House of Lords - European Communities

Select Committee on European Communities Twenty-Second Report

PART 2 EXAMINATION OF ISSUES

DEFINITION OF THE TRANSFER OF AN UNDERTAKING, BUSINESS OR PART OF A BUSINESS

8. Determining the precise scope of application of the current Directive has given rise to difficulties in practice, especially as regards situations such as insolvency and contracting-out. As already mentioned, on a number of occasions the European Court has been asked to give an interpretative ruling. In an attempt to clarify and help matters, the Commission initially proposed adding a new second paragraph to Article 1(1) of the Directive, aimed at excluding from the scope of the Directive a transfer of only an activity of an undertaking, especially one which did not involve the transfer of tangible or intangible assets. That amendment met with substantial criticism and opposition. The Commission has withdrawn it. Very shortly after the Commission put forward its amended proposal it published its Memorandum, partly in lieu of an attempt to secure an amendment clarifying what constitutes the transfer of an undertaking.

9. Witnesses generally welcomed the deletion. The TUC said: "Far from clarifying the law or removing elements of uncertainty, the proposed revision would have made a difficult legal regime almost impossibly complicated and would have diminished workers' rights in the process" (paragraph 2.1). In its response to the Government's consultation, the Employment Law Association (ELA) said that Article 1(1) in the Commission's amended proposal should be left as drafted[7]. Professor Paul Davies and Professor Bob Hepple (Davies and Hepple) did not, however, agree with the abandonment of the attempt to define the transfer of an undertaking. They supported the recommendation in our 1996 Report that the Directive should give a non-exhaustive list of matters to be considered in determining the applicability of the Directive in a particular case (paragraph 6). The Minister said that it was vital that the rules in the Directive were clear so that everybody knew where they stood (Q 2).

CONTRACTING-OUT AFTER S&UUML;ZEN

10. Shortly after the Commission brought forward its amended proposal and also published its Memorandum, the European Court gave judgment in the Süzen case (described above). In the Government's view, that provided further clarification of the scope of the Directive's application:

"whether or not the Directive applies in any particular situation depends (as originally established in the Spijkers case) on all the circumstances, with no single factor determining this; and

it does not apply where work is merely assigned to a new contractor in place of the one to whom it was previously assigned (or, by implication, where work is contracted-out in the first place) with no concomitant transfer of significant tangible or intangible assets or of a major part, in terms of numbers or skills, of the workforce previously carrying out the work".

The Minister offered examples of when the Directive might apply: "In labour intensive businesses where there are few assets, such as a cleaning firm or a computer services supplier, the crucial factor is likely to be whether or not the new employer takes on a significant amount of staff, in terms of either numbers or the skills required, from the old employer. If so, that would point towards being a transfer" (Q 3).

11. Davies and Hepple, however, noted that the Süzen decision had been strongly criticised and said that it had left the law in a confused and uncertain state. There was, in their view, no logical reason for distinguishing first- and second-generation contracts on the basis of the Court's reasoning. They added: "Moreover, from the viewpoint of the employment protection objective of the Directive, it is undesirable to lay down particular pre-conditions for the finding of a transfer, which may be open to manipulation by unscrupulous transferors and transferees". The implementation of the Committee's earlier recommendation (that the Directive should give a non-exhaustive list of matters to be considered in determining its applicability) would allow the necessary flexibility to deal with the wide variety of factual situations which may arise in Member States and avoid the manipulation of transactions by the parties (paragraphs 4-7).

12. The TUC said Süzen had increased rather than reduced the area of uncertainty. Employees wanted to know whether they have a right to transfer and work for the new contractor. "The approach in Süzen suggests that employers can avoid the rigours of the Directive by simply refusing to take on any of the employees and limit the value of any assets transferred". Unscrupulous contractors would be able to contest the applicability of the Directive. The TUC doubted whether an acceptable solution could be achieved at Community level and said consideration should be given to dealing with the problems at a domestic level by amending the TUPE Regulations (paragraphs 3.3, 3.5).

13. The CBI and the Business Services Association (BSA) also criticised the Süzen case for the uncertainty it had brought. The Court's ruling had, however, gone some way in excluding certain transactions from the Directive. The BSA said: "No longer do contracts of employment automatically transfer when a contracted-out service changes hands. Non-TUPE bids are possible if there is no significant transfer of tangible or intangible assets or the significant part of the workforce by the new employer". There were, on the other hand, potential transactional burdens associated with Süzen, in particular accrued redundancy liabilities for the current contractor (paragraph 3.5). John Doyle Group Ltd, a construction and local authority services group, gave the Committee a practical example of the potential extent of such liabilities (p 2).

14. The CBI referred to the concern that the Süzen case had caused to some employers because its outcome was different from their expectations of the law. The CBI said that business still needed certainty in this area of the law. It doubted, however, whether a formula could be found which would be acceptable to all the European participants involved (a view shared by the ELA[8]). Moreover, the Commission had withdrawn its attempt to find the necessary clarification and it might therefore be unproductive to seek to reopen the issue (p 2). The CBI urged the Government to take the opportunity of its Presidency "to seek the commitment of all Member States' Governments to agreeing a position which will allow companies to compete with a degree of certainty. Rather than working under the spectre of a law and its interpretation which is unpredictable, it is paramount to achieve a position of consistency"[9].

15. The Government, in its Consultative Document, recognised the problems caused by the uncertainty about the scope of the Directive. Any amendment, however, would clearly have to improve on the current position. It saw difficulties in securing an amendment to which all Member States could agree. The Consultative Document had sought views on the question whether all contracting-out situations should be brought within the legislation's coverage and on how such a change could best be achieved[10]. The Minister said that he had received a great deal of evidence and comment on the issue, views differing on whether the party was a first or second generation contractor. It was necessary to get the balance right. If not both the protection of employees and the effectiveness of contractual arrangements and the quality of goods and services delivered could be jeopardised (Q 5).

16. In our 1996 Report we recommended that if second generation contracting out was within the Directive it should be amended to enable potential contractors to acquire all information necessary to tender effectively. In its Consultation Document the Government also recognised the need for prospective contractors to have comprehensive and accurate information about the size and terms and conditions of employment of the relevant existing workforce where a contract was to be let on a basis that would constitute a transfer of an undertaking within the meaning of the Directive[11]. The Minister had received a positive response from consultees, though it was recognised that there might be difficulties in spelling out the requirements in any legislation (QQ 22-24).

LIABILITY FOR PRE-TRANSFER DEBTS TO EMPLOYEES—JOINT LIABILITY

17. The Directive currently gives Member States the option to provide that the transferor shall, after the transfer, remain liable in respect of obligations arising from the employment contract or relationship. A number of Member States have adopted some form of transferor/transferee co-liability, but not the United Kingdom. Under the initial proposal transferor and transferee would have been jointly liable for debts falling due after the date of the transfer, though Member States could limit the transferor's liability to obligations which arose before the transfer date and falling due up to a year after that date. The Commission's amended proposal retains mandatory co-liability and makes two changes. It clarifies the nature of the liability: the transferor and transferee would be jointly and severally liable. Secondly, that liability would extend to all obligations falling due before the date of transfer.

18. Davies and Hepple supported the changes, noting that they met the Committee's criticisms of the uncertainty to which the earlier version would have given rise. They drew attention to the existing regimes in some other Member States and suggested that the Directive should allow Member States to extend the transferor's liability to those debts which fell due within twelve months of the transfer (as was the case under Dutch and German law). This would facilitate the drawing up of suitable indemnities as between transferor and transferee, particularly in contracting-out situations, and would permit some "levelling-up" of protection (paragraphs 8-9). The TUC welcomed the removal of the one year limitation and considered the new Article 3(1) to be clearer. But some difficulties remained, especially in relation to what the TUC called the "twofold limitation" in Article 3(4). The effect of Article 3(4) (introduced in the Commission's initial proposal) would be to limit the extent of the transferee's liability in the case of transfers effected in certain insolvency situations. The TUC would have that limitation removed: "it is a matter of simple fairness that employees should be able to claim for unpaid debts against a solvent transferee" (paragraph 4.1).

19. The BSA noted that the Commission had accepted the arguments of industry in favour of joint and several liability for obligations arising after the transfer. The wording, however, did not appear adequate to deal with Government, NHS and local authority contracts (paragraph 2.3). The CBI, in its response to the Government's consultation, said that it was wholly opposed to the Commission's proposed treatment of liability, which the CBI believed would cause more confusion[12]. The ELA was also opposed to making joint liability mandatory: it would complicate the commercial contract between the transferor and transferee, where it was already common practice to apportion certain liabilities, create difficulties for insolvency practitioners, and require further measures to avoid the possibility of employees achieving double recovery[13]. Some form of agreed apportionment of liabilities was supported by Ladybrook Nursery, which was opposed to mandatory joint liabilities on religious grounds (p 1).

20. In its Consultative Document, the Government said that it proposed to oppose any amendment to the Directive making it mandatory to introduce joint and several liability between transferor and transferee. It thought that other Member States would be unlikely to support the Commission's proposal and that the matter would be best left to national law and practice. A particular disadvantage foreseen by the Government was its application in insolvency cases[14]. The Minister said that he was not necessarily opposed to the introduction of co-liability but that it was a matter to be left to individual Member States to consider (Q 7).

INSOLVENCY SITUATIONS

21. The existing Directive is silent on the question of its applicability in the context of insolvency and it has been for the Court of Justice to determine this. In Abels it said that the Directive does not apply to the transfer of an undertaking, business or part of a business in the course of insolvency proceedings[15]. But the Directive applies to a transfer of an undertaking subject to a procedure (short of, but comparable to, insolvency proceedings) aimed at ensuring the continuance of its business[16]. The Court has recently held, in Jules Dethier, that the Directive applies in the case of a liquidation of the transferor's assets where the undertaking continues to trade[17]. In this case the procedure had the same basic objective as insolvency proceedings but there were significant differences in the form and legal effects of the procedure[18].

22. The Commission's proposal would permit Member States to exclude the application of certain provisions of the Directive in cases where the undertaking, business or part of the business being transferred is "the subject of bankruptcy proceedings or any other analogous proceedings instituted with a view to liquidation of the assets of a natural legal person and under the supervision of a competent public authority". Davies and Hepple recalled that the Commission's text was based on an analysis of the Court of Justice's case law before Jules Dethier. That case changed the position, the Court having considered that the correct criterion to apply for the application of the Directive was not the purpose of the liquidation proceedings (i.e. the realisation of the assets of the company) but whether the company continued to trade after the liquidation process was initiated. Davies and Hepple said: "continuing to trade is indeed a much better criterion for determining the applicability of the Directive, rather than either the purpose of the legal procedure in question or the financial state of the company. If, however, as a result of the Jules Dethier case the application of the Directive to companies being wound up depends upon whether the liquidation procedure in a particular country is capable of dealing with solvent companies as well, we think that the Abels rule looks even more arbitrary and the case against embodying it in the revised version of the Directive is strengthened" (Supp. Mem. p 2).

(a) Dismissals/Amendment of contracts

23. Under the original proposal, when the Directive applied (i.e. in rescue proceedings), Member States could confer on competent judicial authorities power to alter or terminate contracts of employment in order to ensure the survival of the undertaking concerned. That provision (Article 4(5)) has now been deleted. Davies and Hepple said: "in view of the potential difficulty of applying this provision in the UK, its removal is a contribution to the clarity of the new set of proposals" (paragraph 14). The TUC also welcomed the deletion of this provision (paragraph 5.5).

24. It remains possible, however, under Articles 4 (3) and (4), for changes in the terms and conditions of employment, including dismissals and pay cuts, to be modified by agreement with the employees' representatives. The latest version of the proposal adds the qualification that such representatives must "enjoy sufficient independence to carry out the function assigned to them". Davies and Hepple considered this to be an improvement and urged that any eventual implementing legislation apply this principle fully (paragraph 15). The TUC also regarded the change as an improvement but retained their fundamental opposition to the regime in Articles 4(3) and (4). It would place unions in an invidious position. The TUC said: "Art. 4.3 is an additional and unnecessary device that could be used by unscrupulous employers to try to reduce labour costs and employees' contractual rights when this might not be strictly necessary". The TUC advocated making the application of any exception to the prohibition of dismissals in Article 4(1) dependent on agreement with employees' representatives under the Collective Redundancies Directive (paragraphs 5.2-5).

25. The Minister said that it ought to be possible for terms and conditions to be changed or dismissals to be agreed with representatives of the workforce if that was in everybody's long term best interests. He considered that the Directive provided a workable solution in the circumstances where the Directive would apply in a rescue situation. The requirement that the employees' representatives be independent was in line with that proposed in the Government's Consultation exercise (QQ 9, 10, 12).

(b) Fraudulent proceedings

26. The Commission's latest text proposes that Member States "provided the necessary measures to ban the use of fraudulent proceedings intended to deprive employees of the rights laid down in this Directive". Witnesses drew attention to the twofold nature of the prohibition and doubted its usefulness in practice. The TUC said: "The European Parliament alerted the Commission to the problem of so-called `Phoenix' companies in the less reputable sector of the economy which arise from the ashes of earlier business failures with disturbing frequency. Whether Art.3.5 is sufficient to prohibit such practices is an open question" (paragraph 5.1).

27. The Government's Consultative Document also identified difficulties in the application of such a provision; "by its nature, any fraud is likely to be discovered only after the event, when it can be dealt with accordingly under the relevant laws of each Member State". It considered the proposed amendment to be "unworkable and unnecessary"[19]. The CBI supported the Government's proposal to oppose any amendment to the Directive to ban the use of "fraudulent" insolvency proceedings[20]. The Minister believed the United Kingdom would receive support from other Member States in removing this amendment from the proposal (Q 16).

INFORMATION AND CONSULTATION

28. The Directive currently requires the transferor and transferee to inform the representatives of their respective employees affected by the transfer in good time of the reasons for the transfer, its legal and economic and social implications, and the measures envisaged in relation to the employees. Member States may provide that where there are no employees' representatives the employees themselves must be informed in advance when a transfer is about to take place. In its initial proposal the Commission proposed giving Member States the option to limit the information and consultation obligations to undertakings or businesses which normally employ 50 or more employees or which, if employing fewer than 50, fulfil the workforce-side's threshold for a works council. This change was intended inter alia to lessen the burden on small undertakings.

29. The amended proposal would no longer enable Member States to limit the information and consultation requirements to undertakings with 50 or more employees. The Commission has reverted to the current text of the Directive which enables limitation of these requirements to "undertakings or businesses which, in terms of the number of employees, meet the conditions for the election or nomination of a collegiate body representing the employees". As the Government pointed out, there is no such requirement, and therefore no such threshold, in the United Kingdom. The BSA wondered where this left the position here (paragraph 2.5).

30. Davies and Hepple noted that the Commission's argument for the new formula was "procedural rather than substantive", that the national works council thresholds should apply pending further harmonisation under the proposed national information and consultation directive. They agreed that the threshold should be the same for all the directives in this area and that the national information and consultation directive should be the lead directive. They accepted that as a consequence the United Kingdom would not have a threshold for these purposes under the Acquired Rights Directive. But they believed that no matter how small the firm such informing and consulting ought to take place and they questioned whether it was a serious burden on small businesses (paragraph 19).

31. The TUC considered the new Article 6(5) to be an improvement. It remained opposed to the introduction of any threshold (paragraph 6.1). The ELA said that the provisions of the Directive should apply to all employees, irrespective of the size of the employer, unless it was established by credible evidence that the disadvantages to small firms were significant and widespread such as justify the creation of a threshold[21]. Ladybrook Nursery, a small firm, supported the objectives of the Directive but wanted the freedom to be able to consult employees individually and directly (p 1).

32. The CBI said that it, in common with the views of employers across Europe, took the view that flexibility and voluntariness were important in the achievement of worker participation. They could support the Commission's proposal if it were to lead to or enable flexibility. As regards thresholds, the Commission should be wary of imposing burdens on business, and especially on small and medium sized enterprises (SMEs) (p 2). The CBI continued to believe that it would be useful to have a threshold[22].

33. The Government, in its Consultation Document, acknowledged that the current implementation of the information and consultation requirements of the Directive[23] had been criticised and were causing uncertainty. Instead of the current arrangements (under which an employer can choose to inform and consult either a recognised union, or elected representatives of the affected workers, when there is the prospect of a transfer of an undertaking or of redundancies), the Government has proposed that in future "the employer must inform and consult:

i.e.

not

only

The Government does not believe that employers should be forced to introduce works councils or similar bodies, though the legislation would permit employers to meet their obligations in such a way. If not, employees representatives would have to be elected. Where the employer generally provides the opportunity for elections but the employees fail to take it up (e.g. because no one is willing to stand) the employer should be held to have discharged his or her obligations by giving directly to the individual workers in the affected[24] workforce the information which would have been provided to their representatives in the case of consultation.

34. The Government's Consultation Document noted that the Acquired Rights Directive contained no provision for a lower limit, in terms of the number of employees, for its consultation requirements (although, as mentioned above, it allows Member States where there are statutory works councils to limit consultation requirements to firms with the number of employees necessary to require the establishment of such bodies). The Government did not propose to seek the introduction of a threshold for consultation on transfers, having taken the view that the importance of proper consultation in the case of a transfer was the same regardless of the numbers involved[25]. The Minister did not believe that it would be reasonable to propose a threshold, whether 50 or 20 workers, and so exclude a substantial percentage of the United Kingdom workforce from information and consultation. Nor did he think such a proposal would receive support from other Member States (QQ 17-18).

7 ELA's response to Government consultation, p 6. Back

8 ELA's response to Government consultation, p 8. Back

9 CBI's response to Government consultation, paragraph 8. Back

10 URN 98/513, paragraph 16. Back

11 URN 98/513, paragraphs 49-50. Back

12 CBI's response to Government consultation, paragraph 22. Back

13 ELA's response to Government consultation, pp 13-15. Back

14 URN 98/513, paragraphs 34-35. Back

15 Case 135/83, [1985] ECR 499. Back

16 In Abels, the Dutch procedure of "surséance van betaling" (judicial leave to suspend payment of debts). Also, the special administrative procedure for undertakings in difficulties considered in Case C-362/89, D'Urso and Others, [1991] ECR I 4105, and Case-C 472/93, Spano and Others, [1995] ECR I-4321. Back

17 Case C-319/94, Jules Dethier Équipement SA v Jules Dassy, Sovam SPRL: judgment of 12 March 1998. Back

18 The Court, at paragraph 29 of its judgment, summarised the differences as follows: "According to the reference by the national court, in the case of a liquidation the liquidator, although appointed by the court, is an organ of the company who sells the assets under the supervision of the general meeting; there is no special procedure for establishing liabilities under the supervision of the court; and a creditor may as a rule enforce his debt against the company and obtain judgment against it. By contrast, in the case of an insolvency, the administrator, inasmuch as he represents the creditors, is a third party vis-à-vis the company and realises the assets under the supervision of the court; the liabilities of the company are established in accordance with a special procedure and individual enforcement actions are prohibited." Back