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
His Honour Judge Peter Clark
UKEAT/0320/06/CEA

		Royal Courts of Justice Strand, London, WC2A 2LL
		03 April 2007

Lady Justice Smith :

Introduction

1. This is an appeal brought with the permission of Sir Henry Brooke, against the decision of the Employment Appeal Tribunal (EAT) by which it dismissed the appellants' appeal from a decision of an Employment Tribunal (ET) sitting at Southampton in April 2006. The ET heard an application by a group of employees of the respondent company, Guernsey Ship Management (GSM) in which the employees alleged that there had been unlawful deductions from their wages. The essence of their claim was that, on 27^th September 2004, their employment had been transferred to the respondent from a company called Wightlink (Guernsey) Limited (WGL). Following the alleged transfer, the employees were paid at a lower rate than they had received while employed by WGL. They claimed that their employment had been transferred pursuant to the transfer of an undertaking to which the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) applied and that they were entitled to receive the same rate of pay after the transfer as before.
2. The ET held that there had been no transfer of an undertaking to which the TUPE Regulations applied. The employees' employment with WGL had been terminated and they had entered fresh employment with the respondent. Accordingly they were entitled only to the wage rates applicable to their contracts with the respondent. The claims failed.
3. On appeal, the EAT held that the ET had directed itself correctly in law and had been entitled to decide as it had. On appeal to this court, the appellants submitted that there had been a transfer of an undertaking to which the TUPE Regulations applied.

The Factual Background

4. Prior to September 2004, the six claimants, now the appellants, were employed by WGL on short term contracts. WGL was an associate company of Wightlink Ltd, which operated ferries between the Isle of Wight and the mainland. The function of WGL was to supply personnel for the ferry operations. Most of the WGL employees provided to Wightlink were permanent employees; there were about 230 of those. In addition, there were 12 or 13 WGL employees (of whom the appellants were six) on short term contracts. It should be noted however, that these 12 or 13 workers were not seasonal workers; their short term contracts were renewed from time to time so that they continued to work for WGL through the winter. The short term contract workers were paid less than permanent employees doing the same work.
5. The six appellants filled different positions with Wightlink. Four of them were crewmen, one was a second engineer and one was a steward. We have not been told what work the other 6 or 7 short term contract employees carried out. Each vessel operated by Wightlink had its regular crew, comprising a master, a first officer, an engineer, a second engineer, a deck officer, three crewmen and two stewards. In the summer season, each vessel would also have a shop assistant. The six claimants did not work on the same vessel. Indeed, as I understand it, each of them worked on a different vessel.
6. In addition to the workers provided by WGL, Wightlink also needed about 60 seasonal workers during the summer. These were supplied to it by the respondent, pursuant to a contract. The respondent employed these workers on short term seasonal contracts, which ran from April to September.
7. During the summer of 2004, RMT, the trade union recognised by WGL, was in dispute or negotiation with Wightlink about, inter alia, the pay differential between short term and permanent workers. At a meeting on 24^th September 2004, Wightlink conceded the argument and agreed that, for the summer season of 2004, the short term contract workers (including the appellants) would be paid at the same rates as the permanent workers. The ET found that there was an effective variation of the appellants' contracts of employment from that date. The appellants were formally informed of that retrospective pay rise towards the end of October 2004.
8. However, by that time, the summer season had ended. On 17^th September 2004, WGL had written to the appellants advising them that, as the summer season was coming to an end, the company's requirements for staff would reduce and their employments would terminate on 26^th September. In fact, as the ET held, that letter was not accurate. It was true that the summer season was coming to an end but it was not true that there was a reduced requirement for the services of these short term workers. In fact, Wightlink still needed them after 27^th September. What had in fact happened was that WGL had decided that, in future, it would employ only permanent staff and that its requirement for short term workers (whether seasonal or not) would be supplied by the respondent. Mr Carrington, the respondent's Managing Director told the ET that he had had a contract with Wightlink for the supply of seasonal workers since March 2004 and, in September 2004, he was told that his contract was to be extended and that there would be a requirement for him to employ and supply more workers. There was a pool of labour available which included the appellants. As I understand it, the pool of labour comprised the 12 or 13 short term contract WGL employees. Accordingly, the respondent had offered the appellants (and maybe the other 6 or 7 as well) employment to work on Wightlink ferries, with effect from 27^th September 2004. The respondent rostered the appellants to fill their old positions on their usual Wightlink vessels. The employment offered was described as 'seasonal' although in fact the offer was for employment until 6^th January 2005. But, the rates of pay offered by the respondent were lower than the rates of pay for the permanent workers, which WGL had just agreed should also be paid to short term contract workers for the summer season of 2004.

The Law

9. It is convenient at this stage to set out the relevant provisions of the TUPE Regulations 1981 and of the European directive which lay behind them. The 1981 Regulations were brought into effect in response to the Council Directive 77/187/EC (The Acquired Rights Directive). Both that directive and the 1981 Regulations have been amended. The directive current at the time material to these proceedings is 2001/23/EC, dated 12 March 2001. The preamble to the 2001 directive states that whereas:

"(1) …..

(2) Economic trends are bringing in their wake at both national and Community level, changes in the structure of undertakings, businesses or parts of undertakings or businesses to other employers as a result of legal transfers or mergers.

(3) It is necessary to provide for the protection of employees in the event of a change of employer, in particular to ensure that their rights are safeguarded."

10. Article 1(a) provides that the Directive will 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. Article 1(b) provides that there will be a transfer within the meaning of the 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."

11. Article 3(1) of the Directive provides that the transferor's rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer shall, by reason of such transfer, be transferred to the transferee.
12. Regulation 3 of the TUPE Regulations 1981 defines a relevant transfer. The undertaking or the part of an undertaking must be situated in the UK immediately before the transfer. The regulations apply whether the transfer is effected by sale or by some other disposition or by operation of law. Also, the transfer of an undertaking may take place whether or not any property is transferred to the transferee by the transferor.
13. Regulation 5 provides for the effect of a relevant transfer on contracts of employment. Regulation 5(1) provides that a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor in the undertaking or part transferred but any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee.

The Argument before the ET

14. Before the ET, the claimants argued that there had been a transfer of part of WGL's undertaking to the respondent. The part of the undertaking was the group of short-term contract employees. They were an economic entity because they were a discrete sub-group of the WGL workforce. If there had been a transfer of this part of the WGL undertaking, the terms of the contracts of employment which the appellants had enjoyed before the transfer (including the pay rise) would be preserved after the transfer.
15. For the respondent, it was submitted that there had not been a transfer of part of the WGL undertaking. The group of which the claimants were a part was not an economic entity either before or after 27^th September. It was a disparate collection of employees doing a variety of different jobs for Wightlink. The claimants' individual short term contracts with WGL had expired and had not been renewed. They had been offered new short term contracts on different terms by the respondent. The TUPE Regulations did not apply.
16. Counsel referred the ET to a number of authorities, the most important of which was Cheesman and others v R Brewer Contracts Ltd [2001] IRLR 144 EAT to which I will shortly refer. Both counsel submitted that, in deciding whether there had been a transfer of undertaking, the ET should adopt a 'multifactorial approach'. In other words, the ET should look at all the circumstances relating to the alleged transfer when deciding whether there had been a transfer within the regulations.

The ET decision

17. The ET began its deliberations by citing a lengthy passage from the judgment in Cheesman of Sir John Lindsay, then President of the EAT. In that case, the EAT reviewed the law relating to the transfer of undertakings and in particular set out the criteria which should be applied by ETs when deciding whether there had been a transfer within the TUPE Regulations. At paragraph 10 of the decision, Sir John Lindsay said:

"From those four cases we distil the following:

(i) As to whether there is an undertaking there needs to be found a stable economic entity whose activity is not limited to performing one specific works contract, an organised grouping of persons and of assets enabling or facilitating the exercise of an economic activity which pursues a specific objective.

(ii) In order to be such an undertaking it must be sufficiently structured and autonomous but will not necessarily have significant assets, tangible or intangible.

(iii) In certain sectors such as cleaning and surveillance, the assets are often reduced to their most basic and the activity is essentially based on manpower.

(iv) An organised grouping of wage earners who are specifically and permanently assigned to a common task may in the absence of other factors of production amount to an economic entity.

(v) An activity of itself is not an entity; the identity of an entity emerges from other factors such as its work-force, management staff, the way in which it works, is organised, its operating methods and where appropriate, the operational resources available to it."

18. The ET sought to apply the guidance given in that passage and at paragraph 38 of its decision, held that a group of employees whose function was to provide the operational labour that manned the ferries could be an economic entity. It also said that it was prepared to hold that all the personnel employed by WGL constituted an undertaking within the meaning of the TUPE Regulations. It then considered whether the sub-group of short-term employees (which included the claimants) could constitute an economic entity. At paragraph 40, it said that it found this a difficult question but, on balance, it did not think that the sub-group was an entity. Although it had said that it would adopt a 'multifactorial approach' to this question, it did not identify the factors taken into account. If the holding that the sub-group was not an economic entity was right, the regulations could not apply and the claim would fail.
19. However, presumably because it had found the first question difficult, the ET went on to consider whether, on the assumption that it had been wrong to say that the subgroup was not an economic entity, there had been a transfer of part of an undertaking. Again, it directed itself by reference to Cheesman and cited paragraph 11 of Sir John Lindsay's judgment. Then, at paragraph 42, the ET concluded that there had not been a transfer because it was satisfied that the sub-group had not retained any separate character after that sub-group had become employees of the respondent. It said that the sub-group 'had been subsumed into a much larger group of the respondent's employees, all of whom were on fixed term contracts and whose members had no distinction as to function or in any other respect'. Thus it concluded that the sub-group had not been an economic entity either when employed by WGL or when employed by the respondent and accordingly there had been no transfer of an undertaking or part of an undertaking. The claim failed.

The Appeal to the EAT

20. In the EAT, it was submitted on behalf of the appellants that the ET's finding that the sub-group of which they were a part was not an economic entity was in truth a holding of law and was wrong. The respondent contended that it was a finding of fact. The appellants accepted that, if it was a finding of fact, the appeal would fail. In other words, they did not allege that the finding of fact, if such it was, was perverse. The EAT held that the question as to whether the sub-group was an economic entity was one of fact. The appeal was dismissed.

The Appeal to this Court

21. Before this court, the appellants were represented by Mr Hendy QC. Although he did not abandon the pleaded ground that the finding that the sub-group was not an economic entity was an erroneous holding of law, he did not pursue it with any vigour. Instead, he focussed on the contention that both findings of fact, (that is whether the sub-group was an economic entity and whether or not there had been a transfer) were plainly wrong. The difficulty about this proposition, which had been barely pleaded in the grounds of appeal, was that the court did not have the notes of evidence, which are usually provided where the court is to be invited to consider whether findings of fact are perverse.
22. Undeterred by this disadvantage, Mr Hendy advanced his arguments most persuasively. They went thus. WGL had two types of worker. The great majority were permanent employees. WGL also had the 12 or 13 short term non-seasonal employees who, he submitted, were intended to provide a degree of flexibility for Wightlink, unrelated to the seasonal changes in their requirements. In short, each of WGL's groups of employees formed a discrete group. As the function of WGL was to employ personnel and supply Wightlink's needs, each of the groups was an economic entity. When, in September 2004, WGL informed Mr Carrington of the respondent that his contract was to be extended so that he was to supply more workers and that a pool of labour was available (including the appellants) what WGL was in fact doing was to transfer part of its undertaking (the group of 12 or 13 non-seasonal short term contract workers) to the respondent.
23. Mr Hendy accepted that, when the nature of their employment was considered, the group did not have anything in common. That, he said, did not prevent them from being a discrete group and an economic entity. He accepted also that the fact that they had similar contractual terms did not of itself make them into an economic entity: see Wynnwith Engineering Co Ltd v Bennett and others [2002] IRLR 170. But, he submitted, this was not the only factor that they had in common; it was their common position and role in the business of the WGL which made them into an economic entity.
24. Mr Hendy accepted that the ET had directed itself correctly as to the law on this issue, by reference to paragraph 10 of Sir John Lindsay's judgment in Cheesman. He observed, with justification, that, although the ET said that it had adopted a multifactorial approach, it had not identified the factors which it regarded as important and had not explained how it had weighed the various factors against each other. He accepted that it was easy to identify two factors. One was the role that the sub-group played in WGL's business, namely the provision of flexibility in Wightlink's workforce; that pointed towards the existence of an economic entity. The other was the fact that the members of the group did a variety of different jobs and worked on different vessels. In no sense could they be described as a team. That, he accepted (I think) suggested that the group was not an identifiable economic entity.
25. Mr Goudie QC for the respondent submitted that the issue for the ET was plainly a question of fact. The ET had directed itself correctly according to Cheesman and, although one might have wished that the factors had been more explicitly discussed, there was plainly evidence on which the ET was entitled to reach its conclusion that the sub-group of which the claimants were members was not an identifiable entity.
26. I for my part have no doubt that, notwithstanding the attractive way in which Mr Hendy advanced his submissions, there plainly was a perfectly proper basis on which the ET was entitled to find as it did. It had cited the appropriate passage from Cheesman and there can be no suggestion that it misdirected itself. Although, on the one hand, the claimants could be said to belong to a group which could be identified because all members had short term contracts and fulfilled a specific role in WGL's business, on the other hand they all did different work, on different vessels. To my mind, neither factor was conclusive and the ET was entitled to hold that, taking both factors into account, this group was not an economic entity.
27. That should dispose of the appeal, as, if the ET's first finding of fact was soundly based, its secondary finding of fact was immaterial. If there was no economic entity to be transferred, there could not have been a transfer. The ET only went on to make a finding on the issue of whether there had been a transfer on the basis that it might have been wrong in respect of its first finding. However, Mr Hendy submitted that the ET's second finding of fact was also wrong. It will be recalled that, in respect of the issue of whether there had been a transfer, the ET considered paragraph 11 of Cheesman and held that the group of which the appellants were a part had been subsumed into a much larger group of the respondent's employees where they were not identifiable as a group at all. Mr Hendy submitted that this was wrong; the subgroup of former WGL employees must have been the respondent's only employees who were working for Wightlink after 27^th September. That was because, with the ending of the summer season, all the respondent's other employees placed with Wightlink must have been laid off. On the face of it, that seemed logical. However, there was no finding of fact to that effect in the ET decision. Quite the contrary, there was a finding of fact that the subgroup of WGL employees was 'subsumed' into a much larger group of the respondent's employees. That suggested that the workers employed by the respondent who had been assigned to Wightlink during the summer season of 2004 had not been dismissed, even though they had been withdrawn from Wightlink.
28. The difficulty with Mr Hendy's submission on this point is that we simply do not know what the evidence was. Certainly, before the EAT, there was no submission that this finding was perverse and, for that reason, the ET's notes of evidence were not commissioned. In my view, it is now far too late to question the soundness of the ET's second finding of fact. In any event, it was not a necessary part of the tribunal's conclusion.
29. For those reasons, I would dismiss this appeal.

LADY JUSTICE ARDEN :

30. I agree.

LORD JUSTICE MAY :

31. I also agree that this appeal should be dismissed for the reasons given by Smith LJ.