Important decision on ETO reasons defence in TUPE cases

A recent decision of Liverpool Employment Tribunal in Royden & Others v Barnett Solicitors has serious adverse implications for outsource providers and their clients. The ET held that the new outsource provider was not able to rely on the ETO reason defence under TUPE, when it relocated the work to its own offices. The employees were therefore entitled to unfair dismissal compensation rather than just redundancy pay.

We believe this could have a chilling effect on outsourcing. The case is also one of the first to consider the application of regulation 4(9) which deals with transfers which involve a substantial change in working conditions to the material detriment of an employee.

In Royden & Others v Barnett Solicitors, the short facts were that 6 employees of the Birkenhead office of one law firm, LLW, claimed that their contracts of employment had transferred pursuant to TUPE to Barnetts when Barnetts had won LLW’s contract with a building society for the provision of conveyancing services to borrowers referred to them by the society. The employees had resigned on the basis that Barnetts had repudiated their contracts, or alternatively, that the transfer would be a substantial change to their working conditions to their material detriment under reg 4(9) of TUPE, entitling them to treat themselves as constructively dismissed, by requiring them to relocate to Barnetts’ office in Southport, some 20 miles away across the Mersey on the other side of Liverpool.

The ET rightly had to make a series of step-by-step decisions to decide the case:

1. Was there a transfer under TUPE?

The ET found there was no old fashioned “transfer of undertaking”, but did decide that the award of the contract to Barnetts was a “service provision change” pursuant to TUPE, as there was an organised grouping of employees on the contract work at LLW, despite those employees not spending all of their time on the contract work.

2. Were the Claimants assigned to that service provision work?

The ET considered the not very complete evidence in relation to the work and duties of the 6 claimants, and, following the approach in Duncan Web Offset v Cooper, the ET concluded that only two of the claimants had been assigned to the contract work, as their work on other business was peripheral, and therefore only they were transferred and protected by TUPE. The 2 claimants who worked in the call-handling team for the entire conveyancing department of LLW, not just the contract team, were excluded, as were the remaining 2 claimants who worked in the post-completion team, as the ET was not satisfied that any of them were in practice dedicated to the contract work.

3. Were the Claimants constructively dismissed?

While the ET was uncertain whether there was an actual breach of contract as a result of the relocation, the ET decided that the requirement of Barnetts that the 2 transferring claimants work in Southport was an adverse material change in working conditions under Reg 4 (9), regardless of what their written contracts and their implied terms might say, given the location of their homes in relation to the new place of work. The decision does not say where their homes were, but we assume it was somewhere in the vicinity of Birkenhead.

4. Was the potential automatically unfair dismissal avoided by the ETO reason defence under Reg 7?

The ET ruled it was clear there were economic and organisational reasons for the relocation by Barnetts, but surprisingly the ET ruled that that these reasons did not “entail” (as the Regulations state) changes in the workforce, that is a change in headcount or the duties of the relevant employees. To put it another way, according to the Tribunal, the reason the direction to work in Southport was given by Barnetts was not to bring about a reduction in the workforce. On the contrary, Barnetts were recruiting employees to help them carry out the work under the newly won contract. So the 2 remaining claimants were automatically unfairly dismissed under TUPE and entitled to compensation on that basis, rather than to statutory redundancy pay only.

Comment

The decision that the ETO reason defence did not apply is rather surprising, since TUPE 2006 equates an ETO reason dismissal with redundancy and workplace relocation is one of the classic examples of redundancy.

There are only a few decisions at Appeal Tribunal level where relocation has been considered in the context of an ETO reason, and all of them are under the old TUPE, which did not contain reg 4(9). In one, Collins v John Ansell & Partners, it was accepted that relocating a business some 30 miles into central London was an ETO reason, but the question whether it did or did not in fact involve a change in the terms of the numbers or functions of the workforce as a whole was left open by the English EAT for lack of evidence. In another, Convy v Saltire Press Ltd, a new printing factory was set up by a different group company at a Greenfield site using new technology, involving a changed organisation and management structure with day to day operation organised on a completely different footing, and the old hot metal printing works in a different location run by a different group company was shut down and its work transferred to the new plant. This was such that according to the Scottish EAT “it was difficult to imagine a more classic case of the application of [the ETO defence] to protect the employer” against automatic unfair dismissal claims. So the employees of the old printing business were just entitled to redundancy pay.

We assume that Barnetts would have a different organisation and management structure from LLW, so would have imagined that the Employment Tribunal in their case would have had little difficulty following the Convy line of reasoning.

It remains to be seen whether there will be an appeal, and whether the two successful claimants will get a much bigger award of compensation for unfair dismissal than if they had been made redundant.

In the meantime, business thinking of changing outsource provider, or outsource providers thinking of tendering for an outsource contract, where the work would be done in a different location, will have to think again about the cost/risk in the tender, given any new provider may well now face not just redundancy costs, but the much higher potential exposure to unfair dismissal claims from the old workforce.