In the UK, there is no general requirement to consult employees on business issues or strategy. However, collective redundancy legislation does require employers to consult meaningfully with employee representatives where 20 or more redundancies are proposed within a 90-day period, which can mean that the business is effectively consulting on strategy. Where the number of proposed redundancies is 20-99 employees, consultation must be for a minimum of 30 days before the first dismissal takes effect, and this is increased to 90 days where 100+ employees are impacted. Consultation is first triggered when the proposals are identified, but this will also include the situation where a higher-level business strategy decision is taken that would inevitably lead to those redundancies, such as a decision to close an office. The penalty for any breach of these requirements is up to 90 days’ full pay for each affected employee (regardless of the number of redundancies).

The Advocate-General of the European Court of Justice has recently suggested in USA v. Nolan, a case referred by the UK Court of Appeal, which this also applies where that strategic business decision is taken by a body other than the direct employer. In such a case, consultation must begin before that business decision is finalized in order for it to be “meaningful” and therefore reasonable. The case involved the closure of a U.S. military base in Hampshire, England—the closure decision was taken by the Secretary of the U.S. Army in March 2006 and the British authorities were informed in April and May of that year. Employee consultation by the employer (the local entity) commenced in June.

It was the Advocate-General’s opinion (the decision of the Court itself is still awaited but typically it follows the Advocate-General’s opinion at the preliminary stage) that this meant that consultation had started too late—by the time the closure decision was taken, redundancies were inevitable and so consultation (seeking to avoid or minimize redundancies) could not be meaningful. This was the case even though the decision was taken by an entity which was completely different from the employer itself. In the Advocate-General’s words, the obligation to consult arises when a strategic or commercial decision that compels the employer to contemplate or to plan for collective redundancies is made by a body or entity which controls the employer.

A prior ECJ case (the Akavan case) had previously identified that a parent company-level decision that would result in redundancies in a subsidiary could trigger an obligation on the part of the subsidiary once it was identified, even though the subsidiary was not party to that decision. What was not particularly clear from that case was the necessary timing of the start of that consultation. The suggestion in this latest Opinion is that the timing will be for the relevant national courts to decide— which would in turn suggest that this will be a circumstantial case-by-case decision, providing little practical comfort for the UK employer who has to decide when to consult. There is also a question over whether this principle can be extended further to unrelated third parties. So, for example, if a major customer is threatening to cancel a contract for the supply of goods and this would lead to a significant reduction in the supplier’s business such that more than 20 redundancies would be inevitable, would the employer have to start consulting at that point, thus unsettling its employees and risking adverse publicity before the decision to cancel the contract had even been made?

We hope for further clarification and guidance in this area when the ECJ produces its final decision. In the meantime, this Opinion and its predecessor case underline the importance of communication and timely action in international groups of companies. If the Opinion is followed without further clarification on timing, there will be no set guidance on when the consultation must begin and as such, to avoid potential test cases, the UK employer would need to start consulting at the earliest practical opportunity. Where a U.S. parent, for example, is considering closing its UK sales office because it is no longer profitable, then assuming 20 or more employees are impacted, consultation by the UK employer would need to start before that parent-level decision was finalized. This would mean, in practice, that the U.S. parent would have to consult the UK subsidiary management in advance and allow them to consult their employees before taking the final decision or risk facing damages of up to 90 days’ pay for each of the affected employees.