A reminder of the legal background
This case was decided under the old Transfer of Undertakings (Protection of Employment) Regulations 1981, but the same principles apply under the new TUPE regime which came into force in 2006.
Under TUPE 1981, any dismissal before a transfer is automatically unfair if the principal reason for the dismissal is connected with the transfer – unless the dismissal is for an economic, technical or organisational reason which entails changes in the workforce of either the seller or the buyer (an ETO reason).
Where there is an ETO reason, any liability for a pre-transfer dismissal (such as notice and redundancy pay) remains with the seller.
What happened here?
The facts of this case were unusual. Mr Smith was the creator and sole director of a company, F. He applied to have his company made insolvent on 7 August 2003.
On the day he was appointed, one of the administrators dismissed all of the employees because he had no money to pay them. He then sought offers for the business from nine interested parties.
In a complicated transaction, the parts and the machinery of the business were then sold to a company which was controlled by Mr Smith and which already owned the premises of the old business.
The production line and the customers were bought by a new company which had been set up – with money from Mr Smith – by a former employee. It took on 60 of F’s former employees.
A few months later, Mr Smith became the controlling shareholder of that company. Those employees and their unions who were not taken on by the buyer brought claims for unfair dismissal under TUPE and a failure to consult.
Court of Appeal’s judgment
The tribunal found that there had been a transfer, but that liability for the dismissals did not pass to the buyer since the administrator had dismissed the employees for a clear economic reason.
The issue which was brought to the Court of Appeal was whether it mattered that Mr Smith seemed to have stage-managed the administration, in order to take over the business without the liability of any dismissals.
The Court of Appeal found that only the motivation of the person who decided to dismiss the employees was relevant.
The administrator had acted professionally at all times and had not colluded with Mr Smith. He had decided to dismiss the employees for a clear economic reason – he did not have the money to pay for them.
In fact, when he dismissed the employees, no buyer had been identified. As such, their dismissal was not automatically unfair under TUPE 1981 and liability for their dismissal did not pass to the buyer.
The fact that the administrator had been an unwitting tool of Mr Smith was not enough to fix the administrator with Mr Smith’s intentions.
However, one of the judges dissented from this judgment, saying that the court should not look solely at the intentions of the legal entity which made the decision to dismiss, but that it should take into account all objective circumstances.
We will let you know if this judgment is appealed.
Comment
The outcome of this case might seem somewhat unfair. Mr Smith appears to have got away with an attempt to circumvent his obligations under TUPE. However, remember that the circumstances of this case were unusual.
Generally, attempts to manipulate where liability for dismissals fall under TUPE will not be successful. In particular, a buyer who puts pressure on seller to dismiss employees before a transfer will not escape liability for those dismissals.
Read the full judgment here