In a case arising from the sudden collapse of the construction company Carillion, the Employment Appeal Tribunal (EAT) has confirmed the narrow scope of the "special circumstances" defence that may be available if an employer has failed properly to consult on collective redundancies.(1) Special circumstances must involve something "out of the ordinary" or "uncommon", and a gradual financial decline leading to insolvency is unlikely to meet this test.
Section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 requires an employer to consult with its employees' appropriate representatives if it is proposing to dismiss as redundant 20 or more employees at one establishment within a period of 90 days or less. Consultation must start "in good time" and at least 30 days before the first of the dismissals takes effect, or at least 45 days before it if the employer is proposing to dismiss 100 or more employees.
Affected employees are usually entitled to compensation of up to 90 days' uncapped pay if their employer breaches this requirement. However, an employer will not be liable if "special circumstances" existed which made it not reasonably practicable for the employer to comply – so long as the employer took all steps towards compliance as were reasonably practicable.
Carillion began to face serious financial difficulties by July 2017. It went into liquidation six months later, on 15 January 2018. Its collapse followed a weekend of failed negotiations between its board of directors and its stakeholders, including the government. Although it had not previously received financial support from the government and knew that continuing financing of its operations by its banks would be conditional on such support, the board's position was that this outcome to negotiations was nonetheless "unexpected".
In the days after its collapse, Carillion's liquidators dismissed a significant number of its 18,000 employees without first consulting their appropriate representatives. Over 1,000 of these employees brought claims for compensation.
Carillion's liquidators argued that the collapse of rescue talks over the weekend of 13 and 14 January 2018 meant that "special circumstances" had existed. Relying on a decision of the Court of Appeal from 1978 (Clarks of Hove v Bakers' Union), the Employment Tribunal (ET) rejected this argument. It found that there had been no "out of the ordinary", "uncommon" or "sudden disaster" event. Instead, Carillion's insolvency had followed a "downward path" representing a "history of decline" in its financial position over many months.
Carillion's liquidators appealed against the ET's decision. They argued that the ET had wrongly focused solely on the cause of Carillion's insolvency and not its wider circumstances. They also argued that the ET should not have followed Clarks in the way that it did, because that decision predated the introduction in the 1980s of a "rescue culture" for businesses in financial distress and the possibility of employees' employment continuing with another employer if business assets are sold as a result of a transfer under the Transfer of Undertakings (Protection of Employment) Regulations 2006.
The EAT rejected each of these arguments. It agreed with the decision in Clarks that insolvency "may or may not" constitute "special circumstances". This is because whether a particular insolvency is "special" will always depend on its particular facts, as insolvency is not an uncommon event. The ET had expressly considered all events dating back to July 2017 when reaching its conclusion. The EAT found that, despite the ET's focus on the events of the weekend of 13 and 14 January 2018, it had been entitled to conclude that Carillion's particular circumstances were not "special" or a "sudden disaster".
The EAT also rejected the argument about the emergence of a "rescue culture". It noted that Clarks was general guidance and had never been limited to insolvency situations. It also noted that Carillion's liquidation – as opposed to, for example, it being placed into administration – meant that the dismissals were analogous to those made in the 1970s in any event.
This decision highlights the problem that an employer will always face if it is confronted by financial difficulties. On the one hand, a prudent approach might be to commence consultation well in advance of potential dismissals in order to minimise the risk of significant financial penalties if the employer later needs to act quickly. On the other hand, the very exercise of engaging in consultation may well signal the business's difficulties to the market, and thereby exacerbate them.
It is at least understandable why Carillion did not commence consultation at an earlier date if its board of directors was confident of securing financial support, irrespective of how mistaken this belief might have been. The decision nevertheless demonstrates the potentially significant financial cost for a business if it chooses not to consult when the possibility of dismissals can reasonably be foreseen, and then has to act quickly due to a financial collapse.
This decision also provides useful guidance in light of the covid-19 pandemic. In March 2020, and prior to the introduction of the government's furlough scheme, many businesses chose to make significant numbers of dismissals without consulting employee representatives first. This was on the basis that the onset of the pandemic amounted to a sudden intervening event, meaning they had to cut their costs as quickly as possible. This case demonstrates the difficulty that employers will face in defending claims for failure to consult if it would have been practicable, even if costly, for them to consult properly during that difficult time.
For further information on this topic please contact David Hopper or Kerry Salisbury at Lewis Silkin by telephone (+44 20 7074 8000) or email ([email protected] or [email protected]). The Lewis Silkin website can be accessed at www.lewissilkin.com.
(1) Carillion Services Ltd (in compulsory liquidation) v Benson – judgment available here.