In this issue, we discuss a dispute about a construction of a TUPE indemnity clause about employment responsibilities for staff in a concession at Harrods Department Store in London. We also cover a recent case on transfer of employment between associated employers. And we bring you up to date on a case about automatically unfair dismissals under TUPE that is going to the GB Court of Appeal.

Construction of a TUPE indemnity clause

In Urban Retreats Ltd v Harrods Ltd (GB High Court, 12 October 2018, unreported) a dispute arose between the commercial parties under a licence agreement on the construction of an indemnity clause. Urban Retreats had operated a hairdressing and beauty salon in Harrods department store since 2001. In 2017 Harrods terminated the agreement in accordance with its terms. This was initially disputed but the parties reached a settlement under which it was agreed the licence would terminate on 22 April 2018. Urban Retreat’s employees who worked in the concession transferred to Harrods under TUPE. Harrods claimed that, under the original licence agreement (which had not been varied by the settlement agreement) it was entitled to commission payments for March and April 2018 and reimbursement of salaries, including holiday for 1-22 April 2018, totalling £387,000 (which Harrods had paid). It proposed to deduct that amount from the second tranche of monies due under the settlement agreement. A dispute about this reached the High Court by way of an application for declaratory relief in respect of construction of the licence agreement, and for payment of sums owing.

In question was clause 12(H) of the licence agreement which provided for Urban Retreats to indemnify Harrods against all employment liabilities, as defined, in connection with "(a) all salaries, emoluments or other sums payable ... to or in respect of any member of staff ... which fall due ... prior to the date of termination ... (b) any liability or obligation arising under or in connection with any member of staff ... prior to the date of termination ... (e) any other claim by a member of staff the responsibility for which passes to [the defendant] ... and which has its cause ... prior to the date of termination of this agreement.".

Urban Retreats argued that since the salaries and commission were payable in arrears they had not "fallen due" prior to the date of termination of the concession agreement. Harrods said that it would be contrary to the overall scheme and commercial purpose of the agreement for it to bear the costs of employment of the staff relating to a period when Urban Retreats had been the employer and had taken the benefit of the services of the employees in question.

The High Court agreed with Harrods. Thus:

“The scheme of cl.12 (H) and the context in which it was to be interpreted was that the indemnity was intended to cover all staff liabilities prior to the termination date and the passing of the business to the defendant. There was nothing surprising about that. Otherwise the claimant would receive a windfall since it would receive the revenue relating to the employment but not incur the expense”.

The phrase “which fall due” had to be interpreted as including the case where the obligation to pay had arisen even if the date for payment had not yet arrived. So Harrods was entitled to an indemnity in respect of the relevant staff costs under cl.12 (H) (a). And it would also be entitled to an indemnity under cl.12 (H) (b) since the staff costs were also "any liability", even if not yet payable (there was no warrant for reading "any liability" as meaning "any other liability"). The relevant sums would also be within the “sweeping-up” provision in cl.12 (H) (e), so that everything prior to the termination date was Urban Retreat’s obligation under the indemnity, even if not yet paid. The relevant payments made by Harrods were "contractual payments" within the definition of "employment liabilities" for the purposes of cl.12 (H).

Continuity of employment and associated employers

Section 218 (6) of the Employment Rights Act 1996 and Article 14 (6) of the Employment Rights (Northern Ireland) Order 1996 protect continuity of employment on a transfer of an employee between “associated employers”. These provisions apply, even when there is no business transfer, to a case where an employee of an employer is taken into the employment of another employer who, at the time when the employee enters his employment, is an associated employer of the first employer. In such a case, the transfer of employment does not break continuity of employment and the period of employment with the first associated employer counts towards employment with the second associated employer.

There has been considerable litigation over the meaning of ‘associated employer’, which is defined in the ERA 1996, s 231 and Article 4 of the 1996 Order. These provide that:

‘… any two employers are to be treated as associated if:

(a)    one is a company of which the other (directly or indirectly) has control, or

(b)   if both are companies of which a third person (directly or indirectly) has control …’

It has been questioned whether ‘control’ in this context includes de facto, or functional, control as well as de jure control by a numerical majority of shares in the general meeting of a limited company. However, the balance of cases support a view that control should be determined solely by the question of whether the controller has the majority of votes in the general meeting of a company (Secretary of State for Employment v Newbold [1981] IRLR 305, EAT; Washington Arts Association Ltd v Forster [1983] ICR 346, EAT; Hair Colour Consultants Ltd v Mena [1984] ICR 671, [1984] IRLR 386, EAT; Umar v Pliastar Ltd [1981] ICR 727; South West Launderettes Ltd v Laidler [1986] ICR 455, [1986] IRLR 305, CA).

The test of de jure control was more recently confirmed by the EAT in Schwarzenbach t/a Thames-Side Court Estate v Jones UKEAT/0100/15/DM. However, in a case where the lines of ownership and control were obscured by complicated offshore and family arrangements, the EAT considered it permissible, on the facts, for an employment tribunal to draw inferences as to what was the actual position in terms of the ultimate shareholding in, and voting control of, a company.

This approach has now been followed by the GB EAT in SD (Aberdeen) Limited v Wright UKEAT/0003/18/JW, where it held that an employment tribunal was entitled to draw an inference that two companies (Chiahealth Property Limited and SD (Aberdeen) Limited) were associated where a director (Mr Kerr) described as a “principal actor” in both companies could have given evidence to shed light on the issue, but failed to do so. Thereby the employee’s continuity of employment was protected on transfer between the two entities. Lady Wise summarised the approach thus:

“The single issue in the present appeal is whether there was sufficient in the evidence or by implied admission for the tribunal to draw the inference that Mr Duncan Kerr had legal control of both companies, Chiahealth and SD.  The case of Schwarzenbach is a good example of a tribunal being able to draw such an inference where respondents had chosen not to shed light on the issue of ultimate legal control.  Accordingly, while voting control rather than mere de facto control is required for the purpose of section 231, it seems to me to be clear that evidence of de facto control can properly be used to draw an inference of voting control if the respondent has an opportunity to clarify the legal position and fails to do so”.

This is a welcome, pragmatic, decision. Who controls a company is often an opaque question, especially to a claimant employee, who has no inside knowledge of what is really going on. It is surely right to make the appropriate inferences, especially when the directors and controllers of a company decline to give evidence to contradict an employee’s case.

TUPE and automatic unfair dismissal

It will be remembered from the TUPE update in October 2018 that in Hare Wines Ltd v Kaur UKEAT/0131/17 the GB EAT found that an employee was automatically unfairly dismissed because of a TUPE transfer.  The dismissal took place before the transfer at the encouragement of the transferee because the transferee did not want to inherit working relationship problems the employee had with her supervisor.  Although it was argued that this issue was personal to the employee, the sole or principal reason for dismissal was the transfer itself. Leave has now been given for appeal to the Court of Appeal (Case A2/2017/2990) and the case is listed for hearing, to float on 19 or 20 February 2019.