The Court of Appeal has held that employees who were dismissed for refusing to agree to new terms following a TUPE transfer, who were then re-employed on new terms, were automatically unfairly dismissed.  It did not matter that the changes to terms and conditions were introduced as part of cost saving measures which included redundancies.  The Tribunal was entitled to make an order that they should be re-engaged on their previous (higher) salaries but otherwise on the new terms and conditions.

Background

The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") operate to transfer employees on their existing terms and conditions in the event of certain business transfers and service provision changes.  Before 31 January 2014, dismissals which were "connected with" a TUPE transfer were automatically unfair, unless they were due to an economic, technical or organisational reason entailing changes in the workforce (an "ETO reason").  To date, the case law has generally held that in order to establish an ETO reason, a change in the workforce must entail a change in the numbers or functions of employees (Delabole Slate Co Limited v Berriman).  Some cases have suggested that other changes may be sufficient but it has been clear that simply changing terms and conditions is not a change in the workforce.

From 31 January 2014, TUPE was amended to provide that dismissals will only be void where the sole or principal reason for the dismissal is the transfer itself and the reference to transfer connected reasons was removed.  A copy of our previous alert on the changes to TUPE that came into force on 31 January 2014 can be found here. The definition of change in the workforce was also expanded to include a workplace relocation.

Manchester College v Hazel and another

Manchester College (the "College") took over the provision of offender learning services from the Prison Service.  That resulted in the transfer of 1,500 employees to the College under TUPE.

Shortly after the transfer, the College realised that significant cost savings were required.  This was in part due to reductions in funding in the Further Education system, but also because there were hidden costs in providing offender learning which it did not appreciate until after it took over those services.  In response, the College proposed a number of redundancies.  It also proposed to harmonise terms and conditions, since the former Prison Service employees had transferred over on 37 different sets of terms.  It proposed to put in place replacement terms which were most appropriate in light of its funding situation.

The two Claimants were initially put at risk of redundancy.  Following consultation, it was confirmed that their roles were no longer at risk.  However, they were asked to agree to changes to their terms and conditions which would include a pay reduction of 18.5 percent and 13.2 percent respectively.  Both Claimants refused to accept those changes, and were dismissed as a result.  The Claimants then accepted the new terms including the reduced salary, and continued in employment, but brought claims for unfair dismissal, arguing that the dismissals were connected with the TUPE transfer, and were not for an ETO reason. 

The College conceded that the changes were connected with the transfer and so the question was whether there was an ETO reason.  The Tribunal and EAT found that the Claimants had been automatically unfairly dismissed as the College did not have a valid ETO reason, there having been no change in the numbers or functions of the employees. 

The Tribunal decided to make an order for re-engagement based on the new terms but retained the Claimants' pre-transfer salaries, which were then frozen so as to red circle the arrangement until such time as the salaries of the other employees caught up with the Claimants.  The College appealed.

Decision

The Court of Appeal upheld the Tribunal's decision in respect of both liability and remedy.  The College had argued that it had an ETO reason for the dismissals, because it was also making redundancies (which constituted changes in the numbers of employees).  It said that although the Claimants themselves were not at risk of redundancy at the relevant time, the overall changes (including the redundancies) should be looked at holistically as part of an overall cost saving and rationalisation package of measures that it was taking. 

The Court of Appeal rejected this argument.  The question that the Tribunal was required to answer is what is the sole or principal reason for the Claimants' dismissals.  On the facts of this case, it was clear that the Claimants were dismissed for refusing to accept the new terms and the redundancies did not factor into the College's decision to dismiss the Claimants.  The Claimants' dismissals did not entail a change in the workforce (following Berriman) as the numbers and functions of employees were not affected, just their terms.  Therefore the dismissals were automatically unfair for a transfer connected reason. 

The Court also considered that the Tribunal was entitled to make the re-engagement order. 

Comment

This case illustrates the difficulties for employers in changing, and particularly in harmonising, terms and conditions after a TUPE transfer.  The Court expressed sympathy for the difficulties that employers face when there is an economic need to harmonise terms and conditions of employees following a TUPE transfer but noted that the existing case law is clear that an employee's right to preserve his/her existing terms prevails over the employer's interest in achieving harmonisation, at least when it is "connected with the transfer".   However, the Court did suggest that there may be some flexibility for employers to argue in such cases that the proposed changes were not "connected with the transfer" at all.  That argument was not considered by the Court of Appeal in this case as the College had conceded that the Claimants' dismissals were connected with the transfer in the Tribunal proceedings.  However, the argument has succeeded in other cases where there was a commercial need to make changes and the harmonisation was incidental.

The recent changes to TUPE (see above) were intended to give the maximum flexibility permitted under European law to make changes following a TUPE transfer.  On the face of it, the amendments give employers greater flexibility to dismiss employees fairly following a TUPE transfer.  That said, the Government's updated TUPE guidance emphasises that this is a new test, therefore, the fact that a reason might previously have been considered to be connected with the transfer before 31 January 2014 does not mean that it will not be held to be because of the transfer under the current regime.  However, the argument pointed to by the Court of Appeal in this case may be more likely to succeed under the new test, making it possible to change terms and conditions where there is a commercial reason for the change.