United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MS N ELLENBOGEN (of Counsel) Instructed By: Allen & Overy One New Change London EC4M 9QQ
For the Respondents	MR D BROWN (of Counsel) Instructed By: Legal Services Department USDAW 188 Wilmslow Road Fallowfield Manchester M14 6LJ


 


MR JUSTICE MAURICE KAY:

1. This is an appeal from an Employment Tribunal sitting at London South. It raises an important point under the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE). Mrs. French and six others, the Respondents to the appeal, were originally employed by Sainsburys Supermarket Limited (Sainsburys). On 17 May 1999 Sainsburys transferred the part of the undertaking in which the Respondents worked to Pitney Bowes Management Services Limited (PBMS). It is common ground that that was a TUPE transfer. At the time of the hearing before the Employment Tribunal, the Respondents were still the employees of PBMS pursuant to the transfer. However, shortly before the hearing of this appeal there was a further TUPE transfer by PBMS to MITIE Management Services Limited (MITIE) as a result of which the Respondents are now employees of MITIE. Accordingly, and by consent, MITIE was substituted for PBMS as Appellant. The issue in the case concerns the precise contractual entitlement of the Respondents to profit- sharing benefits.
2. Prior to the transfer from Sainsburys to PBMS, the Respondents benefited from Sainsburys' profit sharing scheme. So far as that scheme is concerned, the Employment Tribunal proceeded on the basis of the following agreed facts:

(a) The Sainsburys' scheme is an Inland Revenue approved profit sharing scheme under which eligible employees received either a cash payment or awards of Sainsburys' shares provisionally allocated to them in accordance with the rules of the scheme.

(b) Although the scheme is discretionary, Sainsburys' directors had exercised their discretion positively every year from 1980 to 1999.

(c) The scheme is operated on an annual basis related to the consolidated profits of the company and its subsidiaries in the relevant accounting period.

(d) The amount of each cash payment or number of shares is a fraction of pay level and length of service, there being no individual performance element.

(e) Awards of shares vest and may be transferred to participants after two years.

(f) After three years from the allocation date, the shares may be released to the participants free of income tax.

(g) In order to participate in the scheme, an employee must have been employed in the Sainsburys group for one financial year on 3 April in the year of payment and continue in service until 21 July of that year.

PBMS also operated a profit-sharing scheme of its own. However, it was not Inland Revenue approved. It took the form of an annual cash bonus, with no shares component. The bonus was linked to the performance of the company and an individual performance appraisal rating in respect of each eligible employee.

3. The proceedings before the Employment Tribunal took the form of an application by the present Respondents under section 11 of the Employment Rights Act 1996 to determine what particulars ought to have been included in or referred to in a statement of particulars so as to comply with the Act. The case for the Respondents was that, by reason of the TUPE Regulations, they remained contractually entitled to participate in the Sainsburys scheme, even though they were no longer employed by Sainsburys. The Employment Tribunal agreed, holding that

"the contracts [of employment] and each of them contain a profit-sharing clause in the terms set out by the transferor employer, Sainburys Supermarkets Ltd. and entitled '1998 Profit Sharing Scheme Guide and Choice Form'."

TUPE regulation 5 and the authorities

4. Regulation 5 provides:

"(1) ....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.

(2) Without prejudice to paragraph (1) above.....on the completion of a relevant transfer -

(a) all the transferor's rights, powers, duties and liabilities under or in connection with any such contract shall be transferred by virtue of this Regulation to the transferee; and

(b) anything done before the transferor is completed by or in relation to the transferor in respect of that contract or a person employed in that undertaking or part shall be deemed to have been done by or in relation to the transferee."

The TUPE Regulations are the national implementation of the Acquired Rights Directive (Council Directive 77/187/187/EEC), Article 3(1) of which states:

"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"

5. These provisions have given rise to numerous decided cases. One which influenced the Employment Tribunal in the present case was the decision of the Employment Appeal Tribunal in Whent v. T Cartledge Ltd [1997] IRLR 153. There, the employees worked in the street lighting department of the London Borough of Brent until a TUPE transfer of that part of the undertaking to T. Cartledge Ltd. Prior to the transfer their contracts of employment provided for their pay and conditions to be "in accordance with the agreement made by the National Joint Council.......and as amended from time to time". The union to which the employees belonged was a party to the National Joint Council. Ten days after the transfer, the transferee company wrote to the union and the employees stating that it was withdrawing recognition of the union and that future NJC agreements would not affect the employees. The employees contended that they continued to be entitled to improved pay and conditions emanating from NJC agreements from time to time but the transferee company maintained that the pay and conditions were effectively frozen at the levels obtaining at the moment when the company withdrew recognition and ceased to participate in the NJC. Although the company's argument prevailed at the industrial tribunal, the employees succeeded in the Employment Appeal Tribunal. His Honour Judge Hicks QC stated (at para. 16):

"The tribunal's next reason is that it 'cannot be right that an employer is bound ad infinitum by the terms of a collective agreement negotiated by a body other than themselves'. In our view that is fallacious for a number of reasons. In the first place the employer is not in any event bound 'ad infinitum'. It can at any time, without breach of contract, negotiate variations of contract with individual employees....or terminate their contracts on due notice and offer fresh ones. The latter course may no doubt lead to its incurring obligations to compensate for unfair dismissal, but that is a matter for it to weigh commercially. The words 'ad infinitum' are in truth no more than colourful surplusage; the question is simply whether the employer is still bound by the NJC agreement, so far as incorporated in individual contracts of employment, not withstanding its 'withdrawal' from collective participation........The third [reason] is that there is simply no reason why parties should not, if they choose, agree that matters such as remuneration be fixed by processes in which they do not themselves participate."

We do not doubt the correctness of that decision. What we shall have to consider later is whether the present case is, as the Employment Tribunal opined in paragraph 37 of its extended reasons, "on all fours" with it.

6. In Unicorn Consultancy Services Ltd v. Westbrook [2000] IRLR 80 the issue was whether or not, following a TUPE transfer, the transferee was liable to pay the employees profit-related pay under, or by reference to, the scheme operated by the transferor company. Giving the judgment of the Employment Appeal Tribunal, Charles J referred to Whent as being no more that an example of the effect and application of TUPE in its particular factual context. Having considered the particular facts in the Unicorn case, the EAT held it would accord with the purposes of TUPE if the transferee company was bound to pay profit-related pay under the scheme of the transferor company. It is clear from the judgment that Charles J and his colleagues were at pains to decide the case on a narrow basis, confined to the factual matrix before them Thus (at paragraph 50):

"In reaching this conclusion, we have not forgotten that in other situations.....practical problems would arise that do not arise on the facts of this case.....in our judgment the correct approach to the application of TUPE in respect in respect of transferred contracts of employment is to construe and apply the relevant package of rights and obligations of the employees and employer....in the circumstances that exist and the result is not simply a matter of construction of the original contract and related documents.....it follows that we should concentrate on the facts of this case.....in a different factual situation which gives rise to practical problems and although we express no view on it, the alternative argument of the employees that the [transferee] company was under an obligation to provide a replacement scheme or make payments equivalent to those 'earned' under the [transferor company's] scheme could be relevant and provide a solution that accords with the underlying purpose of TUPE."

In the present case, in the Employment Tribunal and before us, PBMS/MITIE placed great reliance on this obiter passage. Clearly the employment tribunal was not impressed by it. In paragraph 41 of the extended reasons it states:

"With the greatest respect to Charles J......either there is a transfer, in which case, however inconvenient in practice, it is the existing clause which transfers, and which must be honoured or lawfully varied, or there is no transfer at all, leading to a vacuum to be filled in a normal contractual manner or by agreement between the parties."

7. We shall return to the authorities when we come to address the grounds of appeal in the present case. Before we do so, it is appropriate to describe more of the facts of the present case.

The facts

8. In addition to the recital of agreed facts concerning the transfer and the two schemes with which we began, the following facts put some further relevant flesh on the bare bones. The letters pursuant to which the employees were originally employed by Sainsburys included this provision:

"Profit Sharing Scheme

After a qualifying period of one financial year with the Company you will be eligible for Company Profit Sharing. A leaflet explaining the scheme is available from the Company Secretary's department."

At the date of the transfer (17 May 1999), the leaflet was "1998 Profit Sharing Scheme Guide and choice form". It began with a message from the Chairman which concluded:

"If you would like to receive all or part of your entitlement in shares, the choice form should be completed and returned … If a form is not returned you will automatically receive a cash payment....."

The leaflet went on to describe how, each year, Sainsburys allocate part of the annual group pre-tax profit to the employees' profit fund, using a set formula based on sales and profit "and so will go up or down depending on the group's performance". Where an employee opted for shares, the shares would be "appropriated" to him but held in "the Share Trust" for three years (thereby enabling the tax advantage). The Share Trust is governed by the Consolidated Rules of the J Sainsbury Profit Sharing Scheme Share Trust, rule 13 of which provides that the Rules

"may at any time and in any respect be modified or altered in accordance with the terms of a trust deed supplemental to the Trust Deed to which the said Rules are scheduled and which is entered into by the Company and the Trustees"

subject to the approval of the Board of Inland Revenue and, in some respects, of the members of the company in general meeting.

The grounds of appeal

9. The main grounds of appeal were set out as follows in the Notice of Appeal:

"(1) Regulation 5(2) of the Regulations is not to be construed in a vacuum…The Tribunal was obliged to have taken into account the impossibility of performance by [PBMS/MITIE] of the [Sainsburys] scheme: [PBMS/MITIE] has no control over such scheme (the provisions of which could be varied at any time in accordance with its rules) and no entitlement to the commercially sensitive information which would enable its operation. Further, it has no ability to issue shares in [Sainsburys].

(2) In any event, the Tribunal erred in reading into Regulation 5(2) a requirement that the [Sainsburys] scheme as in fact operated by [Sainsburys] was to be transferred word for word into the [Employees'] respective contracts of employment with [PBMS'MITIE]. The relevant contractual entitlement was to a performance-related pay scheme and the precise operation of such scheme, of necessity, would be determined by reference to the performance of the employing entity. Nothing in the wording of Regulation 5(2) or on the authorities to which the Tribunal was directed, requires such a restrictive reading of the [employees'] respective entitlement.

(3) Further, and in any event, the fact that the [Sainsburys] scheme as operated by [Sainsburys] is impossible of performance by [PBMS/MITIE], thereby automatically forcing it into breach of each of the ...contracts of employment, leads to the unpalatable conclusion that, on the Tribunal's findings, the only alternative view must be that the [Sainsburys] scheme did not transfer at all, leaving the [employees] with no entitlement to any scheme.

(4) The purpose of the Regulations, and of the Acquired Rights Directive to which they seek to give effect, is to protect the employee in the event of a change of employer. This aim is frustrated by a construction of the Regulations which is considered to have either of the following effects:

(a) the transfer of terms and conditions of employment which cannot be performed by the transferee; or

(b) no entitlement on the part of the employee to a benefit comparable to that enjoyed in the course of employment by the transferor.

The Regulations must be construed in accordance with their objective and the Tribunal's determination frustrates such objective."

We apprehend that the reference in (2), above, to "performance-related" should in fact be to "profit-related".

A fifth ground of appeal rather fell away in the course of the hearing.

10. It will be apparent that there is considerable overlap between the four grounds of appeal which we have set out. We shall deal with them as Miss Ellenbogen did in her Skeleton Argument and in her oral submissions by approaching them as two groups.

Grounds (1) and (2)

11. In essence, these grounds seek to eschew what Miss Ellenbogen characterises as a "black letter law" construction of Regulation 5(2). She accepts that the purpose of the Directive and, therefore, of the Regulations is "to protect workers and, more particularly, to safeguard their rights upon a change of employer" (see the Abels case, 135/83, para.33) but, she submits, that purpose is to be achieved by a broad approach rather than one that yields results which are absurd or impossible to administer. If the decision of the Employment Tribunal were correct, it would give rise to the following oddities: (1) the employees of PBMS/MITIE would have their profit-related pay controlled by the profitability of a company for which they no longer work; (2) it would either fossilize any entitlement arbitrarily as at the date of transfer or vary it by reference to the performance of a company which is no longer relevant to the employees; (3) the rules of the Sainsburys Trust would continue to be subject to alteration in accordance with rule 13 of its Consolidated Rules, without any input from PBMS/MITIE or the relevant employees; (4) PBMS/MITIE has no power to issue shares in Sainsburys; (5) neither does it have a right of access to Sainsburys commercially sensitive information upon the basis of which the trustees determine the (so far) annual pay out; (6) such problems multiply upon subsequent transfers, such as that to MITIE and any further ones, each removing the employees further from Sainsburys; (7) nor is this a one-way street – it would be absurd if the profit-sharing rights of employees in a highly profitable transferee company were to cease because of, say, the insolvent liquidation of the transferor company some years later.
12. Pointing to these and other similarly anomalous features, Miss Ellenbogen fortifies her contention for a broad approach by reference to the judgment of Peter Gibson J. in Marshall v. Kerr [1995] AC 148, 164:

"For my part I take the correct approach in construing a …………….provision to be to give the words used their ordinary and natural meaning, consistent so far as possible with the policy of the Act and the purposes of the provisions so far as such policy and purposes can be ascertained, but if such construction would lead to injustice or absurdity, the application of the statutory fiction should be limited to the extent needed to avoid such injustice or absurdity, unless such application would clearly be within the purposes of the fiction. I further bear in mind that because one must treat as real that which is only deemed to be so, one must treat as real the consequences and incidents inevitably flowing from or accompanying that state of affairs, unless prohibited from doing so"

She also relies on a passage in the judgment of Dillon LJ in Morris Angel & Sons Limited v. Hollands [1993] 1RLR 169, para. 21, which in turn drew on the speeches of Lord Templeman and Lord Oliver of Aylmerton in Litster v. Frith Dry Dock & Engineering Co [1989] 1RLR 161, 164-165. All this authority was considered and applied by Charles J in the Unicorn case (supra).

13. Taking the broad approach suggested to be justified by that line of authority, Miss Ellenbogen makes the following submissions. First, that which was transferred pursuant to Regulation 5(2) was simply "eligibility for Company Profit Sharing", being the contractual right derived from Sainsburys' letter of offer of employment. That was the essential entitlement. The 1998 leaflet was merely a snapshot of the way in which the entitlement was treated in that year. Secondly, and alternatively, that natural construction of Regulation 5(2) is one which does not give rise to absurdities and injustices and, when applied to this case, produces an entitlement on transfer to an equivalent or comparable scheme rather than, literally, the Sainsburys scheme. Thirdly, as PBMS/MITIE is unable to issue shares in Sainsburys and cannot be confident of having access to Sainsburys commercially sensitive information, the entitlement found by the Employment Tribunal is impossible to perform and, accordingly, a construction which produces such a result is absurd and unjust. Fourthly, if necessary the contractual entitlement of the employees should be construed so as to include an implied term: "so far as capable of performance by the transferee company". Finally, the fairness and appropriateness of her approach is underlined by the fact that none of the employees in the present case could point to any quantifiable loss or detriment.
14. So far as the authorities considered by the Employment Tribunal are concerned, Miss Ellenbogen submits that Whent is not really in point, being primarily a case concerned with the relationship between a collective agreement and contracts of employment and lacking the elements of impossibility and absurdity. Unicorn, on the other hand, while factually distinguishable, leaves the door open to precisely the present submissions in the final paragraph of the judgment which contemplates a replacement or equivalent scheme.
15. In answer to these formidable submissions, Mr. Brown adopts a more legalistic approach – in effect, that which he persuaded the Employment Tribunal to adopt – on the basis that anything less would fly in the face of the clear words of the Regulation 5 and the Directive to which it owes its existence. The agreed purpose – "to protect workers and, more particularly, to safeguard their rights upon a change of employer" – can only be achieved by rigorously ensuring that, upon transfer, their full entitlements go with them. That is what a transferee company understands and it is up to that company to negotiate such commercial terms with the transferor company and/or such consensual variations of employment terms with the employees and their unions as will be mutually acceptable. If they fail to do so and Regulation 5(2) bites, it has the consequences illustrated by the decision of the Employment Tribunal. The transferee company is bound by it unless and until he procures a consensual variation or resorts to dismissal and reengagement on new terms. In the meantime, the PBMS/MITIE must somehow provide Sainsburys' benefits or commit breaches of the employment contracts but, in the latter case, they can avoid liability for damages if they provide benefits which are truly equivalent. Mr. Brown further submits that PBMS/MITIE are exaggerating in their references to "impossibility" and "absurdity". The point about confidential information is not established by the evidence and, having contracted themselves into this position, they can contract themselves out of it by negotiation or, for example, buying Sainsburys shares in the market so as to make them available to the transferred employees. What they cannot do, but what they are seeking to do, is unilaterally to rewrite the contracts of employment. As regards the authorities, Mr. Brown submits that none of them is against his approach, which is one of construction, both literal and purposive. Moreover, if it had been intended to exclude entitlements such as contractually specific profit sharing from Regulation 5, the Directive and the Regulations would have done so expressly, in the way that Article 3.4 of the Directive and Regulation 7 exclude pension schemes. Indeed, in Abels, the Court of Justice said of the pension scheme exclusion (para 37):

"The existence of such a specific clause, limiting the scope of the basic rule, leads to the conclusion that Article 3.1 relates to all the rights of employees, whether are not covered by that exception, whether those rights arose after or before the transfer of the undertaking."

Mr. Brown pointed to Bernadone v. Pall Mall Services Group [2000] 1RLR 487 both as an example of a right which can be transferred under Regulation 5(2)(a) – in that case a cause of action in respect of a claim for damages for personal injury sustained in the course of employment with the transferor company being transferred and becoming a cause of action against the transferee company – and as a useful review of the authorities which illustrate the sheer variety of what may be transferred: see Peter Gibson LJ paras 20-32.

16. We have not found this to be an easy case but, in our judgment, the decision of the Employment Tribunal was erroneous for the reasons set out in the second and third of Miss Ellenbogen's submissions, as we have enumerated them. There are limits to the literal or, as Miss Ellenbogen puts it, ""black letter" approach contended for by Mr. Brown. We are encouraged to this view by the concluding observations of Charles J., albeit obiter, in Unicorn. They opened a door through which we consider it appropriate to pass. We do not consider that Abels obstructs such a passage. It would make it difficult if not impossible to contend that a profit-related pay entitlement could not be the subject of transfer but it is not conclusive as to precisely what has transferred by way of contractual entitlement in relation to a particular scheme. So far as that is concerned it is our view that the entitlement of the transferred employees in a case such as this, which has complications absent from, say Unicorn, is to participation in a scheme of substantial equivalence but one which is free from unjust, absurd or impossible features. In most cases, we would expect the transferee company to be able to negotiate a scheme of such equivalence with the transferred employees or their unions. If a negotiated conclusion is impossible, then it is appropriate for an application to be made to an Employment Tribunal, probably under section 11 of the Employment Rights Act, for a determination of the relevant particulars of employment. In our judgment, this approach is consistent with the agreed purpose of the Directive and the Regulations –"to protect workers and, more particularly, to safeguard their rights upon a change of employer". It is no part of that purpose to provide obstacles to industrial reorganisation, provided that workers are properly protected and their rights appropriately safeguarded.

Grounds (3) and (4)

17. The essence of these grounds of appeal is that if, by reason of impossibility or otherwise, PBMS/MITIE is unable to give effect to the Sainsburys' scheme for the benefit of the transferred employees, this would give rise, on the approach of the Employment Tribunal, to unavoidable breaches of contract by PBMS/MITIE; or to dismissal followed by reengagement on different terms but in circumstances in which the dismissal would be unfair pursuant to Regulation 8(1); or, perhaps, to a finding that the employees retain no entitlement to profit-sharing at all post-transfer because impossibility of performance frustrates the transfer of the rights. Miss Ellenbogen submits that these three possible outcomes are all inherently unattractive and that it is incumbent upon the court to construe the TUPE Regulations in such a way as to give effect to their objective, namely the protection of employees following transfer. This, she submits, can only be sensibly achieved by a construction which ensures that the employees are left in a position of substantial equivalence rather than literal identity. In support of these submissions, she refers to a number of additional authorities and places reliance particularly on Wilson v. St. Helens Borough Council [1998] 1 RLR 706, HL, in which Lord Slynn of Hadley said (at para 93):

"…although on a transfer, the employees' rights previously existing against the transferor are enforceable against the transferee and cannot be amended by the transfer itself, it does not follow that there cannot be a variation of the terms of the contract for reasons which are not due to the transfer either on or after the transfer of the undertaking. It may be difficult to decide whether the variation is due to the transfer or attributable to some separate cause. If, however, the variation is not due to the transfer it can, in my opinion,…validly be made."

This, it is suggested, points to a fault in the way in which the Employment Tribunal in the present case allowed itself to be seduced by the "ad infinitum" passage in Whent and relied upon it is being "on all fours" with the present case. In one sense all this is no more that a reformulation or amplification of the first two grounds of appeal. However, to the extent that it is advanced as a discrete ground, we are not attracted to it. The quotation from Lord Slynn does not assist in the task of determining what was and was not transferred by way of obligation of the employer in the present case. It deals with variation and its potential consequences. There has been no consensual variation in relation to the profit-related pay entitlement in the present case. The issue is as to what has been transferred in the absence of such consensual variation. So far as that is concerned, we shall allow the appeal on Grounds (1) and (2), rather than Grounds (3) and (4).

18. It follows from what we have said that we shall allow PBMS/MITIE's appeal. This will necessitate a remission of the case to the Employment Tribunal – either the same or a different membership – so that appropriate findings of particulars of substantial equivalence can be made. Of course, if the parties are able to reach mutually agreeable terms without further resort to the Employment Tribunal, so much the better.
19. We indicated at the conclusion of the hearing that, upon our assessment of this case, if the losing party were to seek permission to appeal, we would be minded to grant it. If the present Respondents wish to avail themselves of that, they should inform the Registrar of the EAT within seven days of the handing down of the judgment, and such permission will then be included in the order.