United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellants	MR R JAY (Of Counsel) The Treasury Solicitor Queen Anne's Chambers 28 Broadway London SW1H 9JS
For the Respondents	NO ATTENDANCE BY OR ON BEHALF OF THE RESPONDENTS


 


MR JUSTICE MORISON (PRESIDENT): Under Section 122 of the Employment Protection (Consolidation) Act 1978, as amended, the Secretary of State for Trade & Industry is liable to make to former employees of an insolvent employer payments of amounts which are due to them in respect of certain specified debts. The three applicants in this case were held by an Industrial Tribunal to be entitled to be paid amounts ranging from £510 to £320 in respect of specified debts due to them from Gayton International Limited ["Gayton"], the first respondents, who were insolvent, and who had been their employers until 28 July 1994. The sole issue before the Industrial Tribunal was whether Gayton's business had been transferred to Intro Business Limited ["Intro"], in circumstances such that their indebtedness to the applicants had also been transferred. If the indebtedness was transferred, then the Secretary of State would not be liable, unless it could be shown that Intro were insolvent and unable to make payments to the applicants on that account. As there was no evidence that Intro were insolvent, the Industrial Tribunal were solely concerned to determine whether the obligation to pay the applicants had been transferred from Gayton to Intro.

The Industrial Tribunal found that, on 28 July 1994, the three applicants had been told that they were being made redundant and that Gayton's business was being taken over.

"None of the applicants was told that their employment would transfer to the new company and none of the applicants was told the identity of the new company. In fact, none of the applicants became aware of the identity of the purchaser until after these proceedings had been under way for some time."

The Tribunal also found that Gayton's business was sold to Intro and that the terms of the sale agreement were set out in a written contract dated 26 July 1994, which, effectively, expressly acknowledged the application of the Transfer of Undertakings (Protection of Employment) Regulations 1981 ["The Regulations"].

"Immediately after the sale [Intro] continued to run a similar venture to [Gayton] in the premises and the business retained its identity."

"Having examined the contract for the sale of the business of the [Gayton] to [Intro], I accepted that there was clearly, as contended by the Secretary of State, a transfer of an undertaking from [Gayton] to [Intro], under Regulation 3 of ["The Regulations"].

The effect of such a transfer would be to transfer all the obligations in respect of the applicants' contracts of employment of [Gayton] to [Intro] under Regulation 5. Therefore, prima facie, the responsibility to make the payments .... would be that of [Intro] and not the Secretary of State. However, although the applicants were told that the business had been sold, they were not told the identity of the purchasers of the business and did not in fact discover it until a substantial period of time after the transfer. In the decision of the EAT in Photostatic Copiers (Southern) Limited v Okuda & Japan Office Equipment Limited (In Liquidation) [1991] IRLR 11 it was held that Regulation 5(1) of [The Regulations] does not take effect in relation to an employee's contract of employment unless and until the employee is given notice of both the fact of the transfer and the identity of the transferee. This decision is binding on me. As I have concluded the applicants were unaware of the identity of the transferee, it follows that if the case is correctly decided the contracts of employment of the three applicants were not transferred to [Intro]. Therefore liability for the payments is that of [Gayton] under the contract, and as they were admittedly insolvent the sums are due to be paid by the Secretary of State.

I reach this decision with some reluctance but conclude that the decision of the EAT is binding on me. It is a decision that has been criticised because it would enable unscrupulous employers to avoid obligations under the Acquired Rights Directive ["The Directive"] and [The Regulations]. It is not for me to comment on those possibilities....

If knowledge of the identity of the transferee was not a material factor, I would have held that the contracts of employment of the applicants have been transferred to [Intro] on transfer. As such, therefore, obligations in respect of the payments due under their contracts of employment to the applicants became the responsibility of [Intro]. If this matter is to be considered by another Court, it may be material that although the sale contract placed obligations on the vendor to ensure that the employees were aware of the identity of the transferee and to arrange the transfer of their contracts of employment, there was no evidence before me that any steps had been taken by the vendor to fulfil those obligations under the agreement....."

The Secretary of State has appealed this decision and asks the EAT not to follow the Photostatic case. The EAT is not bound by its previous decisions, although they will only be departed from in exceptional circumstances, or where there are previous inconsistent decisions.

In that case, the EAT held that a transfer of an undertaking does not take effect in relation to am employee's contract of employment

"Unless and until the employee is given notice of (i) the fact of the transfer and (ii) the identity of the transferee."

It is to be noted that the Industrial Tribunal did not accept the employers' evidence that there had been a transfer of the undertaking in which the applicant/employee was employed [paragraph 5]. Further, they found as a fact that after the alleged transfer the applicant continued to be paid by the alleged transferor. It would appear that the alleged transferee was in financial difficulties. The real point on the appeal was whether, in the light of fresh evidence the matter should be remitted back to the Industrial Tribunal to reconsider their award of compensation. It would appear that there was evidence which suggested that the employee may have moved over to a rival company and solicited his former employers' customers.

It seems to us, with due respect to those involved in the decision in the Photostatic case, that it cannot be regarded as a correct interpretation of the Directive or Regulations.

The Regulations were made to give effect to the Directive. The purpose of the Directive is to safeguard the rights of workers in the event of a change of employer by making it possible for them to continue working for the transferee under the same terms and conditions as those agreed with the transferor [see, for example, the decision of the European Court in Berg v Besselsen [1990] ICR 396]. Until the Regulations were amended by the Trade Union Reform and Employment Rights Act 1993 [with effect from 30 August 1993], it was assumed that the Regulations operated so as automatically to transfer to the transferee the contracts of employment of those who were employed by the transferor in the undertaking immediately before the transfer; and that the contracts were transferred, whether or not the employees objected. Regulation 5(1) overruled the common law rule that a change in the identity of a contracting party required consent.

In December 1992, the European Court considered the following question in a case referred to it by the Arbeitsgericht of Hamburg in the case of Katsikas v Konstantinidis [1993] IRLR page 179:

"... must Article 3(1) of the Directive be interpreted as meaning that an employee of the transferor may not object to the transfer to the transferee of his contract of employment?"

The Court concluded that the Directive could not be interpreted as obliging the employee to continue his employment relationship with the transferee.

"Such an obligation would undermine the fundamental rights of the employee who must be free to choose his employer and cannot be obliged to work for an employer that he has not freely chosen.

It follows from that that the provisions of Article 3(1) of the Directive do not prevent an employee from objecting to the transfer of his contract of employment ... and, thus, from not benefiting from the protection provided to him by the Directive.

Nevertheless, as the Court has held (in its judgment in Berg ....) the purpose of the Directive is not to ensure that the contract of employment .... with the transferor is continued where the undertaking's employees do not wish to remain in the transferee's employ.

It follows from that that the Directive does not oblige Member States to provide that the contract of employment ... be continued with the transferor in a case where an employee freely decides not to continue the contract of employment ... with the transferee. In such cases, it is for the Member States to determine the fate of the contract of employment ....

The Member States may, in particular, provide that in this case, the contract of employment ... may be considered as terminated either on the initiative of the employee or on the initiative of the employer. They may also provide that the contract of employment .... be continued with the transferor."

In the light of this Judgment, the United Kingdom Parliament introduced an amendment to Regulation 5, giving those employees who would otherwise have been transferred the right to object to being transferred. Where such an objection is made, the employee's contract will be terminated by the transfer but he shall not be treated as having been dismissed by the transferor. In other words, Parliament chose to provide that the contract of employment terminated "on the initiative of the employee" rather than being "continued with the transferor".

The amendments were effected by the 1993 Act. Two new sub-paragraphs were introduced into Regulation 5.

"(4A) Paragraphs 1 and 2 above shall not operate to transfer his contract of employment and the rights, powers, duties and liabilities under or in connection with it if the employee informs the transferor or the transferee that he objects to becoming employed by the transferee.

(4B) Where an employee so objects the transfer of the undertaking or part in which he is employed shall operate so as to terminate his contract of employment with the transferor but he shall not be treated, for any purpose, as having been dismissed by the transferor."

The language of the new provisions is consistent with the right to object being exercised immediately before the transfer. It will be seen that where that right is exercised, the objector ceases to be employed by the transferor in circumstances in which he has no claim for unfair dismissal. That is because he is treated as not having been dismissed.

It seems to us that the effect of this Court's decision in the Photostatic case has been neatly summarised in Harvey's Encyclopaedia of Industrial Relations and Employment Law, Volume 1, section F, at paragraph 137.01.

"The EAT have gone one step further by holding, in the case of Photostatic Copiers (Southern) Ltd v Okuda and Japan Office Equipment Ltd (in liquidation)[1955] IRLR 11, that reg 5 (1) does not take effect in relation to an employee's contract of employment unless and until the employee is given notice of both the transfer and the identity of the transferee. The EAT's approach is perhaps understandable. They looked at the matter from a common law standpoint, observing that the substitution of one employer for another could only be effected by novation of the contract which would require the knowledge and consent of the employee. Whilst the ECJ in Berg and Busschers v Besselsen: 144, 145/87 [1989] IRLR 447, [1990] ICR 396, had abrogated the common law rule in the case of transfers of undertakings by removing the need for the employee's consent, there was, argued the EAT, no reason to abandon the principle that novation of a contract required at least the knowledge of the parties it affected. Reinforced by a concession of counsel that the amendment to reg 5 by TURERA, giving employees the right to object to a transfer, did not operate where the contract had already transferred by operation of reg 5, the EAT held that on the facts of the case the employee remained employed by the transferor and could claim against the transferor when, several years after the original transfer, he was dismissed. Understandable though it is, there is an obvious problem arising out of the EAT's approach to the case. In effect, an employer could sidestep the operation of TUPE by keeping the employees accidentally or deliberately in the dark about the transfer, which seems to be completely at odds with the purpose of the Regulations which are intended to afford protection to employees in just such a situation. It may be that the right to object now to be found in reg 5(4)(A) is a casualty in the sense that it may not be exercisable after a transfer has taken place, but ultimately this is to be preferred to a situation where the whole application of the Regulations depends solely upon an employee's knowledge that a transfer is taking place and the protection afforded by the Regulations removed in the absence of this."

We consider that if the decision in the Photostatic case were to be regarded as good law, the very protection which the Directive and Regulations are designed to provide would be significantly undermined. If the employee needs to know, in advance, the identity of the transferee before his contract is transferred, unscrupulous employers would simply refuse to disclose what was happening. It is partly because workers are often not told what is happening that the Regulations were designed to take effect in a way which would guarantee continuity of employment for them. To imply that the Regulations only have effect if they have the requisite knowledge would be to diminish the effectiveness of the protection which the Directive was designed to achieve.

Although the learned editors of Harvey suggest that Regulation 5(4)(A) may become a casualty if the Photostatic case is no longer relied upon by Industrial Tribunals, we think they have overstated the position.

Where, as here, the employees are dismissed immediately before the transfer, then the liabilities in relation to that dismissal pass, as a matter of law, to the transferee. The fact that at the date of dismissal the employee did not know the name of the transferee will not alter that position. He will have the benefit of the presumption of unfairness provided to him by Regulation 8. If he was dismissed but did not know that the business was being transferred, at any hearing of an Industrial Tribunal of his complaint of unfair dismissal, the employer will be required to prove the reason for his dismissal. Whilst it is not beyond the bounds of possibility that an unscrupulous employer may lie convincingly about the reason, it seems to us inherently unlikely that the employee will have no knowledge or suspicion about the transfer having been effected, if only because it is likely that many of his former colleagues will have started work for the new employer. It would be a most unusual case where concealment of the transfer could successfully be maintained during the Industrial Tribunal procedure.

In relation to the employee who, had he known what was happening, would have objected to being transferred, it seems to us that he has lost nothing of value. Had he objected in time he would have lost his employment without an opportunity of claiming compensation, since he would not have been dismissed [Regulation 4B]. It is to be noted that Parliament provided that an objector could give notice either to the transferor or to the transferee. If the objector, through concealment, found himself employed by the transferee before he could raise an objection, then it seems to us that the moment he discovered what had happened and that his employer was not the transferor but the transferee, he could leave his employment without liability: at the least, the parties to the transfer would be estopped from denying that the employee had exercised his right to object timeously. Further, it may well be the case that it would be a breach of the employers' duty of good faith to employees to conceal from them a transfer which has taken place. Whether any such breach would give the employees valuable claims for damages would need examination. Further, an employee has an express right to terminate his contract in the circumstances provided by Regulation 5(5).

It seems to us that, to import into the Regulations a pre-condition, which was not there before August 1993, namely that a transfer to which the Regulations apply cannot be effective to transfer contracts and liabilities unless the employees knew of the transfer and the identity of the transferee, in order to cater for the situations to which we have just referred, is unnecessary. An employee who is misled will not, in any case which can sensibly be contemplated, suffer any disadvantage. The position is, therefore, that there is no need for the implication of any such pre-condition; conversely, such pre-condition would conflict with the purpose of the Directive and of the Regulations.

Accordingly, whilst fully understanding the position taken by the EAT in Photostatic, we are persuaded that it should not be followed in future by Industrial Tribunals, because it is inconsistent with the purpose of the Directive.

We sympathise with the decision of the Industrial Tribunal in this case. They were right to conclude that they were bound by the Photostatic case, and we respectfully agree with what the Chairman said about it. Accordingly, the appeal is allowed.