Comments of the Law Society of England and Wales on the consultation document issued in March 2005

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1 TUPE: DRAFT REVISED REGULATIONS Comments of the Law Society of England and Wales on the consultation document issued in March 2005 June 2005 Introduction The Law Society is responsible for representing and regulating approximately 110,000 solicitors in England and Wales. The following comments have been prepared on the Society s behalf by its Employment Law Committee, which consists of senior and specialist employment lawyers whose experience includes part-time chairmanship of employment tribunals and providing advice and representation to employers and employees through practice in City and regional firms, industry, trade unions and Law Centres. We welcome the opportunity to comment on these draft amendment regulations. We note that views are not sought on policy issues, although, inevitably, some policy issues do arise in passing. We have therefore concentrated on consideration of whether the draft regulations at Annex A of the consultation document correctly and effectively implement the Government s intended reform of TUPE, principally, although not exclusively, set out in the DTI press release of 15 March accompanying the consultation document. We have also taken the opportunity to consider the draft regulations compliance with EC Directive 2001/23 and other Community Law. The Law Society 2005

2 We have confined our comments to the eight questions for consultation set out at pages 8 and 9 of the consultation document. Questions 1 and 2 (Regulation 3: the standard and supplementary (service provision change) Definitions of transfer of an undertaking and the proposed exceptions to the latter, with particular regard to the proposed exception for professional business services We note with approval the standard definition of transfer of an undertaking (regulation 3(1)(a)) which we regard as compliant with Community Law. The definition involves the transfer of an economic entity which retains its identity. We note with approval the definition of economic entity in regulation 3(2) which, again, we regard as compliant with Community Law. We have considered the supplementary definition of a transfer on service provision changes in Regulation 3(1)(b). We note that the definition covers first generation contracting, second generation contracting (contractor changeover), and contracting-in from contractor to client. We regard this definition, which triggers a transfer on service provision changeover itself, as long as prior thereto there is an organised grouping of employees the principal purpose of which is the carrying out of the activities concerned on behalf of the client, as clear, and an improvement on the present legal position. We consider that it will be successful in capturing most service provision changeovers within the protection afforded by TUPE. We consider there may be a conflict between regulations 3(3)(a)(i) and 3(4)(b)(ii). One of the conditions for there to be a relevant transfer when there is a service provision change is that the organised group of employees must be situated immediately before the change in the UK. However regulation 3(4)(b)(ii) states that the regulations will apply notwithstanding that the persons employed in the organised grouping involved in the service provision change ordinarily work outside the UK. We believe this tension should be clarified. As to transfers within public administration we note that the regulations adopt the exclusion laid down by the ECJ in Henke v Gemeide Schierke and

3 Verwaltungsgemeinschaft Brocken [1996] IRLR 701. We note that the Cabinet Office Statement of Practice (2000) or a special ad hoc statutory instrument made under section 38 of the Employment Relations Act 1999 might, notwithstanding the exclusion, confer protection to employees in transfers of public administration. However, it seems to the Committee that a simpler solution would be, via section 38, to reverse the Henke decision in the regulations itself, thus protecting such employees in one fell swoop. It is suggested that consideration be given to this. We note that regulation 3(3)(a)(i) requires that before the service provision change there is an organised grouping of employees. It is arguable that this would exclude a single employee in the position of Frau Schmidt (see Schmidt v Spar-und Leihkasse der fruheren Amter Bordesholm, Kiel und Kronshagen [1994] IRLR 302). While appreciating that the singular normally includes the plural (and vice versa), we consider the present wording might give rise to uncertainty and potential litigation and, therefore, it should be clarified that a single employee is included. We are asked to consider, in particular, the proposed professional services exemption to the supplementary definition. In fact we wish to comment on all three exclusions, the socalled single project exclusion, the procurement of goods and the procurement of professional services exemptions. Single Projects A condition of the applicability of the service provision changeover definition is that the client intends that the activities will, following the service provision change, be carried out by the transferee other than in connection with a single specific event or task. We consider that this might lead to some harsh results, and also give rise to litigation. First, we note that it is dependent on the intention of the client. As the consultation document points out, this would not rule out a client using a contractor for a second time, as long as the intention at the outset was to use the contractor only once; the exemption could arguably still apply. This would seem unfair. Secondly, the exemption pays no regard to the size of the single project. Some single projects can be very large and last for some years. Would it be fair to exclude employees from protection on a changeover of contractors during a project the size of, say, the London Olympic bid (if successful)? We

4 believe the possible uncertainty generated by this exclusion merits its further consideration. Procurement of Goods If there were, on a contract for the procurement of goods, an assignment of a dedicated group of employees servicing the customer, we see no reason why, on a changeover of suppliers, those employees should not enjoy protection equal to that of workers engaged on a services contract. We believe the instances where there is, in a contract for the supply of goods, an organised grouping of employees the principal purpose of which is to supply those goods to the customer, will be rare. Where they occur, we believe the employees should enjoy TUPE protection. Professional Services We see no merit in the proposal to exclude professional services from the service provision changeover definition. We consider that the arguments against the exemption are cogently set out in paragraph 32 of the consultation document. We are not persuaded by the arguments put forward in favour of the exemption in paragraph 31 of the consultation document, which, in contrast, are weak. In conclusion, we consider that there is no reason to discriminate against professional service workers. We note the Cabinet Office Statement of Practice (2000) and the Local Government Code of Practice (2003) do not discriminate against professional services workers. It would therefore be wrong for public sector professional services workers to be protected (albeit by Statement or Code of Practice) and private sector public sector professional services workers not to be similarly protected under the TUPE regulations. We are not aware that professional services businesses have given rise to more legal problems in practice than any other sectoral business. Reform of Regulation 5: Question 3 and Regulation 4 The point is made repeatedly throughout the consultation document that, with one limited exception, we are not being asked to comment on policy issues. In that context, our broad answer to Question 3: Do you consider that Draft regulation 4 represents an effective implementation of the Government s decision to update and clarify regulation 5 of the existing regulations?

5 has to be, yes. Against that general background, we have the following comments in respect of the detail of the regulations: 4(1) This amendment to the existing regulation 5(1) helpfully incorporates the concept of assignment which, itself, is defined in regulation 2(1), reflecting the fairly recent decision in Securiplan v Bademosi [2003] All ER (D) (2) The principal change in this paragraph is to except from transfer the joint and several liability of the transferor and the transferee arising from a failure to inform and consult. In our opinion that objective is achieved. 4(3) This paragraph effectively codifies the decision of the House of Lords in Litster v Forth Dry Dock Engineering Co Ltd [1990] AC 546 with regard to the effect of transfer related unfair dismissals and, logically, incorporates (through the reference to regulation 7(1)) an unfair dismissal for a reason connected with the transfer that is not an ETO reason. Once more, in our opinion, the Government s objective is achieved. 4(4) This is the first of the paragraphs dealing with contractual variations. In our opinion, it is effective in rendering void a variation made because of the transfer or one that is not ETO transfer-connected. However, given the present interpretation of entailing changes in the workforce, as applied in Berriman v Delabole Slate Ltd [1985] IRLR that the intention must be to change the overall numbers or the functions of the employees comprising the workforce - it will be apparent that many attempted post-transfer harmonisations of terms and conditions of employment will be void even if they are agreed by the employees or their representatives. As stated in paragraph 45 of the consultation document, a purported variation for a transfer-connected reason that does not entail a change in the workforce will invariably be void even if it is for an economic, technical or organisational reason.

6 4(5) This is the innovative paragraph that, supposedly, introduces flexibility to agree variations in terms and conditions of employment. Clearly, issue cannot be taken with sub-paragraph (b), as those circumstances are outwith the protection of TUPE, but the points made above with regard to the need to show that the reason for the variation entails changes in the workforce apply equally to sub-paragraph (a). More relevant to this consultation document, we wonder whether this paragraph (a), which allows agreed variations of contracts in the specified circumstances, complies with the Directive as applied in Foreningen af Arbejdsledere I Danmark v Daddy s Dance Hall A/S [1988] IRLR 315. As we understand it, that decision makes it clear that there cannot be a waiver of rights afforded by the Directive, even with the agreement of the employee concerned. It will be noted that the agreement is to be between the employer and his employee. At paragraph 44 the consultation document refers to the variation being agreed between the parties (or their representatives). However, there does not appear to be anything in the regulations that envisages the agreement to the variation being effected by the representatives alone. In paragraph 45 we question the Government s reason for permitting agreed variations for a transfer-connected ETO reason that not to do so would constitute a perverse incentive for employers to dismiss employees and then offer to re-engage them (with loss of continuity). Although we appreciate that loss of continuity might possibly be engineered, the explanation seems to assume that the mere dismissal and reengagement would of itself break continuity. This we doubt. 4(7) Although this regulation is in identical terms to the existing regulation 5(4A) we wonder whether the second word and should read or. 4(9) This is also a new provision. To an extent it overturns the decision in Rossiter v Pendragon plc [2002] IRLR 483 that the circumstances envisaged in the present regulation 5(5) would not amount to a dismissal if the requirements in Section 95(1)(c) of the Employment Rights Act 1996 were not satisfied. By virtue of the new paragraph there might be a dismissal even if those requirements were not satisfied.

7 It will be noticed that the deemed dismissal is with notice, it being explained in paragraph 46 of the consultation document that the Government s view is that it would not be right for an employer to be penalised for failing to give notice in such a situation. We can appreciate why the Government is intending to distinguish between dismissal in the circumstances of this paragraph and a constructive dismissal in paragraph (10), but if there has been a change which is both substantial and detrimental (as it has to be for the paragraph to apply), why should the employee be precluded from receiving a compensatory payment in lieu of notice? Although, if the employee were successfully to claim unfair dismissal, he or she could obtain such compensatory payment of part of the compensatory award, the year s qualifying period of continuous employment would be required. We consider regulations 4(9) and 4(10) have the potential to cause confusion. If there is a substantial, detrimental change to working conditions, the employee can resign and is deemed to have been dismissed with notice. He will therefore have an automatic unfair dismissal claim but not a breach of contract claim. This is however without prejudice to his right to resign without notice in response to a repudiatory breach. Are two separate paragraphs really necessary here? An employee can resign with or without notice and claim constructive dismissal. Whether or not he has a claim for notice will depend on whether he resigned in response to a substantial change in working conditions or some other repudiatory breach. We question the need to make a distinction between a change in working conditions and a repudiatory breach. In some circumstances a change in working conditions (whether or not there is a TUPE transfer) will amount to a repudiatory breach. Reform of Regulation 8: Question 4 and Regulation 7 Once more, our answer to Question 4: Do you consider the draft of regulation 7 represents an effective implementation of the Government s decision to update and clarify regulation 8 of the existing regulations? is, yes.

8 As to the detail: 7(1) This paragraph reflects regulation 4(4) dealing with void purported variations to contractual terms. Once more, the current lack of definition of entailing changes in the workforce will continue to give rise to difficulties in practice in respect of both this paragraph and paragraph (3) which, by reference to paragraph (2), also requires the ETO reason to entail changes in the workforce. 7(3) This paragraph helpfully clarifies the relationship between the present regulations 8(1) and (2) following the previous almost academic conflict that was essentially resolved in the case of Thompson v SCS Consulting Ltd [2001] IRLR 801. By virtue of sub-paragraph (b) dismissals for an ETO reason entailing changes in the workforce are rendered potentially fair subject to the test of reasonableness contained in Section 98(4) of the 1996 Act. It seems to us, however, that reference might also be made to Section 29 of the Employment Act We would accept that this is perhaps not strictly necessary, as the statutory procedures will apply as a matter of law without any such reference, but we would suggest that it would be helpful to reinforce the fact that even if the dismissal is for an ETO reason entailing changes in the workforce and the requirements of Section 98(4) have been complied with, such dismissal will be an automatically unfair dismissal if the relevant statutory procedure has not been complied with. In our opinion this point has not been addressed in the consultation document where, in paragraph 49, it is stated that dismissals in accordance with regulation 7(3) will be fair, subject to the normal test of reasonableness in the unfair dismissal legislation. Quite clearly, such dismissals will not be fair if the statutory procedure has not been complied with. The sub-paragraph (b) also gives effect to what has been, in our experience, good industrial relations practice of entitling employees dismissed in a redundancy situation to receive a redundancy payment, and clarifies and, to an extent codifies, the most recent precedents in this area of law.

9 Questions 5 and 6: Insolvency In proposing to limit the employee debts exemption from transfer to those payable under the relevant statutory schemes, the Government will inevitably limit the circumstances where this will materially assist the "rescue culture". In some cases, particularly those involving a large number of employees, the proposed changes may make a material difference to the quantum of the liabilities that would otherwise pass. However, in other cases (for instance, where staff are earning considerably more than the statutory week's pay recoverable from the Secretary of State), the proposed exemption may not materially help either in depressing the price payable for the business, or in preventing a going concern sale at all. We recognise that there is a balance to be struck here. Giving the transferee an entirely clean slate in respect of the categories of debt which are covered by the insolvency provisions of the Employment Rights Act would certainly improve the possibility of rescues, mindful that there would be no prejudice to staff in terms of other liability (such as personal injury claims or matters outside the statutory categories), which would still pass to the transferee. On the other hand, we recognise that transferring employees would be giving up a debt which would otherwise be met by an ultimate transferee. Given this conflict of interest we are content with the proposal to limit non-transfer of debts only to those reimbursable by the Secretary of State, especially as this solution is compliant with the option given to Member States by Directive 2001/23. Otherwise the provisions appear in general to be clearly drafted, and in particular we welcome the proposed clarification in regulation 8(7) of the precise types of insolvency proceedings to which regulations 4 and 7 will apply. We wonder however whether any analogous proceedings which have instituted with a view to the liquidation... etc. is sufficiently clear and precise. We consider that draft regulation 9 would certainly go some way towards implementing the Government's decision to take advantage of the second of the two options in article 5.2 of the Required Rights Directive. However, we believe that some amendment and clarification is required to make this fully effective. In particular, we are concerned that as presently drafted this may not promote the "rescue culture" in as many cases as the

10 Government would wish, and that the proposed definition of "permitted variation" would leave uncertainty, and so scope for test cases, for the reasons set out below. Paragraph 68 of the consultation document: There are several important consequences to the proposed limited definition of "appropriate representatives". Firstly, as pointed out in the Committee's response to the original TUPE consultation in 2001, empowering recognised unions to agree to vary the terms and conditions of employees they represent may well go beyond existing collective bargaining arrangements. This is because most collective agreements only become effective in law by virtue of incorporation into individual employees' contracts of employment. We therefore consider it preferable to extend the requirement in regulation 9(6)(b) to notify changes in terms and conditions in writing to all employees to whom they are intended to apply to all cases (even where there are union representatives), in order to give all the affected employees a proper opportunity to consider and make representations to their representatives about the proposed contractual changes. Secondly, there may well be a significant number of employers (particularly SME's) who will not have appropriate representatives as defined. The reasons for this are as follows:- Many SME's do not choose to invite arrangements for electing representatives either for collective redundancies or for TUPE transfers and, in the nature of things, may not have time to do so in an insolvency situation (in order then to be able to negotiate a permitted variation). Even if it anticipates a "relevant insolvency proceeding, a transferor employer who has no such elected representatives in place will have no incentive to conduct such elections for the benefit of any possible buyer / transferee, and the transferee who wishes to negotiate a permitted variation will need to carry out elections posttransfer; with inevitable timing and employment relations issues. The third potential category of appropriate representatives (namely, those specifically appointed or elected with authority from the employees they represent to agree

11 "permitted variations" on their behalf) goes beyond the normal mandate of any such representatives who may be appointed / elected under, for example, the Information and Consultation regulations. The wording of regulation 9(2)(b)(i) suggests evidence of such authority is required, with the inevitable practical difficulty of obtaining this (if not already in place) in an insolvency situation (i.e. the same timing issue as in the second point above). Paragraph 72 of the consultation document: The second requirement for a permitted variation (namely one "designed to safeguard employment opportunities ") is uncertain and leaves scope for unhelpful litigation. In particular the word "designed" suggests a subjective test of the parties motives, which is likely to encourage test cases about the degree of evidence required: for example, is this to be the sole, or primary motive, and, if so, who has the burden of proof (presumably the transferee, but that would need to be clarified). We suggest it would be clearer to use a more objective test, "that is reasonably necessary to safeguard ". We appreciate, however, that the wording actually proposed is the wording laid down by Directive 2001/23. Question 7 (Regulations 11 and 12) Notification of employee liability information We welcome the Government s decision to implement the option contained in Article 3.2 of the Directive. It will plainly assist the transferee in understanding the extent of the obligations that are transferring to it. The drafting is not entirely consistent with the Government s press release of 13 March 2003, which envisaged the notification of all associated rights, liabilities etc. that will pass. There are also divergences and omissions from the wording of Article 3.2. Regulation 11 (1) defines employee liability information as information which is or ought to be known to the transferor.. That is not the same as all of the information which exists as to the transferor s rights, powers, duties or liabilities. The wording is, however, consistent with Article 3.2. The word information is unclear. Does it include copies of each assigned individual s terms and conditions of employment or statement of written particulars of employment, or summaries of what are seen as the principal terms? The precise wording of terms

12 and conditions of employment can be important in identifying the obligations which transfer. For example, the precise wording in individuals contracts of employment incorporating terms of a collective agreement meant that entitlement to nationally negotiated pay awards transferred in Whent v Cartledge [1997] IRLR 153, but, where the wording of the contracts was slightly different, it did not do so in Ackinclose and others v Gateshead Metropolitan Borough Council [2005] IRLR 79. Employee liability information should specifically include collective agreements with trade unions, which may or may not be incorporated into individual terms and conditions of employment, but, without incorporation, will seldom otherwise be legally enforceable. It should also include details of recognised unions, particularly as the Government intends to introduce regulations to provide for the automatic transfer of statutory declarations. Employee liability information should include the ages of the transferring employees. This will be relevant not only to pension provision, but also to the time at which rights and obligations will crystallise. For example, in Beckmann v Dynamco Whicheloe MacFarlane [2002] IRLR 578 rights on redundancy at age over 50 to the immediate payment of an enhanced pension transferred under the Directive. Article 3.2 of the Directive provides for notification of the rights and obligations which will be transferred. Regulation 11 provides for notification of the transferor s rights, powers, duties and liabilities. The two are not the same - the obvious example is that pension rights and obligations would have to be notified under regulation 11, but not under Article 3.2. In fact, the extended definition in regulation 11 is preferable. In the context of pensions, it is desirable for the transferee to be notified of the pension rights and obligations of the transferor. Although not provided for in Article 3.2 of the Directive, the employee liability information should be copied to the appropriate representatives (as defined in regulation 13(2)). For the employee representatives to be informed and consulted under regulations 13, they need to be provided with the information that is to form the basis of decisions by both the transferor and the transferor that will underlie that information and consultation process.

13 The timing of the provision of employee liability information to the transferee is, in any event, unclear. For example, in tender situations, there is no specific requirement to provide the information in time for it to be reflected in the invitation, or before the successful bidder commits to the contract. The Directive is silent as to timing. The provision of employee liability information is in any event a precursor to the transferor and the transferee complying with their obligations to inform and consult with appropriate representatives under regulation 13. Without it, the transferee, for example, will be unable to decide upon any measures which it proposes to take in relation to affected employees and cannot comply with its obligations under regulation 11(4). The appropriate representatives rights to information and consultation will be compromised in the event that the information is not provided to the transferee a sufficient time before the information and consultation has to be provided under regulation 13. Regulation 11(5) envisages a last possible backstop date for the provision of the employee liability information as the date of completion of the relevant transfer. The transferor should be under an obligation to take all steps towards performing that duty as are reasonably practicable, consistent with the employer s obligations where there are special circumstances under regulation 13(9). As appropriate representatives should be given copies of the employee liability information, they should also be entitled to a remedy in the event of non-compliance by the transferor. Default in provision should provide an additional basis for a complaint under regulation 13. We do not agree that the High Court is necessarily the most appropriate judicial forum for considering complaints by employers under regulation 12. The stated reasons are that employment tribunals and the EAT are not involved in deciding disputes between different employers, and do not have, as part of their remit, the imposition and assessment of fines. We do not accept that that is the case. First, in many tribunal cases where there has been a change of employer, the original and subsequent employer may well be arguing between themselves as to whether or not

14 the change amounts to a TUPE transfer and, if so, which of them should be liable for any award. The tribunal will decide that dispute between those different employers. Secondly, the tribunal does impose and assess penalties in the nature of fines rather than just awarding compensation. The decision of the Court of Appeal in the case of Susie Radin Ltd v GMB [2004] IRLR 401 makes it clear that the purpose of a protective award made under Section 189 of the Trade Union and Labour Relations (Consolidation) Act 1992:...is to provide a sanction for breach by the employer of the obligations in Section 188: it is not to compensate the employees for loss which they have suffered in consequence of that breach. [emphasis added] Additionally, how else could the sanctions recently introduced by the Employment Act 2002 be categorised other than as penalties or fines? Section 38 of the 2002 Act that requires the tribunal to make an award if the employer has failed to provide a section 1 statement even if the tribunal does not make an award in favour of the claimant in respect of his principal claim. Similarly, Section 120(1)(A) of the 1996 Act requires the tribunal in the stated circumstances to award a basic award of four weeks pay: a further penalty. Further examples are found in the 2002 Act in respect of non-completion of the statutory dispute resolution procedures, which require awards of compensation to be increased in the stated circumstances: again, the imposition of a penalty. If there is any doubt that that is a penalty, consider simply the case where a claimant has made a liquidated claim for a very precise amount of wages and the employer is ordered to pay that sum plus 50%. Nor is this is all new law. In a case of unnotified deductions, under section 12 of the 1996 Act a tribunal has long been able to order the employer to pay the employee the amount of those deductions simply because he was not notified of them in an itemised pay statement and notwithstanding the fact that they were legitimate deductions.

15 Many of the above statutory examples also apply to the second element of assessing penalties. With regard to Section 38 of the 2002 Act, the tribunal has to assess whether the award should be two weeks pay or whether it is just and equitable to increase the award to four weeks pay. It must also assess whether there are exceptional circumstances that make it unjust or inequitable to make any award at all. Again, when determining whether to order the four week minimum basic award, the tribunal has to assess whether that would result in injustice to the employer ; if so, the award may not be imposed. In the case of non-completion of the statutory dispute resolution procedures it is, once more, not merely a matter of imposition but also of assessment: the tribunal is given a wide discretion as to whether to impose 10% or 50% or any sum in between, being guided only by the standard test of just and equitable in all the circumstances. Furthermore, the tribunal need not make any such reduction or increase if there are exceptional circumstances rendering that unjust or inequitable : another example of assessment.

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