British Labour Law - Job Security - Business Transfers and Insolvency

Business Transfers and Insolvency

See also: Mergers and acquisitions in United Kingdom law and UK insolvency law

Business transfer sources Business Transfers Directive 2001/23/EC arts 3-4 Transfer of Undertakings (Protection of Emp) Regs 2006 r 7 Litster v Forth Dry Dock UKHL 10 Wilson v St Helens BC UKHL 37 BTD 2001 art 5 and TUPER 2006 r 4 Credit Suisse Ltd v Lister EWCA Civ 1551 University of Oxford v Humphreys EWCA Civ 3050 BTD 2001 arts 3(3) and TUPER 2006 r 5 Parkwood Leisure Ltd v Alemo-Herron EWCA Civ 24 BTD 2001 arts 1 and TUPER 2006 r 3 Spijkers v Gebroeders Benedik Abattoir CV (1986) C-24/85 Süzen v Zehnacker Gebaeudereingung GmbH (1997) C-13/95 Oy Liikenne Ab v Liskojärvi (2001) C-172/99 RCO Support Services v Unison EWCA Civ 464 BTD 2001 art 5 and TUPER 2006 r 8 SS for Trade and Industry v Slater IRLR 928 (EAT) Oakland v Wellswood (Yorkshire) Ltd EWCA Civ 1094

Another context in which the common law left workers particularly vulnerable was where the business for which they worked was transferred between one person and another. In Nokes v Doncaster Amalgamated Collieries Ltd it was held (albeit to protect the worker from draconian sanctions in the arcane Employers and Workmen Act 1875) that an employment contract could not transfer without the consent of the parties involved. Consequently, in a situation where company A sold its assets (including contracts) to company B, the employment relationship would sever and the only claim a worker would have for dismissal would be against company A. Particularly from the 1950s, the view was increasingly accepted across Europe that workers have something more than a personal right, and akin to a property right in their jobs. Just as the transfer of a freehold property between two landlords would not mean that a tenant could be evicted, the first Business Transfers Directive, passed in 1978 and updated in 2001 (often still referred to as the "Acquired Rights Directive"), required that a business transferee would have to provide a good economic, technical or organisational reason if they were either to not retain all previous employees, or wanted to make detrimental variations to their workers' contracts. This means that the new employer who is a transferee of a business through an asset sale is in no better position than would be a new owner who gained control of a business by buying out a company's shares: contractual variations require the employees' consent and dismissal rights remain as if it were the old employer. As implemented by the Transfer of Undertakings (Protection of Employment) Regulations 2006, a clear example where employees contracts transfer was in Litster v Forth Dry Dock. The House of Lords held that a purposive interpretation is to be given to the legislation so that where 12 dockworkers were sacked an hour before a business sale, their contracts remained in effect if the employees would still be there in absence of an unfair dismissal. This does not, however, mean that employees unfairly dismissed before a sale have a right to their jobs back, because national law's normal remedy remains with a preference for damages over specific performance. The same principle goes for any variation that works to the detriment of the employee. So the transferee employer may not (without a good business reason) for example, try to impose a single new gardening clause or withdraw tenure, or the employee will have a claim for constructive dismissal.

An acute question for the TUPE Regulations, particularly in the years when the Conservative government was implementing a policy of shrinking the size of the public sector, was the extent they applied to jobs being outsourced, typically by a public body, like a local council, or changed between businesses in a competitive tender process for public procurement. On this point a series of ECJ decisions came to the view that there could be a relevant transfer, covered by the Directive, even where there was no contractual link between a transferor and a transferee business, so long as the business entity retained its "identity". In turn the "identity" of a business would be determined by the degree to which the business' factors of production remained the same before and after a sale. It could be that no employees were hired after an asset sale, but the sacked employees would still have a claim because all their old workplace and capital equipment was being used by the new employer. It is also relevant to what extent a business is capital or labour intensive. So in Oy Liikenne Ab v Liskojärvi the ECJ held that it was unlikely that 45 Helsinki bus drivers' contracts were transferred, between the company that lost the contract and the new bus company that won it, even though 33 drivers were rehired, because "bus transport cannot be regarded as an activity based essentially on manpower". On the other hand, employees stand to benefit where a new employer offers old staff their jobs, the intention to rehire makes it more likely the court will deem there to be a transfer.

Employees and insolvency Insolvency Protection Directive 2008/94/EC Employment Rights Act 1996 ss 166-170 and 182-190 McMeechan v Secretary of State for Employment ICR 549 Buchan v SS for Trade and Industry IRLR 80 SS for Trade and Industry v Bottrill EWCA Civ 781 Regeling v Bedrijfsverg de Metaalnijverheid (1999) C-125/97 Mann v Secretary of State for Employment IRLR 566 Robins v SS for Work and Pensions (2007) C-278/05 Insolvency Act 1986 s 176ZA and Sch B1, para 99 Re Allders Department Stores Ltd BCC 289 Krasner v McMath EWCA Civ 1072 see UK labour law and UK insolvency law

Often business transfers take place when a company has plunged into an insolvency procedure. If a company enters liquidation, which aims to wind down the business and sell off the assets, TUPER 2006 regulation 8(7) states that the rules on transfer will not apply. The main objective, however, in an insolvency procedure particularly since the Cork Report and the Enterprise Act 2002, is to effect rescues through the system of company administration. An administrator's task under the Insolvency Act 1986 Schedule B1, paragraph 3, is either to rescue the company as a going concern, rescue the business typically by finding a suitable buyer and thus save jobs, or as a last resort put the company into liquidation. If employees are kept on after an administrator is appointed for more than 14 days, under paragraph 99 the administrator becomes responsible for adopting their contracts. The liability on contracts is limited to "wages and salaries". This includes pay, holiday pay, sick pay and occupational pension contributions, but has been held to not include compensation for unfair dismissal cases, wrongful dismissal, or protective awards for failure to consult the workforce before redundancies. If the business rescue does ultimately fail, then such money due employees achieves the status of "super priority" among different creditors' claims.

The Insolvency Act 1986 priority list

1. Fixed charge holders

2. Insolvency practitioner fees and expenses, s 176ZA

3. Preferential creditors, ss 40, 115, 175, 386 and Sch 6

4. Ring fenced fund for unsecured creditors, s 176A and SI 2003/2097

5. Floating charge holders

6. Unsecured creditors, s 74(2)(f)

7. Interest on debts proved in winding up, s 189

8. Money due to a member under a contract to redeem or repurchase shares not completed before winding up, CA 2006 s 735

9. Debts due to members under s 74(2)(f)

10. Repayment of residual interests to preference, and then ordinary shareholders.

Sources: Insolvency Act 1986 and Companies Act 2006

The priority list in insolvency sees creditors with fixed security (typically banks) get paid first, preferential creditors third, unsecured creditors up to a limit of £600,000 third, floating charge holders (usually banks again) fourth, remaining debts to unsecured creditors (in the unlikely event that anything remains) fifth, "deferred debts" (typically to company insiders) sixth, and shareholders last. Among the preferential creditors, the insolvency practitioners' fees together with adopted contracts attain super-priority. Otherwise, employees wages and pensions still have preferential status, but only up to an £800 limit, a figure which has remained unchanged since 1986. Employees having priority among creditors, albeit not above fixed security holders, dates back to 1897, and is justified on the ground that employees are particularly incapable, unlike banks, of diversifying their risk, and forms one of the requirements in the ILO Protection of Workers' Claims (Employer's Insolvency) Convention. Often this limited preference is not enough, and can take a long time to realise. Reflecting the Insolvency Protection Directive under ERA 1996 section 166 any employee may lodge a claim with the National Insurance Fund for outstanding wages. Under ERA 1996 section 182 the amount claimable is the same as that for unfair dismissal (£350 in 2010) for a limit of 8 weeks. If an employee has been unpaid for a longer period, she may choose the most beneficial 8 weeks. The Pensions Act 2004 governs a separate system for protecting pension claims, through the Pension Protection Fund. This aims to fully insure all pension claims. Together with minimum redundancy payments, the guarantees of wages form a meagre cushion which requires more of a systematic supplementation when people remain unemployed.