UK: CRunch - Employment Focus Q1 2012

Last Updated: 15 February 2012
Article by Ben Smith and Roger Elford

Welcome to the first edition of the CRunch - Employment Focus, in which we provide bite-sized legal updates to insolvency professionals, who regularly encounter employment and pensions issues.

The last 6 months have seen a number of important developments, both in the Courts and by way of legislative amendment. A number of these are discussed below.

At Charles Russell, our specialist Employment Insolvency team regularly advises on employment issues arising in the context of restructurings and insolvencies, from SME's, to large complex retail (and other) restructurings.

Our expertise includes advising insolvency practitioners and purchasers of businesses from administrators with respect to the following:

  • the application and effect of TUPE in insolvency sales (including pre-pack sales);
  • dismissal processes, including collective consultation requirements under TUPE and/or in a redundancy situation;
  • potential liabilities for unfair dismissal, discrimination and failing to properly satisfy consultation obligations;
  • appropriateness of requesting a stay on Employment Tribunal proceedings;
  • adoption of employee contracts, unsecured and preferential liabilities and so called 'super priority' of qualifying liabilities;
  • Employment Tribunal claims arising following a pre-pack sale/TUPE transfer and (where appropriate) defending and/or seeking to settle such claims;
  • assisting liquidators with the adjudication of former employees' claims in liquidations;
  • the employment and pensions implications of proposed Company Voluntary Arrangements and other schemes;
  • dealing with applications to the Pensions Regulator for the sanction of various transactions within an administration context.

CRunch Employment Focus is edited by Ben Smith and Roger Elford, both of whom have significant experience in dealing with employment law issues arising in insolvency and restructuring. In addition, Michael Jones is a pensions specialist with experience in advising insolvency professionals on a range of pensions issues, including anti avoidance provisions in pensions legislation, strategies for dealing with underfunded schemes and safeguarding restructuring procedures from the threat of contribution notices.

For more information on any of the issues raised in this bulletin, please contact Roger or Ben on their relevant contact details.

Market overview

With growth in the UK economy stubbornly slow against a backdrop of austerity measures and the recent financial crisis, certain sectors are really feeling the pinch. In addition, there is anecdotal evidence that the banks are becoming more aggressive in dealing with defaulting customers and that HMRC's approach to defaulting debtors is hardening. The retail sector has been one of the high profile casualties of the current market and its current woes are inevitably contributing to the UK's high levels of unemployment.

Whilst the clarity provided by the Court of Appeal in the Key 2 Law case (discussed below) will provide IP's with clearly defined parameters as to when TUPE will apply, the new certainty that it provides may make pre- (and post) pack sales of businesses in administration more unattractive to potential purchasers, who may previously have been more inclined to take a risk as to TUPE's application. In addition, the ruling by the Court of Appeal in the Spaceright case (also discussed below) will make it harder for IP's to dismiss staff in cases where they are continuing to search for a purchaser of the business (or part of it) as a going concern.

The implications of TUPE on an insolvency sale can often be a deal breaker for would-be purchasers and so an early review of the liabilities and consideration as to how best to mitigate them is advisable.

Insolvency/Employment Update

Increase in statutory entitlements under the Employment Rights Act 1996

With effect from 1 February 2012, the following changes have taken effect to payments made under the Employment Rights Act 1996:

  • Limit on the weekly amount payable under the insolvency provisions of the Act is increased to £430;
  • Limit on the statutory guarantee payment payable to employees laid off work in increased to £23.50 a day;
  • Maximum basic award for unfair dismissal is increased to £5,300;
  • Maximum compensatory award for unfair dismissal is increased to £72,300;
  • Maximum amount of a week's pay for calculating the basic award for unfair dismissal or for a redundancy payment is increased to £430.

Recent case highlights

There have been four recent cases of particular interest to Insolvency Practitioners:

  • Dismissals of employees in circumstances where there is no sale of the business in the offing

In Spaceright Europe Limited v Baillavoine and others, the Court of Appeal held that the dismissal of an employee was transfer-related and therefore automatically unfair, even though there was no particular transaction or purchase in existence or contemplation at the time. The liability for the dismissal then transferred to the purchaser as the dismissal was transfer-related.

In this case, the employee was dismissed on the same day his employer went into administration (being a month before the TUPE transfer); the Court found that the dismissal was not for an economic, technical or organisational reason entailing changes in the workforce but was brought about in order to facilitate the sale of the business – the company continued to need the employee (who was the chief executive) following the appointment of an administrator.

This decision significantly increases the risk of purchasers being liable for pre-transfer dismissals effected by administrators (even though the identity of the purchaser is not known or contemplated at the time of the dismissal) where the dismissal is to facilitate the sale of the business.

  • TUPE will apply on administration sales

Following the uncertainty stemming from the decisions in OTG Ltd v Barke and others and Oakland v Wellswood (Yorkshire) Ltd, the Court of Appeal in Key 2 Law (Surrey) LLP v D'Antiquis has clarified the long running debate as to whether the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") apply to the acquisition of businesses in administration.

The Court of Appeal decided that TUPE does apply to these transactions and that the exception provided for in Regulation 8(7) of TUPE will not apply. The provisions of Regulations 4 and 7 (dealing with the transfer of employees and their dismissal rights respectively) will therefore apply and employees will benefit from the full protection offered by TUPE.

In OTG Ltd v Barke, the Employment Appeal Tribunal decided that administration sales (including pre-packs) always fall within the scope of TUPE. This contrasted with the earlier decision in Oakland, where the EAT established a factual-test based on the whether the insolvency was instituted with a view to the liquidation of the transferor's assets. The Court of Appeal decided this was not the correct approach, instead following the approach in OTG Ltd, being the "absolute" approach. Although it may not be welcome news to Insolvency Practitioners or indeed prospective purchasers that employees will transfer to the purchaser under TUPE, it does provide some much needed clarification as to the position. Those considering acquisitions from a company in administration will therefore need to consider this and also factor in the potential liability they could inherit regarding any employees dismissed prior to the TUPE transfer when considering the commercial merits of any deal.

Possible reform of TUPE?

In November 2011 it was announced that the effectiveness of the 2006 Regulations was to be reviewed. In his covering letter, (former) Minister for Employment, Ed Davey called for evidence of TUPE's effectiveness in "smoothing the process of business restructuring".

A full copy of the BIS paper entitled "Call for Evidence: Effectiveness of Transfer of Undertakings (Protection of Employment) Regulations 2006" (including details of how you can participate) can be viewed at http://www.bis.gov.uk/assets/biscore/employment-matters/docs/c/11-1376-call-for-evidence-effectiveness-of-tuperegulations.pdf .

The paper indicates that if the evidence suggests that there is a clear need for reform, then there is likely to be formal consultation on this issue later this year.

  • Administrators may be personally liable for discrimination

In Lehman Brothers Ltd. v Spencer (UKET 3201700/09) Mrs Spencer was dismissed by the administrators of her insolvent employer whilst on maternity leave. She brought proceedings for sex discrimination and claimed that, as well as Lehman Brothers Ltd, the administrators were also liable as they knowingly aided her employer in the discrimination against her and that the Head of Corporate Security who had recommended her for redundancy had acted as the administrator's agent.

The claim for sex discrimination failed on the basis that the claimant's dismissal was genuinely for redundancy and she had not been treated any differently to her colleagues.

The Tribunal held that had it found unlawful discrimination, it would not have found the administrators liable for knowingly aiding that discrimination as there was no fact known to them which would have supported this claim and they were entitled to assume that the HR team at Lehman Brothers Ltd would carry out a fair and lawful redundancy process.

However, the tribunal did consider that if there had been discrimination and the administrators knew of the facts surrounding it, the administrators could be liable on the basis of an agency relationship with the employees of the insolvent company.

This is a first instance decision and is therefore not binding on future tribunals and courts. However, administrators should be aware that there is a risk they could be found personally liable for any discrimination by the employees of the insolvent company on the basis of an agency relationship.

  • Collective redundancies: each Woolworths store was an establishment

In USDAW and ors v WW Realisation 1 Limited (In Liquidation), the Tribunal held that each store was a distinct establishment and that employees were assigned to individual stores rather than to Woolworths' retail organisation as a whole. This was on the basis that each store was physically distinct, had its own organisation and purpose and employees worked at a particular store and were not peripatetic. This meant that for the many stores with less than 20 employees the collective consultation provisions were not triggered.

This is a useful decision for employers but it is likely to be appealed and it is questionable as to whether it is consistent with the European Collective Redundancies Directive.

The Tribunal also found that Woolworths had breached its collective consultation obligations where there were more than 20 employees at a stress and that it could not rely on the special circumstances defence. It awarded 60 days pay as there had been some attempt at consultation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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