Transfer of undertakings 4: variation and unfair dismissal

Meade v British Fuels

An attempt has now, however, been made by a differently-constituted EAT to distinguish and limit the impact of Wilson.

In Meade and another v British Fuels Ltd, Mr Meade was dismissed by the transferor on the grounds of redundancy with effect from 28 August 1992. He received certain sums from the transferor in lieu of notice and by way of redundancy payments. A relevant transfer of the undertaking in which he had worked took place four days later, on 1 September. On that same date, Mr Meade commenced employment with the transferee on significantly less favourable terms and conditions than he had enjoyed with the transferor. These revised terms were confirmed in a statement of terms and conditions signed by Mr Meade some eight months later, in April 1993. The facts in Mr Baxendale's case were not materially different.

Both employees subsequently challenged the validity of the terms and conditions offered after the transfer by way of complaints to industrial tribunals under s.11 of the ERA. They alleged that the statements of terms and conditions which they had belatedly received were inaccurate, and sought findings as to the particulars which ought have been included. The tribunals in both cases concluded that the terms and conditions contained in those statements were accurate. In relation to Mr Meade, the tribunal found that he had been effectively dismissed by the transferor and had entered into entirely fresh employment with the transferee. By contrast, the tribunal found that Mr Baxendale had not been dismissed by the transferor. His contract of employment was transferred under the Regulations, but had been validly varied by consent or conduct.

The EAT (in a majority decision) upheld the ultimate conclusions of both tribunals, but for the reasons given by the tribunal in Mr Meade's case. Mr Justice Holland observed that there is "nothing in the Regulations which in terms invalidates, in the context of a transfer of an undertaking, what would otherwise be a dismissal. On the contrary, the validity of a dismissal the reason or principal reason for which is such a transfer is the premise for the provisions of reg. 8. Thus, such a dismissal is not deemed to be a nullity but is deemed to be unfair for the purposes of the relevant provisions of the [ERA]." Indeed, said Holland J, article 4(1) of the Directive - which states that "the transfer of an undertaking ... shall not in itself constitute grounds for dismissal" - itself raises the possibility that a dismissal connected with a transfer may be deemed to be merely unfair, rather than a nullity. And the decision of the House of Lords in Litster, was based on the premise that a dismissal by the transferor is valid, subject to deemed liability on the part of the transferee.

The EAT then turned to consider the Wilson decision. Holland J appeared to accept that the conclusion in that case could have been reached only on the basis that what he describes as the "purported" dismissals of the employees by the county council on 30 September (see above) were a nullity and of no effect, so that the pre-existing terms persisted. And, he said, it was apparent that those dismissals had not been the subject of any submissions or findings by that EAT. No question had been raised in Wilson about the "significance" of any of the dismissals, and it was noteworthy that there was no mention of the payment and acceptance of redundancy payments consequent upon dismissal: "If that omission reflects the full facts, then it may be that there is a true difference in quality between the dismissal of Mr Meade [and Mr Baxendale] and that of [the applicants in Wilson]". In any event, the decision in Wilson did not call into question the conclusion in the present case that Mr Meade "was validly if unfairly dismissed."

On the other hand, all of the members of the EAT in Meade were agreed that if the reasoning of the majority was wrong, and Mr Meade's dismissal by the transferor was (by reference to EC law) a nullity and invalid, his purported agreement to new terms and conditions at the time of the transfer would have been rendered void by virtue of reg. 12 (see above). And on the premise that there was "no dismissal" and that his contract with the transferor had been transferred, the statement of some eight months later, as purportedly a confirmation of those new terms, "must similarly be struck down". But, warned Holland J, reg. 12 could not serve "indefinitely to inhibit the parties from bringing the legal position into line with the reality. The longer the period since the transfer, the easier it will be to demonstrate a variation by conduct or to justify a variation by agreement ... the 'land mine' [that is, reg. 12] does not pose an indefinite threat."

The Meade decision contains many flaws, not the least of which is a somewhat unconvincing attempt to distinguish Wilson on the basis of the "significance" or quality of a dismissal. This entirely overlooks the very purpose and function of the automatic transfer principle contained in reg. 5(1). Where that provision applies (or is deemed to apply as a result of Litster), any purported dismissal by the transferor must arguably be regarded as ineffective, if employees are re-engaged by the transferee immediately thereafter.

Leave to appeal has also been sought by the employees in Meade, and it seems reasonable to speculate that the proceedings might be consolidated with Wilson. Authoritative guidance from the Court of Appeal will be eagerly awaited by all those involved in business transfers, and it is to be hoped that the Court will be able to determine the proper meaning and application of the ECJ's statements in Daddy's Dance Hall and Rask without the need for a further reference to Europe.

Constructive dismissal

Notwithstanding the uncertainty about the validity of consensual variations of the contracts of employment of employees transferred (or deemed to have been transferred) under reg. 5, it is clear that the transferee is otherwise bound by the terms and conditions (express and implied) contained in those contracts as if it were the original (transferor) employer. It follows that any attempt unilaterally to vary or impose revised terms and conditions in relation, for example, to pay, hours of work, holidays, sickness entitlements or job function, will constitute a breach of contract.

And if, as will often be the case, the transferee's conduct in this respect amounts to a "significant breach going to the root of the contract", or shows that "[it] no longer intends to be bound by one or more of the essential terms of the contract", the employee is entitled to treat himself or herself as discharged from any further performance thereunder (Western Excavating (ECC) Ltd v Sharp). He or she may then "accept" what is termed the employer's "fundamental" or "repudiatory" breach by resigning from employment with or without notice. In these circumstances, the employee will be treated as having been "constructively dismissed" by the transferee both at common law and for statutory employment protection purposes. The employee will consequently retain his or her rights to sue for damages for breach of contract (and wrongful dismissal) at common law, and the statutory right to complain of unfair constructive dismissal (s.95(1)(c) of the ERA).

Reservation of rights

Against this background must be placed reg. 5(5) of the Regulations. This states that reg. 5(1) (the automatic transfer principle) and (4A) (the employee's right to object to transfer - see part three, pp.8-9) "are without prejudice to any right of an employee arising apart from these Regulations to terminate his contract of employment without notice if a substantial change is made in his working conditions to his detriment [limb 1]; but no such right shall arise by reason only that, under [reg. 5(1)], the identity of his employer changes unless the employee shows that, in all the circumstances, the change is a significant one and is to his detriment [limb 2]."

In the view of many commentators, this provision merely restates and reasserts the general principle that an employee may complain of constructive dismissal if faced with a repudiatory breach of contract - other than that which would, but for the Regulations, be caused by the transfer itself - by the transferee. For example, in Crown Leisure Ltd v Waldron, the EAT thought that reg. 5(5) "is really a negative or passive saving of the position which would arise under the general law and does not impose any new requirement, except that by the words 'if a substantial change is made in his working conditions to his detriment' it, as it were, recognises the existing law that such a change is capable of being the sort of significant breach of contract which an employee is entitled to treat as entitling him to terminate the employment without notice."

But the problem is that the wording of limb 1 of reg. 5(5) - which is drawn directly from the parallel provision in article 4(2) of the Directive - may be interpreted in a number ways. On another reading, it potentially narrows the scope of the employee's protection against constructive dismissal by requiring the employee to demonstrate not only a repudiatory breach of contract by the transferee, but that such breach also constitutes a substantial change in the employee's working conditions which is to his or her detriment. Whilst it is clear that most repudiatory breaches of contract are likely to be characterised as both substantial and detrimental, it is perfectly possible that on this analysis an employee might be precluded from complaining of constructive dismissal if the substantial changes imposed are, taken as a whole, seen to be broadly beneficial or at least neutral in their overall effect. It is therefore submitted that this latter approach would undermine the protective purpose of the Regulations, and cannot therefore be justified.

A separate test?

Indeed, the balance of opinion in cases where the issue has arisen for consideration is that reg. 5(5) may in some way expand the traditional test for constructive dismissal in the context of business transfers or, more accurately, that it creates a separate free-standing test for these purposes.

In Delabole Slate Ltd v Berriman, Lord Justice Browne-Wilkinson (as he then was) considered that the effect of reg. 5(5) is that an employee whose employment is transferred under the Regulations "has the right to treat himself as constructively dismissed by any detrimental change in his working conditions." This dictum was referred to by the EAT in Servicepoint Ltd v Clynes and another, where Mr Justice Wood said that it is not necessary to equate the wording of reg. 5(5) with the general test for constructive dismissal: "It may be that the Regulations should be read as a whole and that where [they] have clear wording, then they should be applied, without necessary reference to the principles of constructive dismissal."

Similarly, the EAT in Dabell v Nofotec Co Ltd purported to follow the "guidance" given in Delabole, and proceeded on the clear understanding that the test under reg. 5(5) is entirely distinct from the general constructive dismissal test. Mr Dabell resigned some three weeks after a transfer in response to a number of "differences" which arose between himself and the transferee. This "gradual accumulation of irritants" included the fact that his new employer had required him to clock-in, refused to pay him for two separate days he had needed to take off work as a matter of necessity, told him it would be two months before he could take a holiday, disputed his views as to his finishing time, and failed to give him the support he expected in his work. There was also no arrangement for the payment of sick pay. An industrial tribunal nevertheless concluded that there had been no "fundamental" breach of contract by the transferee which had entitled Mr Dabell to resign. Allowing an appeal against that decision, the EAT said that the terminology used by the tribunal indicated that it had misunderstood and failed to apply the tests which the Regulations require.

Non-contractual terms

It thus seems possible that reg. 5(5) creates a right for an employee to resign in response to substantial detrimental changes in non-contractual working conditions, or changes in contractual conditions which fall short of a fundamental or repudiatory breach. And this may indeed be what is required by article 4(2) of the Directive, as it has recently been interpreted by the ECJ.

In Merckx and another v Ford Motor Co Belgium SA, the ECJ observed that article 4(2) requires that if the contract of employment or employment relationship is terminated because the transfer involves a substantial change in working conditions to the detriment of the employee, the employer must be regarded as having been responsible for the termination. A change in the level of remuneration awarded to an employee is, the Court continued, a substantial change in working conditions within the meaning of that provision, even where the remuneration depends (wholly or partly) on turnover or profitability. And where the employment contract or relationship is terminated because the transfer involves such a change, article 4(2) applies.

On the facts of Merckx, it is at least arguable that there was no repudiatory breach of contract or change in the method of calculating the employee's remuneration, merely a failure to guarantee that the turnover or performance of the transferee would sustain the level of income which they had previously enjoyed. This may have implications for any element of remuneration which is not fixed and which is dependent in some way on the relative performance of the transferee undertaking, including bonuses, commission and other similar payments.

An alternative analysis

There nevertheless remains a problem in perceiving reg. 5(5) as creating an entirely separate test for constructive dismissal from that which applies at common law or for statutory employment protection purposes. The apparent disparity may be reconciled in the following way.

The automatic transfer principle embodied in reg. 5(1) overrides an employee's traditional common-law right to treat the transfer of an undertaking as a repudiatory breach giving him or her the right to terminate the contract of employment. This is, in fact, the only right which is prejudiced by the operation of reg. 5(1). Accordingly, it is at least arguable that the effect of article 5(5) is not to reserve or modify the employee's general constructive dismissal rights which are in all other respects unaffected by reg. 5(1), but to resurrect the employee's right to treat the transfer itself as a repudiation of the contract in the circumstances described in reg. 5(5). An employee may, on this view, consequently leave and complain of constructive dismissal (relying, exceptionally, on the transfer) if substantial detrimental changes are made to his or her working conditions which do not in themselves constitute a fundamental or repudiatory breach.

Identity of employer

This leaves the question of the meaning and effect of limb 2 of reg. 5(5). Based on the analysis which we have just proposed, this reinstates the employee's right to resign (again relying on the transfer) solely in response to the change in the employer's identity, but only where the employee can show that, in all the circumstances, that change is "significant" and is to his or her detriment.

There is no authority on the factors that might be relevant here. It is submitted, however, that the change in identity which is required must relate to some characteristic which is intrinsic to the transferee employer. This might include its reputation, standing in the community, its trading policies (for example, does it trade with unsavoury regimes?), its health and safety or environmental pollution record, its broader pay or promotion structures and opportunities, its attitude to trade unions and even possibly its size (if, for example, the employee's influence on policy and decision-making is significantly reduced).

Unfair dismissal

The Regulations substantially modify the unfair dismissal protection afforded to employees in the context of business transfers. It establishes a special regime which is applicable only in these circumstances, and purports to implement the requirements of article 4(1) of the Directive (see part three).

Regulation 8(1) lays down the basic principle that where, either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated for the purposes of the unfair dismissal provisions of Part X of the ERA as automatically unfairly dismissed "if the transfer or a reason connected with it is the reason or principal reason for his [or her] dismissal".

This principle does not, however, apply where the reason, or principal reason, for dismissal is "an economic, technical or organisational reason entailing changes in the workforce of either the transferor or the transferee before or after a relevant transfer". In these circumstances, reg. 8(2) provides that the dismissal is to be regarded as having been for some other substantial reason of a kind such as to justify the dismissal of an employee holding the position which that employee held (for the purposes of s.98(1)(b) of the ERA - reasons"). The fairness of the dismissal will then be determined in the normal way in accordance with s.98(4) of the ERA.

Who is protected?

The provisions of reg. 8 are not limited to those employees who are covered (or deemed to be covered by virtue of Litster) by the automatic transfer principle in reg. 5. They apply whether or not the employee in question is employed in the undertaking or part of the undertaking transferred or to be transferred (reg. 8(3)), and cover any transfer-related dismissal by the transferor or transferee before or after transfer. The following categories of employees are therefore potentially protected:

Qualifying period

It is now established beyond doubt that any of the above groups of employees will need to establish the normal two years' continuous employment required under s.108(1) of the ERA in order to found an unfair dismissal complaint based on reg. 8. This requirement is underlined in respect of dismissals occurring on or after 26 October 1995 by a new reg. 8(5), inserted by the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 1995². This reverses the EAT's decision to the contrary in Milligan and another v Securicor Cleaning Ltd, where it was suggested that the normal qualifying requirements did not apply under reg. 8(1). And, in MRS Environmental Services Ltd v Marsh and another, the Court of Appeal has now overruled Milligan in respect of pre-26 October 1995 dismissals, and observed that the recent amendment of the Regulations was probably "unnecessary". The validity of the amendment Regulations was upheld by the High Court in R v Secretary of State for Trade and Industry ex parte Unison and others.

Indeed, reg. 8(5) now makes it clear that employees are subject to all of the qualifying requirements and exclusions relating to unfair dismissal complaints contained in the ERA, including those relating to retirement age.

"Connected" to transfer?

The key issue under reg. 8(1) is "whether the transfer or a reason connected with it" was the reason or principal reason for any given dismissal. This is predominantly a question of fact to be determined by industrial tribunals. Although it is clearly not only a matter of temporal proximity, the closer in time to a transfer (either before or after) that a dismissal takes place, the more likely it is that it will be found to have been connected to the transfer.

In interpreting the broadly analogous provision in article 4(1) of the Directive (see part three), for example, the ECJ has stated that in determining whether the main reason for a pre-transfer dismissal is the transfer itself, "account must be taken of the objective circumstances in which the dismissal took place and, in particular ... the fact that it took place on a date close to that of the transfer and that the workers concerned were re-engaged by the transferee" (P Bork International A/S (in liquidation) v Foreningen af Arbejdsledere i Danmark). But it remains a question for domestic tribunals when applying reg. 8(1) as to the importance which they attach to the proximity of the date on which the dismissal occurred, the time when the transfer began to take place and the time when it was finally implemented (Harrison Bowden Ltd v Harrison).

More broadly, it is necessary to consider whether there is or continues to be a causal link between the transfer and dismissal. It is not necessary for there to have been any "collusion" in effecting dismissals between the transferor and transferee (see part three).

Need to identify transferee?

There are, however, differing views on the extent to which it is necessary to show that a pre-transfer dismissal was connected to the particular transfer which ultimately took place. In other words, is it necessary to identify the ultimate or actual transferee at the time of an employee's dismissal by the transferor?

In Harrison Bowden, the transferee had by the time of dismissal only "expressed an interest" in acquiring the business in response to an advertisement placed by the administrative receivers of the transferor company. The transfer was completed just over a week after the dismissals. The EAT felt that the reference in reg. 8(1) to "the transfer" was a "reference to a transfer which actually takes place ... We cannot see that it is of importance that the transferee has been identified at or before the moment of dismissal." The ECJ's decision in Bork suggested that the proper approach "is to look back in time to see what actually happened", and in that case there was no question of the transferee being identified at the moment of dismissal. And there is, said the EAT, a conceptual difficulty in distinguishing between a prospective transferee and an actual transferee. Why, for example, should it make any difference to the rights of employees that at the point of dismissal there was one "front runner" to take over the business who is then "gazumped" by the ultimate and actual transferee?

The relaxed approach in Harrison Bowden was subsequently criticised by a differently constituted EAT in Ibex Trading Co Ltd (in administration) v Walton and others. In August 1991, the transferor went into administrative receivership. As part of a plan to sell the business, the joint administrators sought to reduce the size of the workforce and reduce the wages of those employees who remained. Each of the transferor's employees was asked to sign a letter accepting new, lower wages. Although the letter made no mention of the possibility, those who refused to sign - that is, 40 out of a total of 94 - were dismissed by reason of redundancy with effect from 4 November 1991. The fact that the company's production manager calculated that he needed to retain exactly 54 employees was said to be "a coincidence". An offer to purchase the business was made by the transferee on 11 November and a contract for sale was eventually signed on 13 February 1992.

Contrary to what was said in Harrison Bowden, Mr Justice Morison said that the present EAT attached significance to the words "the transfer or a reason connected with it". It accepted that the link, in terms of time, between the dismissals and the transfer could vary considerably, since a transfer was not just a single event: it extended over a period of time culminating in completion. But the employees here had been dismissed before any offer had been made for the business. Whilst it could properly be said that they were dismissed for a reason connected with a possible transfer of the business, the EAT was "not satisfied that they were dismissed by reason of the transfer or for a reason connected with the transfer. A transfer was, at the stage of the dismissal, a mere twinkle in the eye and might never have occurred."

On the other hand, Morison J stressed that he was not saying that the prospective transferee had to be identified in every case. On occasion, one purchaser might drop out at the last minute and be replaced by another party. But on the facts of Ibex Trading, it seemed to the EAT to be difficult to say, by reason of the timing of the dismissals and the sale of the business, that the employees would have been employed at the date of completion but for their dismissals. Therefore, even applying Litster, they were not employed immediately before the transfer as required under reg. 5(3), and their dismissals were not for a reason falling within reg. 8(1). Accordingly, reg. 5(1) and (2) did not apply to make the transferee liable for what was properly found to be an unfair dismissal on general principles.

Again, in Swinnock v Grosvenor of Chester (Automotives) Ltd and others, the EAT under Morison J said that at the most it could be said that the employee's dismissal "was in connection with a possible sale at some future and unknown date to an as yet unidentified purchaser". Even if the ultimate transferee had been "sniffing around the company" before the employee's dismissal, it was only one of several potential purchasers. It could not be said that the dismissal was in connection with the transfer, which is what reg. 8(1) requires.

The apparent conflict between the latter cases and Harrison Bowden has subsequently been considered in Michael Peters Ltd v (1) Farnfield (2) Michael Peters Group Ltd. There the EAT said that it saw no particular significance in the use of the definite article ("the") in the later part of reg. 8(1). It is, said Mr Justice Tucker, no more than a reference back to the words "a relevant transfer" in the earlier part of the regulation. It had been held in Harrison Bowden that it is not necessary for the actual transferee to have been identified at or before the moment of dismissal, and it had been conceded in the present case that "it is not necessary for an actual contract to be in place - it can be projected". In the EAT's opinion, the decision in Ibex Trading "is not inconsistent" with Harrison Bowden. It is submitted that this more flexible approach best reflects the protective purposes of the Regulations.

Financial and other pressures

It obviously remains the case that tribunals may find that pre-transfer dismissals and redundancies were effected due to commercial, financial or other economic considerations and pressures unconnected with a transfer. Such dismissals will consequently not be caught by reg. 8(1).

This, indeed, was the basis on which the House of Lords in Litster distinguished Secretary of State for Employment v Spence, and found that that decision was correctly decided on its facts (see part three, p.6). It was thus accepted that the dismissals in Spence were the result of the independent action of the transferor's receivers, who decided to dismiss because, pending the renegotiation of a contract with the company's principal customer, there was no prospect of work for the business. This conclusion was sustainable notwithstanding the fact that a transfer actually took place only three hours after the dismissals.

If, however, dismissals are effected by the transferor at the request of the transferee, they will normally be connected to the transfer. But in Longden and Paisley v Ferrari Ltd and Kennedy International Ltd, the EAT (by a majority) nevertheless held that there was evidence to support a tribunal's conclusion that the transferor's employees were dismissed by receivers because of financial constraints and pressure from the bank which had appointed the receivers to close the undertaking down, and not because there had been any request or instruction from the transferee. Although the transferee had submitted a "family tree" to the receivers identifying the employees of the transferor whom "it was essential to retain", the tribunal did not accept that this request "necessarily carried with it a request that the other employees should be dismissed".

Post-transfer dismissals

Post-transfer dismissals which are causally connected to the transfer also fall within reg. 8(1). There is no minimum or maximum time-scale over which dismissals cease to be so connected.

But if a transferee dismisses surplus employees at a point in time fairly close to the transfer, it is always more likely to be inferred that the dismissals were connected with it. For example, in Meikle v McPhail (Charleston) Arms, the transferee of a pub dismissed all but one of the staff some four days after the transfer when, after further consultations with his accountant, he realised he had overstretched himself and could not afford to sustain existing staffing levels. Indeed, it seems that any dismissals resulting from a plan of rationalisation or reorganisation which is formulated at or around the time of the transfer may potentially be caught by reg. 8(1), even if they are implemented over a lengthy period.

Similarly, the dismissal of incoming employees who refuse to accept changes in their terms and conditions of employment following transfer is likely to fall within reg. 8(1), as will constructive dismissals which result from an attempt by the transferee unilaterally to impose new terms. Again, dismissals which take place some time after transfer may well remain related to it. In Crown Leisure v Waldron (above), for example, the transferee sought to apply new terms to a transferred employee over a period of eight or nine weeks after the transfer. The employee reserved his position on the changes, and resigned within a month of receiving a written statement outlining the new terms. (It should be noted that one of the problems arising from the Wilson decision is whether employees will ever be able to affirm and accept unilateral variations of contract which are causally linked to a transfer - does this mean that, at any point after such variation, an employee could resign and complain of constructive dismissal?)

In contrast, the dismissal of employees on grounds related to their personal characteristics, conduct or competence may well be unconnected to a transfer. In an interesting illustration of this point, the EAT in Prickards v Shipperly held that the transfer itself did not "cause or contribute" to the post-transfer dismissal of the transferor company's former managing director. Rather, he was dismissed because the company's suppliers had indicated that they would not deal with the business as long as he remained involved.

"ETO reasons" for dismissal

As noted above, dismissals falling within reg. 8(1) cease to be automatically unfair if the employer can demonstrate (see Gateway Hotels Ltd v Stewart) that the reason or principal reason for dismissal was "an economic, technical or organisational reason entailing changes in the workforce" (reg. 8(2)).

It is irrelevant that such dismissals are at the same time connected to the transfer. In Trafford v Sharpe & Fisher (Buiding Supplies) Ltd, the EAT roundly rejected any suggestion that the ETO exception in article 4(1) of the Directive applies only to dismissals "which would have been made in any case, for instance if the decision was taken before there was any question of transferring the undertaking ..." (see the advisory Opinion of Advocate-General Van Gerven in D'Urso and others v Ercole Marelli Eletromeccanica Generale SpA (in special administration) and others). The EAT said that the Directive recognised that the rights of workers not to be dismissed must not stand in the way of ETO dismissals: "In such cases the rights of workers may be outweighed by the economic reasons."

Conduct of the undertaking

A literal reading of the terms "economic", "technical" or "organisational" would potentially be so wide as to entirely circumvent the purpose of reg. 8(1), since in the broadest sense a transfer is itself almost always an "economic" reason. In Wheeler v Patel and J Golding Group of Companies, the EAT therefore held that the word "economic" must be given a restricted meaning. The reference to "technical" and "organisational" reasons seemed to be a reference to reasons "which relate to the conduct of the business". In the EAT's view, "economic" reasons must be similarly construed. It therefore concluded that if the reason relied upon was no more than a desire on the part of the transferor to achieve an enhanced sale price for the business, or no more than a desire to achieve a sale, this would not be an economic reason related to the conduct of the business within the meaning of reg. 8(2).

It follows that most pre-transfer dismissals which are effected by the transferor primarily in order to comply with the perceived or stated wishes or requirements of the intending transferee will not amount to ETO reasons. Tribunals will be quick to infer that the transferor's real motivation for compliance was the desire to sell or secure the transfer transaction (as in Wheeler itself). In the Gateway Hotels case, for example, the EAT approved the approach adopted in Wheeler, and held that the transferor had agreed to the transferee's request to dismiss all of the staff in order not to lose the sale, and not for an ETO reason. The same conclusion is likely if the transferor dismisses employees because it believes that, in view of the transferee's equivocations as to its intentions about the workforce, the sale "might proceed more easily" as a result (see Wheeler). This approach has been applied by analogy to dismissals effected by a transferor local education authority at the request of a transferee college of further education, in order to assist the latter in tendering for a contract for the provision of prison education services. In Tracey v Hereford & Worcester County Council and others, an industrial tribunal consequently concluded that "simply to rid oneself of the costs of inheriting long-serving employees is clearly impermissible".

Changes in the workforce

A valid ETO reason must not only relate to the "conduct" of the business in the sense just considered, but must also necessarily be one "entailing changes in the workforce". This requirement has a particularly restrictive impact on the ability of a transferee to harmonise the terms and conditions of the employees transferred with those of its existing workforce.

In Delabole Slate Ltd v Berriman, a transferred employee resigned when the transferee informed him that it intended to alter his pay to accord with the terms that applied to its existing workforce. This entailed a substantial reduction in the employee's previously guaranteed wage, and amounted to a repudiatory breach of his employment contract. The Court of Appeal said that, in determining the reason or principal reason for dismissal in such a case, attention has to be focused on the company's reasons for presenting the employee with the ultimatum changing his guaranteed rates of pay.

Under reg. 8(2), said Lord Justice Browne-Wilkinson, it has to be shown that that reason was an ETO reason "entailing" changes in the workforce. In Delabole, the reason was "to produce standard rates of pay", and this did not involve any change in either the number or the functions of the workforce. The most that can be said is that such an organisational reason may lead to the dismissal of employees who do not fall into line, coupled with the filling of the vacancies thereby created by new employees willing to accept the conditions of service. This is not, however, enough:

Functional changes

It nevertheless remains possible to establish an ETO reason within this restricted meaning where, as a result of reorganisation, there are substantial changes in the functions carried out by transferred employees.

In Crawford v Swinton Insurance Brokers Ltd, the EAT said that Delabole Slate does not require that there must be a change in the identity of the employees who make up the workforce. Indeed, Delabole makes it clear that such a change is in itself insufficient to fall within reg. 8(2). In the EAT's opinion, "what ... has to be looked at is the workforce as an entity, that is to say, as a whole, separate from the individuals who make it up and it then has to be seen whether the reason in question is one which involves a change in that workforce, strength or establishment, and we are satisfied that there can well be a change in the workforce if the same people are kept on but are given entirely different jobs to do. We would regard a workforce that was engaged in a different occupation as being, for the purposes of reg. 8(2) changed ... as a result of an organisational change on a relevant transfer."

The changes in Crawford involved, for example, a typist/clerk being offered employment by the transferee as an insurance salesperson. However, it seems that less radical changes may also amount to ETO reasons. In Porter and another v Queen's University Medical Centre (Nottingham University Hospital) (see part one, p.9), for example, the High Court concluded that significant changes in the organisation of a paediatric and neonatal service in the particular area gave rise to an ETO reason for the dismissal of two consultant paediatricians under the identical wording of article 4(1) of the Business Transfers Directive. Sir Godfrey Le Quesne in effect accepted that the reorganisation of the services in question required employees with different strengths and skills than had previously been the case. Whilst the service still required consultant paediatricians, "the four principal posts [in the new service] required not only expert doctors but doctors with highly developed specialisms and clear gifts for working in collaboration."

On the other hand, a reorganisation may well not give rise to an ETO reason for dismissal if an employee can in fact see his or her old job effectively being carried on in the transferee's undertaking (see May & Hassell (West) Ltd v Jansen). This indicates that tribunals will carefully scrutinise the veracity of any purported changes. Merely changing the labels attached to jobs or functions will not be enough.

Genuine redundancies

Notwithstanding the approach which courts and tribunals have developed in this area, it is clear that genuine redundancies effected by either the transferor or transferee are potentially "one of the most common" of the ETO reasons entailing changes in the workforce (Gorictree Ltd v Jenkinson). If dismissals are effected in the context of a reorganisation and rationalisation undertaken in order to save the undertaking or ensure its viability (as opposed to merely ensuring a specific sale - see above), they may fall within reg. 8(2). The dismissals in the Trafford case (p.9 above) were found to have been for ETO reasons on this basis. And the dismissals in Meikle (p.8 above) were similarly found to have been made on economic grounds within the exception.

But the reasons or motivation for dismissal or declaring redundancies will be scrutinised much more closely in this context than will be the case in general unfair dismissal proceedings. If the transferee re-employs all or significant numbers of the employees purportedly dismissed by the transferor for redundancy - or indeed engages a replacement workforce - there will almost certainly be no ETO reason. Indeed, this was the assumption underlying the House of Lords' conclusions in Litster itself, where it found that there was a collusive bargain between the parties to avoid the application of the Regulations. Employers must therefore be prepared to demonstrate a clear link between any financial or other commercial pressures which they may claim to be under and "the necessity" of reducing their workforce (Southlands Print and Supply v Graham and another). The EAT in Southlands Print, for example, said that there was no evidence to suggest that contracting out work to outside printers, or indeed employing new printers, would be any cheaper for the transferee undertaking.

The need for dismissals or redundancies should therefore in all circumstances be properly "thought through" (UK Security Services (Midland) Ltd v Gibbons and others), and decisions without any clear economic, technical, organisational or commercial basis avoided. Indeed, it may be useful in this respect to heed the words of Advocate-General Slynn in his advisory Opinion in Abels v The Administrative Board of the Bedrijfsvereniging Voor de Metaal- industrie en de Electrotechnische Industrie: "... if a viable part of a business in liquidation [or otherwise] is sold off, there may be no valid economic grounds for dismissing any of the staff employed in that part of the business."

Whose reason?

It seems that a transferee, in defending an unfair dismissal complaint based on Litster principles (ie a complaint brought by an employee who alleges that he or she was dismissed before the transfer for a non-ETO reason connected with the transfer), may be able to rely on the transferor's reason for dismissal (per Lord Templeman in Litster itself). There is no compelling reason why the converse should not be true, particularly where a transferor argues that it was dismissing on the basis of genuine ETO reasons relating to the future conduct of the business formulated by the transferee. This may indeed be the only way that transferors can counteract the widespread assumption that dismissals at the behest of the transferee are primarily motivated by the former's desire to ensure a sale.

In some circumstances, a transferee may inherit the transferor's reason for dismissal whether it likes it or not. Where employees are in fact employed by the transferor immediately before a transfer, their contracts and associated rights are transferred automatically to the transferee under reg. 5(1) and (2). If the transferee merely declines to offer them employment on the mistaken assumption, for example, that the Regulations do not apply to the transfer in question, it may be deemed to have dismissed them for the reasons given by the transferor. In BSG Property Services v Tuck and others, for example, the transferor council gave notice of dismissal terminating the contracts of employment of council housing staff with effect from 15 May 1993. A relevant transfer of the council's maintenance activities between the council and a private contractor took place on 14 May. The EAT held that the notice of termination given by the council, for the reason of the council, is deemed to have been a notice given by the contractor for that reason.

The applicants' employment did not, said the EAT, terminate as a result of any act or decision of dismissal by the contractor for any reason of its own, let alone an ETO reason. It did nothing other than stop paying or providing work for the applicants, because it, like the council, believed that the Regulations did not apply. The EAT also warned tribunals that it is impermissible in these circumstances for tribunals to find a "fictitious composite reason characterised as a potentially fair reason of an ETO kind which [the contractor] could have had, but did not in fact have, in mind", the EAT concluded.

Where employees remain in employment at the moment of transfer, but they are neither expressly dismissed by the transferor nor offered re-employment by the transferee, there will be a deemed dismissal at the date of the transfer by the transferee by reason of its failure to offer re-employment. It seems that this analysis will apply even if the transferee is unaware of the existence of the employee in question (Scanlon v Mitchell and another).

Reasonableness

If the transferor or transferee establishes an ETO reason for a dismissal for which it is responsible, this is automatically to be treated as an "SOSR" reason which potentially justifies the dismissal within the meaning of s.98(1)(b) of the ERA. The case is then "thrown back into the mainstream" of unfair dismissal legislation and, in particular, reasonableness will be determined in accordance with the test laid down in s.98(4) of the ERA (McGrath v Rank Leisure Ltd).

This means that employers must still comply with the normal canons of substantive and procedural fairness, including the requirements to warn and consult employees laid down by the House of Lords in Polkey v A E Dayton Services Ltd. Indeed, the EAT has expressed the hope "that there is no view going about that administrators [of insolvent companies] can behave as they like to the employees of the company of which they are the agent, and use, as an excuse for unfairness, the economic circumstances of the company which brought them there in the first place. Employees are always entitled to be treated with respect, especially where their jobs may be at risk due to economic circumstances which may be out of their own control to a greater or lesser extent" (Ibex Trading).

Exclusive remedy

At the law stands at present, an employee who is automatically unfairly dismissed in contravention of the Regulations must pursue his or her remedies under the statutory scheme provided in part X of the ERA. The remedy for unfair dismissal lies exclusively with an industrial tribunal under those provisions, and reg. 8(1) of the Regulations creates no separate right. Employees cannot therefore restrain a dismissal which falls foul of that regulation by way of injunction in the High Court (Betts and others v Brintel Helicopters Ltd and another).

"Collective" issues

Several provisions within the Regulations deal with what may broadly be described as "collective" matters. The provisions on the provision of information and consultation on transfers are summarised in the box. This leaves two outstanding issues:

-that agreement, in its application in relation to the employee shall, after the transfer, have effect as if made by or on behalf of the transferee with that trade union, and accordingly anything done under or in connection with it, by or in relation to the transferor before the transfer, shall, after the transfer, be deemed to have been done by or in relation to the transferee and;

-any order made in respect of that agreement, in its application in relation to the employee shall, after the transfer, have effect as if the transferee were a party to the agreement (reg. 6).

-where after a relevant transfer the undertaking or part of the undertaking transferred maintains an identity distinct from the remainder of the transferee's undertaking; and

-before such a transfer an independent trade union was recognised to any extent by the transferor in respect of employees of any description who in consequence of the transfer become employees of the transferee then, after the transfer

the union shall be deemed to have been recognised by the transferee to the same extent in respect of employees of that description so employed. But any agreement for recognition may be varied or rescinded accordingly.

Both of the above provisions are of limited significance. Collective agreements in the UK are presumed not to be legally binding as between the parties to them (s.179 of the Trade Union and Labour Relations (Consolidation) Act 1992), and may be terminated without any recourse to legal remedies. On the other hand, terms derived from collective agreements are often incorporated into the contracts of employment of individual employees and will consequently be indirectly protected under reg. 5. Similarly, union recognition is in essence a voluntary act by an employer, and may be withdrawn at any time.

No contracting out

Regulation 12 of the Regulations states that "any provision of any agreement (whether a contract of employment or not) shall be void in so far as it purports to exclude or limit the operation of Regulation 5 [the automatic transfer principle], 8 [unfair dismissal] or 10 [information and consultation] ... or to preclude any person from presenting a complaint to an industrial tribunal under Regulation 11 [failure to inform or consult]."

We have seen one possible implication of this provision in our earlier discussion on the permissibility of even consensual variations of contract by transferees. More generally, it obviously precludes any attempt to exclude employees from the benefit of the protection provided by the Regulations by, for example, an agreement between the transferor and transferee purporting to exclude contracts of employment from the transfer (Secretary of State for Employment v Helliwell & Sons and others). On the other hand, reg. 12 probably does not prevent employees and employers reaching a binding ACAS conciliated settlement or a compromise agreement in relation to unfair dismissal claims in accordance with s.203 of the ERA.

Variation and dismissal: main points to note

Information and consultation on business transfers - a summary³

-the fact that the relevant transfer is to take place, approximately when it is to occur, and the reasons for it;

-the legal, economic and social implications of the transfer for the affected employees;

-the measures which it envisages it will take, in connection with the transfer, in relation to those employees or, if it envisages that no measures will be so taken, that fact;

-if the employer is the transferor, the measures which the transferee envisages it will, in connection with the transfer, take in relation to those of the transferor's employees who become (by virtue of reg. 5) employees of the transferee after the transfer or, if it envisages that no measures will be so taken, that fact. The transferee must give the transferor "such information at such time" as will enable the transferor to perform its duty under this provision.

-"employee representatives" elected by the employees; or

-if the employees are of a description in respect of which an independent trade union is recognised by the employer, representatives of the union.

In the case of employees who both elect employee representatives and are of a description in respect of which a union is recognised, the employer may choose whether to inform and consult the elected representatives or representatives of the union (reg. 10(2A)).

-in the case of a failure relating to elected employee representatives, by any of the employee representatives to whom the failure related;

-in the case of a failure relating to trade union representatives, by the trade union; and

-in any other case, by any of the employees who are affected employees (reg. 11(1)).

A complaint must be made within three months beginning with the date on which the relevant transfer is completed (reg. 11(8)(a)).

A revised Directive? - the latest state of play

On 8 September 1994, the European Commission published its proposals for the revision and replacement of the existing "Business Transfers" Directive. Some two years on, we are now awaiting the European Parliament's (the EP) opinion on the Commission's proposals. This is expected to be delivered around November of this year, and is likely to contain only one significant amendment.

A key Commission proposal involved an attempt to clarify the type of transfer to which a new Directive would apply. In particular, it was proposed that the transfer of an "activity" of an undertaking "which is accompanied by the transfer of an economic entity which retains its identity" would fall within the Directive. However, the transfer only of an "activity" of an undertaking, business or part of a business, whether or not it was previously carried out directly, would not "in itself" constitute a transfer as defined.

We understand that the EP will recommend that this distinction be dropped. The Commission has indicated that it will accept the EP's amendment, and hopes to put revised proposals to the Employment and Social Affairs Council early in 1997.

Surviving proposals

The following proposals are amongst those which are likely to reappear substantially unchanged:

-Member States would have the discretion to provide that the transferor's debts (in the form of arrears of payments, damages or other liabilities) due before the transfer or before the opening of insolvency proceedings, do not transfer to the transferee. This provision could be relied upon only if the affected employees are afforded the protection required by the EC "Insolvency" Directive (No.80/987/EEC).

-Member States could allow the employer (or its representatives) and employees' representatives "to change the terms and conditions of employment by an agreement concluded as a means ensuring the survival of the undertaking." Where such an agreement is reached, it would be presumed, unless the contrary was proved, that the alteration took place to ensure the undertaking's survival, and that any resultant dismissals were for "economic, technical or organisational reasons, entailing changes in the workforce" (that is, they would not be automatically unfair) .

-Member States could empower competent judicial authorities to alter or terminate contracts of employment or employment relationships existing at the date of transfer.

-to add a "transnational dimension" to the Directive, by requiring that domestic courts take no account of any defence that an employer could not comply with the information and consultation provisions because the decision that led to the transfer was taken by a head office or controlling body based elsewhere; and

-to allow Member States to limit obligations to consult and inform employees' representatives to undertakings or businesses which normally employ at least 50 employees, or, if employing less than that number, fulfil the workforce size thresholds for the election of or nomination of a collegiate body representing the 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.

²SI 1995/ 258.7

³For a more extensive discussion of this subject see our Guidance Note on "Consultation on redundancies and business transfers" in IRLB 538.

CASE LIST

Abels v The Administrative Board of the Bedrijfsvereniging Voor de Metaalindustrie en de Electrotechnische Industrie [1987] 2 CMLR 406

Betts and others v Brintel Helicopters Ltd and another [1996] IRLR 45

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

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

Crown Leisure Ltd v Waldron 18.3.93 EAT 307/91

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

Dabell v Nofotec Co Ltd 26.3.92 EAT 149/90

Delabole Slate Ltd v Berriman [1985] IRLR 305

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

Gateway Hotels Ltd v Stewart [1988] IRLR 287

Gorictree Ltd v Jenkinson [1984] IRLR 429

Harrison Bowden Ltd v Harrison [1994] ICR 186

Ibex Trading Co Ltd (in administration) v Walton and others [1994] IRLR 564

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

Longden and Paisley v Ferrari Ltd and Kennedy International Ltd [1994] IRLR 157

McGrath v Rank Leisure Ltd [1985] IRLR 323

May & Hassell (West) Ltd v Jansen 27.10 83 EAT 526/83

Meade and another v British Fuels Ltd [1996] IRLR 541

Meikle v McPhail (Charleston) Arms [1983] IRLR 351

Merckx and another v Ford Motor Co Belgium SA [1996] IRLR 467

Michael Peters Ltd v (1) Farnfield (2) Michael Peters Group Ltd [1995] IRLR 190

Milligan and another v Securicor Cleaning Ltd [1995] IRLR 288

MRS Environmental Services Ltd v Marsh and another 9.7.96 Court of Appeal

Polkey v AE Dayton Services Ltd [1987] IRLR 503

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

Prickards v Shipperly 12.10.94 EAT 19/93

R v Secretary of State for Trade and Industry ex parte Unison and others [1996] IRLR 438

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

Crawford v Swinton Insurance Brokers Ltd [1990] IRLR 42

Scanlon v Mitchell and another 12.7.96 EAT 142/96

Secretary of State for Employment v Helliwell & Sons and others 20.6.86 EAT 186/86

Secretary of State for Employment v Spence and others [1986] IRLR 248

Servicepoint Ltd v Clynes and another 14.3.89 EAT 154/88

Southlands Print and Supply v Graham and another 18.3.94 EAT 715/93

Swinnock v Grosvenor of Chester (Automotives) Ltd and others 9.7.94 EAT 189/93

Tracey v Hereford & Worcester County Council and others 9.5.94 COIT 35896/93

Trafford v Sharpe & Fisher (Building Supplies) Ltd [1994] IRLR 325

UK Security Services (Midland) Ltd v Gibbons and others 6.8.91 EAT 104/91

Western Excavating (ECC) Ltd v Sharp [1978] IRLR 27

Wheeler v Patel and J Golding Group of Companies [1987] IRLR 211

Wilson and others v St Helens Borough Council [1996] IRLR 320