of Morison Bishop, who were to form Bishops, took stock of the need for staff.
The Glasgow partners included two of the Morison Bishop corporate partners, who worked with Mr Hynd, and one other lady solicitor in corporate work. The Glasgow partners decided Bishops’ corporate department would sustain only the two partners and the lady solicitor, and that there was no business case for Mr Hynd to continue in the business, based on the expected turnover in Bishops and the likelihood of his reasonably large salary cost being unsustainable in the smaller future Glasgow practice. Accordingly, Morison Bishop terminated Mr Hynd’s services on 31 July 2002 on grounds of redundancy.
Mr Hynd complained to the employment tribunal that his dismissal was unfair. He argued, inter alia, that if the TUPE reg 8(1) applied, then reg 8(2) had to be disapplied.
The employment tribunal dismissed his complaint on the basis that he had been fairly dismissed for an ETO reason, namely on grounds of a “future redundancy” based on a reasonable assessment by the Glasgow partners of Morrison Bishop that, when they formed Bishops of new, they would have an economic and/or organisational reason not to require Mr Hynd’s services.
The EAT rejected an appeal by Mr Hynd, at which he ran the same argument that, if reg 8(1) applied, then 8(2) was disapplied.
Mr Hynd then appealed to the Inner House of the Court of Session. It was heard by the First Division – the Lord President with Lords Reed and MacLean.
Mr Hynd was allowed to advance a different (or amended) argument, namely that the transferor cannot dismiss for the transferee’s ETO reason, especially if the transferee does not exist when the transferor makes the decision, and that reg 8(2), when it reads "entailing changes in the workforce of either the transferor or the transferee before or after a relevant transfer", does not mean that the transferor can refer to changes in the workforce of the transferee after the transfer.
After listening to the arguments during two distinct sittings of the court, the following decision was pronounced. What follows is an extract of a much longer decision.
“[43] We refer to the case of Whitehouse v Charles A Blatchford Ltd [2000] ICR 542, in which the Court of Appeal followed the approach which had been adopted in Wheeler v Patel [1987] ICR 631, for a passage in the judgment of Beldam LJ (with which the other members of the court expressed agreement) at p 548:
'It is to be observed that the transferor in that case [Wheeler v Patel] had no intention of continuing the business and consequently his reason for dismissing the employee could not have been related to his future conduct of the business. It seems to me that the words "economic, technical or organisational reason entailing changes in the workforce", clearly support the conclusion that the reason must be connected with the future conduct of the business as a going concern.'
The first sentence we have quoted appears to proceed on the basis that, for regulation 8(2) to apply where an employee is dismissed by the transferor, the transferor’s reason for dismissal must relate to the transferor’s future conduct of the business: a condition which cannot be met where the transferor has no intention of continuing the business.
"[44] That approach to the interpretation of regulation 8(2) achieves a result which is consistent with article 4(1) of the Directive. Just as the Directive is intended to ensure that the rights of an employee under domestic law – whatever they may be – are safeguarded in the event of a transfer, without otherwise adding to or subtracting from those rights, so regulation 8(2) can be understood as preserving the ordinary right of an employer to dismiss for 'an economic, technical or organisational reason entailing changes in the workforce' without necessarily incurring a liability for unfair dismissal. That right arises, however, where the employer dismisses the employee for a reason of its own, relating to its own future conduct of the business, and entailing a change in its own workforce (as, for example, in Warner v Adnet Ltd [1998] ICR 1056 and Thompson v SCS Consulting Ltd [2001] IRLR 801), and not where the employer dismisses the employee for reasons unrelated to the future conduct of its own business (as, for example, in Wheeler v Patel)."
Accordingly, the court ruled that reg 8(2) was inapplicable and that the operation of reg 8(1) made the decision unfair.
The court also said: "We are not deterred from reaching that conclusion by consideration that it may be, as counsel for the respondents argued, that if the appellant had not been dismissed by Morison Bishop prior to the transfer, he could fairly have been dismissed by Bishops after the transfer, on the grounds of redundancy. An unfair dismissal could readily have been avoided, on that hypothesis, if the dismissal had been effected at a time when the appellant was actually redundant, by the employer to whose requirements the appellant was actually surplus, rather than being effected in advance of that date, by a different employer, in anticipation of those circumstances."
Having resolved the interplay of reg 8(1) and 8(2), the court then indicated that the "existence" issue of the transferee was irrelevant, but stated that it would have regarded non-existence as not necessarily preventing the application of 8(2), if 8(2) had permitted the dismissal.
In many scenarios where TUPE applies, there is a desire to get ETO dismissals moving prior to the transfer.
For example, if a contracted out service is to be contracted back in again, but the location of the work is to move 100 miles and the operation requires to be shrunk for technical or economic reasons, the transferee, in many cases, may wish to attack the ETO issues in advance of the transfer date with full consultation on those issues along with the transferor. Not wise, says the Court of Session. The transferee should wait till the employees cross over and the redundancy actually arises, even in the face of a 12 week notice period and a scenario where those employees who will not or cannot relocate over the 100 mile distance, even on a trial basis, have no work to do during the notice period.
Or, for example, a British operation is changing hands and transferring abroad with a redundant site in the UK. Again, no ETO redundancies can be declared until after the transfer has happened according to this interpretation of TUPE. The employees have to lie idle and be paid during (or in lieu of) the notice period after the declaration of the redundancies.
In short, prior planning with consultation in advance of a TUPE scenario can only be that. No dismissals should be made by the transferor on behalf of the transferee. After transfer day happens, they can then be made by the transferee for his reasons, but there is likely to be an additional cost in terms of notice pay.
John Macmillan,
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