It is a relatively common story, Company A (NewCo) acquires the undertaking of Company B (OldCo) and along with it all of OldCo’s employees. By virtue of Regulation 4(1) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) the transfer does not operate to terminate the contracts of employment but instead they are deemed to be have been originally made with NewCo. Well perhaps it is wishful to think of such a clean story as being common. More typically NewCo acquires part of the business or undertaking of OldCo, which may be held by a subsidiary. Then the question becomes, who was employed by OldCo immediately before the transfer and assigned to the part transferring?
With Regulation 4(3) making it clear anyone dismissed contrary to Regulation 7 (i.e. by reason of or a reason connected to the transfer) is deemed to have been employed immediately before the transfer, the issue of assignment becomes a relatively straightforward question of fact. But what of the position with a group holding or labour-only company? Here some or all of the employees may be employed by the group, but work primarily with the subsidiaries. What happens when NewCo only acquires the subsidiaries? The converse may also apply when the employees are employed by the subsidiaries but it is the group that is acquired and the subsidiaries liquidated. When this situation arises, will the Courts and Tribunals pierce the corporate veil and look at the group as a single economic entity? The answer is most probably not, or at least not openly. If the veil is not lifted, would an employee have any other recourse? The answer is possibly, though it will depend on the facts of each case and may require fi ne distinctions to be made. With the Court of Appeal recently deciding in Key2Law (Surrey) LLP v De Antiquis1 that a transfer by administration does not provide a get out of jail card from the effects of TUPE, this issue is likely to gain more prominence, as it is perhaps the only means to circumnavigate the regulations. So this article revisits the issue, and looks at when an employee may be assigned even if their contract of employment is not with OldCo.
When looking at this question, one might be forgiven for thinking it ought to be straightforward. After all Regulation 4 requires not only that an employee be assigned to the part of the transferring business but also that they are employed by OldCo (the transferor). Of course such a simple analysis would permit corporate structures to be used to obviate the protections of TUPE entirely. This was the observation of Morrison J in Duncan Web Offset v Cooper2. Whilst accepting prima facie an employee of X employed to work for Y (e.g. a subsidiary) would not transfer, he recognised the need for Tribunals to “be astute to ensure that the provisions of the Regulations are not evaded by devices such as service companies, or by complicated group structures which conceal the true position”. However, as this was not necessary to determine the case, Morrison J’s observations are nonbinding. Moreover, in Brookes v Borough Care Services Ltd and anor3 the EAT expressly rejected a suggestion that piercing the veil was a necessary part of considering claims under TUPE and the Acquired Rights Directive.
So can the veil ever be pierced and if so when? There appears to be a reluctance of Tribunals to take this course and the EAT has persistently expressed caution about doing so. This is no doubt because it involves fundamental principles of company law. In Millam v Print Factory4 the Claimant was employed by Fencourt (F), whose shareholding was subsequently acquired by McCorquodale (M). This would not ordinarily give rise to a transfer as F remained a separate company and the Claimant’s employer. In 2005 both companies were placed into administration, with the business of M being acquired by Print Factory Ltd. The Claimant contended his employment transferred to Print Factory. The Tribunal accepted this contention as M’s management of F was far more than that of a simple shareholder or parent company, such that the Claimant was employed by M. The EAT upheld the appeal on the basis the Tribunal had wrongly pierced the corporate veil. Whilst the EAT acknowledged the option to lift the veil, it stated this generally required the subsidiary company to be shown as a sham or façade. This was in line with other areas of law. The Court of Appeal however, reinstated the Tribunal’s decision, but not on the basis the veil could not be lifted or that the test was different in some way. One must therefore observe that in the TUPE context it appears the veil can be lifted, but only if that somewhat high test is met. That tide mark may explain the Tribunal’s reluctance. Accordingly a Claimant can, though is unlikely, to succeed here.
However, the basis upon which the Court of Appeal reinstated the decision in Millam may provide solace. Buxton LJ concluded this was not a case of piercing the veil, highlighting this arose only where “activity x is carried on by Company A, but for policy reasons it is sought to show that in reality the activity is the responsibility of the owner of company A, company B.” Instead he considered the Tribunal had not found activity x to have been conducted by F, decided to pierce the veil and thereafter attributed the activity to M. Rather he formed the view the Tribunal had found the activity was carried on by M. He stated “No judicial effort was required to render [M] liable for what was done by [F] because the ET found that it was [M], not [F], that was performing the activity in the fi rst place.” One may fi nd this a fi ne distinction; a brush past the veil rather than piercing it. In the case of Millam the rationale rested on F being “fully integrated” within M. This starts to look like treating the group as a single economic entity by another avenue. If this does not require the veil to be lifted, Claimants may still contend that they are employed by the group, where it exercises suffi cient control over the subsidiary. This will enable employees to argue for a transfer of their employment, should the group but not the subsidiary be acquired by NewCo. The necessary degree of control required is unclear, though in light of the Tribunal’s reluctance to entertain such arguments thus far, it is likely to be considerable. So can the employee succeed without piercing the veil? Possibly, though each determination in that respect will be fact specifi c and may require fi ne distinctions to be made, a fi ne art.