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|Judgments - British Fuels Limited v. Baxendale and Another|
Wilson and Others v. St. Helens Borough Council
I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Slynn of Hadley. For the reasons which he gives I would allow the appeal of British Fuels Ltd. in both Mr. Baxendale's and Mr. Meade's cases and dismiss the appeal of Mr. Wilson and others against St. Helens Borough Council.
LORD SLYNN OF HADLEY
These two appeals raise important issues under the Transfer of Undertakings (Protection of Employment) Regulations 1981 S.I. 1981/1794 which were made to give effect to the Acquired Rights Directive (77/187/EEC) of the European Council of February 1977.
The Regulations provide as follows:
"3 A relevant transfer
These Regulations apply to a transfer from one person to another of an undertaking [which includes any trade or business] situated immediately before the transfer in the United Kingdom.
"5 Effect of relevant transfer on contracts of employment, etc (1) [Except where objection is made under paragraph (4A) below,] a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor in the undertaking or part transferred but any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee. (2) Without prejudice to paragraph (1) above [but subject to paragraph (4A) below], on the completion of a relevant transfer:-
(a) all the transferor's rights, powers, duties and liabilities under or in connection with any such contract shall be transferred by virtue of this Regulation to the transferee; and
(b) anything done before the transfer is completed by or in relation to the transferor in respect of that contract or a person employed in that undertaking or part shall be deemed to have been done by or in relation to the transferee. (3) Any reference in paragraph (1) or (2) above to a person employed in an undertaking or part of one transferred by a relevant transfer is a reference to a person so employed immediately before the transfer, including, where the transfer is effected by a series of two or more transactions, a person so employed immediately before any of those transactions.
(a) paragraph (1) above shall not apply to his dismissal; but
(b) without prejudice to the application of section 57(3) of the 1978 Act or Article 23(10) of the 1976 Order (test of fair dismissal), the dismissal shall for the purposes of section 57(1)(b) of that Act and Article 22(1)(b) of that Order (substantial reason for dismissal) be regarded as having been for a substantial reason of a kind such as to justify the dismissal of an employee holding the position which that employee held.
"12 Restriction on contracting out
Any provision of any agreement (whether a contract of employment or not) shall be void in so far as it purports to exclude or limit the operation of Regulation 5, 8 or 10 above or to preclude any person from presenting a complaint to an industrial tribunal under regulation 11 above."
The words in square brackets were inserted by the Trade Union Reform and Employment Rights Act 1993 as from 30 August 1993.
It is common ground that, both under English law and under Community law, the national court should construe a regulation adopted to give effect to a directive as intended to carry out the obligations of the directive and as not being inconsistent with it if it is reasonably capable of bearing such a meaning (see Garland v. British Rail Engineering Ltd.  2 A.C. 751 and Litster v. Forth Dry Dock & Engineering Co. Ltd. and Anor  1 A.C. 546). In Sabine Colson and Anor v. Land Nordrhein-Westfalen (case 14/83)  E.C.R. 1891 the European Court said that, pursuant to Member States' obligations under Article 5 of the EC Treaty, "National courts are required to interpret their national law in the light of the wording and the purpose of the directive in order achieve the result referred to in the third paragraph of Article 189." Accordingly where different options are available and effective to achieve the objects of the Directive it is for Member States to choose between them. It is also common ground that if a Regulation does not properly implement the Directive, the Directive can only be relied upon by the employees involved if they can show that the employer is an emanation of the state. It has not been suggested that BFL is such an emanation or that St. Helens Borough Council is not such an emanation.
The Directive is "on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of businesses." It begins by reciting that economic trends have brought about many changes in the structure of undertakings and that "it is necessary to provide for the protection of employees in the event of a change of employer, in particular, to ensure that their rights are safeguarded;"
Article 1 of the Directive provides that the Directive shall apply "to the transfer of an undertaking, business or part of a business to another employer as a result of a legal transfer or merger."
By Article 3:
Member states have, however, a discretion to provide that the transferor shall continue to be liable in respect of obligations arising under the contract of employment in addition to the liability of the transferee.
By Article 4:
In outline the relevant facts are as follows:
Baxendale and Meade
Mr. Baxendale was employed from 1977 and Mr. Meade from 1978 by the British Coal Corporation ("B.C.C.") or its subsidiary National Fuels Distributors Ltd. ("N.F.D."). On 1 September 1992 the undertakings of N.F.D. and of British Fuels Ltd. ("B.F.L."), another subsidiary of B.C.C., were merged. By letters dated 20 August 1992 B.C.C. gave both men three months' notice of dismissal on the grounds of redundancy saying "your effective date of redundancy will . . . be 28 August 1992." They received wages in lieu of notice, statutory redundancy pay and further redundancy pay under B.F.L.'s own arrangements. By a letter also of 20 August 1992 B.F.L. offered the men employment with effect from 1 September 1992 on terms which it is common ground were less favourable than those which they enjoyed with N.F.D.
Both men signed the offer letter accepting employment and they began to work on 1 September 1992. On 22 January 1993 B.F.L. notified them that for statutory purposes their service with N.F.D. would be counted as continuous employment with their service with B.F.L. They were given statutory statements incorporating this change into their existing terms which they accepted, Mr. Meade on 23 April and Mr. Baxendale on 14 May 1993.
On 23 September 1994 Mr. Meade claimed before an Industrial Tribunal under section 11 of the Employment Protection (Consolidation) Act 1978 (now section 11 of the Employment Rights Act 1996) that he was employed by B.F.L. on the terms applicable to his employment with N.F.D., having already in the county court claimed a further £10,000 under B.C.C.'s Redundancy Payments Scheme. He is still employed by B.F.L.
On 6 February 1995 Mr. Baxendale was dismissed by B.F.L. as being redundant. Before an Industrial Tribunal in addition to claiming further redundancy pay, and a declaration that he had been unfairly dismissed he sought a declaration under section 11 of the 1978 Act that until dismissed he was entitled to be employed by B.F.L. on the terms of his employment with N.F.D.
Before separate Industrial Tribunals the two men's claims failed, though on different grounds. They also failed before the Employment Appeal Tribunal. The Court of Appeal decided in favour of the men but gave B.F.L. leave to appeal.
In Mr. Meade's case the Industrial Tribunal held that Regulation 12 did not provide that a dismissal for a reason connected with the transfer was void but rather that it should not be a ground for dismissal. They concluded, therefore, that the dismissal by N.F.D. was an effective dismissal and the applicant could have brought proceedings for unfair dismissal under Regulation 8 within three months of the dismissal, if he could show that the dismissals was "triggered by the transfer or a reason connected with it." Conversely the employer might have a defence under Regulation 8(2) to a claim for unfair dismissal if he could show that the viability of his business was threatened (paragraph 13). Here Mr. Meade "freely negotiated terms and conditions with a new employer against a background of compensation for loss of his employment and its benefits with N.F.D." (paragraph 14). This he could do without contravening Regulation 12 or the Directive.
In Mr. Baxendale's case the Industrial Tribunal found that he was not dismissed for redundancy, or at all, in 1992 but only in 1995. He accepted the new B.F.L. terms either initially after the transfer or when he signed the revised statutory statement of terms on 14 May 1993. He had not claimed constructive dismissal in September 1992 and in respect of any less advantageous terms he was "in effect compensated for this through receipt of the enhanced 'redundancy' package and pay in lieu of notice" (paragraph 27).
The Employment Appeal Tribunal concluded that Mr. Meade had been validly if unfairly dismissed and that neither at Common Law nor by virtue of the Regulation or the Directive was the dismissal to be treated as a nullity. They accordingly rejected Mr. Meade's appeal. They said that if the dismissal was by virtue of Community Law a nullity they would have held that the variation of terms both in the statement signed on 25 August 1992 and in the statement signed on 23 April 1993 were rendered void by Regulation 12. The E.A.T. added, however, that:
As to Mr. Baxendale they held that he was validly if unfairly dismissed and that the statement of terms "properly reflected the new contract that he then entered as subsequently varied." They did not, however, accept that a transferred contract (i.e. if the dismissal was a nullity) could be varied; Regulation 12 prohibited that.
Eight men, including Mr. Wilson, and one woman were employed by Lancashire County Council ("L.C.C.") at the Red Bank Controlled Community Home run by L.C.C. They were employed in different capacities - e.g. as teacher, gardener-groundsman, team leader. In 1990 L.C.C. gave notice that because of the cost involved it would not continue to run the school after 30 September 1992. St. Helens Borough Council ("St. Helens") agreed to assume control of the school on 1 October 1992 on the basis that running the school would involve no charge on St. Helens' resources. This meant that there would have to be a reorganisation entailing a change in the workforce. Some staff stayed with L.C.C. in different jobs; others were made redundant. Some 76 were offered jobs by St. Helens. Each of the appellants was offered employment by St. Helens commencing on 1 October 1992 on terms which were different from those on which they had previously been employed. They each also received a letter from L.C.C. terminating their contracts of employment with L.C.C. with effect from 30 September 1992.
In June 1994 the appellants claimed under the Wages Act 1986 (now the Employment Rights Act 1996) that they were being paid less than they were contractually entitled to when working for L.C.C., that the difference was an unlawful deduction from wages and that they should be paid the difference. St. Helens succeeded before the Industrial Tribunal, failed before the Employment Appeal Tribunal but succeeded in the Court of Appeal.
The appellants claim that their terms of employment with L.C.C. immediately before transfer were more favourable than those which were applied when they began work with St. Helens immediately after transfer. They received no termination payment on dismissal. It is agreed that, though the Industrial Tribunal found that some were promoted with greater allowances, and others lost the responsibilities and allowances, findings remain to be made as to the terms and conditions which applied to the appellants' employment.
As in the case of Mr. Baxendale and Mr. Meade, at the time of the dismissal and re-employment of all the people involved in Wilson's case, it was not realised that there had been a transfer of an undertaking within the meaning of the Regulations and the Directive. The claim that there had been such a transfer on which previous terms of employment continue to apply was raised for the first time in Wilson's case on 2 March 1993. The essence of St. Helens' reply was that the new terms had been agreed and subsequently confirmed by the appellants and that such agreement was lawful and binding.
The Industrial Tribunal found that if L.C.C. or St. Helens had been faced with claims of unfair dismissal they could have successfully relied on Regulation 8(2) on the basis that there were economic, technical or organisational reasons entailing changes in the workforce:
The Industrial Tribunal continued:
But the Industrial Tribunal ruled that, even if as a matter of law the L.C.C. terms applied to the new appointment immediately on transfer, it was possible for the terms to be varied subsequently, either expressly or by conduct. They found that in Wilson's case in relation to all the employees:
Some waited till March 1993, others until 10 June 1994, before indicating through their unions that they did not accept the new contracts. The Industrial Tribunal clearly had no doubt that the contractual variation had been affirmed by conduct.
It appeared from a subsequent decision of the Chairman of the Industrial Tribunal following an application for a review that the defence of "economic, technical or organisational reasons" under Regulation 8(2) had not been specifically argued at the hearing though the facts relevant to such a defence had been fully gone into. A review of the earlier decision was refused partly on the ground that the tribunal had in the alternative held that the new terms had been affirmed and thereby the terms of the employees' contracts varied.
The Employment Appeal Tribunal held that in considering whether there had been an unlawful deduction of wages, it was crucial to decide whether the reason for the alteration of the terms of the contract for employment was the transfer of the undertaking. If it was, the variation was ineffective; if it was not, then the parties were free to vary the terms. The Employment Appeal Tribunal held:
In particular Regulation 8(2) (the "eto" defence) did not apply because the applicants were not dismissed--"nothing in Regulation 8(2) permits a variation in terms or limits the mandatory scope of Regulation 5(1) of the 1981 Regulations."
Accordingly the variation was ineffective and the terms of the original contract remained in force.
The Court of Appeal
In the Court of Appeal Beldam L.J. drew a series of propositions from the consideration of speeches in your Lordships' House in Litster v. Forth Dry Dock & Engineering Co. Ltd. and Anor  1 A.C. 546 and of a number of cases in the European Court of Justice, namely: Wendelboe v. L.J. Music ApS (Case 19/83)  E.C.R. 457, Foreningen af Arbejdsledere i Danmark v. A/S Danmols Inventar (Case 105/84)  E.C.R. 2639, Foreningen af Arbejdsledere i Danmark v. Daddy's Dance Hall A/S (Case 324/86)  E.C.R. 739 and P. Bork International A/S v. Foreningen af Arbejdsledere i Danmark (Case 101/87)  I.R.L.R. 41, viz:
"(4) Under Article 4 the transfer does not by itself justify dismissal by the transferor or transferee unless such dismissal is for economic, technical or organisational reasons entailing changes in the workforce. The employer who dismisses an employee for one of the reasons specified in Article 4(1) can thus justify the dismissal.
"(5) In order to determine whether the only reason for dismissal was the transfer itself, account must be taken of the objective circumstances in which the dismissal occurred, in particular whether it took place on a date close to the transfer and whether the workers concerned were re-engaged by the transferee.
"(6) A dismissal effected before the transfer and solely because of the transfer of the business is in effect prohibited and when considering the application of Article 3(1) is required to be treated as ineffective.
"(7) The crucial question is what is meant by a contract of employment being terminated 'by' a transfer. To answer this question it is necessary to decide what is the effective reason for the termination of the contracts of employment.
In short, neither the former employer nor the succeeding employer may dismiss the employees simply because of the transfer, but they are not prohibited from terminating their contracts of employment on the occasion of the transfer if they do so on economic, technical or organisational grounds."
He said that in Wilson's case there was clearly evidence on which the Industrial Tribunal could, as it did, find as a fact that the reason for the changes in the employees' terms of employment was an economic or organisational reason--L.C.C. ceased running the Home and the employees were no longer needed by L.C.C. to work there so that they were redundant. It was not, therefore, correct to say that the transfer was the reason for the change in conditions of employment. This was so even if the actions of L.C.C. before the transfer are deemed to have been done by St. Helens. Beldam L.J. said:
The other members of the Court of Appeal agreed.
As to Mr. Meade and Mr. Baxendale Beldam L.J. held that on the evidence before the Industrial Tribunal the transfer was the reason for the dismissals. "If it had then considered the consequences, it could only have concluded that the purported dismissals were ineffective and that the contracts of employment continued as if originally made with B.F.L." (paragraph 63).
He did, however, agree that if the dismissal was a nullity the agreement of the terms offered by B.F.L. on 20 August was not effective by reason of Regulations 5 and 8 read with Regulation 12. The change in the terms introduced in B.F.L.'s letter of 22 January 1993 was:
The appeals before your Lordships' House
Two issues are broadly common to the two appeals. The first is whether, on the transfer the employees were entitled to retain the benefit of their previous terms and conditions. The first issue in effect raises the question as to whether the dismissals or purported dismissals by the previous employers took effect or whether they were nullities. Put another way, the question is whether the dismissed employee can compel the transferee to employ him or whether he is given the right to enforce as against the transferee such remedies under national law as he could have enforced against the transferor. The second is whether, if despite dismissal they were entitled to retain the benefit of their previous terms, the employees either by initially agreeing terms with their new employers, or by continuing to work for the new employers or (in the case of Mr. Meade and Mr. Baxendale by accepting the statement of terms and conditions subsequently) varied any entitlement to the previous terms and conditions.
Paragraph 1 of Regulation 5 provides that transfer does not (i.e. by itself) operate to terminate the contract of employment but "any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made [with] the transferee." That replaces the position in English law where the sale of a business by one employer to another does not automatically transfer a contract of employment. There has to be a novation, a new contract by which the employee agrees to be employed by the new employer. The regulation makes such a new contract unnecessary; the "novation" takes place by operation of the regulation. Paragraph 5 of Regulation 5 does not, however, in terms provide that an actual dismissal, before, on or after the transfer, has no effect so that the transferee is obliged to employ the employee until such time as he has an independent justification for terminating the employment.
Paragraph 2 of Regulation 5 takes the matter one step further. On such a transfer "all the transferor's rights, powers, duties and liabilities under or in connection with any such contract" are transferred to the transferee and anything done before the transfer by or in relation to the transferor in respect of the contract or a person employed in that undertaking shall be deemed to have been done by or in relation to the transferee. Those rights, powers, duties and liabilities must obviously depend on the law governing the contract.
In English domestic law it is clear that the dismissal of an employee by an employer determines the working relationship between them. As Lord Oliver of Aylmerton said in Litster v. Forth Dry Dock & Engineering Co. Ltd.  1 A.C. 546:-
Thus, English courts will not as a general rule, though there are exceptions, specifically enforce contracts of employment since (see Treitel, Law of Contract 9th ed. p. 927):
On the other hand if the determination is in breach of contract the employee can claim damages for wrongful dismissal. If it is unfair he may be able to obtain statutory compensation for unfair dismissal or an order for reinstatement or re-engagement. But the contract of employment is gone save for the purpose of enforcing rights under it other than a right to go on working.
The transferor's liability is thus to pay damages or to comply with an order under the relevant employment legislation for compensation or reinstatement, but it is not to continue actually to employ the employee he has dismissed. It is that liability of the transferor under the contract which is transferred by virtue of the Regulation to the transferee. Paragraph 2(b) makes it doubly sure that the transferee is to be liable because if the transferor dismisses the employee that act is deemed to have been done by the transferee.
Paragraph 3 of Regulation 5 makes it clear that the reference to a person employed is a reference to a person employed immediately before a transfer. Paragraph 4A in force from 30 August 1993 (i.e. after the transfer in these cases) provides that no transfer of the contract, or of rights and liabilities under it, are to pass if the employee informs the transferor or the transferee that he objects to becoming employed by the transferee. Paragraph 4A does not mean, in my view, that but for an objection by the employee the right to continue actual employment with the transferee would exist if the transferor dismisses the employee. What it means is that there is no automatic novation, which would impose obligations on the employee, so that any claims which the employee may have against the transferor must be enforced, if at all, against the transferor. The transferee is not liable for them.
There is an important provision in respect of an employee's rights under domestic law on a transfer in paragraph 1 of Regulation 8. Dismissal before or after transfer by transferor or transferee is deemed to be unfair, for the purposes of legislation dealing with unfair dismissal, if the transfer, or a reason connected with it, is the reason or a principal reason for his dismissal. Equally there is an important provision for employers in that the dismissal is not to be deemed to be unfair where:
These provisions both seem to me to point to the dismissal being effective and not a nullity. If there is no dismissal there cannot be compensation for unfair dismissal. It is because the dismissal is effective that provision is made for it to be treated as unfair for the purposes of awarding compensation under employment legislation.
B.F.L. were right to point out, as the recitals to the Directive expressly recognised, that the Regulation affects many transfers which occur as an everyday matter--not just on the merger of giants but in the sale of a business or part of a business, or in the redistribution of a business or part of a business or in the redistribution of a business between subsidiary companies. Changes may be needed in order to harmonise terms and conditions of the combined workforces--either by agreement or by dismissal (which, if it is unreasonable, will attract compensation) followed by an offer of re-engagement. It does not follow, they submit, that an obligation to take on all the workforce on the existing terms is necessarily in the best interests of employees. It could deter transfers which overall would be in the interest of the employees. Moreover where adjustments have to be made to working conditions, detailed questions may fall to be litigated as to whether the various adjustments do mean that the employee's terms overall are less favourable or as to whether the employer has discharged the onus of showing that the "eto" reason relied on was one "entailing changes in the workforce" and whether it was the reason or a principal reason for dismissing the employee.
It follows in my opinion that under the Regulation the dismissals are not rendered nullities; nor is there an automatic obligation on the part of the transferee to continue to employ--to find work for--the employees who have been dismissed.
If this reading of the Regulation is right the next question is whether the Regulation complies with the Directive.
The European Court of Justice has considered the meaning of Articles 3 and 4 of the Directive in a number of cases.
In the first place the Court made it clear that only those employed on the date of transfer can claim the benefit of Article 3 of the Directive (Wendelboe v. L.J. Music APS (case 19/83)  E.C.R. 457). The Court ruled that whether a contract of employment or an employment relationship existed at such date:
The Advocate General further expressed the opinion that: see p. 460.
In Foreningen af Arbejdsledere i Danmark v. A/S Dansmols Inventar ("Mikkelsen's case") (case 105/84  E.C.R. 2639 the Advocate General said:
The Court concluded:
"The protection which the directive is intended to guarantee is however redundant where the person concerned decides on his own accord not to continue the employment relationship with the new employer after the transfer. That is the case where the employee in question terminates the employment contract or employment relationship of his own free will with effect from the date of the transfer, or where that contract or relationship is terminated with effect from the date of the transfer by virtue of an agreement voluntarily concluded between the worker and the transferor or the transferee of the undertaking. In that situation Article 3(1) of the directive does not apply." (Paragraphs 15 and 16).
In Katsikas v. Konstantinidis and Others (cases 132/91 138/91 139/91)  E.C.R. 6577 the Court added to this last point: