For various reasons - including possible tax and National Insurance Contributions savings - it is now common practice for the employees of a business to be employed through a service company, which then provides those employees to work for the operating company within a group structure. The legal consequence of such an arrangement is that the contract of employment is with company A, but the employee works and provides his/her services for company B.
On the face of it, this may seem like a simple way to get around the consequences of TUPE 2006, by divorcing the contract of employment from the operating company, so that when the business of the operating company is sold, it can be sold free of employees which may be attractive to a purchaser.
This situation recently came before the European Court of Justice (ECJ) in the case of Albron Catering BV v. FNV Bongenoten & Another.
In this case, the Heineken Group included:-
- a service company through which all employees are employed (Services); and
- an operating company which provided catering services to the Group (Catering).
On 1 March 2005, the business of Catering was transferred to Albron. Mr Roest obtained a declaration that, notwithstanding the fact that his contract of employment was with Services, his employment transferred with the business of Catering so that he became an employee of Albron.
Albron appealed this decision to the Regional Court of Appeal, Amsterdam, which referred the case to the ECJ asking whether or not the Acquired Rights Directive (ARD) should be interpreted so as to apply to employees of a group that work for the business being transferred, even though their contracts of employment are with a service company which functions as the group's central employer.
The wording of the ARD is slightly different from TUPE. Article 3(1) of the ARD says:-
"The Transferor's rights and obligations arising from a contract of employment or from an employment relationship [emphasis added] existing on the date of a transfer shall, by reason of such transfer, be transferred to the Transferee".
The Transferor is defined as a person who by reason of the transfer "ceases to be the employer" in respect of the undertaking being transferred (see Article 2(1)(a) ARD).
Applying the ARD to the facts in the Albron case, the ECJ had little hesitation in concluding that
- a formal contractual link with the Transferor is not necessary;
- under Article 3, there must be either a contract or 'an employment relationship'; and
- where there is more than one employer (in this case, Services and Catering), the ARD does not require precedence to be given to the entity with which the employee has the contract, instead the ARD requires a change in the entity responsible for the economic activity which is transferred and with which the employee has his/her employment relationship.
Regulation 4 of TUPE provides for the automatic transfer of rights and obligations under or in connection with the contract of employment of "any person employed by the Transferor and assigned to the organised grouping of resources for employees that is subject to the relevant transfer".
Accordingly, TUPE requires the employee to be employed by the Transferor and assigned to work for that part of the Transferor's business which is being transferred. TUPE does not use the words "employment relationship".
Whereas the courts and tribunals have been reluctant to pierce the corporate veil - look behind the contractual relationship between an employee and a group company - it is a well established principle that tribunals "should be astute to ensure that the provisions of the Regulations are not evaded by devices such as service companies, or complicated group structures which conceal the true position" (Mr Justice Morrison, Duncan Webb Offset (Maidstone) Limited v Cooper and others).
The decision of the ECJ in Albron will strengthen this principle and tribunals, which are, in any event, bound to construe national law so that it achieves an outcome that is consistent with the objectives of the ARD, will, if necessary, read in words so that TUPE is consistent with the ARD.
In the circumstances it will be prudent for buyers and sellers of businesses to remember the purpose for which the ARD and TUPE have been enacted, namely to safeguard and protect the rights of employees on a "change of employer" and not assume that, because an employee is employed by a service company and not by the operating company whose business is being transferred, that the operating company has no employees and that TUPE therefore does not apply.
In relation to public sector employees, of course, the ARD can have direct effect, so the analysis has to be in relation to both the contract of employment and any employment relationship.
For the private sector, devices that separate the contract of employment from the business being transferred should be treated with care. To avoid any possible litigation, it may well be sensible for the seller, pre sale, to transfer those employees who are assigned to the business that is being sold to that business to avoid any argument. Buyers should consider asking for appropriate indemnities and/or a pre sale assignment of employees from the service company to the operating company whose business is being acquired.
What remains to be seen is what, if any, effect the Albron decision may have in relation to agency workers who may well be assigned to work in a business that is being transferred but who have a contractual relationship (if one can be found) with a third party employment bureau rather than with a group service company.