England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE EMPLOYMENT
APPEAL TRIBUNAL (HHJ J BURKE QC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		13th February 2004

Lord Justice Mummery:

The Legal Background

1. This appeal turns on the interpretation of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) and their application in a contracting out situation to a claimed transfer of "part of an undertaking." The case involves an excursion into a relatively unexplored corner of the much litigated provisions of TUPE and of the Acquired Rights Directive EC/187/EEC (the Directive). It raises a difficult point on which there is no direct decision of the European Court of Justice or of the English courts and tribunals.
2. The overall purpose and general principles of the Directive and of the implementing provisions in TUPE are well known. They were recently re-stated by the Court of Justice in the following passage taken from the judgment in a case of one company in a group sub-contracting work to another company in the same group. Allen v. Amalgamated Construction Co Ltd [2000] IRLR 119 at 134 paras 23-27 is central to the arguments advanced in support of this appeal.

"23 The aim of the Directive is to ensure continuity of employment relationships within an economic entity, irrespective of any change of ownership. The decisive criterion for establishing the existence of a transfer within the meaning of the Directive is whether the entity in question retains its identity, as indicated inter alia by the fact that its operation is actually continued or resumed (case 24/85 Spijkers [1986] ECR 1119, paragraphs 11 and 12, and case C-13/95 Suzen [1997] IRLR 255, paragraph 10).

24 First of all, in order for the Directive to be applicable, the transfer must relate to a stable economic entity whose activity is not limited to performing one specific works contract (case C- 48/94 Rygaard [1996] IRLR 51, paragraph 20). The term "entity" thus refers to an organised grouping of persons and assets facilitating the exercise of an economic activity which pursues a specific objective (Suzen, cited above, paragraph 13).

25 It is for the referring court to establish, in the light of the interpretative criteria set forth above, whether the driveage work carried out by ACC at the Prince of Wales Collieries was organised in the form of an economic entity before that undertaking sub-contracted that work to AMS.

26 Second, in order to determine whether the conditions for the transfer of an economic entity are met, it is necessary to consider all the facts characterising the transaction in question, including in particular the type of undertaking or business, whether or not its tangible assets, such as buildings and movable property, are transferred, the value of its intangible assets at the time of the transfer, whether or not essential staff are taken over by the new employer, whether or not its customers are transferred, the degree of similarity between the activities carried on before and after the transfer, and the period, if any, for which those activities are suspended. However, all those circumstances are merely single factors in the overall assessment which must be made and cannot therefore be considered in isolation (see, in particular, Spijkers, paragraph 13, and Suzen, paragraph 14).

27 So the mere fact that, in the instant case, the service provided by the undertaking holding the contracts for driveage work and then by the undertaking to which the work was then subcontracted is similar does not warrant the conclusion that an economic entity has been transferred between the first and the second undertaking. Such an entity cannot be reduced to the activity entrusted to it. Its identity also emerges from other factors, such as its workforce, its management staff, the way in which its work is organised, its operating methods or, indeed, where appropriate, the operational resources available to it (Suzen cited above, paragraph 15, joined cases C-127/96, C-229/96 and C-74/97 Hernandez, Vidal and others [1999] IRLR 132, paragraph 30, and joined cases C-173/96 and C-247/96 Hidalgo and others [1999] IRLR 136, paragraph 30."

3. The national court is under an obligation to apply those principles in discharging its duty to interpret the provisions of TUPE, if it is possible to do so, so as to be compatible with the provisions of the Directive, as interpreted by the Court of Justice. Thus, in determining whether there is a transfer of an "undertaking" or of "part of an undertaking" the English courts and tribunals must give effect to the description of the essence of an undertaking by the Court of Justice as the carrying on of work organised in the form of "a stable economic entity" before the contracting out of that work has taken place. (The relevant jurisprudence of the Court of Justice on this issue is now reflected in Article 1 (b) of the amending Directive 98/50/EEC.)
4. It is not in dispute that the provisions of the Directive and TUPE apply to the transfer of "part of an undertaking." That is made clear by article 1 of the Directive and by regulations 2 (1) and 3(1) and (4) of TUPE. The principles stated in Allen above apply to the transfer of part of an undertaking, as well as to the transfer of the entirety of an undertaking.
5. It is common ground that (a) the provisions and principles set out in Allen are capable of applying to the contracting out of services by public authorities (see, for example, RCO Support Services v. UNISON [2002] IRLR 401 and the cases cited therein); and (b) the persons protected by the provisions are those who were employed under a contract of employment by the transferor in the undertaking, or the part transferred by a relevant transfer, immediately before the transfer: see article 3 of the Directive and regulation 5 (1) and (3) TUPE.

The Appeal

6. The context of the case is a competitive tendering process operated by a local authority for the award of contracts for the supply of building maintenance services to it in the area of its borough. It is a second-generation, re-tendered contract. The particular point taken on the transfer of "part of an undertaking" arises in an appeal to this court from the decision of the Employment Appeal Tribunal on 27 March 2003. In proceedings for unfair dismissal brought by applicants, all of whom claimed to have been employees in the relevant undertaking immediately before the transfer, the Employment Tribunal had held that there was a transfer of part of an undertaking to the appellant, Fairhurst Ward Abbotts Limited (Fairhurst) in April 1999. That was the date on which the previous contractor and respondent to this appeal, Botes Building Limited (Botes), lost its contract for the supply of building maintenance services for the whole of the London Borough of Southwark (Southwark) and Fairhurst successfully tendered for the supply of such services in one of the two areas into which the borough was partitioned for the purposes of the re-tendering process.
7. The Appeal Tribunal dismissed Fairhurst's appeal from the decision of the Employment Tribunal, which was explained in extended reasons sent to the parties on 3 July 2000. The effect of upholding the original tribunal ruling was that the applicants employed in the part of the undertaking transferred to Fairhurst succeeded in their unfair dismissal claims against Fairhurst.
8. Another employee of Botes during the currency of its contract with Southwark was Mr Salih, a carpenter. He happened to be on sick leave at the time of the award of the Area 2 contract to Fairhurst in April 1999. He was held by the Employment Tribunal not to have been transferred to Fairhurst, on the ground that he was not employed in the undertaking immediately before the relevant transfer. He was, however, held to have been unfairly dismissed by Botes. The Appeal Tribunal allowed a cross-appeal by Botes on that point and remitted the case to the same Employment Tribunal to determine whether Mr Salih was in fact employed in the relevant part of the undertaking immediately before the transfer. Mr Salih now appeals to this court. His amended cross appeal was heard at the same time as Fairhurst's appeal and was met with a mixed reception from both Botes and Fairhurst.

The Facts

9. Botes supplied building maintenance services throughout Southwark from 1 April 1996 to 12 April 1999 pursuant to a single contract called "the Major Voids Contract." It was not a contract to carry out specific works. It was described by the Employment Tribunal in the following terms –

"31…..What it did was to create a service framework. The contractors would provide organisation; administration; and supervision. It would provide labour, both direct and subcontract, including skilled trade. It would provide materials and equipment."

10. In December 1998 Southwark invited new tenders for its building maintenance work for the period April 1999 to 31 March 2002. This time Southwark partitioned the geographic area of the borough covered by the Major Voids Contract into two geographic areas, Area 1 and Area 2. It invited separate tenders for each area. There would now be two contracts for the supply of building maintenance services instead of one contract for the whole borough. No tenderer could obtain the contracts for both Area 1 and Area 2. Tenders were invited on the basis that TUPE applied.
11. Fairhurst successfully applied for the Area 2 contract. The Area 1 contract was awarded to a third party, which is not involved in these proceedings.
12. There was no transfer of assets by Botes to Fairhurst. The activity of Fairhurst in Area 2 continued to be the same as the activity previously carried out by Botes under the Major Voids Contract prior to April 1999, but there was no agreed taking over of the employees of Botes. Fairhurst refused to take the employees on, contending that there was no relevant transfer of an undertaking and that TUPE did not apply. Botes contended that TUPE did apply to Area 2 and therefore refused to accept that any of the applicant employees continued to work for it after 8 April 1999.
13. On 14 June 1999 nine employees brought unfair dismissal claims. Both Fairhurst and Botes were joined as respondents.

Decision of the Employment Tribunal

14. The Employment Tribunal held that Fairhurst was liable for the unfair dismissal of six of the employees and that Botes was liable for the unfair dismissal of two employees, one of whom was Mr Salih.
15. After reviewing the evidence and the relevant law in considerable detail, the Employment Tribunal concluded that the Major Voids Contract was an "undertaking" in the form of an economic entity in the hands of Botes from 1996 to April 1999. It was a "building services contract, a service framework."(paragraph 53).
16. The Employment Tribunal then held that there was a "transfer of part of the undertaking", saying-

" 57. There was a similarity of the undertaking before and after the change of contractor. On a partial basis, defined geographically, the support, administration and premises dedicated to the original contract related to the whole of Southwark were continued.

58. Having regard to the factors which we have set out and having regard to the overall picture which they create, we find that there was an undertaking which was transferred in two parts, to areas one and two."

17. The Employment Tribunal rejected Fairhurst's case that the part of undertaking (Area 2) could not have been transferred to it, as that part had not existed as a discrete economic entity prior to the alleged transfer.
18. Finally, the tribunal turned to the question whether each relevant applicant was employed in the part of the undertaking transferred immediately before the transfer. The particular position of Mr Salih was that he had been absent from work because of sickness from 4 January 1999. He had not returned to work by 12 April 1999, when Fairhurst became the new contractor for Area 2. The time sheets recorded Mr Salih as being sick, but allocated to 102 Coburg Road, a site in Area 2. The tribunal held-

" 61. Mr Salih had been off sick since January 1999. He had become detached from the remainder of the workforce constituted by the Applicants. Although on paper he was assigned to the part of the undertaking transferred to [Fairhurst], that was not the real situation. He was not in fact employed in the part transferred. He had a contract of employment with [Botes]. Therefore he remained in that employment until he was either transferred under TUPE or dismissed. He was not transferred to either area, and therefore the decision by [Botes] to treat him as no longer being employed by them as a dismissal of him, which was unfair."

Decision of the Employment Appeal Tribunal

19. On the "economic entity point" the Appeal Tribunal identified the novel feature of the case and summarised the competing submissions as follows-

"20. ….whether, when an undertaking or economic entity operated by "A" ceases to be operated by "A" and continues in the hands of others but is divided into more than one part and one or more of the divided parts is taken over by "B", there can be a transfer of undertakings falling within Regulation 3 of TUPE from "A" to "B." Mr Swift on behalf of [Fairhurst] submitted, in short, that there must be an identity of entity prior to and after the supposed transfer, that on the facts of this case the economic entity which [Fairhurst] began to operate in April 1999 did not even exist before that date and that any decision that there could be a relevant transfer on the facts of this case was inevitably in conflict with established UK and European authority. Mr Brown on behalf of Botes submitted in short that there could be a relevant transfer if the entity as a whole retained its identity in the hands of the new operators even if split into more than one part; alternatively he submitted that the Tribunal had found on the facts that there was a transfer of a part of an undertaking which fell within Regulation 3."

20. After considering TUPE, the Directive and the authorities, the Appeal Tribunal agreed with the Employment Tribunal that there was a relevant transfer caught by TUPE.

" 39. In our judgment the Acquired Rights Directive and TUPE envisaged, when including within protection, in the case of the Directive, to be provided by Member States, and, in the case of TUPE, to be provided in the United Kingdom, the granting of such protection to cases in which the undertaking or entity in the hands of the new employer was structurally different from and was only part of the undertaking or entity in the hands of the old employer. We do not regard the provisions of the Directive or TUPE which apply that protection to the case of transfer of part of an undertaking as necessarily requiring that the part transferred was of itself a separate economic entity before transfer. Such a requirement appears to us to be neither logical nor practical; it would not be a logical outcome because, if the part transferred had to be an individual entity prior to transfer, there would be no need to treat the case as one of the transfer of a part; the case could be seen simply as a transfer of an entity which did not lose its identity after transfer. It would not be practical because there must inevitably be cases in which a body decides to contract out one or more of its activities which was not or were not, in its hands, separately operated which became separately operated in the hands of the contractors who take up the activities; similarly in a second generation contracting out. We do not believe that TUPE does not or cannot apply in such a situation.

40. We have already set out the reasons why, in our view, the conclusions for which Mr Swift contends on this issue potentially weaken the protection given to employees by TUPE to a substantial degree. In choosing between the rival contentions, we are entitled to take into account that those of Mr Brown, supporting the decision of the Tribunal on this issue, preserve at least to an important extent the purposes and intentions of the Acquired Rights Directive and of TUPE in a situation in which, were the contrary contentions to be preferred, those purposes and intentions would be at real risk not only in cases of second generation contracting out, as in the present case, but on a wider basis. Further, if for there to be a transfer of part of an undertaking, that part has of itself to have been an individual economic entity before the transfer, it would seem that the provisions for protection in the case of a transfer of part of an undertaking would be unnecessary.

41. We should make it clear that we do not take the view that in every case as a matter of law where an entity is split into parts there will be a transfer falling within Regulation 3 of TUPE; one can envisage circumstances in which the degree of fragmentation might be such that what emerged was not recognisably the same entity or part of the same entity when viewed as a whole and/or in circumstances in which an individual separated part or even all the separated parts were not of themselves stable entities; if the Tribunal so found on the facts, it would not be open to them to proceed to consider whether there was a transfer; but on the findings of fact in this case the Tribunal were in our judgment not precluded in principle from so proceeding, as they did, on the basis that the undertaking carried on in Area 2 by [Fairhurst] from April 1999 was a part of the undertaking or entity operated by Botes up to that time and that, therefore, there could in law, on the facts found, be a transfer from Botes to [ Fairhurst] within Regulation 3 of TUPE of that part of Botes' undertaking.

42. In summary, then, we conclude that it is not a prerequisite of a conclusion that there has been a transfer within Regulation 3 of TUPE of a part of an undertaking that that part was a separate economic entity in the hands of the transferor before the transfer. It was therefore open to the Tribunal to resolve in favour of the employees the issue as to economic entity."

21. The Appeal Tribunal went on to hold (paragraph 66) that the Employment Tribunal was entitled to conclude on the evidence that there was a relevant transfer to Fairhurst, having considered whether there was a retention of identity of that undertaking or part of it and having taken into account the reasons, in what was obviously a labour-intensive operation, why the employees in the undertaking had not been transferred.
22. As to Mr Salih's cross appeal, the appeal tribunal concluded (paragraphs 78 and 79) that it should be allowed and the matter remitted to the same tribunal to determine whether he was employed to work in Area 2 immediately before the transfer i.e. whether Area 2 was his contractual place of work and whether Botes would have required him to work immediately before the transfer, had he not been excused from attendance as a result of his illness. The Employment Tribunal had not applied the appropriate test when it asked whether he was in fact working in Area 2 immediately before the transfer and concluded that he was not because he was away sick.

A. Fairhurst's Appeal

23. In his careful submissions Mr Swift argued that the ruling of the Employment Tribunal that the subject matter of the alleged transfer to Fairhurst was an undertaking in the hands of Botes prior to the transfer was inconsistent with TUPE, the Directive and the authorities. The Employment Tribunal had erred in law. The Appeal Tribunal ought to have allowed Fairhurst's appeal.
24. The essential point of law made by Mr Swift was based on the passage in Allen cited in paragraph 2 above. He contended that the subject matter of the relevant transfer must be, in the hands of the transferor, an identifiable, pre-existing "stable economic entity," within which the continuity of employment relationships is to be preserved, irrespective of any change of ownership. An economic entity is a concept distinct from (a) the activity actually carried out by the undertaking and (b) the undertaking, which may comprise more than one identifiable economic entity. It is necessary to identify the "economic entity" in the hands of the transferor, which is capable of being transferred, before it can be determined whether that entity has retained its identity in the hands of the transferee and has been transferred. If the undertaking, or part of the undertaking, does not amount to a stable, identifiable "economic entity," then there is nothing capable of being transferred within the meaning of the Directive or TUPE. Once it was appreciated that the undertaking, or the part transferred, had to be an economic entity, the basis of the general comments about evasion of the protection in the Directive and TUPE made by the Appeal Tribunal in the passages quoted in paragraph 19 above ceased to exist.
25. When the approach laid down in Allen is compared with the approach of the Employment Tribunal, as upheld on appeal, it is apparent, Mr Swift argued, that the decision reached was erroneous in law: it proceeded on the misconceived basis that a "part of an undertaking" could be transferred where the part was not a separate, identifiable economic entity in the hands of the transferor before the relevant transfer. The economic entity in the hands of Botes prior to April 1999 was the Major Voids Contract. That contract comprised what became Area 1 and Area 2. There was, however, no finding that Area 2, which was the subject matter of the re-tendered contract with Fairhurst, existed as a discrete, identifiable economic entity in the hands of Botes prior to April 1999. The Area 2 contract was all that was obtained by Fairhurst as a result of the tendering exercise. If it was not an economic entity in the hands of Botes, it could not have been transferred as such to Fairhurst. In concluding that there was a relevant transfer the tribunals below had used the terms "economic entity" and "undertaking" interchangeably. They erroneously referred to a different economic entity (Area 2), when deciding whether there was a transfer, than they had referred to when addressing the prior question whether there was an economic entity in the hands of Botes capable of being transferred (the Major Voids Contract). They were not the same entity. There was no finding that, prior to April 1999, the workforce was organised or deployed, or that the Major Voids Contract was arranged or administered, to reflect a distinction between Area 1 and Area 2. The organisation run by Botes was directed to fulfilling the obligations with respect to the provision of building maintenance services under the Major Voids Contract as a whole, and not in respect of two discrete stable economic entities within that contract, so as to be capable of being separately transferred and retaining their identities in two different hands.
26. Mr Swift's arguments are a logical development from his initial premise that the economic entity, which is to be the subject of the transfer, must, in the case of a transfer of a part, be identified as such in the hands of the transferor before the relevant transfer takes place.
27. I am not persuaded that, as a matter of law, the initial premise on which Mr Swift's submissions rest is correct. TUPE applies

"3(1)…to a transfer from one person to another of an undertaking situated immediately before the transfer in the United Kingdom or a part of one which is so situated."

28. TUPE also provides that

"2 (2) References in these Regulations to the transfer of part of an undertaking are references to a transfer of a part which is being transferred as a business.

29. The effect of the application of TUPE is that by Regulation 5(1) and (3) any contract of employment of a person employed immediately before the transfer by the transferor in the undertaking or part transferred, which would otherwise have been terminated by the transfer, " shall have effect after the transfer as if originally made between the person so employed and the transferee." It is also made clear in Regulations 3(4) and 5(3) that a transfer may be effected by a series of two or more transactions.
30. On the question whether there is within TUPE an "undertaking", which is the same as the expression used in the Directive (see Article 1) along with the expression "business or part of a business," I agree with Mr Swift that it is first necessary to identify a "stable economic entity," being an organised grouping of persons and of assets enabling (or facilitating) the exercise of an economic activity which pursues a specific objective. An activity or a service is not in itself an economic entity: the emphasis is on the way in which the work is organised: see Allen above and the citations in the judgment given by Lindsay J on behalf of the Appeal Tribunal in Cheeseman v. R Brewer Contracts Ltd [2001] IRLR 144 at paragraph 10.
31. I part company from Mr Swift in his approach to a case, such as this, of a transfer of something less than the entire undertaking. His approach to partial transfers is too narrow and literal. I agree that, unless a stable economic entity can be identified as existing before the transfer takes place, there can be no transfer of an undertaking. In this case a stable economic entity was identified as existing prior to April 1999. It existed in respect of whole area of the borough. So, if the tendering process had been organised in the same way as previously, the award of a new contract to Fairhurst, in the place of Botes, for the whole area of the borough would, on the present state of the authorities, undoubtedly have been a transfer of an undertaking.
32. This case is concerned with the effect of partitioning the borough into two separate areas. As already explained, the Directive and TUPE are capable of applying to the transfer of "part of an undertaking," as well as to the transfer of an entire undertaking. A part of an undertaking is simply something less than the whole of an undertaking. Neither the legislation nor the case law expressly requires that the particular part transferred should itself, before the date of the transfer, exist as a discrete and identifiable stable economic entity. Nor do I think that such a requirement is implicit in the need to identify a pre-existing stable economic entity. In my judgment, it is sufficient if a part of the larger stable economic entity becomes identified for the first time as a separate economic entity on the occasion of the transfer separating a part from the whole.
33. I agree that, if it is possible to identify part of an undertaking as a discrete economic entity before the transfer takes place, the applicant will find it easier to satisfy both the "transfer" test that the part transferred retains its identity in the hands of the transferee, and the requirement that the applicant was employed, immediately before the transfer, in the part transferred. But I do not agree that, in the absence of a part which is identifiable as a discrete economic entity before the transfer takes place, there can be no transfer of a part or that it will be impossible for the applicant to establish that there was a transfer of the part of the undertaking in which he was employed. It all depends on the evidence available in the particular case. In contending for transfer of a part it may be more difficult to make the required "before" and "after" comparison where the part becomes a discrete economic entity for the first time on the making of the transfer, but it is not necessarily an impossibility.
34. I would add that the attainment of the aim of the Directive and of TUPE, in preserving the continuity of employment relationships within an undertaking, does not require a distinction to be drawn between (a) the case where the part of the entity transferred was identifiable as a discrete part before the transfer and (b) the case where the part of the entity transferred became identifiable as a separate entity, in this case geographically, on the actual making of the transfer. On the contrary, if Mr Swift is correct, TUPE and the Directive would not apply to the case where an existing stable economic entity, in which there are employment relationships, is partitioned into separate identifiable parts for the first time on the making of the transfer, even in cases in which it is evidentially possible to trace the organisation of the work carried on after partition back into a part of the larger pre-partition stable economic entity. That result is not, in my view, consistent with the aim of TUPE and the Directive nor is it dictated by the text and scheme of the domestic and Community legislation.
35. I do not think that this approach is inconsistent with the decision of the Northern Ireland Court of Appeal in Hassard v. Mc Grath & Ors [1996] NILR 586 on the interpretation and application of TUPE. That was a case in which, before the alleged transfer, the undertaking of general building work operations, was carried on by the Northern Ireland Housing Executive through its Direct Labour Organisation. It was divided into four modules based on districts. The employee joiner divided his time between the modules, two of which were then contracted out to two separate building contractors. The question arose in unfair dismissal proceedings by the employee whether there had been a transfer of an identifiable part of an undertaking by the executive to one of the contractors. The court observed that it was common ground that there were two elements in deciding whether there was a relevant transfer: whether there has been an identifiable undertaking and whether on the facts a transfer had taken place. On the first issue as to whether the content of the modules was sufficient to enable them to be classified as parts of an undertaking, the court emphasised the need to consider the "undertaking" issue separately from the "transfer" issue. It was held that there must have been an economic entity capable of being transferred as a going concern, but that the part of the undertaking transferred did not have to have been regarded by either the transferor or the transferee as a separate or distinct part of it, or to have been separately operated by them. This was said at p598

" We are of the opinion that it would not be correct to look at the issue exclusively from the standpoint of either the transferor or the transferee. It is relevant to consider in the first instance whether the transferor regarded the activity in question as a distinct part of his undertaking, for an affirmative answer to that may well settle the matter. It is not, however, conclusive that he did not so regard it or treat it as a separate part of his organisation, if it was in effect an economic entity capable of being transferred as a going concern, For example, a bank may have many branches throughout Northern Ireland, in two or three of which the cleaners are employed directly by the bank, while others are cleaned by a company to whom the operation is contracted out, which has travelling squads of cleaners each dealing with a number of branches. If the bank decides to arrange for the contracting company to undertake the cleaning of the remaining branches, that may on the authority of the Schmidt case be capable of constituting the transfer of so many parts of the bank's business, even though the company is merely adding them to an already extensive cleaning operation and may simply adjust its schedules to add those branches to groups of others cleaned by particular squads. The test is whether the cleaning of each branch could be regarded as an economic entity which is capable of transfer as a going concern, even if it is not so regarded by the transferor or separately operated by the transferee. There must of course be a point at which the fragmentation is so great that the fragments could not be regarded as distinct parts of the transferor's undertakings. The question of fragmentation will also be material to the second issue in this appeal, namely whether the employee was assigned to the part or parts transferred.

In our view it was a matter for the tribunal to consider whether the modules purchased by the contractors constituted parts of the executive's business, by the application of the principles which we have set out. We are not prepared to hold that those modules could not reasonably be regarded by a tribunal properly directed by the law as parts of the executive's undertaking, and it was therefore a matter of fact which it was open to the tribunal to decide. It is necessary to determine whether it did apply the correct test when it held in favour of the employee on this issue. The tribunal confined itself in para 17 of its decision to holding that the modules constituted an identifiable entity, which remained identifiable in the hands of the private contractors to whom they were transferred. For the reasons we have set out, we do not consider that in so holding it applied the correct test. The test which it did apply is relevant to the question whether there was a transfer, as distinct from some change of activity which does not amount to a transfer. It is not sufficient to determine the question whether what was transferee constituted a part of the transferors' undertaking…"

36. In my judgment there was no error on the part of the Employment Tribunal on this point. They found that prior to April 1999 there was an existing stable economic entity, the Major Voids Contract, which was an undertaking in the hands of Botes. It was a single contract for building maintenance services for the whole of the Borough of Southwark. After that date the same services were supplied to the Council over the same geographical area, but by two stable economic entities under two separate contracts in the hands of two different contractors. The fact that the two areas were previously one entire area covered by one contract prior to April 1999 did not prevent the tribunal from concluding in the circumstances that part of the larger economic entity in the hands of Botes and covered by area 2 was capable of being transferred to Fairhurst, in whose hands it then retained its identity as a part of the larger economic entity. Accordingly I would dismiss Fairhurst's appeal.

B. Mr Salih's Cross Appeal

37. The cross appeal raises the question: who dismissed Mr Salih? Mr Salih's position is that he cannot lose: if he was not transferred, as was held by the Employment Tribunal, he succeeds against Botes; or, if he was transferred he succeeds against Fairhurst.
38. The primary submission of Mr Gumbiti-Zimuto, appearing for Mr Salih, was that Botes had unfairly dismissed Mr Salih. He contended that Mr Salih remained an employee of Botes after April 1999 for two reasons: the first was that, as submitted by Fairhurst on its appeal, there was no transfer of part of the undertaking by Botes: the second was that, even if there was a transfer of part, Mr Salih was not included, as, for the reasons given by the Employment Tribunal, he was not employed in the relevant part of the undertaking at the date of the transfer. On that aspect of the appeal he criticised the Appeal Tribunal for interfering with the decision of the Employment Tribunal by ordering the case to be remitted. Mr Damian Brown, appearing for Botes, submitted that there was a transfer of part and that it included Mr Salih, even though he was away sick at the date of the transfer.
39. As a result of an amendment to the respondent's notice allowed at the hearing of the appeal, Mr Gumbiti-Zimuto was able to advance an alternative case of unfair dismissal against Fairhurst. If, contrary to the contentions of Fairhurst, there was a transfer of part of the undertaking, Mr Salih was unfairly dismissed by Fairhurst. The court had sufficient material, he argued, to decide that Mr Salih was employed in the relevant part of the undertaking immediately before the transfer and was therefore included in it. Mr Swift, appearing for Fairhurst, repeated his argument that there was no transfer of part, and submitted that, even if there was, Mr Salih was not transferred, as there was no evidence that he was employed in the part transferred.
40. In my judgment, the cross appeal should be dismissed. For the reasons already given, there was no error of law in the decision of the Employment Tribunal that there was a transfer of part of the undertaking to Fairhurst. There was, however, an error of law in the part of the decision (paragraph 61) holding that, as Mr Salih had been away sick since January 1999, he had become detached from the remainder of the workforce and that the real situation was that he was "not in fact employed in the part transferred" immediately before the date of the transfer. If he was in fact employed in that part of the undertaking for the purposes of TUPE, the fact that he was away from work because he was sick would not of itself prevent the transfer from including him. A person on sick leave, like a person on holiday, on study leave or on maternity leave, remains a person employed in the undertaking, even though he is not actually at his place of work. The question is whether he was employed in the part transferred. That is a factual matter.
41. The Appeal Tribunal remitted to the same Employment Tribunal for determination the question whether Mr Salih was employed to work in Area 2 (as his contractual place of work) and could have been required to work there immediately before the transfer of that part, had he not been excused from attendance by reason of sickness. In my judgment, that was the correct course to take. As explained by the Appeal Tribunal (paragraph 78) the tribunal had not asked or answered the factual question where Mr Salih would have been required by Botes to work, had he been fit to do so. The only findings of the Employment Tribunal relevant to the point were that (paragraph 21) "On 17 March all the men except Mr Potter and Mr Salih were sent to 102 Coburg Road, in Area 2. They were working there for the rest of March and into April" and (paragraph 22) "The time sheets recorded Mr Salih as being sick but assigned to 102 Coburg Road." The Employment Tribunal went on to find that, although Mr Potter (a contract supervisor) was treated by the Managing Surveyor, Mr Bolen, as being assigned to Area 2, it was "a paper exercise" and he continued to work all over the area, and not substantially or exclusively in Area 2.
42. I would, if I could, put an end, now and without further delay or expense, to the controversy surrounding Mr Salih. As explained earlier, he is entitled to succeed either against Botes or against Fairhurst, I am unable, however, to accept the submission that the Employment Tribunal properly considered or decided the question whether or not he was employed in Area 2. It was distracted from doing so by its legal error in treating Mr Salih's absence from work at the time of the transfer as conclusive of the question whether he was transferred to Fairhurst. The result was that the Employment Tribunal did not make sufficient findings of fact to enable the Appeal Tribunal or this court to conclude whether Mr Salih was or was not employed to work in Area 2 immediately before the transfer. There is only the bald statement that the time sheets recorded him as assigned to 102 Coburg Road. In the absence of agreement about the position of Mr Salih further investigation is needed to establish his work situation before he went on sick leave and how and why he was recorded as assigned to 102 Coburg Street when he was in fact unable to attend work. Unlike the others (except Mr Potter) he never went to work at 102 Coburg Street because he was sick.

Result

43. I would dismiss the appeal. As for the cross appeal, I would dismiss it on the basis that there was a transfer of part to Fairhurst and it will be for the Employment Tribunal to decide whether Mr Salih was employed in that part and was dismissed by Botes or by Fairhurst. It should be possible for this to be done without further costs to Mr Salih.

Lord Justice May:

44. I agree that the appellants' appeal should be dismissed for the reasons given by Mummery LJ, whose account of the fact and circumstances of this appeal I gratefully adopt.
45. The 1981 regulations were made to implement Council Directive 77/187/EEC. Article 1 of the 1977 Directive originally provided:

"1. This Directive shall apply to the transfer of an undertaking, business or part of a business to another employer as a result of a legal transfer or merger."

46. The 1977 Council Directive was amended by Council Directive 98/50/EEC of 29^th June 1998. The date by which domestic implementation of this amending Directive was required was 17^th July 2001. It had not been implemented at the time of the events giving rise to this appeal, but it is useful to consider the amended terms of Article 1 of the 1977 Directive. It now reads:

"1.(a) This Directive shall apply to any transfer of an undertaking, business, or part of an undertaking or business to another employer as a result of a legal transfer or merger.

(b) Subject to sub-paragraph (a) and the following provisions of this Article, there is a transfer within the meaning of this Directive where there is a transfer of an economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary."

47. It is useful to refer to this amendment because it was explicitly designed to reflect decisions of the European Court of Justice which considered the nature of a transfer for the purposes of the 1977 Directive. One of the preambles to the 1998 Directive explained that considerations of legal security and transparency required that the legal concept of transfer be clarified in the light of the case law of the Court of Justice. This clarification was not to alter the scope of the 1977 Directive as interpreted by the Court of Justice.
48. Paragraph 3 of the 1981 Regulations provides:

"(1) Subject to the provisions of these Regulations, these Regulations apply to a transfer from one person to another of an undertaking situated immediately before the transfer in the United Kingdom or a part of one which is so situated.

(2) Subject as aforesaid, these Regulations so apply whether the transfer is effected by sale or by some other disposition or by operation of law."

49. As the Employment Appeal Tribunal pointed out in the present case, both the Directive and the Regulations contemplate the transfer of part of an undertaking or business.
50. I considered a number of the European and Domestic cases relating to the transfer of an undertaking under the Directive and the Regulations in my judgment in ADI (UK) Limited v Firm Security Group Limited [2001] EWCA Civ 971 (22^nd June 2001). I refer generally to what I there said. One important subsequent case to which reference has been made in this appeal is the decision of this court in RCO Support Services v UNISON [2002] IRLR 401. In the ADI case I said at paragraph 9:

"Notwithstanding the retention in the amended Article 1 of the 1977 Directive of the requirement for the transfer to result from "a legal transfer or merger", that requirement has been emasculated out of existence by purposive judicial interpretation. The literal words, and indeed the whole structure, of the Directive appear to require some legal relationship effecting a transfer between the transferor employer and the transferee employer, such as, for instance, might take place upon the assignment of an undertaking or the sale of a business. But the cases have eliminated the need to look for such an orthodox legal relationship. Speaking generally, the question of transfer may arise where an undertaking or business carried out by one or more employees ceases to be carried out by one employer and starts to be carried out by another employer. If the undertaking or business is an "economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity", there is or may be a transfer within the meaning of the Directive. Thus the concept of transfer is now a judicially constructed fiction derived from the purpose of the Directive and the Regulations to safeguard the rights of employees." (See also paragraphs 20 and 32 of that judgment.)

51. Mr Swift has referred us to a number of authorities. I refer to short passages from two of them. In Suzen v Zehnacker Gebaudereinigung [1997] IRLR 255, the European Court of Justice said:

"13. For the Directive to be applicable, however, the transfer must relate to a stable economic entity whose activity is not limited to performing one specific works contract (case C-48/94 Rygaard [1996] IRLR 51, paragraph 20). The term entity thus refers to an organised grouping of persons and assets facilitating the exercise of an economic activity which pursues a specific objective.

…

15. As observed by most of the parties who commented on this point, the mere fact that the service provided by the old and the new awardees of a contract is similar does not therefore support the conclusion that an economic entity has been transferred. An entity cannot be reduced to the activity entrusted to it. Its identity also emerges from other factors, such as its work force, its management, staff, the way in which its work is organised, its operating methods or indeed, where appropriate, the operational resources available to it."

52. The first of these paragraphs reappears verbatim as paragraph 24 of the judgment of the European Court in Allen v Amalgamated Construction Co Limited [2000] IRLR 119. Paragraph 25 of the judgment states:

"It is for the referring court to establish, in the light of the interpretive criteria set forth above, whether the driveage work carried out by ACC at the Prince of Wales Collieries was organised in the form of an economic entity before that undertaking subcontracted that work to ANS."

53. In the present case, for 3 years to April 1999 Botes provided building maintenance services to the London Borough of Southwark under a contract known as the Major Voids Contract. This operation and Botes' performance of it was, for the purpose of the Directive and the Regulations, a stable economic entity. Mr Swift, for the appellants, accepts this and emphasises that the Employment Tribunal so found. Southwark decided to divide their building maintenance operations into two geographically. The appellants tendered for the Area 2 contract and were successful. They carried out in that area the work and operations which Botes had carried out in the larger area, which included Area 2.
54. Mr Swift puts his submissions in various ways, but in my view they really boil down to this. The authorities require a two stage inquiry. At the first stage it is necessary to identify a stable economic entity. At the second stage, the question is whether that entity was transferred. The stable economic entity has to exist within the organisation effecting the "transfer" before the transfer takes place. The Employment Tribunal did not, he submits, address this question and did not find that what was transferred to Fairhurst existed within Botes' organisation as an identifiable stable economic entity before the "transfer". It is not sufficient if what was transferred was an entity created for the purpose of the transfer, if that entity did not exist before it was so created.
55. I do not accept this submission. The European and domestic authorities to which we have been referred do not address or deal with situations where what is transferred is part of a larger economic entity. Mr Swift has referred us to no authority which positively supports his submission. As the Employment Appeal Tribunal pointed out, if it were correct, it could be used to undermine the purpose of the Directive and the Regulations. In my judgment, there is no reason in principle why a stable economic entity sufficient to be transferred under this legislation cannot be carved out as part of a larger economic entity for the purpose of and at the time of the transfer. It does not have to exist separately as such before it is carved out. It will depend on all the facts and circumstances whether what is carved out is indeed a sufficient economic entity. The Employment Appeal Tribunal reached essentially this conclusion in paragraph 39 of its judgment. In my view, they were correct to do so.
56. The principle which I have identified is encapsulated in the judgment of Carswell LJ in the Northern Ireland Court of Appeal in the case of Hassard v McGrath [1996] Northern Ireland Law Reports page 586 at 599a as follows:

"The test is whether the cleaning of each branch could be regarded as an economic entity which is capable of transfer as a going concern, even if it is not so regarded by the transferor or separately operated by the transferee."

57. Mr Swift further submits that the Employment Tribunal did not make sufficient findings of fact to sustain the decision which the Employment Appeal Tribunal upheld. I do not agree. The findings, admittedly shortly stated, are to be found in paragraphs 57 and 58 of the Employment Tribunal determination, where they stated:

"57. There was a similarity of the undertaking before and after the change of contractor. On a partial basis, defined geographically, the support, administration and premises dedicated to the original contract related to the whole of Southwark were continued.

58. Having regard to the factors which we have set out, and having regard to the overall picture which they create, we find that there was an undertaking which was transferred in two parts, to Areas 1 and 2."

58. In my judgment, these findings sufficiently support a conclusion that the economic entity created for Area 2 was capable of transfer as a going concern, even if it was not so regarded by Botes.
59. I regret that I disagree with Mummery LJ in the case of Mr Salih. In my view, Mr Salih's alternative appeal against Fairhurst, brought by the amended respondents' notice for which this court gave leave during the hearing, should be allowed. The Employment Tribunal found that Mr Salih was absent from work because he was ill from 4^th January 1999 onwards. He had not returned to work by 12^th April when Fairhurst became the contractor for Area 2. He had, however, been assigned to 102 Coburg Road, which was in Area 2. It is not suggested that this assignment was a device. The Employment Tribunal found that Botes had acted legitimately in the dispositions which they made in anticipation of ceasing to be the maintenance contractor. Mr Salih was thus in the same position as the six employees who were found by the Employment Tribunal to have been employed in the part of the undertaking transferred to Fairhurst, except that he was away from work on account of sickness.
60. The Employment Tribunal's decision that Mr Salih was not transferred to either area and that therefore Botes' decision to treat him as no longer being employed by them was a dismissal of him which was unfair depended on their reasoning in paragraph 61 of their determination as follows:

"Although on paper he was assigned to the part of the undertaking transferred to the First Respondents that was not the real situation. He was not in fact employed in the part transferred. He had a contract of employment with the Second Respondent. Therefore, he remained in that employment until he was either transferred under TUPE or dismissed. He was not transferred to either area. …"

61. The only reasons which the Tribunal gave for their conclusion that his assignment Area 2 was not the real situation were that he was not in fact employed there and that he was not transferred to either area. The assertion that he was not transferred begs the question which had to be decided. He was not employed in the part transferred only because he was sick. His contractual assignment was to that part and the proper inference is that he would have been working there apart from his sickness. Mr Swift accepted that a person who is contractually employed in an undertaking which is transferred is part of the undertaking for the purposes of the Directive and the Regulations, and that the fact that they may be away from work on account of sickness does not alter this. On the facts which they found, in my view the Tribunal should have concluded that Mr Salih was employed in the part of the undertaking transferred to Fairhurst and the Employment Appeal Tribunal should have allowed the appeal before them relating to Mr Salih to a greater extent than they did. There is no need for further facts to be found.

Lord Justice Pill

62. For the reasons given by Mummery LJ and May LJ I agree that the appeal should be dismissed. I agree with Mummery LJ that Mr Salih's cross-appeal should be dismissed for the reasons he gives and on the basis that it will be for the Employment Tribunal to decide who, for present purposes, is his relevant employer. I too express the hope that this issue between employers can be resolved without Mr Salih having to incur further costs.

Order: Minute of order to be lodged with court

(Order does not form part of the approved judgment)