Employment Law

Assessed Coursework

Question 1

“Although the Suzen decision has been described as involving a shift of emphasis or a clarification of the law, nothing was said in Suzen which casts doubt on the correctness of the interpretation of the Directive in… earlier decisions… The importance of Suzen [has], I think, been overstated”.

Analyse the law relating to transfers of undertakings. To what extent do you agree with the statement of Mummery LJ?

At common law, a contract of employment was a personal contract between the employer and the employee; when that relationship ceased, the contract of employment came to an end. Thus if a business was sold, the purchaser had the right to choose whom to employ and the employee had the right to choose whom he would serve. It can be seen therefore that the sale or transfer of any business, under the common law, resulted in the termination of any existing contract of employment.

In 1977, this common law situation was threatened when the Acquired Rights Directive was passed. Its aims were, inter alia, essentially to ensure that when an employer transfers his business to another employer, the transferor and the transferee shall inform the employees affected and to ensure that the latter’s contracts, along with agreed terms and conditions, are transferred from the first to the second employer. The Common law position was then altogether defeated in 1981, when the Directive was implemented by virtue of the Transfer of Undertakings (Protection of Employment) Regulations. These Regulations thus generally attempt to put the transferee employer in the same position as the transferor, so that the rights and obligations contained in the contracts of employment with the first employer are equally effective in with regard the second.

TUPE has been said to represent a major limitation on both the principles of freedom of contract and the power of employers to arrange their commercial and corporate affairs in such a way as to minimise their employment liabilities. Moreover, in this respect, greater uncertainty has resulted from the extension of the TUPE principles in the fifteen or so years between the introduction of the Regulations and the ECJ decision in Suzen. How this case has figured in the contemporary jurisprudence of employment law will be considered below, following a brief examination of how the courts, both domestic and European, approached the law of transfers.

The notion of corporate responsibility within the community is a relatively new one; predominantly led by the great environmental abusers such as BNFL and Shell. In the 1980’s there were moves to try and redress the negative image these organisations had acquired in the post-war years and it is clear that the Acquired Rights Directive was just one element of a (frankly incoherent) pan-European social policy.

“In our view the basic principle is that employees should be protected where the undertaking in which they work is transferred ‘over their heads’.

The term ‘undertaking’, which is defined under Regulation 2(1) as including ‘any trade or business’, has caused some difficulties in the past and its interpretation has resulted in a number of barriers to employee protection and these problems manifested themselves most clearly in cases that involved contracting out. The received wisdom of the late 1970’s and early 1980’s was generally that a franchise, for example, was not an undertaking or a business for the purposes of TUPE and furthermore, neither the contracting out nor the transfer of a sub-contract would constitute an undertaking. Moreover, the courts’ inability to recognise a functional identity in an ancillary activity was compounded by an exclusion in the original drafting of TUPE, of transfers of non-commercial ventures.

However, in Dr Sophie Redmond Stichting, which concerned a switch of local authority funding between two charitable organisations and was clearly a transfer in the context of a non-commercial activity, the ECJ held that there was no such barrier in the Directive; thus the non-commercial venture ‘barrier’ was removed.

In order to determine whether the Directive covered contracting out and therefore, TUPE, the court in Dr Sophie Redmond Stichting, applied the same test that had been formulated in the much earlier case of JMA Spijkers. Essentially, the decisive criterion for establishing whether there is a transfer is whether the business retains its identity as would be indicated by the fact that its operation was ‘either continued or resumed’. In order to determine this, it is necessary to consider all the factual circumstances of the transaction. These include: ‘the type of undertaking or business concerned, whether the business’s tangible assets 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 and the degree of similarity between the activities carried on before and after the transfer’.

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Thus the principle test, under the Directive and hence TUPE, is whether there has been a transfer of a stable economic entity which retains its identity after the transfer has taken place. If the new owner carries out the essential business activity, it is likely that there has been a transfer within the meaning of the Regulations. The transfer of ‘goodwill’ has also been successful in a number of cases and the fact that there was no transfer of goodwill has been used to hold that a transfer was outside the scope of the Regulations. Indeed, in the case of a sale ...

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