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15-11-2013

In July, we reported on the case of Kavanagh v Crystal Palace Football Club

Under The Transfer of Undertakings (Protection of Employment) Regulations, 2006 (“TUPE”) the dismissal of an employee will be automatically unfair if the sole or principal reason for the dismissal is the transfer itself, or a reason connected to it that is not an “economic, technical or organisational” reason (ETO reason) entailing changes in the workforce.

If the dismissal is a pre-transfer dismissal then liability for the automatically unfair dismissal will pass to the buyer. If there is an ETO reason then liabilities for pre-transfer dismissals will remain with the seller. This is obviously an issue when trying to secure a buyer for an insolvent business.

The Employment Appeal Tribunal held in Kavanagh that for an ETO defence to succeed there must be an intention to change the workforce and to continue to conduct the business, as opposed to dismissing the employees with the aim of making the sale more attractive to a potential buyer. It seemed therefore that the ETO defence will rarely be available on an administration unless it is clear that at the time the dismissals were made, improving the chances of a sale was not a factor in the dismissal.

The case has since been appealed and it has been reported that the Court of Appeal has reversed the Employment Appeal Tribunal’s decision observing that Administrators “will almost always have a transfer of the undertaking as their ultimate objective” but that does not mean that the reason for dismissals made by them will always be to make the business more attractive to a purchaser. They can also be made to allow the business to carry on trading.

On the facts of this case the dismissals at the Club had been made to allow the Club to carry on trading, that was an ETO reason and therefore liability did not pass to the purchaser.

The Court of Appeal noted that the proceedings involved the interaction of the legislative regime governing the position of employees on transfers of the undertakings and the regime governing companies in serious financial difficulties which have been put into administration and that interaction of the two regimes will often involve tension between two policies.

The method for resolving this tension is the ETO provisions of Regulation 7 of TUPE which is intensely fact-sensitive. Whilst the decision is a very welcome one to insolvency practitioners, the employment tribunal will remain alert to attempts to dress up dismissals for ETO reasons and so this area remains fraught with difficulties.

Sarah Rushton (srushton@moonbeever.com)

Tel: 0207 539 4147

This is intended for general information only and should not be considered as giving advice in relation to any individual case nor be taken as applying to any particular case. No liability is accepted for any such use of the information.

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