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 of a business, it seems that it must be sold as a going concern (the mere transfer of stock and other assets alone is not sufficient) and there must normally be a transfer of business goodwill as well.
Whether the court can identify an ‘economic activity which retains its identity’ clearly relies on a number of factors. A relevant factor is more likely where some employees are taken on, some of the work is carried on at the same premises as before and there has been a sale or lease of equipment. However, the absence of one or more of the relevant factors need not be fatal to there being a relevant transfer.
Traditionally, it was generally believed that the Directive only applied to the transfer of an identifiable economic activity and not to the transfer of a contract purely for services (i.e. cleaning maintenance, security etc). However, the ECJ dispelled this in Rask v. ISS. In this case, a company decided to contract out the running of its works canteen. The new employer in turn agreed to employ the former canteen staff at the same rates of pay. Under the new firm, there was an administrative change to the way in which wages were paid and Rask complained that this constituted an alteration of the previous terms of employment. The court held that the variation of the contract term constituted a change in the applicant’s working conditions. Moreover, it was held that the transfer of the service was within the scope of the Directive and the fact that those activities were ancillary to the main activities of the original company was irrelevant.
Irrespective of the retained economic identity issue, a further problem that has been encountered is as a result of competitive tendering, particularly in situations that have involved, ‘second phase’ contracting out. In Dines v. Initial Health Care Services and Pall Mall Services, the applicants were hospital cleaners employed by Initial. The cleaning contract then went out to competitive tendering and Pall Mall was awarded the contract. The applicants were made redundant by the former and were then offered (and accepted) employment by the latter. The new employment terms were, however, on less favourable terms than they had originally been and the applicants sought to assert their rights (for unfair dismissal) under Regulation 8 (TUPE). The industrial tribunal held that because there was no contractual relationship between Initial Healthcare and Pall Mall, that the latter did not purchase any equipment or materials or that there was no sale or transfer of goodwill, there was no transfer within the meaning of the Regulations.
The Employment Appeals Tribunal upheld this decision, where Wood J stressed that “one must look for a ‘trigger mechanism’ for a transfer and not the resulting effects of the transfer”. This implies that there is some formal nexus between transferor and transferee, which is mostly lacking on a change over of contractors. However, this analysis has been academically criticised (it is submitted correctly), as being inconsistent with European law. ‘The trigger mechanism should be viewed as unimportant from the point of view of protecting employee rights’. There does not appear to be any logical grounds for distinguishing between the rights of those who transfer in the initial phase of contracting out, where there will be an identifiable legal nexus and those in the second phase.
The Court of Appeal ultimately reversed the EAT’s decision in Dines and held that the transfer took place in two stages, i.e. the handing back of the cleaning services from Initial Healthcare to the Hospital and the re-handing over of the contract to Pall Mall. The cleaning services remained essentially the same, on the same premises and by the same personnel. The court therefore found, (rightly) that this constituted a transfer within the meaning of TUPE.
The Court of Appeal’s decision had the effect of bringing some certainty to a previously uncertain area of law and furthermore it dispelled the fears of certain Trade Unions that had the EAT’s decision stood, second transfer employees were in a significantly more precarious position in respect of employment protection.
“…the decisive criterion for establishing whether there is a transfer for the purposes of the Directive is whether the business in question retains its identity…”.
While Dines was waiting to go up to the Court of Appeal, the ECJ delivered its decision in Christel Schmidt where the employee was employed as a cleaner in a bank. It was then arranged for the cleaning services to be taken over by another company which already had the contract in respect of other branches. The employee was offered (but refused) employment with the new company as it was at a lower hourly rate. Instead, she brought a claim alleging a breach of the Directive. The ECJ held, inter alia, that the fact that the activity transferred was ancillary to the main business was irrelevant and moreover, the Court dismissed the argument that the total absence of transfer of assets was crucial.
It is clear from an analysis of the above cases that there had, since the introduction of the Directive and TUPE, been a significant widening of the net. Employee rights were clearly gaining momentum and indeed it seemed that by the time of Dines and Schmidt, that job security in the context of transfers of undertakings, was a foregone conclusion. It has been argued that cases like Dines would mean that the replacement contractor bidding for the new contract would be in a much better bargaining position than the potentially outgoing contractor. This is because he could bid on a non-TUPE basis and thereby save the costs that the first contractor could not. While it would in no way be desirable to return to the ‘bad old days’ of the master/servant relationship and all of its attendant abuses, it is submitted that this situation is not, as argued, ‘indefensible’. Moreover, it is submitted that if these decisions accurately interpret the Directive (and thus the Regulations), then the result may mean that certain negative economic consequences follow. Like it or not, we live in a western democracy based on capitalist ideals. While employee rights are of paramount importance, so too are needs of the consumer. Competition law and thus competitive tendering demands that the consumer be afforded a value service. New contractors may well be able to provide more efficient and cheaper services if they are free to do business without having to inherit the employment obligations of the former. The economic reality is that in order to achieve a fair balance between consumer and employee benefits; one or the other may have to suffer at some time.
‘Suzen allows the transferee to decide whether the Directive and TUPE apply!’
The result of cases such as Spijkers, Rask, Schmidt and Dines, was that the presumption, by the mid-1990’s, was that any transfer of services was likely to be caught by the Directive and thus by TUPE. However, in 1997 the European Court in Suzen, held that a mere loss of a service contract to a competitor cannot by itself indicate the existence of a transfer within the meaning of the Directive. The facts of Suzen are similar to those in Dines, albeit that the applicants were not offered any employment by the new contractor.
This judgement, in effect meant that a non-TUPE bid, could, in certain circumstances, be possible when tendering for services and thus it introduced a new uncertainty into decision making both by employers and the courts. It seemed that the idea of continuation of identity of the function alone as the paramount factor, decided by Schmidt, was no longer tenable. The ECJ held, in Suzen, that the transfer of a service contract is not a transfer of a part of a business within the Directive “…if there is no concomitant transfer of significant tangible or intangible assets or the taking over by the new employer of a major part of the workforce, in terms of their numbers and skills, assigned by the predecessor to the performance of the contract”.
Moreover, where the business is an activity i.e. a service contract that is being transferred, the effect of the judgement is to make the application of the Directive in labour-intensive service sectors depend on the willingness and consent of the transferee to take on the transferor’s workforce. According to this, if the transferee takes care not to acquire any substantial tangible assets (or intangible assets such as goodwill) he can frustrate the purpose of the Directive altogether and refuse to take any of the old employees. This clearly turns the Directive on its head and fails spectacularly to give regard to the purpose of the legislation. The whole point of the Acquired Rights Directive was to protect workers caught up in such a transaction.
Thus, following Suzen, the presumption that there is a relevant transfer must be reversed. Now a transfer of services will only be a transfer subject to TUPE where there is also a transfer of significant assets or at least a sizeable proportion of the workforce. On reliance of this interpretation, there has indeed been a raft of UK decisions, which have applied the Suzen test and ruled against a transfer where there were insufficient assets and or employees. In Betts v. Brintel Helicopters Ltd., the Court of Appeal said that Suzen represented ‘a shift of emphasis, or at least a clarification of the law’ and on the facts, found that there had been no transfer.
It is submitted that by drawing the distinction between an ‘economic entity’ and an ‘activity’, particularly in cases where the activity consists of supplying specific services, Suzen can be regarded as having at least narrowed the test for determining what is a relevant transfer. Lord Justice Mummery’s statement, in ECM, that the importance of Suzen has been overstated is, it is respectfully submitted, incorrect. There is a deal of academic ambivalence in respect of the Suzen ruling, for example contrast the views of Deakin and Morris (which accord with Mummery LJ) and those of Shrubsall and McMullen. However, it cannot be denied that the pre-Suzen position on transfers was considerably wider and more protective towards employees than it is today. Certainly there has been a shift in emphasis; whether the law is clearer is another matter.
The reasoning behind Lord Justice Mummery’s statement, however, may not be as flawed as it may seem. In many of the decided cases since 1977, there has been a melding of the Directive and TUPE. The ECJ in Suzen declared that it was for the national court to determine the factors to be considered in a given case and in ECM, it seems, the court were reasserting the domestic legislation in a national setting. In view of other important employment legislation, such as the Working Time Directive and the introduction of the minimum wage, the political climate of the day demanded that workers rights be reinforced. It is undeniable that the European Courts decision represented a major change of approach to the application of the Acquired Rights Directive to the transfer of service undertakings and creates a significant gap in employment protection rights. It seems that it was therefore crucial for a higher English court, as in ECM, to hold that where a contractor in such a case refuses to take on employees it is possible for a tribunal to look at the motive of the contractor in making that decision. And if the motive is bad (in order to get around TUPE) the tribunal can still find that there is a TUPE transfer.
Having said that, it can be seen in many of the above cases that the Regulations cannot be excluded by a single factor. Moreover, in Securicor Guarding Ltd., it is significant that the EAT had already recognised, by 1996, that the basic principle of TUPE is that employees should be protected, “…if both tenderers bid on a level playing field, that is one where the terms and conditions of the staff are the same in either case, this provides the necessary protection for the employees, who can have no influence over whether or not the undertaking in which they work changes hands”.
In conclusion, this analysis has necessarily focused on a narrow area of the law of transfers of undertakings; it is nevertheless an important area and one that is likely to receive a fair amount of ongoing attention. The ECM case has, as did Suzen before it, received a fair amount of criticism. Whilst it was well meaning it sits uneasily with European Court case law and thus further adds to the uncertainty. Yet not only has ECM been upheld in the Court of Appeal, it has subsequently been followed in Magna Housing Association Ltd. Thus irrespective of calls that the case compounds the sheer uncertainty of the application of Suzen in the UK, it appears that employee’s rights are to be safeguarded for a while longer; at least until the next bizarre anti-protective measure to come out of Europe.
BIBLIOGRAPHY
Texts
Craig, P. & De Burca, G. EU Law 1998 2nd Ed. OUP: Oxford
Deakin, S. & Morris, G. Labour Law 1998 2nd Ed. Butterworths: London
Eeckhout, P. & Tridimas, T. (Eds.) Yearbook of European Law 1998 OUP: Oxford
Furmston, M. P. et al Law of Contract 1996 13th Ed. Butterworths: London
Weatherill, S. & Beaumont, P. EC Law 1995 2nd Ed. Penguin: London
Articles
Davies, P. ‘Amendments to the Acquired Rights Directive’ (1998) 27 ILJ 365
McMullen, J. ‘Contracting Out and Marketing Testing – The Uncertainty Ends?’ (1994) 23 ILJ 230
McMullen, J. ‘Atypical Transfers, Atypical Workers and Atypical Employment Structures – A Case for Greater Transparency in Transfer of Employment Issues’ (1996) 25 ILJ 286
McMullen, J. ‘TUPE – Sidestepping Suzen’ (1999) 28 ILJ 360
Shrubsall, V. ‘Competitive Tendering, Out-sourcing and the Acquired Rights Directive’ (1998) MLR 85
Industrial Relations Law Bulletin (Guidance Note) ‘Transfer of Undertakings 1: the European Approach’ 551 August 1996
Industrial Relations Law Bulletin (Guidance Note) ‘Transfer of Undertakings 2: Relevant Transfers’ 552 September 1996
Industrial Relations Law Bulletin (Casenotes) 596 July 1998 8
Industrial Relations Law Bulletin (Casenotes) 686 August 1999 5
Industrial Relations Law Bulletin (News) 642 February 1998
Table of Cases
Betts v. Brintel Helicopters Ltd., and KLM ERA Helicopters (UK) Ltd., [1997] IRLR 361
Christel Schmidt v. Spar-und Leihkasse der fruheren Amter Bordesholm, Kiel und Cronshagen [1994] IRLR 302
Cowan v. Belfast Harbour Commissioners [1976] ITR 127
Dr Sophie Redmond Stichting Foundation v. Bartol [1992] IRLR 366
Dines v. Initial Health Care Services and Pall Mall Services [1993] IRLR 321
ECM (Vehicle Recovery Service) v. Cox [1998] IRLR 416
ECM (Vehicle Delivery Service) Ltd., v. Cox & Others [1999] IRLR 559
Foreningen a f Arbjedsledere in Danmark v. Daddy’s Dance Hall A/S [1988] IRLR 315
JMA Spijkers v. Gebroeders Benedik Abbatoir CV [1986] ECR 296
Kenmir Ltd., v. Frizzell [1968] 1 All ER 414
Kenny v. South Manchester College [1993] IRLR 265
Litster v. Forth Dry Dock and Engineering Co. Ltd., [1990] AC 546
Magna Housing Association Ltd., v. Turner (EAT/198/98)
Table of Cases continued…
Melon v. Hector Powe Ltd., [1981] ICR 43
Merckx and Neuhuys v. Ford Motors Company (Belgium) SA [1996] IRLR 467
Nokes v. Doncaster Amalgamated Collieries Ltd., [1940] AC 1014
Rask and Christiensen v. ISS Kantineservice A/S [1993] IRLR 133
Robert Seligman Corporation v. Baker [1983] ICR 770
Securicor Guarding Ltd., v. Fraser Security Services & Others [ 1996] IRLR 552
Superclean Support Services plc v. (1) Lansana (2) Wetton Cleaning Services Ltd (EAT/281/96)
Suzen v. Zehnacker Gebaudereinigung GmbH and Lefarth GmbH [1997] IRLR 2555
ECM (Vehicle Delivery Service) Ltd., v. Cox & Others [1999] IRLR 559 per Mummery LJ
Nokes v. Doncaster Amalgamated Collieries Ltd., [1940] AC 1014
Deakin, S. & Morris, G. Labour Law 1998 2nd Ed. Butterworths: London @ 217
Securicor Guarding Ltd., v. Fraser Security Services & Others [ 1996] IRLR 552 per Clark J
E.g. Cowan v. Belfast Harbour Commissioners [1976] ITR 127 & Robert Seligman Corporation v. Baker [1983] ICR 770
Dr Sophie Redmond Stichting Foundation v. Bartol [1992] IRLR 366
JMA Spijkers v. Gebroeders Benedik Abbatoir CV [1986] ECR 296
Kenny v. South Manchester College [1993] IRLR 265
E.g. Kenmir Ltd., v. Frizzell [1968] 1 All ER 414
Robert Seligman Corporation v. Baker [1983] ICR 770
Melon v. Hector Powe Ltd., [1981] ICR 43
Merckx and Neuhuys v. Ford Motors Company (Belgium) SA [1996] IRLR 467
Rask and Christiensen v. ISS Kantineservice A/S [1993] IRLR 133
McMullen, J. ‘Contracting Out and Marketing Testing – The Uncertainty Ends?’ (1994) 23 ILJ 230
Dines v. Initial Health Care Services and Pall Mall Services [1993] IRLR 321
As approved of in: Foreningen a f Arbjedsledere in Danmark v. Daddy’s Dance Hall A/S [1988] IRLR 315
Christel Schmidt v. Spar-und Leihkasse der fruheren Amter Bordesholm, Kiel und Cronshagen [1994] IRLR 302 @ 304
Shrubsall, V. ‘Competitive Tendering, Out-sourcing and the Acquired Rights Directive’ (1998) MLR 85 @ 90
McMullen, J. ‘TUPE – Sidestepping Suzen’ (1999) 28 ILJ 360
Suzen v. Zehnacker Gebaudereinigung GmbH and Lefarth GmbH [1997] IRLR 2555 - ECJ Judgment para. 23
See Litster v. Forth Dry Dock and Engineering Co. Ltd., [1990] AC 546
e.g. Superclean Support Services plc v. (1) Lansana (2) Wetton Cleaning Services Ltd (EAT/281/96) and many others. See McMullen, J. ‘TUPE – Sidestepping Suzen’ (1999) 28 ILJ 360 for a comprehensive list
Betts v. Brintel Helicopters Ltd., and KLM ERA Helicopters (UK) Ltd., [1997] IRLR 361
Ibid @ 366 per Kennedy LJ
ECM (Vehicle Recovery Service) v. Cox [1998] IRLR 416
Magna Housing Association Ltd., v. Turner (EAT/198/98)