Thursday, December 12, 2013

UK - More scope to justify employee terminations in a TUPE transfer

In a case concerning a soccer club, the UK Court of Appeal has ruled on where employee dismissals can be justified in the context of a TUPE transfer. The question was whether the reason for the dismissals was primarily to make the business more attractive to a seller (which would have fallen foul of the TUPE protection), or whether it related to the efficient running of the business in the period before the sale (which falls within the ETO exception justifying dismissals, under TUPE).

TUPE and dismissals

The European Acquired Rights Directive is implemented in the UK by way of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”). Dismissals connected with a TUPE transfer will be automatically unfair, provided employees have sufficient seniority (1 year’s seniority for employees joining before 6 April 2012; 2 years for employees who joined after that date). Statutory unfair dismissal entitles employees to compensation of up to the lesser of one year’s pay, or £74,200, plus a basic award of up to £13,500 based on seniority.
Dismissals can however be justified where the sole or principal reason for the dismissal is an economic, technical or organisational (“ETO”) reason entailing changes in the workforce. This exception requires the employer to show an objective need to change the workforce as part of the day to day running of the business, and would not encompass positioning the business for a sale further down the line.

Liability for pre-transfer liabilities, including unfair dismissal, usually passes to the purchaser by operation of law. Ordinarily this is dealt with by way of indemnities between the buyer and seller under the sale agreement, but these are typically not forthcoming where the business sold is insolvent.


The case concerned a soccer club, Crystal Palace FC, which was put into administration as a result of its financial troubles. Under UK law, the administrator appointed to run the Club had a primary responsibility to the Club’s creditors, either to rescue the company as a going concern, or to realise a higher repayment for them than if it were immediately liquidated and its assets sold off. The administrator tried to secure a sale of the Club as a going concern over a period of five months. At the end of that time, and entering the end of the soccer playing season, the administrator decided to ‘mothball’ the Club with the aim of reducing its staffing costs and helping it survive until it could be sold. All non-core staff, some 29 in total, were made redundant.

The sale of the Club was subsequently agreed the following month, and completed two months later.

The Claimants brought claims for unfair dismissal.

History of the litigation

The case was initially heard by the UK Employment Tribunal, which found in favour of the administrator and upheld the dismissals. The decision was then reversed by Employment Appeal Tribunal before being restored by the Court of Appeal, which is the second most senior court of England and Wales. This decision then carries significant weight, making it more useful for employers. The series of appeals shows however that these cases tend to be finely balanced, and will depend heavily on the particular facts.

The Court of Appeal’s decision

The key question for the Court was whether the sole or principal reason for the dismissals was the TUPE transfer, or whether it was an ETO reason relating to the operation of the business.

In a previous decision of a lower court, the Employment Appeal Tribunal, the dismissal of a CEO was held unfair because its main purpose was “to make the business of the company a more attractive proposition” to prospective buyers (Spaceright Europe Ltd v Baillavoine and another [2012] IRLR 111). For dismissals to be justified in the context of a TUPE transfer, they needed to be primarily grounded on a need to change the workforce as part of the ongoing operation of the business.

Spaceright concerned an employee dismissed on the same day that a business entered administration. The business was supported by its main lender so did not need to dismiss the employee in order to stay afloat. Although a buyer had not been identified, it was clearly the plan that the business would be sold and that given his position, the CEO would then be surplus to requirements. On these facts, the employee’s dismissal was mainly motivated by a potential sale of the business, which would entail a TUPE transfer, and was not justified on ETO grounds.

In the case of Crystal Palace, a sale was far more clearly in prospect - a sale agreement with a prospective buyer had in fact been finalised, although completion was still subject to the separate negotiation and sale of the stadium used by the Club. However, there was no evidence that the dismissals were designed to make the Club more attractive to a prospective buyer. There was however clear evidence that there was an immediate need to reduce the Club’s wage bill in order for the Club to survive until a sale could be concluded. Although a fairly fine line, the Court held that the primary driver was the immediate survival of the business rather than to facilitate a future sale. This meant that the dismissals fell within the ETO exception under TUPE, and were not unfair.

The fact that the administrator had always had the ultimate intention to sell the Club, either as a going concern or to liquidate it did not mean he could not rely on the ETO exception. The purpose of an administration is always to dispose of assets and realise maximum value for creditors, which will inevitably trigger the TUPE transfer of any employees who are (or should have been) employed at that point. If the ETO exception did not apply where there was the prospect of a sale of the business, no administrator could ever rely on this exception and any dismissals they made would inevitably be unfair.

Where a business is insolvent, there is a difficult balancing exercise between TUPE (which is designed to protect employees where a business changes hands) and the UK insolvency regime (which aims to secure maximum value for creditors, with only limited “guaranteed” payments to employees). The Court of Appeal has struck a sensible balance between the employees’ right not to be dismissed simply to maximise the value of any sale, against the creditors’ priority over the sale proceeds. The decision recognises the fact that administrators usually need to “reform and economise” the way a business is being run while negotiating a sale, where the aim is to sell the business instead of liquidating it.


The principles of this case are not limited to insolvent businesses. Dismissals in the context of a TUPE transfer are always liable to challenge, and will typically have the dual purpose both of helping the business survive in the short term, and positioning it for a sale in the longer term. This decision confirms that provided the immediate reason for the terminations is to keep the business afloat day to day, dismissals can be justified on ETO grounds even where a sale of a going concern is the ultimate objective.
Outside the insolvency arena, employers may also need to rely on ETO grounds when justifying dismissals either before or after a TUPE transfer. This case confirms that where there is an immediate business case for those terminations, whether for financial or wider organisational reasons, they can potentially be justified even in the context of a sale or other TUPE event. Particular care needs to be taken where sale negotiations are already underway - whether or not a likely buyer has been identified - to ensure there are clear reasons to show any dismissals were required as part of the day to day running of the business, independent of any sale.

By Georgina McAdam and Tessa Cranfield, Seyfarth Shaw (UK) LLP