Transfer of undertakings 1: the European approach

In the first of a series of Guidance Notes on business transfers, we look at the European dimension to the law protecting employees' rights on the transfer of the undertaking or business in which they work.

"The purpose of the Directive is to safeguard as far as possible the rights of workers in the event of change of employer by allowing them to remain in the employment of the new employer on the same conditions as those agreed with the transferor. The Directive applies, therefore, whenever as a result of a legal transfer or merger there is a change in the natural or legal person responsible for the running of the undertaking and who because of this enters into contractual obligations as an employer towards the employees working in the undertaking."

(from the judgment of the European Court of Justice in Landsorganisationen i Danmark v Ny Mølle Kro)

The legal provisions governing the rights of employees and obligations of employers on the transfer of a business or undertaking have given rise to intense debate, and a corresponding deluge of high-profile litigation. Much attention has been focused on the impact of the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("the Regulations") on, for example, the contracting-out of services in both the public and private sectors of the economy. Crucially, in applying the Regulations, United Kingdom courts and tribunals have increasingly had to wrestle with and apply concepts derived from the EC Business Transfers Directive (No. 77/187/EEC - "the Directive") and related decisions of the European Court of Justice (the ECJ).

The pre-1982 position

Prior to 1982, employees in the UK had little or no protection when the organisation in which they worked changed hands. At common law, an employee cannot, without his or her consent, be transferred from one employer to another (Nokes v Doncaster Amalgamated Collieries Ltd). Such a transfer effectively terminates the contract of employment. In technical terms, it constitutes a repudiatory breach of the contract by the transferor employer, which thereby disables itself from continuing to employ the employee. The employee has no practical option but to accept the repudiation, and is thus left only with his or her remedy in damages against the original employer for unlawful termination (which would normally be limited to compensation for the employee's proper notice period - see, for example, Newns v British Airways plc). Employees might, in addition, have been able to claim a statutory redundancy payment against that employer and, in some circumstances, compensation for unfair dismissal. But they would have had no immediate rights against the employer taking over ("the transferee").

There was some limited provision for the preservation of employees' continuity of employment for the purposes of statutory employment protection legislation, but only where the transferee took the employees on voluntarily (see s.218 of the Employment Rights Act 1996 - the ERA). In particular, s.218(2), provides that if a trade, business or undertaking is transferred from one person to another, the continuity of employment of an employee who is employed in that trade, business or undertaking at the time of the transfer is not broken. (This provision is of continued relevance, and will be discussed further in part three of this series.) But there was no obligation on the transferee to respect an employee's pre-existing terms and conditions of employment. The only other generally applicable statutory provision merely modified an employee's right to receive a redundancy payment where, following a change in the ownership of a business or part of a business, the incoming employer offered to renew the employee's existing contract of employment, or to re-engage him or her in suitable alternative employment (see the now repealed s.94 of the old Employment Protection (Consolidation) Act 1978).

The Business Transfers Directive

This position was radically altered by the introduction of the 1981 Regulations, which were made in an attempt to implement the obligations imposed on the UK by the Directive. According to its preamble, the Directive is intended to provide for "the protection of employees in the event of a change of employer, in particular, to ensure that their rights are safeguarded." To achieve that purpose, it enshrines three "core" principles:

  • all of the transferor's rights and obligations (other than those relating to old-age, invalidity or survivors' benefits under occupational pension schemes) arising from employment relationships or contracts of employment existing on the date of a transfer are automatically transferred to the transferee (article 3 - "the automatic transfer principle");

  • the transfer itself cannot constitute grounds for the dismissal of employees by either the transferor or transferee. But this does not stand in the way of "dismissals that may take place for economic, technical or organisational reasons entailing changes in the workforce" (article 4).

  • the transferor and transferee must give specified information to, and in more limited circumstances consult with, the representatives of employees who may be affected by a prospective transfer (article 6 - see Consultation on redundancies and business transfers).

    After a number of amendments, the Regulations now appear broadly to reflect these principles (see box and parts 2-4 of this series). In any event, United Kingdom courts and tribunals must adopt a "purposive" approach to the construction of the Regulations, "so as to accord with the interpretation of the Directive laid down by the European Court of Justice if that can be done without distorting their meaning" (Webb v EMO Air Cargo (UK) Ltd). In other words, the Regulations must be construed in order to give effect to the Directive and relevant ECJ decisions, and this may even involve "implying the words necessary to achieve that result" (Litster and others v Forth Dry Dock & Engineering Co Ltd). Indeed, whilst the Directive does not itself give rise to any directly enforceable rights for employees (at least in the private sector), tribunals are now advised to approach the Regulations "using the language of the European Court" (Council of the Isles of Scilly v Brintel Helicopters Ltd and another).

    In the first two parts of a series of four Guidance Notes on the transfer of undertakings, we examine the scope and fundamental purposes of the Directive and the Regulations and, in particular, consider the broad range of transfers and types of businesses and undertakings to which they apply. This first part analyses the development of the jurisprudence of the ECJ on this issue, since this is now the primary point of reference for domestic courts and tribunals dealing with the Regulations.

    Scope of the Directive

    The Directive applies "to the transfer of an undertaking, business or part of a business to another employer as a result of a legal transfer or merger" (article 1(1)). It covers the transfer of any undertaking, business or part of a business situated within the territorial scope of the European Union (article 1(2)), but does not apply to sea-going vessels (article 1(3)).

    Two key questions arise under article 1(1):

  • what constitutes "a legal transfer or merger"? and

  • has there been a transfer of an identifiable undertaking, business or part of a business?

    Change in employer responsible

    On the first of these questions, the ECJ has held that the Directive applies to an increasingly wide range of transfers, and is not limited to the simple sale and purchase of an undertaking or business (or part thereof). It has consequently been applied to the transfer of, amongst other things, leases, licences, franchises and dealerships, transfers occurring in the context of conditional sales agreements, the switching of public subsidies from one charitable organisation to another, and the contracting-out (or contracting-in) of services or activities.

    Thus a transfer of ownership is not required for there to be a "legal transfer", and there does not have to be a contractual or legal relationship between the transferor and transferee. This means that a direct transfer between transferor and transferee may occur for the purposes of the Directive, notwithstanding that it technically takes place in two stages because of the involvement of a third party (for example, the landlord of premises or the owner of a business which is leased, franchised or otherwise contracted-out to successive contractors). In a nutshell, the crucial issue is whether there has been a change in the identity of the employer responsible for the undertaking, however this has come about.

    This guiding principle was stated in the ECJ's ruling in Landsorganisationen i Danmark v Ny Mølle Kro: "The purpose of the Directive is to safeguard as far as possible the rights of workers in the event of change of employer by allowing them to remain in the employment of the new employer on the same conditions as those agreed with the transferor. The Directive applies, therefore, whenever as a result of a legal transfer or merger there is a change in the natural or legal person responsible for the running of the undertaking and who because of this enters into contractual obligations as an employer towards the employees working in the undertaking. It is of no importance to know whether the ownership of the undertaking has been transferred. In fact, the employees of the undertaking which changes its employers without a transfer of ownership are in a comparable situation to that of employees of an undertaking which has been sold and therefore need equivalent protection."

    Transfer under leases

    In Ny Mølle Kro itself, the owner of a tavern, Mrs Hannisbalsen, leased it to a Mrs Larsen. Mrs Hannisbalsen subsequently rescinded the lease and took over the running of the tavern herself, on the ground that Mrs Larsen had breached the terms of the lease. The ECJ concluded that, insofar as a managing lessee acquires the capacity under the lease of employer within the meaning of the above-stated principle, the granting of the lease must be considered as a transfer of an undertaking to another employer as a result of a legal transfer within the meaning of the Directive. Similarly, there is a legal transfer if the owner re-acquires the capacity of employer as a result of taking back the running of the leased undertaking following a breach of the lease by the lessee.

    And, in Foreningen af Arbejdsledere i Danmark v Daddy's Dance Hall A/S, the Court confirmed that the Directive may apply to the transfer of the lease on an undertaking between successive lessees. Irma Catering had a non-transferable lease on restaurants and bars owned by Palads Teatret. On 28 January 1983, the lease was determined with effect from 25 February 1983. Irma Catering dismissed its staff, who were given the notice required under statute. Irma Catering continued to operate the business in question with the same staff until the termination date. On that date, a new lease was concluded between Palads Teatret and Daddy's Dance Hall, which immediately re-employed the staff previously employed by Irma Catering.

    The ECJ concluded that there is a legal transfer within article 1(1) if a lessee who has the capacity under a lease of proprietor of an undertaking loses that capacity on termination of the lease, and a third person acquires it under a new lease concluded with the owner. The fact that in such a case the transfer takes place in two phases, in the sense that, as a first step, the undertaking is transferred back from the original lessee to the owner who then transfers it to the new lessee, does not exclude the application of the Directive as long as the economic unit retains its identity. This will particularly be the case, said the Court, when the business continues to be run without interruption by the new lessee with the same staff that was employed in the undertaking before the transfer.

    Termination of lease and sale

    The same principle operates in respect of the surrender or termination of a lease and the subsequent sale of the undertaking by the owner. In P Bork International A/S (in liquidation) v Foreningen af Arbejdsledere i Danmark, Bork had a lease on a beechwood veneer factory belonging to another company (OTF). In the autumn of 1981, Bork gave notice of termination of the lease with effect from 22 December of the same year and dismissed the workforce employed at the factory. On 31 December, Junckers Industrier (JI) bought the factory from OTF, and took effective possession on 4 January 1982. The factory was brought back into operation on the same date, and JI took on more than half the staff previously employed by Bork (but did not recruit any new staff).

    The ECJ reaffirmed the principle that the Directive applies whenever, "within the framework of contractual relations there is any change of the natural or legal person responsible for operating the undertaking who enters into contractual obligations as an employer with the employees of the undertaking." It follows, the Court continued, that when the lessee, in its capacity as employer, loses that capacity at the end of the lease and a third party subsequently acquires that capacity under a contract of sale concluded with the owner, the resulting transaction may fall within the scope of article 1(1). Again, the fact that the transfer takes place in two stages - inasmuch as the undertaking is initially re-transferred by the lessee to the owner, who then transfers it to the new owner - does not preclude the application of the Directive, provided the undertaking retains its identity.

    Conditional sales agreements

    The fact that a change in the ownership of an undertaking, business (or part thereof) is not a necessary prerequisite for the application of the Directive is underlined by the decision in Berg and Busschers v Besselsen.

    Mr Besselsen was the owner of a Dutch bar/discotheque. In February 1983, the operation of the bar was taken over by a commercial partnership, under a lease-purchase agreement. Under Dutch law, such an agreement is defined as a "sale and purchase by instalments, where the parties agree that the purchaser does not acquire ownership of the business sold to him by the transfer alone." On 25 November 1983, a Dutch court, upon an application by Mr Besselsen, dissolved the lease-purchase agreement because of faulty performance by the partnership, and ordered the business to be returned to him. The ECJ was faced with the general question of who was responsible for arrears of salary claimed by employees in the undertaking in respect of the period when the business was run by the partnership.

    On the particular issue of whether there had been one or more legal transfers, the Court ruled that if the purchaser of an undertaking becomes the employer under a lease-purchase agreement, the transfer falls within the Directive, even if the purchaser only acquires ownership of the undertaking at the moment when it has paid the complete purchase price (ie on payment of the final instalment). The same applies when the undertaking is returned to its former owner (or head) after the lease-purchase agreement has been dissolved. It does not matter, said the Court, whether that dissolution is the consequence of an agreement between the parties to the contract, or of a unilateral declaration by one of those parties, or of a judicial decision. In all of those cases, the transfer takes place in the context of a contractual relationship.

    Switching grants and subsidies

    The scope of the Directive was further widened in Dr Sophie Redmond Stichting v Bartol and others. There, the Dr Sophie Redmond foundation ("Redmond") primarily provided assistance to drug addicts belonging to certain minority groups within Dutch society, particularly those of Surinamese or Antillean origin. It also provided social and recreational facilities for its clients. It was at all times entirely funded by grants from the local authority in Groningen. The local authority decided to terminate that funding with effect from 1 January 1991, and to switch it to the Sigma foundation ("Sigma") on condition that, as a foundation providing general assistance in the area of drug dependency, it would also be accessible to drug addicts.

    The Court followed the logic and approach of its previous rulings, and concluded that the term "legal transfer" in article 1(1) "covers the situation in which a public body decides to terminate a subsidy paid to one legal person, as a result of which the activities of that person are fully and definitively terminated, and to transfer it to another legal person with similar aims." In reaching this conclusion, it said that the decision of a public authority to transfer funding from one organisation to another pursuing the same or similar activities is governed by "comparable reasoning" to that which had been applied in cases such as Bork . It does not matter that the decision to switch funding is taken "unilaterally" by the public body, or that it does not result from an agreement concluded by it with the organisation subsidised. There is just as much of a unilateral decision where an owner of premises decides to change to a new lessee, as "when a public body alters its funding policy". And the legal nature of a grant or subsidy - which in some Member States is granted by a unilateral act accompanied by certain conditions, and in others by way of subsidy agreements - cannot be taken into account. "In all cases, the change of the beneficiary of the subsidy takes place in the context of a contractual relationship within the meaning of the Directive and of the case law," asserted the Court. It also emphasised that a transaction is not excluded from the scope of the Directive merely because it arises out of the grant of subsidies to foundations or associations "whose services are not remunerated" (ie they are charitable and non-profit-making).

    Contracting-out

    At least two ECJ decisions confirm that the Directive applies to the transfer of a part of an undertaking or business, and, in particular, to the contracting-out of discrete services or functions within undertakings.

    In Rask and Christensen v ISS Kantineservice A/S, the Directive was found to cover a situation in which an organisation contracted out the running of its staff canteen to outside contractors. The protection provided by the Directive applies, said the Court, to the transfer of only a part of an undertaking or business. It therefore concerns the employees "assigned" to that part of the undertaking, since the employment relationship is essentially characterised by the link existing between the employee and the part of the undertaking to which he or she is assigned to carry out his or her duties. (See Botzen and others v Rotterdamsche Droogdok Maatschappij BV - this case, and the question of which employees are consequently covered by the automatic transfer principle contained in the Directive and the Regulations, will be discussed further in part three of this series.)

    It follows that article 1(1) of the Directive applies where the owner of an undertaking entrusts, by means of a service contract or agreement, the responsibility for providing a service to its undertaking, such as a canteen, to the owner of another undertaking, which thereby assumes responsibilities and obligations as an employer towards employees who are engaged in the provision of that service, the Court ruled. This is unaffected by the fact that "the activity transferred is only an ancillary activity of the transferor undertaking not necessarily related to its objects." Similarly, the fact that the agreement between the parties relates to the provision of services provided exclusively for the transferor in return for a fee, which is fixed by the terms of the agreement, does not preclude the application of the Directive.

    The reasoning in Rask was relied on in Schmidt v Spar- und Leihkasse der früheren Ämter Bordesholm, Kiel und Cronshagen, perhaps the ECJ's most wide-ranging and controversial decision on the Directive to date. Mrs Schmidt was employed by a German savings bank as the only cleaner at one of its branch offices. She was dismissed when the bank decided to contract out the cleaning of the premises to a company which was already responsible for cleaning most of the bank's other premises. The Court ruled that "when an undertaking entrusts by contract the responsibility for operating one of its services, such as cleaning, to another undertaking which thereby assumes the obligations of an employer towards employees assigned to those duties, that operation may come within the scope of the Directive." It again emphasised that the fact that the activity transferred is for the transferor merely an ancillary activity not necessarily connected with its objects cannot exclude the activity from the Directive's scope. Neither is the fact that "the activity in question was performed, prior to the transfer, by a single employee sufficient to preclude the application of the Directive, since its application does not depend on the number of employees assigned to the part of the undertaking which is the subject of the transfer." One of the objectives of the Directive is to protect employees in the event of a change of employer. That protection extends to all staff, and "must therefore be guaranteed even where only one employee is affected by the transfer."

    Transfer of franchises/contracts

    Most recently, the ECJ has found that the Directive may apply to the transfer of a motor vehicle franchise or dealership between successive franchisees or dealers (Merckx and another v Ford Motors Co Belgium SA). This reflects its previous decisions on the transfer of leases, licences and subsidies, and strongly indicates that the Directive also applies to changes in contractors providing services to a customer or client. Indeed, in Ledernes Hovedorganisation, acting on behalf of Ole Rygaard v Dansk Arbejdsgiverforening, acting on behalf of Strø Mølle Akustik A/S, the Court said that the transfer of a contract for the completion of certain building works between successive contractors can amount to a "legal transfer" (although on the facts of the case it was held that there was no transfer of an identifiable and " undertaking).

    In Merckx, Anfo Motors sold motor vehicles as a Ford dealer in a number of areas in and around Brussels (indeed, Ford was the main shareholder in Anfo). On 8 October 1987, Anfo informed its employees that it would be discontinuing all its activities on 31 December of that year and that, with effect from 1 November, Ford would be working with an independent dealer, Novarobel SA, in the areas previously covered by the Anfo dealership. The ECJ said that, because of the differences between the laws of Member States with regard to the concept of a "legal transfer", it had adopted a sufficiently flexible interpretation of that phrase in keeping with the Directive's objective of safeguarding employees in the event of a transfer of their undertaking (that is, the general principle originally set out in Ny Mølle Kro ). It was also clear from the previous case law that there does not need to be a direct contractual relationship between the transferor and transferee for a transfer to take place. Consequently, the Court ruled that where a motor vehicle dealership concluded with one undertaking is terminated and a new dealership is awarded to another undertaking pursuing the same or similar activities in the same area, the transfer of the undertaking is the result of legal transfer for the purposes of the Directive.

    " ... the Directive aims to ensure the continuity of existing employment relationships in the framework of an economic entity, irrespective of a change of owner. It follows that the decisive criterion for establishing whether there is a transfer for the purposes of the Directive is whether the entity in question retains its identity. Consequently it cannot be said that there is a transfer of an enterprise, business or part of a business on the sole ground that its assets have been sold. On the contrary, in a case like the present, it is necessary to determine whether what has been sold is an economic entity which is still in existence, and this will be apparent from the fact that its operation is actually being continued or has been taken over by the new employer, with the same economic or similar activities."

    (from the judgment of the European Court of Justice in Spijkers v Gebroeders Benedik Abatoir CV and another)

    Insolvency proceedings

    The Directive does not, however, apply to transfers of undertakings effected in the context of insolvency proceedings which are intended to achieve the liquidation of an undertaking's assets under the supervision of a competent judicial authority (Abels v The Administrative Board of the Bedrijfsvereniging Voor de Metaal Industrie en de Electrotechnische Industrie). This exception is based on the absence of any express provision in the Directive relating to insolvency, and on the ECJ's opinion that the extension of the Directive to cover such situations would undermine its underlying purpose to protect the interests of employees. That purpose will not be served, says the Court, if jobs are lost because potential purchasers are deterred from acquiring insolvent businesses.

    On the other hand, the Court in Abels ruled that the Directive does apply to procedures where the primary aim is to protect the assets of an undertaking, and to ensure, where possible, that the undertaking can continue to trade. It therefore applied to a procedure under Dutch law which was clearly designed to prevent insolvency by means of a collective agreement with creditors to suspend the payment of debts, and was not intended to achieve the liquidation of the undertaking's assets. This approach was endorsed in D'Urso and others v Ercole Marelli Elettromeccanica Generale SpA (in special administration) and others, where the ECJ said that the principal question in any case is "the purpose of the procedure in question" (see also the Court's decision in Spano and others v FIAT Geotech SpA and another).

    The ECJ has thus recognised the variety of national regimes governing insolvency situations, and the consequent problems of attempting to determine the scope of the Directive purely from an examination of the nature and extent of the judicial or administrative control exercised over such proceedings. It has therefore adopted a pragmatic approach based on whether the purpose of any given procedure is to realise the assets of an undertaking in order to pay off creditors following a declaration of insolvency, or is rather intended to maintain the viability of the whole or part of the undertaking, with the possibility of its sale as a going concern.

    Any attempt to apply this distinction to the myriad procedures available in UK insolvency law may, however, be of primarily academic interest. This is because the Regulations in any event cover any relevant transfer of the whole or part of an undertaking (including insolvent undertakings) as a going concern, as opposed to a mere sale of assets. We will consider the practical application of the Regulations in insolvency situations in subsequent parts of this series.

    Share transfers excluded

    It is also important to note that the requirement for a change in the identity of the employer responsible for an undertaking means that the Directive (like the Regulations) does not cover acquisitions or takeovers which take place by way of share transfer. In these circumstances, there is no change in the employment relationship between employer and employee. All that changes is the owner of the controlling shares in the company concerned. The owner of the undertaking remains the same, namely the company whose shares have been transferred (see Transport and General Workers' Union v BICC Bryce Capacitors Ltd). The employees are employed by the same legal entity as before, and under the same terms and conditions.

    Retention of identity

    Given the otherwise all-encompassing approach of the ECJ to the question of what constitutes a "legal transfer" under the Directive, attention is more often focused on the second question raised by article 1(1), namely, whether there has actually been a of an undertaking, business or part of a business".

    The Spijkers principles

    In addressing this issue, the starting point is the ECJ's ruling in Spijkers v Gebroeders Benedik Abattoir CV and another. According to the Court, the aim of the Directive is "to ensure the continuity of existing employment relationships in the framework of an economic entity, irrespective of a change of owner". It follows that "the decisive criterion for establishing whether there is a transfer for the purposes of the Directive is whether the entity in question retains its identity." Consequently, it cannot be said that there is a transfer of an enterprise, business or part of a business on the sole ground that its assets have been sold. In all cases, it is "necessary to determine whether what has been sold is an economic entity which is still in existence, and this will be apparent from the fact that its operation is actually being continued or has been taken over by the new employer, with the same economic or similar activities" (our emphasis).

    In order to determine whether these conditions are met, it is further necessary to consider all the factual circumstances characterising the transaction in question, including:

  • the type of undertaking or business involved;

  • the transfer or otherwise of tangible assets, such as buildings and stocks;

  • the value of its intangible assets at the time of the transfer (including, for example, the "goodwill" attaching to a business);

  • whether or not the majority of the staff are taken over by the new employer;

  • the transfer or otherwise of the transferor's circle of customers;

  • the degree of similarity between the activities carried on before and after the transfer; and

  • the duration of any interruption in those activities.

    These circumstances are, however, merely single factors in the overall assessment required, and therefore they cannot be examined independently of each other. It is for national courts to make the necessary factual appraisal in order to establish whether or not there is a transfer, in the light of the above criteria.

    Beware of disguises

    This guidance was given in a context in which the transferor company had entirely ceased activity and dissipated its goodwill by the time it sold its assets (comprising a slaughterhouse and appurtenant premises and stock) to the transferee. After a gap of some six weeks, the transferee commenced an apparently new slaughterhouse business from the same premises, having taken on all but two of the transferor's employees, but none of its customers.

    It is clear from the Court's judgment, and more particularly from the Opinion given in the case by Advocate-General Slynn, that the fact that at the time of a transfer trading has ceased, goodwill and existing contracts (and customers) are not transferred, or that there is a gap before trading is resumed, is not conclusive against there being a transfer within the meaning of the Directive. In the Advocate-General's view, for example, if a transferee retains or re-engages the transferor's employees in order to reorganise or renovate premises or equipment, and trading is then resumed, a national court will be entitled to find that there is a transfer. Similarly, the fact that the business is carried on in a different way does not preclude a transfer - new methods, new machinery and new types of customer are relevant factors but they do not of themselves prevent there being "in reality" a transfer of a business or undertaking. As the Advocate-General warns, "though it is plain that a sale may take place simply of the physical assets or part of them with no intention in any real sense that the business should thereafter be carried on, care must be taken to ensure that such a sale is not a disguise to avoid obligations to the workers under the Directive."

    Continuation or resumption of activities

    Subsequent decisions have confirmed the importance of the retention of identity test expounded in Spijkers, and have emphasised the consequent need to focus on whether the operation of the original business, undertaking or economic entity (or part thereof) has actually been continued or resumed by the transferee with the same or similar activities.

    In Ny Mølle Kro, for example, the ECJ accepted that the fact that the tavern was closed, and that it consequently had no employees, at the time of the transfer - the evidence showed that the establishment was normally run as a tavern only during the summer season - was a relevant factor to be considered when determining whether an economic entity still in existence had been transferred. But the temporary closure of an undertaking and the consequential absence of the staff at the time of the transfer are not in themselves sufficient to preclude a transfer within the meaning of article 1(1). This conclusion is, in the Court's view, "inescapable" in the case of an undertaking of a seasonal nature, where the transfer occurs during the off-season. Such closure does not as a general rule mean the end of the undertaking's existence as an economic entity. This is also true in a situation in which the undertaking ceases operation only for a short period which also coincides with end-of-year holidays (see Bork ).

    Applying the Spijkers test in Dr Sophie Redmond , the ECJ said that a number of factors "were essential but not determinative" in characterising a transfer of an undertaking between the Redmond and Sigma foundations: the two foundations pursued the same or similar aims; the Redmond foundation had been partially absorbed by Sigma; the foundations had collaborated and cooperated actively in the transfer of Redmond's services and clients (through a "joint working group"); the transfer of Redmond's knowledge and resources had been agreed; the building leased by the local authority to Redmond was leased to Sigma; and Sigma had offered new contracts of employment to some former employees of Redmond. On the other hand, the fact that certain functions (in particular, the social and recreational facilities provided by Redmond) and movable assets had not been transferred did not preclude the application of the Directive.

    Both Rask and Schmidt make it clear that ancillary or subsidiary activities or functions of organisations can amount to a part of an undertaking, and therefore an identifiable economic entity, for present purposes. And the question of whether that entity has retained its identity on transfer is again governed by the Spijkers principles. For example, in Schmidt, the ECJ underlined the fact that the absence of the transfer of any of the transferor's premises or tangible assets to the transferee contractor could not exclude the transfer from the scope of the Directive. The similarity in the cleaning work performed before and after the transfer, which was, moreover, reflected in an offer to re-engage the employee in question, was typical of an operation which comes within the scope of article 1(1).

    Most recently, in Merckx , the Court observed that Novarobel (the transferee) had carried on the activity (that is, as an exclusive Ford dealer) performed by Anfo, without interruption, in the same sector and subject to similar conditions. It had taken on part of Anfo's staff, and was recommended to Anfo customers in order to ensure continuity in the operation of the dealership. Taken as a whole, these factors supported the view that the transfer of the dealership was capable of falling within the scope of the Directive. By contrast, the Court again confirmed that neither the transfer of tangible or intangible assets, nor the partial preservation of the transferor undertaking's structure, organisation or geographical location are in themselves crucial to the application of the Directive. The purpose of an exclusive dealership such as that at issue in the case remains the same, "even if it is carried on under a different name, from different premises and with different facilities. It is also irrelevant that the principal place of business is situated in a different area of the same conurbation, provided the contract territory remains the same." Similarly, the fact that the majority of Anfo's employees were dismissed when the transfer took place could not preclude the application of the Directive.

    "Stable economic entity"?

    Some commentators detected an apparent attempt by the ECJ to limit the effect of certain of its previous rulings in its judgment in Rygaard .

    There, the Court stated that cases such as Schmidt presuppose the transfer of a "stable economic entity" whose activity is not limited to the performance of one specific works contract. Accordingly, it ruled that the Directive does not apply where a contractor takes over, with a view to completing, with the consent of the awarder of the main contract, building works started by another contractor. Such a transfer can fall within the terms of the Directive only if it includes the transfer of a body of assets enabling some or all of the transferor's activities to be carried on "in a stable way". This does not, says the Court, occur where the transferor merely makes available to the new contractor certain workers and materials needed for the completion of the work in question.

    This decision was unexpected, not least because it contradicted the Opinion given in the case by Advocate-General Cosmas. But the Court's insistence that there must be a "stable economic entity", taken together with the very specific nature of the question which it was asked to consider, suggests that factors such as the continuity and duration of the task, function or service transferred will in certain circumstances be crucial. We would submit, however, that this will not in many cases affect the transfer of undertakings, activities or services carried out under leases, licences, franchises and in contracting- out situations. In most such cases, a stable and continuous service, task or function is transferred, which will need to be carried out whoever the contractor may be at any given point in time. The stability and continuity of the service transferred should not therefore be defined or determined solely by the length of the contract awarded to any particular contractor. Only if the service, task or function is itself of limited duration, as it was in Rygaard, will courts and tribunals be required, as a matter of priority, to look for further evidence of stability by considering whether there has been a transfer of a "body of assets".

    The potential impact of the decision should not therefore be exaggerated. The view that Rygaard represents in any sense a reversal of, for example, the ECJ's approach in Schmidt is clearly unsustainable. As the Court in Rygaard itself made clear, it approved the approach taken in Schmidt and was merely addressing the need in all cases to identify a business or economic entity (or part thereof) which is capable of being transferred and continued in the hands of the transferee. The fact that the Court uses the apparently new phrase "stable economic entity" is really only an attempt to define and underline that requirement. Indeed, attempts to define a "business" or "economic entity" are not entirely without precedent. For example, in his Opinion in Schmidt, Advocate-General Van Gerven expressed the view that concepts such as "economic unit", "economic entity" and "business" refer "to a unit with a minimum level of organisational independence, which can exist by itself or constitute part of a larger undertaking". This means, he said, "an organised whole consisting of persons and (tangible or intangible) assets by means of which economic activity is carried on, having an objective of its own, albeit one that is ancillary to the objects of the undertaking; a whole which, moreover, can be part of an even larger corporate whole."

    Indeed, the view that Rygaard is of rather more limited importance than it might appear at first sight is borne out by the reaction which it has received in some of the latest domestic decisions on the application of the Regulations. In BSG Property Services v Tuck and others, for example, the EAT said that the requirement for a "stable economic entity" had to be read in the context of the factual situation considered by the ECJ in Rygaard - that is, a contract of short duration for the completion of specific building works - and is therefore "apt to exclude activities under a short-term, one-off contract". This was to be distinguished from "continuing and recurrent" activities, such as the provision of maintenance services to council house tenants in BSG v Tuck itself (which is considered further in part two of this series) or hospital cleaning services (see, for example, Dines and others v (1) Initial Health Care Services Ltd and (2) Pall Mall Services Group Ltd, which is again considered in part two). A similar approach was adopted in Campion Hall v Waine and Gardner Merchant Ltd, where the EAT rejected the contention that Rygaard had any application to a transfer of catering services (involving, in this case, the resumption of those activities by the client). The reference in Rygaard to a "stable economic entity" was, said the EAT, made in the very different context of completing the performance of a specific contract for construction.

    UK cases on Directive

    The full breadth of the retained identity principle developed by the ECJ has been demonstrated in two UK decisions on the Directive. Both cases involved employees in the public sector, who were consequently able to rely directly on its provisions. It is nevertheless clear from the judgments that the Regulations would also have applied, had it not been for the existence of the now repealed "non-commercial venture" exclusion (see part two of this series).

    Thus, in Kenny and others v South Manchester College, the High Court held that article 1(1) of the Directive applied to the transfer of the provision of education services at a young offenders' institution from a local education authority (the transferor) to a further education college (the transferee), following a competitive tendering exercise by the Home Office. This conclusion was reached notwithstanding the fact that there was no direct relationship between the transferor and the transferee, no transfer of assets, no transfer of clients or customers (the judge, Sir Michael Ogden QC, characterised the offenders as "merely recipients of the service"), no transfer of employees pursuant to the contract with the Home Office, and that the education service "may be carried on in a different way" (for example, through the use of different teaching materials and methods. Adopting a "realistic and robust" approach to the facts of the case, Sir Michael was satisfied that the education service would retain its identity and its operation would continue. The reality was that offenders who attended, for example, a carpentry class on the day the transfer took effect would, save for those released in the meantime, be likely to be in the main the same as those who attended the same class in the same classroom the day before, and would doubtless be using exactly the same tools and materials.

    And, in Porter and another v Queen's Medical Centre (Nottingham University Hospital), the High Court concluded that the Directive applied to the transfer of a contract for the supply of paediatric and neonatal services from a general hospital to a National Health Service trust. In the light of the ECJ's decision in Sophie Redmond, the supply of such services had to be regarded as an "undertaking", and a change in the provider of those services was a change which may bring about a transfer. The High Court noted that the Directive applies wherever there is a change in the identity of the person responsible for running or operating an undertaking. The relevant responsibility in the present case was for actually doing the work of providing paediatric and neonatal services, rather than for seeing that those services were provided. It did not therefore matter that the latter responsibility remained throughout with a third party (the Secretary of State for Health, directing the regional health authority and district health authorities).

    Furthermore, the Court held that the undertaking in question retained its identity through the change of provider. One contract replaced the other; both contracts were intended to meet the neonatal and paediatric needs of the same population; the same buildings and installations (those of the general hospital) were to be used; and the transferee trust had taken on all but four of the staff previously involved in providing the service. The fact that the provision of services was to be carried out in a different way (involving the replacement of an "old-style" hospital-based service receiving referrals from general practitioners, with a "new-style" service integrating primary and secondary care within a single comprehensive service) did not preclude a transfer. "Medical science does not stand still," the Court observed. As it advances, methods of providing care are naturally modified and improved. But this does "not mean that the object of the undertaking is changing but only that new means of achieving it are being adopted ... We are therefore dealing with a type of undertaking in which it is particularly likely that different ways of carrying on the undertaking may be adopted without destroying its identity," said the Court.

    In part two of this series, we move on to consider how the principles set out in this feature now condition the interpretation and application of the domestic transfers legislation.

    The European approach to business transfers: main points to note

  • At common law, employees in the UK have little or no protection when the organisation in which they work changes hands. An employee cannot, without his or her consent, be transferred from one employer to another. Such a transfer effectively terminates the contract of employment.

  • This position is significantly modified by the 1981 Transfer of Undertakings Regulations, which were made in an attempt to implement the obligations imposed on the UK by the EC Business Transfers Directive.

  • The Directive enshrines three key principles: the automatic transfer of the contracts and related rights and obligations of employees employed in an undertaking on the date of a transfer from one employer to another; protection for employees from dismissal as a result of, or for reasons related to, the transfer; and an obligation on employers to inform and consult with employees' representatives in advance of a transfer.

  • UK courts and tribunals must adopt a purposive approach to the construction of the Regulations, "so as to accord with the interpretation of the Directive laid down by the European Court of Justice".

  • The Directive applies to the transfer of an undertaking, business or part of a business as a result of a legal transfer or merger. If the identity of the person responsible for the running of an undertaking or business changes, there will probably be a "legal transfer" within the meaning of the Directive.

  • This will include transfers under leases, licences, franchises and dealerships, transfers occurring in the context of conditional sales agreements, the switching of public subsidies from one charitable organisation to another, and the contracting-out (or contracting-in) of discrete services or activities within an undertaking.

  • In determining whether an undertaking or business (or part thereof) has in fact been transferred, "the decisive criterion" is whether the entity in question retains its identity. It is, in particular, necessary to determine whether what has been transferred is an economic entity which is still in existence, and this will be apparent from the fact that its operation is actually being continued or has been taken over by the new employer, with the same economic or similar activities.

  • In order to determine whether these conditions are met, it is further necessary to consider all the factual circumstances characterising the transaction in question, including: the type of undertaking or business involved; the transfer or otherwise of tangible assets; the value of intangible assets at the time of the transfer; whether or not the majority of the staff are taken over by the new employer; the transfer or otherwise of the transferor's customers; the degree of similarity between the activities carried on before and after the transfer; and the duration of any interruption in those activities.

  • These are, however, merely single factors in the overall assessment required, and therefore they cannot be examined independently of each other. It is for national courts to make the necessary factual appraisal in order to establish whether or not there is a transfer, in the light of those criteria.

    The UK Regulations - key provisions

    Scope: The Transfer of Undertakings (Protection of Employment) Regulations 19811 apply "to a transfer from one person to another of an undertaking situated immediately before the transfer in the United Kingdom or a part of one which is so situated" (reg. 3(1)). This is known as a "relevant transfer" (reg. 2(1)). An undertaking includes "any trade or business" (reg. 2(1)). A relevant transfer may be "effected by sale or by some other disposition or by operation of law" (reg. 3(2)). It may "be effected by a series of two or more transactions" (reg. 3(4)(a)), and may take place whether or not any property is transferred to the transferee by the transferor (reg. 3(4)(b)). The Regulations do not, however, apply to "to the transfer of a ship without more" (reg. 2(2) - our emphasis).

    Automatic transfer principle: Regulation 5 provides that "a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor in the undertaking or part transferred." Any such contract "which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee" (reg. 5(1)). All of the transferor's rights, powers, duties and liabilities under or in connection with any such contract are also transferred to the transferee (reg. 5(2)(a)). These provisions do not, however, apply to transfer any rights, obligations or liabilities relating to benefits for old age, invalidity or survivors arising under occupational pension schemes (reg. 7).

    Unfair dismissal protection: Regulation 8(1) provides that, for the purposes of the unfair dismissal provisions of the Employment Rights Act 1996, a dismissal is deemed to be automatically unfair if the transfer, or a reason connected with the transfer, is the reason or principal reason for dismissal. This principle does not, however, apply where the dismissal is for an "economic, technical or organisational reason entailing changes in the workforce of either the transferor or transferee" (reg. 8(2)).

    Duty to inform and consult: Both the transferor and transferee must give specified information about a relevant transfer and its consequences to the "appropriate representatives" of any of their employees who may be affected by the transfer or measures taken in connection with it (reg. 10 - see Consultation on redundancies and business transfers). There is a more limited duty to consult such representatives about measures which the employer envisages that it will be taking in relation to any of the affected employees.

    IRLB guide to the transfer of undertakings

    Part 1 : Scope and fundamental purposes of the Business Transfers Directive and the Transfer Regulations, covering: the common law position in the UK and the pre-eminence of EC law as an aid to the interpretation of the Regulations; and tracing the development of the ECJ's thinking on the question of what constitutes a transfer of an undertaking or business.

    Part 2 : Transfers under the Regulations, including: the application of EC law; the modern "employment"-orientated approach based on whether an undertaking "retains its identity"; and examples of the types of undertakings and transfer transactions consequently covered by the Regulations.

    Part 3 : The automatic transfer principle, comprising: the employees covered by the Regulations; the rights, obligations, duties and liabilities transferred; and the employee's right to object to transfer.

    Part 4 : Unfair dismissal protection in the context of transfers, information and consultation provisions; and the possible revision of the Directive.

    1SI 1981/1794.

    CASE LIST

    Abels v The Administrative Board of the Bedrijfsvereniging Voor de Metaal Industrie en de Electrotechnische Industrie [1987] CMLR 406

    Berg and Busschers v Besselsen [1989] IRLR 447

    Bork P International A/S (in liquidation) v Foreningen af Arbejdsledere i Danmark [1989] IRLR 41

    Botzen and others v Rotterdamsche Droogdok Maatschappij BV [1986] 2 CMLR 50

    BSG Property Services v Tuck and others [1996] IRLR 134

    Campion Hall v Waine and Gardner Merchant Ltd 23.11.95 EAT 1112/94

    Council of the Isles of Scilly v (1) Brintel Helicopters Ltd and (2) Ellis and others [1995] IRLR 6

    D'Urso and others v Ercole Marelli Elettromeccanica Generale SpA (in special administration) and others [1992] IRLR 136

    Dines and others v (1) Initial Health Care Services Ltd and (2) Pall Mall Services Group Ltd [1994] IRLR 336

    Dr Sophie Redmond Stichting v Bartol and others [1992] IRLR 366

    Foreningen af Arbejdsledere i Danmark v Daddy's Dance Hall A/S [1988] IRLR 315

    Kenny and others v South Manchester College [1993] IRLR 265

    Landsorganisationen i Danmark v Ny Mølle Kro [1989] IRLR 37

    Ledernes Hovedorganisation, acting for Rygaard v Dansk Arbejdsgiverforening, acting on behalf of Strø Mølle Akustik A/S [1996] IRLR 51

    Litster and others v Forth Dry Dock & Engineering Co Ltd [1989] IRLR 161

    Merckx and Neuhuys v Ford Motors Co Belgium SA [1996] IRLR 467

    Newns v British Airways plc [1992] IRLR 575

    Nokes v Doncaster Amalgamated Collieries Ltd [1940] AC 1014

    Porter and another v Queen's Medical Centre (Nottingham University Hospital) [1993] IRLR 486

    Rask and Christensen v ISS Kantineservice A/S [1993] IRLR 133

    Schmidt v Spar- und Leihkasse der früheren Ämter Bordesholm, Kiel und Cronshagen [1994] IRLR 302

    Spano and other v FIAT Geotech SpA and another 7.12.95 Case C-472/93

    Spijkers v Gebroeders Benedik Abattoir CV and another [1986] 2 CMLR 296

    Transport and General Workers' Union v BICC Bryce Capacitors Ltd 29.4.85 COIT 33462/84

    Webb v EMO Air Cargo (UK) Ltd [1993] IRLR 27