Following on from our introduction to our series of articles on change management; we examine one of the external factors that can lead to change.

Statistics from Experian indicate that in the first six months of 2014 alone, mergers and acquisitions involving Irish companies were worth €97.4 billion. The predictions by Investec at the beginning of the year anticipate that 2015 will see further non-core asset disposals, acquisition of Irish technology companies by international companies and restructuring of smaller companies who are dealing with legacy debts.

As an employer of any size, your employees will want to know what a sale or merger will mean for them? Employees have a right to be given notice of some, but not all, information about the change. The timing of when they are informed is important; confidentiality agreements may need to be observed. Equally, the provisions of the Transfer of Undertakings Regulations 2003 may apply and may need to be observed.

A sale or merger may result in a re-evaluation of work practices; decisions to contract out work done in -house, to bring in work previously contracted out, to tender for new contractors or to change contractors.

Relevant Law

The European Council Directive 2001/23/EC was introduced into Ireland by the EC (Protection of Employees on Transfer of Undertakings) Regulations 2003; it replaced similar regulations from 1980. Known as the Transfer Regulations or TUPE, they may apply “to any transfer of an undertaking, business or part of an undertaking or business from one employer to another employer as a result of a legal transfer (including the assignment or forteiture of a lease) or merger.”[1]


What does it mean?

The aim of the regulations is to safeguard the rights of employees from dismissal, changes to their terms of employment or other adverse consequences where the undertaking in which they are employed changes hands, whether by business sale, outsourcing or otherwise.

The application of the regulations is by no means straightforward; some argue it has become unnecessarily complicated; with no hard and fast rules governing what is and is not a transfer of undertakings. What is abundantly clear is that the facts of each individual situation must be considered.


What Constitutes a Transfer?

The definition of transfer in the Regulations is “the transfer of an economic entity which retains its identity”.

An economic entity is defined as being “an organised grouping of resources which has the objective of pursing an economic activity whether or not that activity is for profit or whether it is central or ancillary to another economic or administrative entity”. [2]

The language is tedious but what is clear is that for a transfer to take place there must be a change in the employer or person (either an individual or a company) responsible for running the undertaking/business. A transfer therefore captures all sorts of business transfers or mergers, including assignment of a lease on a business premises, inter-group re-organisations, asset sales, change of service providers and outsourcing. It does not however apply to a share sale.

The previous economic activity of the business must be carried on and continued by the new employer even with some differences or where all of the economic activity is not transferred. The business must be transferred as a going concern.

The ECJ case of Spijkers v Gebroeders Benedik Abbatoir CV [3], set out what is known as the Spijkers Criteria to refer to when considering whether there has been a transfer of an undertaking or not. They are:

- The nature of the business concerned; was the undertaking a stable undertaking with an ongoing life of its own?

-  Has the entity retained its identity?

- Has some or all of the staff been taken over by the new employer?

- Has the customer base transferred?

- Are the activities post transfer similar to those carried on before the transfer?

- Whether there was an interruption of the activity will be a factor?

- Has there been a transfer of tangible assets?

- What is the value of intangible assets at the time of transfer?

The Court noted that the above criteria were merely single factors in an overall assessment and could not be examined in isolation. The nature of the business or activity must be considered first; from that, the degree of importance in respect of each criterion would be considered.

The European Court in the Suzen case[4] placed huge importance on identifying the key assets of the business to be transferred, concluding that if “significant operational assets” are included the Regulations are likely to apply.

In considering whether a business is transferred as an ongoing concern the temporary closure of an undertaking does not in and of itself preclude the application of the regulations. However, they do not apply in the case a transfer where the undertaking is the subject of bankruptcy or insolvency proceedings. An exception to this arises where the main reason for the proceedings is to avoid the employer’s obligations under the regulations. [5]

The Regulations do not specifically refer to service provision contracts, i.e where services are contracted out/outsourced or where outsourced work is brought back in house and/or transferred to a new provider.  The Irish Courts have followed EU case law; determining that a transfer can occur in such situations. Allied to this, the Regulations may not automatically apply and all will depend on the facts of each individual case. This approach differs from the UK position which provides that the Regulations apply in every outsourcing situation.

The Irish position with regard to such contracts was comprehensively addressed in the recent EAT case of Cavan Industrial Cleaning Services Limited -v- 8 employees [6]The Tribunal followed the ECJ decision in Suzen, referred to above stating that

“the mere loss of a service contract to a competitor cannot therefore, by itself, disclose the existence of a transfer within the meaning of the Directive. In those circumstances, the service undertaking previously entrusted with the contract does not, on losing a customer, thereby cease fully to exist, and it cannot be considered that a business or part of a business belonging to it has been transferred to the new awardee of the contract.”

While the Regulations may apply to a transfer of a service provision contract in Ireland, what is being transferred must be a stable economic entity whose activity is not limited to performing one specific works contract. The key question concerns whether or not the new contractor has taken over the ownership of key assets, tangible or intangible, relating to the contract or has taken on the major part of the workforce in terms of numbers and skill who were mainly engaged on that contract prior to transfer. In the absence of such transfers of assets or work force the regulations will not be triggered.

In labour intensive businesses which are not asset reliant, such as catering, cleaning or security, the business is deemed to be the labour and little else. In those circumstances, the acceptance or otherwise by the new contractor/transferee of significant numbers of the previous company’s employees is of particular importance; a fact likely to determine whether the Regulations will apply.

The recent EAT decision Stobart Ireland Driver Services Limited –v- Fourteen workers[7] confirmed that there did not have to be any direct link between the first contractor and the second contractor for a transfer to take place. In dealing with the issue of transfer of the tangible assets, consideration was also given to the effect of the use as opposed to ownership of  the tangible assets. The tangible assets used in the running of the business, namely depot facilities and trucks, were not owned by either contractor. They were owned by the Company contracting out the work. The Tribunal held that this did not prevent the Regulations applying in circumstances where they were used both by the first contractor prior to the transfer and also by the second following the transfer.


Again, what does it mean?

The rights and obligations of the original employer arising from the employment relationship are transferred to the new employer.

These rights include all contractual rights and entitlements, prior service, benefits under collective agreements, trade union representation rights and disciplinary, grievance and other internal processes. They do not, however, include occupational pension benefits to employees, although the new employer must ensure that any scheme in place at the time of transfer is properly maintained in order to protect any accrued entitlement.


What happens if I need to reduce staff numbers?

Dismissal of employees by either the transferor or the transferee is not allowed solely on the grounds of transfer. The regulations do allow dismissal where an employer can show that it was justified by “economic, technical or organisational” reasons. The interpretation for this section of the regulations was considered by the EAT in the case of Smart Bros Ltd and Mexico 79 v Morris and Others [8]

The Tribunal held that these grounds are the same as grounds that justify redundancy. Redundancy relates to the role and not the employee. Such redundancies should be approached carefully, must be strongly grounded on clear factual evidence and will involve a forensic look at the new set of combined roles rather than just the old roles workforce being transferred.

If an employee terminates their employment because a transfer involves a substantial change in working conditions to their detriment, the “old” employer will be responsible for the termination akin to a constructive dismissal situation. An employee taking a case will normally take it against the old and new employer.

An employee cannot insist on continuing with the original employer where the part of the business in which they were employed has been transferred however, an employee cannot be forced to work for the new transferee.


What do I need to do?

It is essential to carry out a full assessment of all roles in the “old” and “new” business; have access to all paperwork including contracts of employment, company handbooks; policies and practices in the workplace. The case of Gary Treacy –v- Irish Packaging Recycling limited[9] highlights this. Mr. Treacy’s employment had been transferred to the Respondents, following a licence agreement with his former employer. The Court found that the respondents had breached Mr. Treacy’s contract of employment by serving him notice of redundancy allowing for only 1 months’ notice where he was entitled to 6 months’ notice on foot of his contract.  It became apparent that the Respondents had failed to carry out a due diligence of Mr. Treacy’s transferring contract entitlements. Had proper due diligence taken place it may have been apparent that Mr. Treacy’s entitlement to 6 months’ notice would have made him a poor candidate for redundancy.


What shall I tell our employees?

Both transferor and transferee employers are obliged to consult with representatives of the employees affected by the transfer in relation to:

• The proposed date of the transfer
• The reasons for the transfer
• The legal implications of the transfer for the employee and a summary of any -relevant economic and social implications of the transfer for them
• Any measures envisaged in relation to the employees.

The above information must be given not later than 30 days before the transfer takes place and, in any event, in good time before the transfer takes place.

Where there are no employee representatives, the employer is obliged to put in place a procedure for employees to choose a person to represent them from within their numbers. Where no representatives are elected, employees must still be informed in writing of the above information not later than the 30 day period.

Furthermore where any measures are envisaged in relation to employees by either transferor or transferee there is an obligation to consult with employee representatives not later than 30 days before the transfer is carried out and in good time before the transfer is affected. The Regulations require that the consultations must be conducted with a view to seeking agreement.

Understandably the 30 day time periods set out can cause significant difficulties in practice as negotiations regarding proposed transfers are often still ongoing close to the transfer date. In those circumstances it is advisable that any negotiations with staff should be made conditional on the transfer taking place. 


Any employer rights in all of this?

Section 21 of the Employees (Provision of Information and Consultation) Act 2006 obliges a transferor to notify the transferee of all the rights and obligations stemming from contracts of employment existing on the date of transfer which will transfer. While failure to notify or disclose relevant information will not affect the transfer of any obligations or rights of employees, it does give rise to a cause of action for the transferee employer for any loss that arises as a result of the failure to provide the information.

To rely on the section the transferee must provide a notice in writing to the transferor indicating the particular obligations the transferee considers will be owed to employees, setting out the type of information or documents they believe are held by the transferor and requesting the provision of that information within a specific period of time.

Ideally a thorough due diligence exercise should enable a transferee to arrive at a reasonably accurate assessment of possible liabilities and allow it to deal with them through warranties or indemnities and or an adjustment to transfer agreements/price for services.


Potential Claims

An employee or an employee’s representative can bring a claim to a Rights Commissioner in relation to an alleged breach of the regulations within six months of the date of the transfer. This can be extended to 12 months in exceptional circumstances. If the complaint relates to insufficient information consultation a maximum of four weeks remuneration per claimant can be awarded. If the claim relates to any other part of the regulations an award can be made not exceeding two years remuneration. Alternatively it is open to them to make an order for reinstatement or re-engagement or to direct the employer to comply with the regulations by taking a specific course of action.

In addition to the above it is also open to an employee to seek injunctive relief in the courts to prevent a transfer occurring until compliance with the Regulations has taken place.


Summary

While it is clear that in some cases it will be obvious that the regulations apply, in many situations this will not be the case and in taking a position in whether the regulations apply or not transferors and transferee’s will no doubt have regard to commercial considerations which may place them at opposing positions. The regulations themselves provide no mechanism for resolving this question and while either party could issue injunctive relief and seek a declaration from the High Court as to whether the regulations apply, such an option is not ideal not least from a cost perspective.

In practice, commercial dynamics, bargaining positions and resources in many cases resolve any issues. Arrangements involving indemnities or cost-sharing agreements to deal with any claims that may arise may be put in place.  To minimise risks, it is advisable that appropriate legal advice should be sought at an early stage.