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Baroness Carnegy of Lour: My Lords, I am not sure whether the noble Lord is in order--

Noble Lords: This is the gap.

Baroness Carnegy of Lour: My Lords, I am sorry.

Lord Pearson of Rannoch: My Lords, I am grateful to my noble friend, but I cleared that point before I started.

However, it is clear that the committee has some real doubts about the revised directive and, if I am not mistaken, the existing directive has already been received with some doubt in commercial and industrial circles in this country. Much Community law which is intended to protect employment appears to have had rather the opposite effect. Indeed, unemployment has reached, and is continuing to reach, all-time highs in the Community. It is for that reason that the British Government have wisely done their best to avoid the conditions of the social chapter.

I do not know whether this directive is being taken under the single market provisions of the Treaty of Rome, but I imagine that it is; and, even if it is not, I imagine that it is subject to the qualified majority vote when the time comes. Nor do I know how my noble and learned friend on the Front Bench will respond to the doubts which have been expressed by the noble and learned Lord, Lord Slynn of Hadley, and the extent to which the Government may agree with the committee's doubts.

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My purpose in intervening is to ask my noble and learned friend whether he can give any indication as to the amount of support that we may expect from other European countries when the matter comes to a vote, and therefore any indication of the prospect of avoiding what appears to be some unusually unhelpful European legislation.

5.27 p.m.

Lord Lester of Herne Hill: My Lords, I have had the pleasure and privilege of serving on Sub-Committee E of the Select Committee on the European Communities under the firm and, if I may say so, entertaining and enlightened chairmanship of the noble and learned Lord, Lord Slynn of Hadley, during its inquiry into this important subject. As has been said, it is important for workers and employers throughout the European Union. The noble and learned Lord explained the main issues clearly and I shall do my best to add to what he said rather than to repeat exactly the same points.

The closer integration of Europe has led to a significant increase in the number of trans-national company takeovers and mergers. The proposed acquired rights directive specifically addresses the social consequences of such takeovers. The directive is aimed at ensuring that with regard to their contract of employment and their rights, the employees of a business which has been transferred are in exactly the same position after the transfer as they were before. The transfer must not be used as an excuse to dismiss them.

With the important aims of the directive in mind, I shall concentrate on just two of the many issues raised in the report: first, on the scope of the directive and, secondly, on its application to share transfers.

First, as regards the scope of the directive, the sub-committee was concerned about the confused wording of Article 1 which governs the type of transactions to which the directive would apply. The new and perplexing wording of Article 1 would remove the clarity and certainty from--if I dare mention this in the presence of the noble Lord, Lord Pearson of Rannoch--the well-established case law of the European Court of Justice in this area. The interpretation of this unsatisfactory language would be a fertile source of lengthy and expensive legal challenge in the future. Its uncertainty would be open to abuse as those bidding to acquire companies sought to manipulate the description of the transaction to remove it, and the employees concerned, from the important protection given by the directive. Surely, the text of the directive should be amended and clarified to reflect the simple, practical test already laid down in the case law of the Luxembourg court. Whether or not a transfer comes within the scope of the directive should continue to depend on whether the business transferred retains its identity after the transfer.

Speaking for myself, I am glad that the sub-committee felt able to support Article 2(2) of the proposed directive which would prevent member states, including the United Kingdom, from excluding part-time, temporary and other so-called atypical

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workers from the definition of "employee" and consequently from the protection of the directive. The number of people employed in such posts in the European Community has greatly increased in recent years. In this country the growth in part-time and temporary employment has been greatest among women, who now constitute 86 per cent. of all part-time employees. The principle of equal treatment for men and women enshrined in Article 119 of the Treaty of Rome increasingly requires equal rights for part-time and atypical workers. It is partly for this reason that it is important that the directive should apply not only when an entire business is transferred but also when an activity carried out by that business is merely contracted out for another firm to perform. Women are employed predominantly in cleaning, catering and the other ancillary services which are commonly contracted out. Experience of the operation of compulsory tendering without employee protection, such as that offered by the proposed directive, shows that the greatest cuts in conditions, hours and pay have occurred in those areas where the staff are predominantly female. The exclusion of contracting out from the directive can have indirectly discriminatory and severe adverse consequences for women.

Experience of the operation of compulsory tendering and contracting out in the UK has also shown that it tends to lead to disproportionately high levels of redundancy among workers with health problems, those nearing retirement age or those with a disability. It is clear from the case law of the Luxembourg court that the existing directive applies to contracting-out activities. The sub-committee concluded that the test of whether or not the business in question retained its identity--stated by the Court of Justice to determine the scope of the directive, and consequently used to determine the applicability to contracting-out--constituted a suitable, workable approach. We thought that that test should be expressly incorporated in the text of the directive in place of the strained and confused language of the current Commission proposal.

I turn finally and briefly to the application of the directive to takeovers by way of share transfer. The proposed directive is silent on the issue, yet a change in the control of a business resulting from the transfer of shares is likely to affect the employees of that company just as much as a change in control resulting from the sale of the business and its assets to a new employer. As the directive currently stands, employees in the former situation would not be entitled to protection against dismissal and the right to consultation which the directive would currently accord to workers in the latter position. We concluded that the question of affording protection to employees should depend upon the substance rather than the legal mechanics of an operation. To exclude takeovers by way of share transfer from the protection offered by the directive would arbitrarily and disproportionately affect the rights of a significant section of the labour force. It would distort competition, giving those bidding who acquire control of a business by way of share transfer an unfair advantage because they could avoid the indirect cost of

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protecting the acquired rights of employees. It would be inconsistent with developments in other Community legislation in this area.

I have mentioned just a few of the many aspects of the sub-committee's detailed report. I favour the rest of the sub-committee's conclusions. Noble Lords who have read it will see that the sub-committee would like to see European legislation strengthening the right of employees to information and consultation during the takeover process. That would entitle an additional 10 per cent. of workers in the United Kingdom, along with those employed on seagoing vessels, to consultation and information without imposing unreasonable or excessive burdens. We looked at other Community legislation in this field and made recommendations on consolidation and harmonisation. We also looked more widely at employment issues and suggested that the directive, which was silent on the matter, might additionally protect employee pension rights.

This is a wide-ranging, enlightened and positive report which should provide a practical contribution to further work on this important and complicated subject. I hope that the Brussels Commission and the Government will take note of our conclusions when any new proposals are brought forward. They may be cheered up by the fact that, although the sub-committee was critical of some of the Commission's proposals, it was untouched by europhobia, little Englandism or mad cow disease of the kind that one sometimes hears, even in your Lordships' Chamber.

5.36 p.m.

Baroness Turner of Camden: My Lords, I congratulate the sub-committee on the report which is today before the House. The issue is a somewhat complicated one. The issue of the protection of employees' rights in the event of mergers and transfers is one that has been discussed in this House on previous occasions as a result of regulations introduced by the Government to comply with EU directives. However, the present report sets out the issues with admirable clarity, as has the noble and learned Lord, Lord Slynn, in his presentation this afternoon.

Until relatively recently, when a business was transferred and thus the identity of the employer changed, the employment contract was automatically terminated. Employees then had no right to protest and had no protection against dismissal, other than any redundancy rights to which they might already have been entitled. The Transfer of Undertakings (Protection of Employment) Regulations 1981 (commonly known as TUPE) were intended to put into effect the EU Acquired Rights Directive 1977, the purpose of which was to protect the rights of employees when the undertakings for which they were working were transferred to other employers. The noble and learned Lord has already said this afternoon that there are two other related directives.

Matters have moved on since then. Mergers and takeovers have become very common, some of them trans-national. In this country in particular there has for

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a number of years been a greater takeover culture than in some other EU countries. Therefore, there is an even greater need for employees to be assured that they will have some protection against arbitrary actions should the firms they work for be taken over by someone else. Moreover, the pattern of employment has changed. For these reasons, it is only right that the provisions of the existing directives should be reconsidered and perhaps strengthened.

In general, therefore, I welcome the Commission's new proposals, although I have some reservations which I will spell out this afternoon. On the positive side, I very much welcome the proposition that part-time and temporary workers should be covered by the directive. We have seen profound changes in the labour scene. It is fashionable to talk about flexible working as though it is an enormously positive development. Some employers may think so, and certainly that appears to be the view of the Government. It is not the view of all employees. It is largely responsible for the general feeling of lack of security which is prevalent today even among those who are in employment. Much of the new employment that has been created is part time, mainly of women and much of it poorly paid. A significant minority of part-time employees earn well below £4 an hour, and some as little as £2 an hour. Many such workers have little sense of security.

Many employers have turned away from offering continuous employment, and offer short-term contracts--often for only two years. Again, that adds to the general feeling of insecurity. It adds to the feeling that many employees have that, so far as their employers are concerned, they are just disposable items. It is therefore right and proper in my view that such employees should have the protection of the directive. I am glad to see that the committee, too, supports that.

I see that the committee does not however believe that agency workers should be included. I am not altogether happy about that. More and more companies are seeking to cut down on their labour costs by employing people who are not part of their own workforce but hired from outside--often for quite long periods. I know that there could be complications, but I think that that is worth looking at again. I am not certain that the committee is entirely happy with its own view on that, as the report says:

    "we do not believe that agency workers should necessarily be included in the definition of 'employee'".
The committee goes on to suggest that in the longer term the directive should attempt a definition of the term "employee". I agree entirely with that.

As to the definition of an undertaking, I am inclined to the views expressed by the TUC and the ETUC that the attempt, as they put it, to drive a wedge between "activity" and "economic entity" could lead to confusion. That view seems to be shared by the committee. In particular, I should not like to see that used as a means of exempting some forms of contracting out. The EOC has drawn attention to the impact that that could have on the employment of women in the public sector, where compulsory competitive tendering has made the contracting out of services very common. As the EOC points out, and as the noble Lord, Lord Lester,

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said this afternoon, that will affect more women than men. The EOC therefore believes that the protection of the directive and of the TUPE regulations must apply, otherwise the effect could well be discriminatory.

I welcome the committee's finding that employees should be protected under the directive where there is a change of control of a business resulting from a transfer of shares. Again, the noble Lord, Lord Lester, dealt with that in some detail. It is also important, in my view, that employees should be protected in insolvency situations. While it is of course right that nothing should be placed in the way of the continuation of a business, with the resulting continuation of employment for the employees concerned--no one suggests that--employees do have rights in insolvency situations, and those should of course be protected. I know that it is a complicated and difficult issue, but it is something which should be considered properly.

On the issue of joint liability, I note that differing views were expressed by a number of witnesses. I believe that the proposal is intended to provide for extra security for workers caught up in a takeover situation, but it does, as the committee says, lack clarity, and I am inclined to agree with that. I note also that the TUC does not particularly favour the proposition. There seems to be general agreement that in British circumstances it will not produce anything very much in the way of additional security for employees.

On the issue of information and consultation, I can see no reason at all to limit information and consultation obligations to undertakings employing 50 or more employees. The result of such a provision would leave very many employees with no protection whatsoever: 9.2 million employees work in undertakings where there are fewer than 50 employees.

I agree entirely with the TUC, which made a submission along those lines to the committee, that that provision is quite unacceptable. I hope that it does not continue to be part of the directive. I am pleased to see that the committee is in agreement with that, although I cannot see why 20 employees should be the threshold either. That still leaves about 25 per cent. of workers with no protection. I am glad that the committee has agreed with the TUC and the union concerned (the NURMT) that the directive should be extended to sea-going vessels, and that it also does not agree that member states should have the option of excluding the information and consultation provisions.

I shall say a word about pensions. I have been under the impression for some time--largely as a result of Ministers' statements--that it was accepted that in takeover situations it was necessary to provide that pensions provision would be comparable. No one believes that it is possible in a takeover, where entirely new pension arrangements may be intended for the merged company, to provide exactly the same pensions. But there are decisions on record which would appear to confirm the view of pensions as deferred pay.

It seems entirely proper therefore that comparable pension provision should be available for employees after a takeover. I would expect the Government to agree with that in the light of some of the statements

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made in the past, and, in particular, in the light of the advice the Government have given, I understand, to local authorities. However, it does seem that as things stand, the issue is not entirely free of ambiguity, and therefore it is appropriate that it should be dealt with in the directive.

Finally, I of course agree that rationalising and harmonising these directives would be a good idea. So, a very good report. In the main, this is a set of propositions that is worthy of support, with the few reservations to which I have referred.

5.47 p.m.

Lord Fraser of Carmyllie: My Lords, one of the attractions of the offer that the Prime Minister made to me to leave the role of Lord Advocate and to return to the mainstream of politics was that never again should I have to offer an opinion on the acquired rights directive. It is accordingly with some dismay that I rise to respond to this debate.

We have had an interesting, albeit short, debate. I wish to join in the expressions of thanks to the committee for the detailed work undertaken in a short period of time on a subject widely recognised as being one of the more difficult and contentious areas of European employment law. It says much for the committee also that it has been able to reach such a consensus on so many important issues.

The Government have in recent years received many representations about the working of the 1977 acquired rights directive. It would be wrong of me to suggest that we do not have serious misgivings about the way it is now being applied to situations not envisaged at the time of its adoption. That is why we welcomed the opportunity afforded by the Commission's proposal to reopen discussion about the proper scope of the directive and the way it operates. Our concerns are shared by others who also wish to see a sensible revision to the directive. In short we wish to ensure that the directive is fit for its purpose and applies only to those situations to which it is suited.

However, while we welcome the opportunity afforded by the proposal to discuss these matters, that does not mean that we welcome all of its detailed provisions. Many aspects of the proposal have been rightly criticised as unclear, uncertain in their effect, or simply unwelcome. We do not wish to see a revised text which would add to the wealth of litigation which has so bedevilled the existing directive. The report rightly draws attention to many of those issues.

Both the Commission's proposal and the report address a wide range of complex issues. I am sure the House will understand that in the time available to me today it may not be possible to do full justice to all of them. However, in responding perhaps I may put on record the Governments' views. I shall also attempt to respond to specific points that have been raised in the course of the debate.

Of the main issues raised in the report, I think it would be fair to say that more than half deal, in one way or another, with the scope of the proposal. By that

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I mean they concern either the situations to which the revised directive would apply--or not apply--or to which categories of employees would be covered by it. Bearing in mind that we are dealing with amendments to a directive which has been in place for nearly 20 years, I find it significant that it is thought necessary to address such basic issues.

The noble and learned Lord, Lord Slynn, referred to the definition of an undertaking. Noble Lords will be aware that perhaps the key element of the proposal, to which we and the committee attach considerable importance, concerns the question of what constitutes an undertaking or part of one. When is there a transfer of an undertaking--and when is there not?

The report took the view that the present text of the directive is open to criticism because it had given rise to a substantial amount of litigation both in our national courts and before the Court of Justice. Reference was also made to the need to amend Article 1 of the directive and to the unsatisfactory nature of the Commission's proposal. It was stated that this was only likely to create greater uncertainty. Again, I welcome your Lordships' findings on those points. They are views which the Government share and which we have been stating for some time now.

There are, of course, those who have said that it is unnecessary to amend the directive at all on this point as the case law of the Court of Justice has put matters beyond doubt. I was attracted by the observation in the report by Mr. Paul Goulding of the Employment Lawyers Association. The report states:

    "The problem with the new text of Article 1 of the directive is that, as Mr. Goulding of the ELA puts it, 'it removes such clarity and certainty as has crept into the law to date'".
That appears to me to sum it up admirably. I am not personally satisfied that a state of absolute clarity or certainty has yet been reached. It is clear that even though the directive has been in existence for nearly 20 years there are still cases concerning its scope to be determined by the Court of Justice. We cannot be certain what direction the court will take in those or in future cases. I therefore welcome the support which the report gives to our call for changes to clarify what constitutes the transfer of an undertaking.

As to where the line should be drawn in respect of the contracting out of services, I may have misunderstood the noble and learned Lord, Lord Slynn, but I thought that he was recording the Government's position as being that all contracting out should be excluded. Perhaps I may make it clear that that is not our position. We recognise that contracting out covers a wide range of situations, some of which will necessarily involve the legitimate transfer of an undertaking. However, that is certainly not true of all contracting out or of all transfers of a contract from one contractor to another. Often such changes would not entail the transfer of an organisational framework or any of those other matters on which any common sense understanding of the term "undertaking" is founded. Inevitably, as the report has recognised, no two factual situations are alike. But what is needed is a clear definition which will enable employers, employees and national courts to assess whether or not there has been

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the transfer to which the directive applies. In that respect, I believe that there is common ground between the Government and the committee. It is what we are seeking in negotiations on the proposal.

It may be helpful if I comment here on developments concerning this aspect of the Commission's proposal. The European Parliament has not yet given its formal opinion on the proposal. I understand that it is expected to be given later this year. However, I also understand that Commissioner Flynn has advised Parliament that following receipt of that opinion the Commission proposes to withdraw the present proposal and substitute a new one. The new proposal which may be put forward would not include changes to Article 1 of the directive. We have had no formal communications from the Commission on this matter so I cannot enlighten the House further at the moment. We shall need to consider any revised proposal when it is made, and we shall ensure that the House is informed in the normal way. However, it follows from my earlier remarks that the Government remain convinced of the need for clear limits to be placed on the scope of the directive and for any revised text to be made as transparent as possible.

Perhaps I may say to my noble friend Lord Pearson that there is a considerable degree of agreement among member countries of the European Union that there should be a change here. I cannot claim that the desire for change points in the same direction. However, countries such as Germany and France, for example, which he might assume are not in favour of any change to the directive, would like to see some change brought about as the indications of the ECJ's more recent decisions start to become clear. If this particular directive is to be amended it would be amended under Article 100 and in those circumstances it would be necessary for unanimity rather than QMV.

Perhaps I may turn to a number of the more specific issues which were raised, one of which was share transfers. The committee commented that the directive should be extended to cover changes of control by share transfers. I shall dwell on that issue only briefly because I believe that our position is clear from the evidence that we gave in the course of the inquiry.

The aim of the directive is to safeguard employees' rights in the event of a change in the legal identity of their employer. The provisions were drafted with that in mind. They make sense in that context. However, in the case of a share transfer there is no change in the legal identity of the employer. The employer remains the same and the employees' contractual and statutory rights are unaffected. To extend the scope of the directive to cover such transfers would, in our view, alter its whole rationale.

Of course, no one would deny that a change in the effective control of a company can have implications for its employees, although it would not necessarily do so. However, there are many situations which can have as many, or greater, implications for employees. For example, changes to the senior management or the direction of the company may take place without any change in share control. That does not mean to say that we can or should legislate for all these situations, still less so at a European level.

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Our existing framework of employment legislation provides proper protection where there is no change in the legal identity of the employer. It is right that it should be so. While I recognise the concerns which led the committee to this conclusion in the report, I regret to say that it is one issue at least on which we do not see eye to eye.

Perhaps I may turn to the definition of "employees". The noble Baroness, Lady Turner, may be interested to know that I agree with her. I welcome and share the report's conclusions that member states should not be allowed to exclude part-time and temporary workers from the definition of employees for these purposes. It is important to recall that the basic purpose of the directive is to ensure that employees continue to enjoy the same legal rights against their new employer as they enjoyed against their former employer. It should not matter that individuals concerned were part-time or employed on a temporary basis. Whatever rights they had before the transfer should transfer and our law already provides for that.

However, I cannot agree that there should in the longer term be a definition of an employee for this purpose. In practice it would be difficult, perhaps impossible, to maintain one definition for this purpose and certain other directives without extending the definition more generally to other areas of our domestic law. I believe that that would be unwelcome and ultimately damaging to our national interest. However, I disagree with the noble Baroness in so far as I welcome the recognition in the report that the proposal goes too far in respect of agency workers.

As regards insolvency, I believe that the report rightly identifies the fact that the key issue is to find the best means by which the interests of employees affected by insolvency situations can be properly safeguarded. Its conclusion that the directive should not provide an obstacle to effective corporate rescues and the saving of jobs must surely be right. That is why we are of the view that insolvency situations should be taken outside the scope of the directive. We believe that to be the simplest and most effective solution and one which is supported by those who know best the problems which can arise--the practitioners themselves. As I read the report, their evidence was clear that the application of the directive in insolvency situations was damaging and that the Commission's proposed distinction between liquidation and non-liquidation proceedings was unhelpful. However, while the total removal of such situations from the scope of the directive would be our preferred option we are fully prepared to explore other options which would ease those problems.

Another issue, which was referred to by the noble and learned Lord, Lord Slynn, and the noble Lord, Lord Lester, was the issue of joint liability. The report did not support the Commission's proposal for mandatory joint liability of the transferor and transferee employers. I welcome that conclusion. We have long said that that is a prime example of the Commission's desire to harmonise for the sake of it. That is a tendency we resist. We do not object to harmonisation when there

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is a clear case for it, but, in our view, no such case has been made here and we are pleased and relieved that your Lordships' committee came to the same conclusion.

Finally, I turn to the matter of information and consultation. I welcome the recognition that there is a balance to be struck between the burdens on businesses, and small businesses in particular, and the protection of employees. We are all in favour of employers properly informing and consulting their workforce. That is nothing less than good business practice. However, I need not remind your Lordships of the importance that we attach to allowing employers and employees to develop arrangements which best suit their particular business. An obligation on all businesses to inform and consult through representatives, as exists at present, may simply ignore the realities of small business life where direct communication with employees will often be more practical and effective.

Therefore, it is important to be clear that the Commission's proposal is not to exclude firms below a certain threshold from all information and consultation rights but to limit the specific obligation to consult through representatives. Employers in those excluded businesses would still be under an obligation to provide information direct to the affected employees. Clearly, there will be room for discussion as regards the precise information which should be provided. That will be consistent with our wish to have the lightest possible legislative burden on small firms.

Quite where the threshold should be drawn is a matter for negotiation. Your Lordships will have noted that there was disagreement in the course of our short debate because the noble and learned Lord, Lord Slynn, reflected the committee's view that the threshold should be at 20 employees while the noble Baroness indicated that she considers that figure to be still too high. I stress that it is a matter of representation and not whether or not information should be required.

The subject of pensions is difficult, and I do not believe that it is appropriate for me to attempt to comment further on that.

I conclude by thanking all noble Lords and the noble Baroness who contributed. In the presence of the noble Lord, Lord Lester, and the noble and learned Lord, Lord Slynn, I offer my views with some trepidation, given their expertise and the expertise of others in your Lordships' Chamber. But I hope that in spelling out in some detail the Government's response to this extremely worthwhile report, it will be helpful to those who have a particular interest in this most difficult area of employment law.

6.2 p.m.

Lord Slynn of Hadley: My Lords, I am grateful to your Lordships who have been present for the debate and who have participated in it. I am particularly grateful to the Minister for his extremely detailed response to our report.

On contracting out, I was summarising the evidence of the DTI which said that,

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    "the application of the Directive to contracting for services restricts entrepreneurial freedom, may inhibit quality improvements as well as denying the client the benefit of substantial cost reductions, is damaging to competition and thus inhibits the prospects for enterprises within the EU to compete and prosper in increasingly global markets".
Despite that I am glad the Minister feels that there is room for some contracting out to be included with the directive.

I am sorry that the noble Lord, Lord Pearson of Rannoch, has not read our report. As the inquiry went on, it became evident how important is this whole subject. If the noble Lord now reads the report, he will see an area, as in so many areas, where the European Court of Justice has been extremely cautious and constructive. He will see in the report that we commended much, pointed out many drafting inadequacies, and sought to make constructive suggestions. I am most grateful to your Lordships for this debate.

On Question, Motion agreed to.

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