Law Report: Obligations to employees transferred to new employer

LAW REPORT v 15 January 1996

Secretary of State for Industry v Cook and others; Employment Appeal Tribunal (Mr Justice Morison, Mrs M.E. Sunderland, Mr R. Jackson) 13 December 1996

For an employer's obligations under the employment contracts of its employees to be transferred to the new owner of its business under regulation 5 of the Transfer of Undertakings (Protection of Employment) Regulations 1981, it was not necessary (as had previously been held) to establish that the employees had notice of the transfer and knew the identity of the transferee.

The Employment Appeal Tribunal allowed an appeal by the Secretary of State for Trade and Industry against the decision of an industrial tribunal that he was liable, under section 122 of the Employment Protection (Consolidation) Act 1978 (as amended), to pay sums ranging from pounds 320 to pounds 510 to three former employees of an insolvent company, Gayton International Ltd.

The sole issue before the tribunal was whether Gayton, when selling its business to another company, Intro Business Ltd, on terms which expressly acknowledged the application of the 1981 Regulations, had also transferred to Intro its indebtedness to the three employees. If so, then the Secretary of State would not be liable to pay Gayton's debts to the employees (unless, which it was not, Intro too were insolvent).

The tribunal held that there had been a transfer of undertaking from Gayton to Intro within reg 3 of the 1981 Regulations, the effect of which, under reg 5, would be to transfer all Gayton's obligations in respect of the employee's contracts of employment to Intro and not the Secretary of State.

However, although the employees were told that the business had been sold, they were not told the identity of the purchaser and did not discover it until well after the transfer. In those circumstances, the tribunal was bound by the Employment Appeal Tribunal's earlier decision in Photostatic Copiers (Southern) Ltd v Okuda & Japan Office Equipment Ltd (in liqn) [1991] IRLR 11, to hold that reg 5(1) of the Regulations did not take effect and that the employees' contracts were accordingly not transferred to Intro, leaving the Secretary of State liable to pay Gayton's debts to the employees.

Robert Jay (Treasury Solicitor) for the Secretary of State; the respondents did not appear.

Mr Justice Morison said it had been held in the Photo- static case that a transfer of an undertaking did not take effect in relation to an 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.

With respect to those involved in that decision, his Lordship did not regard it as a correct interpretation of the Transfer of Undertakings Directive or the 1981 Regulations made to give it effect.

The purpose of the Directive was 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 of Justice in Berg v Besselsen [1990] ICR 396). Regulation 5(1) overruled the common law rule that a change in the identity of a contracting party required consent.

Until the Regulations were amended by the Trade Union Reform and Employment Rights Act 1993, it was assumed that they operated so as automatically to transfer to the transferee the contracts of employment of the transferor's existing employees, whether or not the employees objected. Following a ruling of the European Court of Justice in Katsikas v Konstantinidis [1993] IRLR 179 that this infringed a worker's fundamental right to choose his employer, the 1993 Act amended reg 5 to allow an employee who objected to such a transfer instead to terminate his employment without being treated as having been dismissed: see reg 5(4A) and (4B).

If the Photostatic decision were regarded as good law, the very protection which the Directive and Regulations were designed to provide would be significantly undermined. If the employee needed to know in advance the identity of the transferee before his contract was transferred, unscrupulous employers would simply refuse to disclose what was happening.

To imply such a precondition was unnecessary and conflicted with the purpose of the Regulations. Accordingly, the Photostatic decision should no longer be followed.

Paul Magrath, Barrister