United Kingdom Employment Appeal Tribunal

BAILII case number: [1994] UKEAT 786_93_1301

Appeal No. EAT/786/93

EMPOLYMENT APPEAL TRIBUNAL

58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

At the Tribunal

On 13th January 1994

Judgment delivered on 15th February 1994

Before

THE HONOURABLE MR JUSTICE TUDOR EVANS

MR T S BATHO

MRS P TURNER OBE

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CATAMARAN CRUISERS LTD          APPELLANTS

MR M C WILLIAMS & ORS          RESPONDENTS

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Transcript of Proceedings

JUDGMENT

Revised


 


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APPEARANCES

For the Appellants MISS R DOWNING

(Counsel)

Messrs Warner Cranston

Pickfords Wharf

Clink Street

London

SE1 9DG

For the 1st Respondent MR M C WILLIAMS

(In Person)

For the 2nd & Other Respondents MR A HIGGINS

(Counsel)

Messrs Wortley Redmayne

& Kershaw

Stonebridge House

Stonebridge Walk

High Street

Chelmsford

Essex CM1 1EY


 


MR. JUSTICE TUDOR EVANS: This is an appeal by Catamaran Cruisers Ltd against the unanimous decision of an Industrial Tribunal, sitting at London South in March and April 1993, in which it was held that the Appellants had unfairly dismissed the seven Respondents.

The appeal raises these issues: first, whether the Tribunal erred in law when it ruled that Mr. Williams, one of the Respondents, was an employee of the Appellants and that it therefore had jurisdiction to hear his claim. It is submitted that Mr. Williams was an independent contractor working for the Appellants under a contract for services. Secondly, whether the Tribunal applied the wrong test in law and so misdirected itself when deciding that the Appellants had unfairly dismissed the Respondents. Thirdly, whether the Tribunal failed to find one essential fact and whether they made findings of fact which were unsupported by evidence.

We shall first consider the background of the case.

The main business of the Appellant company was the operation of a river bus service between Charing Cross Pier and Greenwich. There was also a seasonal pleasure cruise service operating chiefly from the months of April to October. The company was a member of the Thames Passenger Service Federation. In about 1991, a French company bought the business of the Appellants. According to the evidence of Mr. Vincent, on behalf of the Appellants, the company had been in such a serious financial state that the French company had had to provide a bank guarantee to avoid receivership. The intention was to change obsolete practices. At various meetings with the Transport and General Workers Union, representing the employees, proposals for a new contract of service were put forward by the Appellants based on a desire for safety, better working conditions and better efficiency. Eventually new terms and conditions were agreed by the trade union. According to Mr. Vincent's evidence, the trade union were satisfied that the survival of the company depended upon the terms being accepted. The new terms were sent to the employees requiring that they be accepted by the 1st April 1992. In paragraph 5 of the Decision the Tribunal records: "Many employees did accept it", (the new contract) "but these Applicants did not do so, preferring to be dismissed because of what they regarded as unsatisfactory terms and conditions". The case for the Appellants was that the dismissals were for "some other substantial reason" within Section 57 (1) (b) of the Employment Protection Consolidation Act, 1978, that is, that the change to the new contract of employment was for a sound business reason and that the dismissals were fair within Section 57 (3).

The Tribunal found in paragraph 9 of the Decision that the company was in a serious financial state and that drastic action was necessary if the Appellants were not to be confronted with receivership or liquidation but it continued:

"We are not however satisfied that the financial condition of the Respondents was sufficiently bad for them to have to consider the imposition on the employees of terms and conditions of employment significantly different from the terms and conditions which the employees had previously enjoyed . . . . . We are of the opinion that financial considerations were only one of the matters which entered into the thinking of the "new owners. We find that uppermost in their mind was not the parlous financial condition of the Respondents but their intention . . . . . to run on the River Thames a profitable service similar to those which the parent company operated through various companies throughout the world. It was this intention, namely, to break away from the restrictions imposed by the Federation and make the company more profitable by the use of greater efficiency which were in the forefront of their minds rather than the desperate financial situation in which they found the Respondents . . . . ."

In paragraph 8, the Tribunal directed itself as to the principles of law to be applied in this type of case. They held that:

"If an employer proposes a change for sound business reasons and the employee refuses, then it may be fair for the employer to dismiss the employee, simply for refusing to accept the new terms and conditions. What the Tribunal has to do, in our view, is to examine, first the employers motives for what he did, and to satisfy themselves that the employer's imposition of the new terms and conditions is not purely arbitrary but is, in fact, proposed for a sound business reason and, secondly, to consider whether, in refusing to accept the new terms and conditions, the employees are acting unreasonably, having regard to the necessity which the employer has for proposing the new terms".

But the Tribunal continued:

"This second point, in our view, involves an examination of the difference between the old terms and the new terms because, if the new terms, although different from the old terms, are in fact, balancing one thing with another, as broadly favourable to the employees as the old terms were, then the employees must, in our view, be regarded as unreasonable if they do not accept them. If, however, the new terms are, when examined, much less favourable to the employee than were the old terms, then unless the business reasons are so pressing that it is absolutely vital for the survival of the employer's business that the terms be accepted, then the employee is not, in our view, unreasonable in refusing to accept those terms and, consequently, any dismissal of him for a refusal to accept is unfair."

The Tribunal considered that the principle which they propounded in the last sentence above quoted was the substance of the test to be found in the authorities cited to them, Richmond Precision Engineering Ltd v. Pearce (1985) I.R.L.R. 179 and St. John of God (Care Services) Ltd v. Brooks (1992) IRLR 546 and (1992) ICR 715. The Tribunal then embarked upon a comparison of the terms of the old and the new contracts of employment and, in paragraph 12 of the Decision, concluded that the new terms were so unfavourable when compared with the old, that the offer of the new terms could not be regarded as reasonable and that the Respondents to the appeal were unfairly dismissed.

On behalf of the Appellants, Miss Downing submitted that the statement that, if the new terms are much less favourable than the old, unless the business reasons are vital for survival, the employee is not unreasonable in refusing to accept them is wrong in law, that it is not supported by the cited or any other authority, that the mistaken view of the law runs like a thread through the whole of the Decision and forms an essential part of the conclusion that the employees were unfairly dismissed. This is the second ground of appeal.

Before we consider it, it is convenient to consider whether the Tribunal wrongly held Mr. Williams to have been an employee of the Appellants at the time of his dismissal.

Mr. Williams started his employment with the Appellant company on P.A.Y.E. In 1984, he was given the opportunity to work on the pleasure boats but he was told that, if he did so, he would have to be self-employed. On the 27th May 1988, the Inland Revenue wrote to the Appellants:

"As conveyed to you by telephone, I must reaffirm the Inland Revenue's view that P.A.Y.E./N.I.C. is deductible from all Journeymen including those whom both companies have hitherto regarded as self-employed."

The effect of this letter was to inform the Appellants that all those, including Mr. Williams, whom the Appellants paid gross were regarded by the Inland Revenue as employees.

On the 14th June 1988, the Appellants wrote to Mr. Williams:

"As you will see from the enclosed letter from the Inland Revenue, we have lost an eighteen month argument regarding self-employed status for various crew members. It appears that we are allowed to only accept invoices from Limited Companies which means that you should consult your accountant as soon as possible to seek his advice as to whether it is practicable and viable for you to do so.

In the meantime, we will be happy to advance up to two-thirds of your weekly earnings pending your decision as to whether to form a Limited Company or accept P.A.Y.E."

Mr. Williams took advice from his accountant as a result of which he formed Unicorn Enterprises Limited (Unicorn) with his Mother as the co-director. Thereafter, according to the finding of the Tribunal, Mr. Williams was paid gross by the Appellants and the money was paid by way of a fee for his services to Unicorn.

Miss Downing submitted that the formation of a limited company had the effect of creating a separate legal entity which operated between the Appellant and Mr. Williams: he was thereafter trading by means of a limited company, a special entity in law, the existence of which, ipso facto, meant that Mr. Williams could no longer be regarded as an employee of the Appellants.

There is no rule of law that the importation of a limited company into a relationship such as existed in this case prevents the continuation of a contract of employment. If the true relationship is that of employer and employee, it cannot be changed by putting a different label upon it. In Massey v. Crown Life Insurance (1978) I.C.R. 590 at page 594, Lord Denning M.R. observed:

"The law, as I see it, is this: if the true relationship of the parties is that of master and servant under a contract of service, the parties cannot alter the truth of that relationship by putting a different label on it."

In our view, it is a question of fact in every case whether or not the contract in question is one of service or a contract for services. We accept that the formation of a company may be strong evidence of a change of status but that the fact has to be evaluated in the context of all the other facts as found.

Having pointed out that it was conceded on behalf of the Appellants that, but for the existence of Unicorn, it could not be argued that Mr. Williams was an independent contractor and that his evidence showed that all the facts necessary for a finding that he was an employee were present, the Tribunal held: (i) that Unicorn could provide the services of Mr. Williams for the work provided and no one else. It was told that: "it was not possible for Unicorn . . . . . to supply to" (the Appellants) "any person other than Mr. Williams to do the work provided and the" (Appellants) "would have objected had Unicorn . . . . . attempted to do this": (ii) that Unicorn was Mr. Williams under another name: (iii) his hours were similar to others who were the Appellant's employees and he was paid on the same basis except that he was paid gross and the money was expressed to be paid as a fee for his services: (iv) Mr. Williams was under the same conditions of service and the same disciplinary procedure as employees, the only difference being that Unicorn was paid a fee for his services.

We might add that we were told during the hearing of the appeal and it was not challenged that Mr. Williams was offered sick pay and holiday pay after Unicorn was formed.

On the findings made, the Tribunal held in paragraph 3:

"We are satisfied that Mr. Williams, through the medium of Accountants, accounted to the Inland Revenue in the proper way for the sums which he took from Unicorn Enterprises Limited by way of salary, and for any corporation tax which there might have been on the profits of Unicorn Enterprises Limited. We have come to the conclusion that, in these circumstances, the Tribunal does have jurisdiction to hear Mr. Williams' claim. We appreciate the fact that, in law, a limited company is an entity separate and distinct from the persons who compose it. We are not, however, prepared in the field of employment law, and where Mr. Williams does not use the medium of this company in order to make his services generally available to a number of persons who wish to hire him, but uses it solely as a medium for supplying his services to the Respondents, to say that the existence of this technical limited company prevents him from being an employee. The situation would, in our view, be different if Mr. Williams, as Unicorn Enterprises Limited, offered his services to a number of persons on the River Thames, for the purpose of captaining their vessels. Even if in such circumstances Mr. Williams were able to show that he had worked for more than the requisite number of hours weekly for one particular person, then it would be clear that the interposition of the limited company would prevent his claiming that he was an employee. The situation, here, however, persuades us of the opposite. We are not prepared to hold that the simple interposition of a limited company, in these circumstances, deprives Mr. Williams of rights which he would otherwise have, such as not to be unfairly dismissed."

It is clear from the findings of fact that, save for the gross payments made to Mr. Williams and described as a fee, there was no factual change whatsoever in the terms of Mr. Williams employment. It was, in our view, right for the Tribunal in these circumstances to find that Mr. Williams worked for the Appellants under a contract of service. The first ground of appeal must fail.

Turning to the second ground of appeal, in our opinion, neither Richmond Precision Engineering Ltd v. Pearce nor St. John of God (Care Services) Ltd v. Brooks (supra) supports the proposition stated in paragraph 8 of the Decision, that if the new terms of a contract of employment are much less favourable to the employee than the terms of the old contract, then the employee is not unreasonable in refusing to accept them and his dismissal will be unfair unless the business reasons are so pressing that it is vital for the survival of the employer's business that the new terms be accepted. We have been referred to a number of other authorities on the question of the need for business re-organisation and none of them supports this proposition: see, for example, Hollister v. National Farmers' Union (1979) I.C.R. 542 C.A. and D.R. Ellis v. Brighton Co-operative Society Ltd (1976) I.R.L.R. 419 E.A.T. We do not accept as a valid proposition of law that an employer may only offer terms which are less or much less favourable than those which pre-existed if the very survival of his business depends upon acceptance of the terms. In Genower v. Ealing, Hammersmith and Hounslow Area Health Authority (1980) I.R.L.R. 297 in paragraph 18 at page 299, Slynn J. (as he then was) observed:

"It is perfectly plain on the decision of the Court of Appeal in Hollister v. The National Farmers Union . . . . . which is followed by this Tribunal in Bowater Containers Ltd v. McCormack . . . . . that a re-organisation or re-structuring of a business may well be a reason which falls within Section 57 (1) (b). Indeed, it may be that, if, to quote from the Court of Appeal judgment "a sound good business reason is shown", this may constitute "a substantial reason" within the meaning of the section, even if the alternative to taking the course they propose is not that the business may come to a standstill but is merely that there would be some serious effect upon the business."

Mr. Higgins, Counsel for the Respondents, did not contend that this proposition was legally correct but he submitted that the Tribunal properly asked itself if the question whether the Appellants' conduct fell within the band of reasonableness and concluded that it did not. It is said that we should therefore not interfere with the decision. But, in our view, in passages to which we shall now refer, the proposition in question was repeatedly applied in the Decision and was the basis of it. In paragraph 8, after stating the proposition in question, the Tribunal continued:

"We think that the summary which we have made in this paragraph represents the way in which a tribunal should look at the matter in that only one of the things which a Tribunal must consider is a comparison of the new terms with the old. It must also consider why the employer is proposing the changes and, if the employers' financial situation is so desperate that the only way of saving his business is to propose stringent reductions in pay and conditions, differing from those which the employees have previously enjoyed, then it is possible that a dismissal for refusing to accept those stringent terms and conditions could be regarded as fair."

That is a clear statement of the principle of law to be applied and then, in the ensuing paragraphs, the Tribunal found as a fact that the financial state of the company was not such as to lead them to have to consider the imposition of terms significantly different from the old terms and that the new terms were much less favourable. The Tribunal concluded paragraph 9 of its decision with this finding:

"Our view therefore is, and we so find, that the primary purpose of the Respondents was to make the operation of the Respondents more efficient by proposing new terms and conditions of employment and that it was not financial considerations demanding immediate and drastic remedies which caused them to take the action which they did. The matter "does not end there because the desire to make the Respondents more efficient is, in our view, a sound business reason for proposing change provided that overall the new terms are no less favourable than the old."

This was a plain misdirection of law which is repeated yet again in paragraph 11 of the decision:

"The new contract, particularly bearing in mind our finding that financial constraints were not the reason for the imposition cannot, in our view, be regarded as necessary for the proper re-organisation of the Respondents."

Finally, when expressing its conclusions, with respect to the questions which arise within Section 57 (3), the Tribunal held:

"We are therefore unanimously of the opinion that, having regard to the authorities and the principles we should apply, and to our findings as to the Respondent's finances that the new conditions, for the reasons we have analyzed in this decision, were so unfavourable when compared with the conditions upon which the employees were working at the present time, that it cannot be said that the offer made by the Respondents was one of new terms and conditions of employment that can be regarded as reasonable. Consequently, the Applicants were wrongly dismissed".

It follows that the second ground of appeal must succeed. We shall consider what course is appropriate when we have considered the third ground of appeal. Before we come to that ground, the language of the passage which we have just quoted makes it extremely clear that the Industrial Tribunal decided the question whether the Respondents to the appeal had been unfairly dismissed by a principle of law which is unsupported by authority and wrong in principle.

The lay members of this Tribunal desire to state they are concerned that, in reaching the conclusion which we have just stated on the second ground of appeal, there may be seen to be a conflict between, on the one hand, the correct principles of law and their application and, on the other hand, good industrial practice. They wish to record that much of recent employment law has been to protect employees against arbitrary changes of their terms and conditions of employment and that this, as a principle, must stand. The fact that the authorities show that an employer is not restricted, when offering less attractive terms and conditions of employment, to a situation where the survival of his business is at stake, does not provide an open door to change. The lay members wish to add that the laws governing constructive dismissal still apply and that an employer must demonstrate, under Section 57 (3) of the Act of 1978 that, if he dismisses an employee for failing to accept changed terms and conditions of employment, his action falls within the bounds of reasonableness.

In the context of these observations, we would draw attention to the principle of law, correctly applied by the Industrial Tribunal in paragraph 8 of this case, that a Tribunal must examine the motives for change in the terms of a contract of employment and to satisfy itself that they are not sought to be imposed for arbitrary reasons.

As to the third ground of appeal, it is first submitted that the Industrial Tribunal failed to make any finding of fact with respect to the evidence of Mr. Vincent that the question of safety was one of the reasons for changing the contracts: see the review of evidence in paragraph 6 of the Decision. We should indicate now that, although such a finding may have been made by inference, it is not entirely clear to us that this is so. The second aspect of the third ground is that it is said that the Industrial Tribunal made seven findings which are unsupported by evidence. The seven errors alleged are set out in paragraph 6 (ii) of the grounds of appeal. We do not propose to repeat them. Miss Downing has supported some of her submissions by reference to a document at page 128 of the case papers. Mr. Higgins accepts that there is one error in paragraph 5 where it is stated that, under the new contract, the Appellants guaranteed 1,900 hours work a year to captains in return for a fixed annual salary whereas in fact the period was 2,200 hours. This error is corrected by the tribunal a little later in paragraph 6 and, in our view, it is clear that the Tribunal had the correct finding of fact in its mind. In any event, if the Tribunal proceeded on a wrong basis of fact, it does not assist the Appellant's argument because the 1,900 hours annual work would make the new contract even less favourable than it was found to be. Mr. Higgins answered seriatim each of the other criticisms, effectively in our view. In any event, having considered the findings, there is ample evidence to support the conclusion of the Tribunal that the new contract was less favourable than the old. Ground 3 is without substance, subject to the failure to find that one of the reasons for the change was safety.

We have come to the conclusion that this case should be remitted for the matters which we shall mention to be considered and decided. As Beldam J. (as he then was) pointed out in Richmond Precision Engineering Ltd v. Pearce (supra) in paragraph 32 at page 184:

"The task of weighing the advantages to the employer against the disadvantages to the employee is merely one factor which the Tribunal have to take into account when determining the question in accordance with the equity and substantial merits of the case. Merely because there are disadvantages to the employee, it does not, by any means, follow that the employer has acted unreasonably in treating his failure to accept the terms which they have offered as a reason for dismissal."

Nor does it follow, as was said in Evans v. Elemeta Holdings Ltd (1982) I.R.L.R. 43 that if it was reasonable for the employee to refuse the new terms then it was unreasonable for the employers to dismiss him for such refusal. Balcombe J. (as he then was) in Chubb Fire Security Ltd v. Harper (1983) I.R.L.R. 311 in paragraph 9 at page 313 declined, rightly in our view, to follow Evans v. Elemeta Holdings Ltd (supra) holding:

"We must respectfully disagree with that conclusion. It may be perfectly reasonable for an employee to decline to work extra overtime, having regard to his family commitments. Yet from the employment point of view, having regard to his business commitments, it may be perfectly reasonable to require and employee to work overtime."

What has to be carried out in deciding the matters for decision under Section 57 (3) is a balancing process.

We have considered whether or not this case should be referred to a new tribunal but, on balance, we think that the same tribunal should deal with the case:

(i) The Tribunal should consider the case without the restriction which it applied, namely that, unless the business reasons were so pressing that it is vital for the survival of the business that the terms be accepted, it is not unreasonable for an employee to refuse the terms.

(ii) The Tribunal should not limit their approach to the questions to be answered under Section 57 (3) of the Act by looking at the matters solely from the point of view of the advantage or disadvantage of the new contract from the point of view of the employee. It is necessary to consider and take into account the benefit to the Appellants in imposing the changes in the new contract.

(iii) An express finding should be made as to whether the Tribunal accept the evidence of Mr. Vincent that the re-organisation was based, at any rate in part, on the question of safety and, if so, what effect it has on the questions arising under Section 57 (3).

(iv) An express finding should be made as to whether the dismissal was reasonable in the light of the fact that many employees accepted it. In paragraph 5 (the first and last sentences) the Tribunal records that a large number of employees accepted: in paragraph 8, the Tribunal referred to observations in St. John of God (Care Services) Ltd v. Brooks (supra) where (at page 722) the Tribunal emphasised the necessity to consider how many accepted.

(v) Finally, the Tribunal should consider whether the dismissal was reasonable in the light of any evidence that the trade union recommended the change.

For the reasons we have given the appeal is allowed.