ADI (UK) LIMITED v. FIRM SECURITY GROUP LIMITED [2001] EWCA Civ 971

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE EMPLOYMENT APPEAL
[2001] EWCA Civ 971Venue TRIBUNAL, Royal Courts of Justice, Strand, London, WC2A 2LL, Friday 22 nd June 2001
Between
ADI (UK) LIMITEDFIRM SECURITY GROUP LIMITED
Before
Lord Justice Simon BrownLord Justice MayLord Justice Dyson
[1]This is an appeal by ADI (UK) Ltd against a majority decision of the Employment Appeal Tribunal handed down on 18 th April 2000. The EAT dismissed ADI's appeal from a decision of the Employment Tribunal, also by a majority, of 23 rd October 1998. Leave to appeal was given by Mummery LJ, who said that the question whether there is a transfer for the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("The 1981 Regulations") continues to cause problems. He considered that the case deserved a full hearing in this court, even though the issue of transfer is usually a question of fact which is unappealable. Facts[2]With one exception, the facts are uncontroversial. They were found by the Employment Tribunal as follows (omitting document references):
"ADI's business is contracting out staff to clients to provide security services. Its clients operate in a number of different activities which range from shopping centres to airports. The contract to provide security services at the Darwin Shopping Centre, Shrewsbury, began in August 1997. The existing security employees of Hillier Parker, the clients, were transferred to ADI. The CCTV, control room and clocking system remained the property of Hillier Parker but were essential to the security operation within the Centre. There was a locker room, a canteen and a monitoring room within the centre. The locker room and canteen were used by other employees of Hillier Parker. There had initially been a dispute about the payment of overtime to the transferred employees but we accept the evidence of Mr Willer that this had been settled after representative employees had visited the First Respondent's head office at Heathrow. ADI employed nine security officers in Shrewsbury. They had no other contracts in the area, the nearest being at Birmingham International Airport. In a letter dated 29 December 1997 ADI gave Hillier Parker three months' notice that they wished to terminate the contract. Hillier Parker agreed and following another letter, dated 19 January 1998 asking for an early release date this was agreed at 16 March 1998. It stated in part "
The situation is getting worse due to the sickness record of the staff and we would appreciate an earlier date than the end of March to withdraw our services". John Marlow held a meeting with ADI's existing security officers on 4 February intending to take them on. We accept Mr Marlow's evidence that the meeting became hostile when it became clear that the Second Respondent would not in the normal course of working expect overtime to be necessary. The hostility also arose because the Applicants were asked to fill in another form for completion of a vetting procedure. We accept that the Applicants declined to say that they would "come over" to the Second Respondent to Firm Security, and that finding is supported since the forms were left on the table in the room where the meeting took place and none were filled in and returned. The Second Respondent wrote to all the Applicants on 27 February 1998 informing them that none of them would be offered a position at the Darwin Centre and suggesting that they talked to their company "to clarify your future employment status with on the termination of the Darwin Centre contract". The Second Respondent wrote to Hillier Parker on 17 February setting out the pros and cons of taking on the existing staff. There was a meeting between the Second Respondent and Hillier Parker on 18 February. This was followed by a letter from Hillier Parker to ADI informing them that the Second Respondent had been awarded the contract and they would be taking over the contract from 16 March 1998. In a letter dated 24 February, the Second Respondent informed the First Respondent that " ... it is not our intention to take on the existing staff and [from Süzen and Betts] ... it is apparent that the transfer of undertakings is not an issue in this situation. An advertisement was placed in the local paper for security staff. It referred to uniformed customer liaison officers. The necessary numbers to cover the contract were appointed. The Second Respondents commenced operation at 6 am on 16 March 1998. The operation was essentially the same as before, although there was a greater emphasis on customer liaison and different uniforms were provided." The Council Directives and the 1981 Regulations[3]The 1981 Regulations were made to implement Council Directive 77/187/EEC and there are numerous cases in the European Court of Justice and in this jurisdiction which grapple with the intractable problem of what at the fringes constitutes a transfer of an undertaking for their purposes.[4]The Council Directive recites that economic trends are bringing in their wake changes in the structure of undertakings through transfers of undertakings, businesses or parts of businesses to other employers as a result of legal transfers or merges. It was necessary to provide for the protection of employees in the event of a change of employer in particular to ensure that their rights were safeguarded. Article 1 of the 1977 Directive originally provided:
"1. This 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."
[5]The scheme of the Directive was and is to safeguard the rights of employees of the transferor employer by providing that the transferor's rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer shall be transferred to the transferee. The transfer of the undertaking or business is not to constitute grounds for dismissal. If the contract of employment or the employment relationship is terminated because the transfer involves a substantial change in working conditions to the detriment of the employee, the employer is regarded as having been responsible for termination of the contract of employment or the employment relationship. Paragraph 5 of the 1981 Regulations provides that a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor. The employment takes effect after the transfer as if it had originally been made between the employee and the transferee. All the transferor's rights, powers, duties and liabilities are transferred. Paragraph 8 provides:
"(1) Where either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated for the purposes of Part V of the 1978 Act and Articles 20-41 of the 1976 Order (unfair dismissal) as unfairly dismissed if the transfer or a reason connected with it is the reason or principal reason for his dismissal."
[6]By paragraph 8(2), however, a dismissal of an employee is justified and not unfair if the reason or principal reason for dismissing the employee is "an economic, technical or organisational reason entailing changes in the workforce of either the transferor or the transferee before or after a relevant transfer". The same language appears in Article 4.1 of the Directive.[7]The 1977 Council Directive was amended by Council Directive 98/50/EC of 29 th June 1998. This took effect slightly after the events which were the subject of the proceedings in the Employment Tribunal and just before the Employment Tribunal's hearing. One of the amendments effected by the 1998 Council Directive was to amend Article 1 of the 1977 Directive so that it now reads:
"1.(a) This Directive shall apply to any transfer of an undertaking, business, or part of an undertaking or business to another employer as a result of a legal transfer or merger. (b) Subject to subparagraph (a) and the following provisions of this Article, there is a transfer within the meaning of this directive where there is a transfer of an economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary."
[8]This amendment was explicitly designed to reflect decisions of the European Court of Justice which considered the nature of a transfer for the purposes of the 1977 Directive. One of the preambles to the 1998 Directive explained that considerations of legal security and transparency required that the legal concept of transfer be clarified in the light of the case law of the Court of Justice. This clarification was not to alter the scope of the 1977 Directive as interpreted by the Court of Justice.[9]Notwithstanding the retention in the amended Article 1 of the 1977 Directive of the requirement for the transfer to result from "a legal transfer or merger", that requirement has been emasculated out of existence by purposive judicial interpretation. The literal words, and indeed the whole structure, of the Directive appear to require some legal relationship effecting a transfer between the transferor employer and the transferee employer, such as, for instance, might take place upon the assignment of an undertaking or the sale of a business. But the cases have eliminated the need to look for such an orthodox legal relationship. Speaking generally, the question of transfer may arise where an undertaking or business carried out by one or more employees ceases to be carried out by one employer and starts to be carried out by another employer. If the undertaking or business is "an economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity", there is or may be a transfer within the meaning of the Directive. Thus the concept of transfer is now a judicially constructed fiction derived from the purpose of the Directive and the Regulations to safeguard the rights of employees. Mr Jeans QC, counsel for the appellants, submitted that the purpose of the legislation is to ensure continuity of employment. If the job continues, the employee or employees should continue to undertake it, subject to the normal incidence of employment rights and obligations between employer and employee. The EAT decision[10]In the present case, the majority of the Employment Tribunal was not satisfied that there was an economic entity which was transferred. They consider that no significant tangible or intangible assets were transferred. There was a contract for the provision of security services at a particular place, but ADI's business did not cease to operate. This was a single contract for a specific customer which ceased. There was no relevant transfer of an undertaking or part of an undertaking and the Regulations did not apply.[11]The EAT did not uphold the majority decision of the Employment Tribunal that there was no economic entity. The EAT said that on the face of the findings of the Employment Tribunal, the entity supplying, in the Darwin shopping centre, the security services, consisting of nine security officers, making use of the facilities provided and many miles away from the nearest similar operation run by ADI, looks very much like a qualifying entity. In this court, there is no respondent's notice seeking to challenge this finding of the EAT and Mr Randall, counsel for Firm Security Group Limited, the effective respondents to this appeal, did not seek to do so. For my part, I agree that the security services provided at the Darwin shopping centre constituted a discrete economic entity for the purpose of the Council Directive and the 1981 Regulations.[12]Both the Employment Tribunal and the EAT considered what I may here shortly refer to as the ECM point. This arises from the case of ECM (Vehicle Delivery Service) v. Cox reported in the EAT at [1998] IRLR 416 and in the Court of Appeal at [1999] ICR 1162 . The hearing before the Employment Tribunal in the present case took place in between these two decisions. I shall have to consider the ECM case in greater detail later in this judgment. For present purposes, the ECM point can be explained by reference to a short passage in the judgment of Morrison J, President of the EAT, at page 419. Having stated that neither the presence nor the absence of any one factor will demonstrate that a transfer of an undertaking has or has not occurred, he said at paragraph 24:
"In this case, on the Tribunal's findings, the transferee did not take on the men precisely because they were asserting that the Regulations applied and were threatening proceedings on that basis. An obvious inference from these facts is that thereby the transferee hoped to defeat their claims. The question arises therefore, whether it is possible for a transferee to cause the Regulations to be disapplied by refusing to take on the workforce. Another way of putting the point is that if the taking on or not of the workforce controls the application or otherwise of the Regulations, then the question at issue is circular. The issue as to whether employees should have been taken on cannot be determined by asking whether they were taken on. It seems to us that we should adopt a purposive approach to the interpretation of the Regulations so as to give effect to the Government's obligations thereunder. We cannot and do not accept that it would be proper for a transferee to be able to control the extent of his obligations by refusing to comply with them in the first place."
[13]Thus in short, the ECM point is that a transferee who does not take on employees of the transferor in order to avoid the application of the Regulations cannot rely on the fact that the employees were not taken on as a factor going to the question whether there was a transfer for the purposes of the Regulations.[14]Having concluded that there was not in the present case an economic entity and that there was no relevant transfer of an undertaking, the majority of the Employment Tribunal further expressed their decision as follows:
"We further considered the judgment in the case of ECM v. Cox but considered that before applying the purposive approach suggested by the President in that case, we must establish that there had been a transfer without posing the hypothetical situation of whether there would have been a transfer had the workforce or the majority of the workforce been transferred in this case. We would, however, observe, having re-read Brintel [ see below ] that the Court of Appeal in that case expressly said it was unnecessary to decide the second issue in the case which was the ban which KLM had imposed upon its staff on taking on Brintel's employees. They state at page 366 paragraph 47 that if the ban had not been imposed and a modest number of Brintel employees had gone to KLM, that would not have led to a different conclusion in relation to the second issue in this case, namely whether the Brintel Beccles undertaking was transferred and that it retained its identity in the hands of KLM, so the ban is really of very little relevance. The majority have decided that in this case it is an activities case rather than an economic entity case and, therefore, there was no transfer and have therefore not applied the purposive approach suggested by the President in ECM."
[15]The minority opinion in the Employment Tribunal was that there was a transfer of an undertaking and that Firm Security Group failed to take on the nine security officers in order to avoid the application of the Regulations. The activity which ADI was engaged in was the provision of security services and this had continued with a slight difference in emphasis in the activity of Firm Security Group. The client was the same. The officers were operating in the same place in the same building using the same equipment. There was no interruption. ADI ended providing the services at 6 a.m. on 16 th March and Firm Security Group took over immediately. Apart from the uniforms there was no change. The object of the 1981 Regulations is to protect employees when there is a transfer of a business and taking the purposive approach to the case, the minority's "possible opinion" was that there was a transfer of an undertaking.[16]The EAT held that "leaving aside consideration of the ECM point", they saw no reason to doubt the Employment Tribunal's conclusion that there was no transfer. "The operation was plainly labour-intensive. No assets at all were transferred, save for the rights to use some of the client's facilities, and no doubt the right to enter the client's premises, which, as discussed above, amounts to nothing more than the recognition that the same operation is going to be carried out at the same premises. In those circumstances, given that the entity consisted entirely or almost entirely of the workforce dedicated to the carrying out of a single contract which terminated at the instance of ADI, it is clear that when none of that workforce is transferred, it is at the very least open to the Employment Tribunal to have found, by reference to any of the tests or any of the guidelines set out above, that there was no transfer."[17]The majority of the EAT referred to the facts found by the Employment Tribunal relating to the circumstances in which, during February 1998, the nine security officers were not taken on by ADI. The EAT majority observed that it was not a finding of the Employment Tribunal majority that Firm Security Group did not take on the nine officers in order to avoid the application of the Regulations. On the contrary, the Employment Tribunal majority rejected the conclusion of the Employment Tribunal minority. It could be said that there was no evidence to support the conclusion of the Employment Tribunal minority, who simply decided that there was a transfer having concluded that the object of Firm Security Group was to avoid the Regulations. This was a flaw essentially because Mummery LJ in the Court of Appeal in ECM indicated that an intention to avoid the Regulations was to be regarded as one factor among others indicating that there was a transfer. The present case was different from the ECM case. Even if there was an intention to avoid the Regulations, all other factors pointed against a transfer. In the circumstances, the EAT majority firmly concluded that not only was ECM distinguishable but there was no basis upon which the EAT could interfere with the decision of the Employment Appeal Tribunal majority.[18]It is, in my view, not entirely clear whether the EAT majority considered that the Employment Tribunal majority had positively rejected the conclusion of the Employment Tribunal minority that Firm Security Group had not taken on the nine security officers in order to avoid the Regulations. If that was the view of the EAT majority, I do not consider that it was justified. The Employment Tribunal majority considered that there was no economic entity and no relevant transfer. They further considered that it was an activities case rather than an economic entity case and that therefore the ECM point did not arise. They did not, as I read their decision, make any finding whether or not Firm Security Group did not take on the nine officers in order to avoid the application of the Regulations .[19]The EAT minority considered that the Employment Tribunal majority misdirected itself and that there clearly was a qualifying transfer. The essence of the EAT minority opinion was that all the criteria indicating a qualifying transfer were present except the fact that none of the nine security officers were taken on. The work was the same. It was carried on in the same place and for the same customer. There was no change in tangible or intangible assets. As to the workforce, the EAT minority considered that the Employment Tribunal should have applied ECM and adopted a purposive approach to the transfer. The Employment Tribunal minority concluded that Firm Security Group failed to take on the nine security officers in order to avoid the application of the Regulations. The Employment Tribunal majority failed to rule on this point. As I read the EAT minority's opinion, it looks as if there was a conclusion that the Employment Tribunal minority were correct on this point. The point however is explicitly made that the Employment Tribunal majority failed to have sufficient regard to the reason why the employees were not appointed. For this reason, the EAT minority concluded that the appeal should be allowed. Authorities[20]It is clear that the state of the European and domestic Authorities is unsatisfactory. I think that the underlying reason for this is that there has, as I have said, been judicial emasculation of the concept of legal transfer, but the language of transfer is retained. It is not necessary for there to be anything which would normally be described as a transfer of an undertaking between a first and subsequent employer. Speaking generally, the Regulations can apply when work or services cease to be carried out by one organisation and begin to be carried out by another. The change can be effected by the person benefiting from the work or services. The Council Directive and the 1981 Regulations have a general purpose of protecting the employment of the employees of the first organisation. The definition of when this is achieved and when it is not has lost such clarity as might originally have been achieved from the concept of legal transfer or merger. The concept of an economic entity which retains its identity and is capable of being transferred within the Directive and the Regulations now resides in paragraph 1(b) of Article 1 of the Amended Directive. Unfortunately, the amendment scarcely achieves the declared objective of clarifying "the legal concept of transfer". I shall refer to some only of the authorities in an attempt to indicate where relevantly things stand.[21]In Schmidt v. Sparkasse Bordersholm [1995] ICR 237 , the plaintiff was employed as the only cleaner at a branch of a savings bank. On the renovation and enlargement of the branch, the cleaning operation was transferred to a firm which was already responsible for the cleaning of the defendants' remaining premises. Her employment by the bank was terminated. The firm offered to continue her employment, but she refused on the ground that the pay offered to her was lower. On a reference from the domestic court, the European Court of Justice held that, where an undertaking contracted out the responsibility for operating a service, such as cleaning, which it had previously performed itself, to another undertaking which thereby assumed the obligations of an employer towards employees assigned to those duties, that operation could come within the scope of the Directive. The absence of any transfer of tangible assets, though a factor, was not decisive for the purpose of establishing whether there was a transfer for the purposes of the Directive. The decisive criterion was whether the business retained its identity. The application of the Directive was not precluded by the fact that the activity transferred was an ancillary activity of the transferor not necessarily connected with its objects, nor by the fact that before the transfer the activity had been performed by a single employee. At paragraph 17 of the judgment of the court at page 247, there is reference to case law of the court - including Spijkers v. Gebroeders Benedik Abattoir [1986] ECR 119 - to the effect that:
"The decisive criterion for establishing whether there is a transfer for the purposes of the Directive is whether the business in question retains its identity. According to that case law, the retention of that identity is indicated, inter alia, by the actual continuation or resumption by the new employer of the same or similar activities."
[22]By contrast in Suzen v. Zehnacker Gebäudereinigung [1997] ICR 662, the plaintiff worked as a cleaner at a school in Germany with which her employer had a cleaning contract. Pending the termination of that contract, the plaintiff was dismissed. The school subsequently awarded the cleaning contract to another cleaning company. In proceedings arising from the dismissal, the domestic court referred to the European Court of Justice for a preliminary ruling the question whether in the circumstances, and given that there had been no transfer of any business assets between the two cleaning companies, the Council Directive applied. The court held that the loss of a service contract to a competitor could not by itself indicate the existence of a transfer of a business or part of a business within the meaning of the Directive. The Directive did not apply where a person terminated a contract with one undertaking for the cleaning of his premises and entered into a contract with a second undertaking for the performance of similar work, if there was no concomitant transfer from one undertaking to the other of significant tangible or intangible assets or taking over by the new employer of part of the workforce previously assigned to the work which was a major part in terms of the number and skills of the employees taken over. The Advocate General referred to earlier cases, including Spijkers , Schmidt and Merckx , and said in effect that it would be an easy solution to apply the Schmidt case. However he had misgivings. To transfer the facilities required by an undertaking to another body is a decision made in competitive circumstances which ensures a choice between several competing rivals. He failed to see how there could be any justification for the transferee of the service being required to keep on such staff of the undertaking that had provided the services in the past. There was no relationship whatsoever between the two firms. The only factor which they did in some respects have in common was that the contracting body for which the service is provided was the same. The Advocate General considered that transfers of undertakings should be more clearly defined and distinguished from other situations which do not come within the terms of the Directive. It is one thing to terminate a contract with an undertaking and subsequently award it to another, as in the case in question. It is quite another to effect a transfer. The Advocate General thus posed the question which, as I have said, the emasculation of the concept of legal transfer has raised.[23]The judgment of the court has the following extended passage:
"10. The aim of Directive (77/187/E.E.C.) is to ensure continuity of employment relationships within an economic entity, irrespective of any change of ownership. The decisive criterion for establishing the existence of a transfer within the meaning of the Directive is whether the entity in question retains its identity, as indicated inter alia by the fact that its operation is actually continued or resumed: Spijkers v. Gebroeders Benedik Abattoir C.V. (Case 24/85) [1986] ECR 1119 , 1128, paras 11 and 12, and most recently, Merckx v. Ford Motors Co. (Belgium) S.A. (Case C-171/94) [1997] I.C.R. 352, 367, para. 16; see also the advisory opinion of the Court of the European Free Trade Association in Ulstein v. Møller (Case E-2/96) E.F.T.A. Court Report July 1995. December 1996, p. 67, para. 27. 11. Whilst the lack of any contractual link between the transferor and the transferee or, as in this case, between the two undertakings successively entrusted with the cleaning of a school, may point to the absence of a transfer within the meaning of the Directive, it is certainly not conclusive. 12. As has been held most recently in Merckx [1997] I.C.R. 352, 368, para. 28, the Directive is applicable wherever, in the context of contractual relations, there is a change in the natural or legal person who is responsible for carrying on the business and who incurs the obligations of an employer towards employees of the undertaking. Thus, there is no need, in order for the Directive to be applicable, for there to be any direct contractual relationship between the transferor and the transferee: the transfer may also take place in two stages, through the intermediary of a third party such as the owner or the person putting up the capital. 13. For Directive (77/187/E.E.C.) to be applicable, however, the transfer must relate to a stable economic entity whose activity is not limited to performing one specific works contract: see Ledernes Hovedorganisation v. Dansk Arbejasgiverforening (Rygaard's Case) (Case C-48/94) [1996] I.C.R. 333, 346 para. 20. The term entity thus refers to an organised grouping of persons and assets facilitating the exercise of an economic activity which pursues a specific objective. 14. In order to determine whether the conditions for the transfer of an entity are met, it is necessary to consider all the facts characterising the transaction in question, including in particular the type of undertaking or business; whether or not its tangible assets, such as buildings and movable property, are transferred; the value of its intangible assets at the time of the transfer; whether or not the majority of its employees are taken over by the new employer; whether or not its customers are transferred; the degree of similarity between the activities carried on before and after the transfer, and the period, if any, for which those activities were suspended. However, all those circumstances are merely single factors in the overall assessment which must be made and cannot therefore be considered in isolation: see, in particular, Spijkers [1986] ECR 1119 , 1128-1129, para. 13 and Dr Sophie Redmond Stichting [1992] E.C.R. 1-3189, 3220, para. 24. 15. As observed by most of the parties who commented on this point, the mere fact that the service provided by the old and the new awardees of a contract is similar does not therefore support the conclusion that an economic entity has been transferred. An entity cannot be reduced to the activity entrusted to it. Its identity also emerges from other factors, such as its workforce; its management staff; the way in which its work is organised; its operating methods, or indeed, where appropriate the operational resources available to it. 16. The mere loss of a service contract to a competitor cannot therefore by itself indicate the existence of a transfer within the meaning of Directive (77/187/E.E.C.). In those circumstances, the service undertaking previously entrusted with the contract does not, on losing a customer, thereby cease fully to exist, and a business or part of a business belonging to it cannot be considered to have been transferred to the new awardee of the contract. 17. It must also be noted that, although the transfer of assets is one of the criteria to be taken into account by the national court in deciding whether an undertaking has in fact been transferred, the absence of such assets does not necessarily preclude the existence of such a transfer: Schmidt v. Spar- und Leihkasse der fruheren Ämter Bordesholm, Keil und Cronshagen (Case C-392/92) [1995] ICR 237 , 247, para. 16 and Merckx v. Ford Motors Co. (Belgium) S.A. (Case C-171/94) [1997] I.C.R. 352, 367-368, para. 21. 18. As pointed out in paragraph 14 of this judgment, the national court, in assessing the facts characterising the transaction in question, must take into account among other things the type of undertaking or business concerned. It follows that the degree of importance to be attached to each criterion for determining whether or not there has been a transfer within the meaning of the Directive will necessarily vary according to the activity carried on, or indeed the production or operating methods employed in the relevant undertaking, business or part of a business. Where in particular an economic entity is able, in certain sectors, to function without any significant tangible or intangible assets, the maintenance of its identity following the transaction affecting it cannot, logically, depend on the transfer of such assets. 19. The United Kingdom Government and the Commission have argued that, for the entity previously entrusted with a service contract to have been the subject of a transfer within the meaning of the Directive, it may be sufficient in certain circumstances for the new awardee of the contract to have voluntarily taken over the majority of the employees specially assigned by his predecessor to the performance of the contract. 20. In that regard, it should be borne in mind that the factual circumstances to be taken into account in determining whether the conditions for a transfer are met include in particular, in addition to the degree of similarity of the activity carried on before and after the transfer and the type of undertaking or business concerned, the question whether or not the majority of the employees were taken over by the new employer: Spijkers v. Gebroeders Benedik Abattoir C.V. (Case 24/85) [1986] ECR 1119 , 1128-1129, para. 13. 21. Since in certain labour-intensive sectors a group of workers engaged in a joint activity on a permanent basis may constitute an economic entity, it must be recognised that such an entity is capable of maintaining its identity after it has been transferred where the new employer does not merely pursue the activity in question but also takes over a major part, in terms of their numbers and skills, of the employees specially assigned by his predecessor to that task. In those circumstances, as stated in Rygaard's case [1986] I.C.R. 333, 346, para. 21 the new employer takes over a body of assets enabling him to carry on the activities or certain activities of the transferor undertaking on a regular basis."
[24]Merckx v. Ford Motors (Belgium) [1997] I.C.R. 352 is a decision of the European Court of Justice which the court itself took into account in Süzen. It was held that, where an undertaking holding a motor vehicle dealership for a particular territory discontinued its activities and the dealership was then transferred to another undertaking which took on part of the staff and was recommended to customers, without any transfer of assets, Article 1(1) of the 1977 Council Directive applied. The court held at paragraph 26 of the judgment on page 368 that the fact that the majority of the staff were dismissed when the transfer took place was not sufficient to preclude the application of the Directive. The dismissals might have taken place for economic, technical or organisational reasons, in compliance with Article 4(1). But failure to comply with that provision could not affect the existence of a transfer for the purposes of the Directive.[25]In Allen v. Amalgamated Construction Company Limited [2000] ICR 436, the European Court of Justice held that there was a transfer within the meaning of the Directive when a stable economic entity, namely, an organised grouping of persons and assets facilitating the exercise of an economic activity which pursued a specific objective and was not limited to the performing of one specific works contract, was transferred without losing its identity, so that its operation was continued or resumed. The existence or otherwise of such a transfer is to be gleaned from all the facts, taken as a whole and not considered individually in isolation. Particular indications may be the type of undertaking or business; whether or not its tangible assets, such as buildings and moveable property, are transferred; the value of its intangible assets at the time of the transfer; whether or not essential staff are taken over by the new employer; whether or not customers are transferred; the degree of similarity between the activities carried on before and after the transfer; and any period during which those activities were suspended. The court applied its earlier decision in Süzen. In my view, Mr Randall is correct in his submission that, insofar as Süzen may contain a shift of emphasis from earlier decisions of the court, the shift is maintained in Allen . The court restated in paragraph 27 on page 460, that an economic entity cannot be reduced to the activity entrusted to it. Its identity also emerges from other factors, including its workforce, its management staff, the way in which its work is organised, its operating methods and the operational resources available to it. At paragraph 29, the court restated the points made in paragraph 21 of the Süzen judgment which I have already quoted.[26]In Oy Liikenne AB v. Liskojärvi [2001] IRCR 171 the European Court of Justice considered a reference from the Supreme Court of Finland. Bus routes previously operated by one company were awarded to another after competitive tendering in accordance with EC Public Procurement Directive 92/50. The first company dismissed 45 drivers. The second engaged 33 of them but on less favourable terms and conditions. No vehicle or other assets were transferred. The European Court held that the fact that a transaction was awarded following a public procurement procedure conducted in accordance with Directive 92/50 did not of itself rule out the application of Directive 77/187. The Court restated the effect of its previous decisions with particular reference to Suzen and Allen . It held, contrary to the view of the Commission (see paragraph 36 on page 178), that bus transport cannot be regarded as an activity based essentially on manpower as it requires substantial plant and equipment. The absence of a transfer of tangible assets which contributed significantly to the performance of the activity must lead to the conclusion that the entity did not retain its identity and that Directive 77/187 did not apply.[27]In Betts v. Brintel Helicopters Limited [1997] ICR 792 , the plaintiffs were employed by a company providing helicopter services from three mainland bases under contracts to an oil company to transfer men and goods to and from oil rigs in the North Sea from its base at Beccles. When these contracts expired, the Beccles contract was awarded to another contractor who did not take over any of the existing staff or equipment and operated from a different helicopter base. The plaintiffs were dismissed. The first instance judge granted a declaration that the plaintiffs became employees of the second contractor on the ground that there had been a transfer of an undertaking for the purpose of the 1981 Regulations on the basis that the second contractor continued to perform the same service or activity as the first contractor had performed at Beccles. The Court of Appeal reversed this decision. It was held that an undertaking comprised a stable economic entity and not merely the performance of a service or activity. The decisive criterion for determining that there had been a transfer of such an undertaking was that the economic entity retained its identity in the hands of the transferee. There could be no transfer, on the termination of one fixed term contract for services and the commencement of another such contract to provide essentially similar services, unless there was a concomitant transfer of significant assets or taking over by the new employer of the major part of the workforce. The first contractor's operation at Beccles had constituted an undertaking consisting of helicopters, infrastructure, staff and a contractual right to land on oil rigs and use the facilities. Even if the right to land on the oil rigs had been transferred to the second contractor, transfer of only such a limited part of the original undertaking could not amount to the transfer of the undertaking such that it retained its identity in the hands of the second contractor. Accordingly there had been no transfer of an undertaking for the purposes of the 1981 Regulations. Kennedy LJ, who gave the leading judgment, referred to a number of authorities including Süzen , which he said could not in reality be distinguished. He accepted that the decision in Süzen represented a shift of emphasis or at least a clarification of the law and that some of the reasoning of earlier decisions may have to be reconsidered. The decision may be seen as being in line with the later European Court decision in Oy Liikenne .[28]In the ECM case, the applicants were drivers and yardmen who had been employed by Axial Limited in the delivery of vehicles under a contract between Axial and VAG Limited, Axial lost the contract to ECM Limited. ECM decided not to employ any of Axial's employees in view of an intention expressed by their representatives to take proceedings for unfair dismissal of employees not taken on. The Industrial Tribunal held that there had been a transfer of an undertaking for the purpose of the 1981 Regulations. The Court of Appeal dismissed an appeal by ECM. It was held that the Industrial Tribunal had taken into account all the relevant factors and applied the correct criteria in reaching its conclusion. Although there were changes in the organisation of the operation for the delivery of cars under ECM's contract, there was a continuation in their hands of the discrete economic entity previously carried on by Axial. The Tribunal had been entitled to have regard, as a relevant circumstance, to the reason why Axial's employees were not employed by ECM. Mummery LJ, who gave the leading judgment, pointed out that the Industrial Tribunal had accepted that the major reason why ECM had decided not to engage any Axial workers was an understanding that the workers' representatives would proceed with an action in the Industrial Tribunal for unfair dismissal if ECM did not engage them. The Employment Appeal Tribunal, which had upheld the decision of the Industrial Tribunal, had gone further and said that it was a legitimate inference that ECM had refused to take on the staff precisely in order to prevent the 1981 Regulations from applying and that if they had been taken on then the Regulations would clearly have applied. Mummery LJ concluded that there was no error of law in the decision of the Employment Tribunal. He considered a submission that Süzen represented a change of emphasis of the European Court of Justice. He considered that the importance of Süzen had been overstated. The ruling should be seen in its proper context. The Court of Justice had not overruled its previous interpretative rulings in cases such as Spijkers and Schmidt . It is still the case that the criteria laid down by the Court of Justice in deciding whether there is a transfer involved consideration of all the facts characterising the transaction in question in order to determine whether the undertaking has continued and retained its identity in different hands. The importance of Süzen was that the Court of Justice had identified limits to the application of the Directive. But other factors remained important. The ECM case was unaffected by the limits indicated in Süzen . It was not a case (like Süzen ) of the loss of a contract with one customer being asserted to amount to a transfer of an undertaking. It was not a case like Betts of the loss of a contract for one location being asserted to be a transfer of an undertaking. It was not a case of a transfer depending merely on a comparison of the similarity of the activities of Axial and ECM after the loss of the VAG contract by Axial. The transfer was established by the Employment Tribunal looking at all the relevant facts and concluding that this undertaking was based on the VAG contract and that it continued in different hands, even though no employees of Axial were reappointed by ECM. The Tribunal was entitled to have regard, as a relevant circumstance, to the reason why those employees were not appointed by ECM.[29]Our attention was drawn to three decisions of Employment Appeal Tribunals, one of them in Scotland, each of them presided over by Lindsay J. These decisions were RCO Support Services Limited v. Unison [2000] ICR 1502, Argyll Training Limited v. Sinclair [2000] IRLR 630 and Cheesman v. R. Brewer Contracts Limited [2001] IRLR 144 . These cases concerned respectively employees carrying out contracts to provide cleaning and catering services at a hospital, a single employee engaged to provide training to local enterprise companies and employees carrying out maintenance work on properties of a district council. In each of the three cases the EAT held that there was a transfer of an undertaking for the purposes of the 1981 Regulations. In each of the cases emphasis is placed on the need to take all relevant factors into account. In the RCO case, it is suggested that there are tensions, if not conflicts, between the Betts case and the ECM case. It is emphasised that Süzen did not depart from earlier decisions of the European Court of Justice including Schmidt , and that Süzen is to be read subject to ECM . The decisions stress that the decisive criterion for a transfer is whether the business in question retains its identity and an important consideration is whether the operation is continued by the new employer with the same or similar activities. I detect in the judgments a plain preference for ECM in so far as there are difference between that case and Süzen or Betts . In Cheesman , Lindsay J distils from previous decisions, including ECM , principles for determining whether there is an undertaking for the purposes of the 1981 Regulations and whether there has been a transfer. As to transfer, the enumerated considerations include (at page 147):
"(ii) In a labour-intensive sector it is to be recognised that an entity is capable of maintaining its identity after it has been transferred where the new employer does not merely pursue the activity in question but also takes over a major part, in terms of their numbers and skills, of the employees especially assigned by his predecessors to that task. ... (iv) Amongst the matters thus falling for consideration are the type of undertaking, whether or not its tangible assets are transferred, the value of its intangible assets at the time of transfer, whether or not the majority of its employees are taken over by the new company, whether or not its customers are transferred, the degree of similarity between the activities carried on before and after the transfer and the period, if any, in which they are suspended. ... (vi) Where an economic identity is able to function without any significant tangible or intangible assets, the maintenance of its identity following the transaction being examined cannot logically depend on the transfer of such assets. ... (ix) ... the mere fact that the service provided by the old and new undertaking providing a contracted-out service or the old and new contract-holder are similar does not justify the conclusion that there has been a transfer of an economic entity between predecessor and successor. (x) The absence of any contractual link between transferor and transferee may be evidence that there has been no relevant transfer but it is certainly not conclusive as there is no need for any such direct contractual relationship. (xii) When no employees are transferred the reasons why that is the case can be relevant as to whether or not there was a transfer."
Submissions[30]In the present appeal, Mr Jeans submits that this case is stronger in favour of a finding that there was a transfer than the ECM case, which is binding on this court. In so far as the ECM case may differ from the Betts case, ECM is the later case and should be followed. The approach of Lindsay J in the three EAT cases should be adopted. Since the Employment Tribunal wrongly concluded that there was in the present case no economic entity, their decision that there was no transfer cannot logically stand. The factual indications are strongly in favour of a transfer. The security services provided before and after 6 a.m. on 16 th March 1998 were the same. The employees of the new contractor used the same premises and equipment. The employer was the same and so were the ultimate beneficiaries of the service, that is the public using the shopping centre. The fact that no employees were transferred should not be taken as decisive in the face of these others similarities, whatever ADI's motive for not taking the employees on. If, contrary to that submission but in accordance with ECM , the reason why ADI did not take on the employees is relevant, the Employment Tribunal majority made no finding of fact on this subject, but they should have done. In that event, Mr Jeans submits that the case should be remitted for a further hearing to establish that question. The EAT majority were wrong to hold that the Employment Tribunal majority were entitled to conclude that there was no transfer irrespective of the application of the ECM point.[31]Mr Randall on behalf of Firm Security Group submits that, on the facts found by the Employment Tribunal, there was no transfer and the Employment Tribunal majority and the EAT majority were entitled so to hold. In doing so, they made no error of law. There was no transfer of assets. The mere fact that the services provided were similar or the same is not decisive. This was simply the loss of a service contract. The economic entity was no more than the services provided by ADI through the nine employees, none of whom were transferred to Firm Security Group. Although Mr Randall accepted that all factors have to be taken into account, on the facts the main ingredient of a transfer could only be the transfer of employees, which did not take place. There was no proper evidential basis for the finding of the Employment Tribunal minority that Firm Security Group did not take on these employees in order to avoid the operation of the 1981 Regulations. The Employment Tribunal majority may be taken to have decided otherwise, and such a finding is in any event indicated by the facts which the Employment Tribunal unquestionably found. Mr Randall accepted that there would on the authorities have been a transfer in the present case if the employees had been transferred. He also accepted that the court should find that there was a transfer, even though the employees were not transferred, if the reason why they were not transferred was to avoid the operation of the 1981 Regulations. Discussion[32]As I have indicated, in my view confusion and uncertainty have arisen because the need for a legal transfer or merger, still present in the Directive, has been eliminated by purposive judicial interpretation, yet the perceived need to find a transfer of some kind remains. The problems are compounded by attempts to reconcile disparate decisions of the European Court of Justice. There has also been a search for factors indicative of a transfer not all of which are, in my view, always as helpful as has sometimes been thought. Few of the cases which have caused difficulty have involved a true transfer of anything between a first and second employer. The suggestion that intangible assets are transferred sometimes amounts to no more than the fact that the same or similar work is carried out at the same place.[33]It might have been possible to legislate to the effect that employees' rights are protected whenever essentially the same job continues to be carried on by a different person or employer. The facts and decision in Schmidt come quite close to this, but the Directive does not on any view say this and the authorities taken as a whole do not justify that conclusion. The cases are unanimous to the effect that the facts have to be taken as a whole and not considered individually in isolation. In my view, Mr Randall is correct in submitting that the case of Allen indicates that the European Court of Justice continues to adhere to its decision in Süzen in so far as that case might represent something of a retreat from earlier cases including Schmidt .[34]In my view, the present case is to be regarded as an example of a labour intensive case, such as was Süzen. The case of Betts was rather different, since the undertaking in that case included substantial equipment, such as helicopters, and infrastructure. In the present case, ADI had a contract for services which they decided to relinquish. Firm Security Group were engaged in their place to provide essentially the same services in the same place for the same employer, but it is, in my view, something of a fiction to say that assets, even intangible assets, were transferred. There was a right to use premises and equipment, but that fact does not, I think, really add anything to the proposition that each contractor was providing the same services at the same place. Adopting what was said by the European Court of Justice in Süzen, I consider that the mere fact that the service provided by ADI and Firm Security Group was similar does not support the conclusion that an economic entity was transferred. An entity cannot be reduced to the activity entrusted to it and the mere loss of a service contract to a competitor cannot by itself indicate the existence of a transfer within the meaning of the Directive. The same, I think, should apply to the 1981 Regulations. The identity of the economic entity and its transfer also has to emerge from other factors and these include the question whether or not the majority of the employees were taken over by the new employers. In the present case, they were not and I agree with the EAT that, apart from the ECM point, there was no relevant transfer in the present case.[35]Consideration does, however, have to be given to the ECM point. As Mummery LJ said in that case, it is necessary to have regard, as a relevant circumstance, to the reason why Firm Security Group did not take on the nine security officers. Granted that, as is constantly stressed in the authorities, no one factor is determinative of whether there is a transfer for the purpose of the 1981 Regulations, in a labour intensive case where the work or services are substantially the same and performed in the same place for the same person, questions relating to the taking on of employees may tip the scales one way or the other.[36]In my judgment, Mr Randall was correct to accept that there would have been a transfer in the present case for the purpose of the 1981 Regulations if the nine security officers had been taken on by Firm Security Group, and that there would also be a transfer if the reason why they were not taken on was in order to avoid the application of the Regulations. More generally, it seems to me that if, as in the present case, the economic entity is labour intensive such that, applying Süzen , there is no transfer if the workforce is not taken on, but there would be if they were, there will be a transfer if, although the workforce is not taken on, it is established that the reason or principal reason for this was in order to avoid the application of the Regulations. I take this form of expression from paragraph 8 of the 1981 Regulations, recognising that it is used there in a slightly different context. I do not accept Mr Jeans' submission that there should be a positive burden on the person arguing against the transfer to establish the reason for not taking on the workforce, failing which a transfer should be found. Nor do I consider that the reason or principal reason for not taking on the employees has to be limited to an economic, technical or organisational reason entailing changes in the workforce of the transferee, failing which a transfer will be found. There may, depending on the facts, be other possibilities.[37]It follows that, in my judgment, there would be a transfer in the present case, if the reason or principal reason for Firm Security Group not taking on the employees was in order to avoid the application of the 1981 Regulations: but that otherwise there was no transfer. Since, as I have indicated, I do not consider that the Employment Tribunal majority decided this issue, it is necessary for the case to be remitted to an Employment Tribunal to reconsider that matter.[38]For these reasons and to that extent I would allow this appeal.

LORD JUSTICE DYSON:

[39]In my view, it is clear that, if the nine employees of ADI had in fact been transferred to the Firm Security Group ("FSG"), there would have been a transfer of undertaking within the meaning of the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("the Regulations"). This was more or less conceded by Mr Randall. This was a case of a labour intensive undertaking. I agree with May LJ for the reasons given by him that, apart from the labour, there was little or nothing to transfer. If the labour is to be taken as not having been transferred, then it seems to me that the majority decision of the EAT is right: it was at the very least open to the Employment Tribunal to have found that there was no transfer.[40]The remaining issue that arises on this appeal stems from the fact that the Employment Tribunal minority was of the opinion that FSG failed to take on the nine security officers "in order to avoid the application of the Regulations" (paragraph 10). The majority of the Employment Tribunal made no finding on this issue. The key question is whether, if the reason why the nine employees were not transferred was in order to circumvent the Regulations, that was a relevant factor that the Tribunal was obliged or entitled to take into account in deciding whether there was a transfer of the undertaking. For reasons that I shall explain, I agree with May LJ and disagree with Simon Brown LJ on this issue. For convenience, like the EAT, I shall refer to this as "the ECM point": ECM (Vehicle Delivery) Limited v. Cox [1999] ICR 1162 .[41]The starting point is the fact that the ECJ has stated time and again that the Acquired Rights Directive (77/187) ("the Directive") should be interpreted by reference to its purpose which, as is shown by one of its recitals, is "to provide for the protection of employees in the event of a change of employer". As was said in Landsorganisationen I Danmark v. Ny Molle Kro [1989] ICR 330, 338 at paragraph 12, the purpose of the Directive is: "to ensure, so far as possible , that the rights of employees are safeguarded in the event of a change of employer by enabling them to remain in employment with the new employer on the terms and conditions agreed with the transferor".[42]If the application of the Directive can be avoided by the new employer by the simple expedient of arranging for the transferor's employees to be dismissed on the transfer, then this purpose will be defeated. The question is whether the Directive when properly interpreted permits its purpose to be defeated in this way.[43]Simon Brown LJ states that it is impossible to reconcile such an interpretation with the ruling ECJ jurisprudence. I accept that paragraph 21 in Suzen v. Zehnacker Gebaudereinigung 1[1997] ICR 662, 672 and paragraph 29 in Allen v. Amalgamated Construction Co Ltd [2000] ICR 436, 460 are of central importance in labour intensive cases. They show that in such cases, a group of workers comprising an economic entity is capable of maintaining its identity after it has been transferred, where the new employer pursues the activity in question and takes over a major part of the employees who had been specially assigned by the transferor to the activity. But, as Mummery LJ said in ECM (page 1169E), the ECJ has not said in Suzen or any other case that the ECM point is an irrelevant circumstance. In my judgment, none of the ECJ authorities to which we were referred dealt with the ECM point. In cases such as Suzen and Allen , there was a transfer of some or all of the transferor's workforce, and the question was whether having regard to all the relevant factors there was a transfer of undertaking.[44]Mr Jeans QC placed a good deal of reliance on Merckx v. Ford Motors (Belgium) [1997] ICR 352. In that case, two of the employees whom the original employer wanted to transfer sought to argue that the Directive did not apply in the events that occurred and therefore that a transfer had not taken place. They advanced a number of reasons in support of their argument. One of these was that the majority of the workforce had been dismissed on the transfer of the motor dealership. This is the argument that the court addressed at paragraphs 24-26 of its judgment as follows:"24. Thirdly, the plaintiffs claimed that the fact that the majority of the staff had been dismissed on the transfer of the dealership indicated that the Directive did not apply.25. Article 4(1) of Directive (77/187EEC) provides that the transfer of an undertaking, business or part of the business does not in itself constitute grounds for dismissal. However, that provision is not to stand in the way of dismissals that may take place for economic, technical or organisational reasons entailing changes in the workforce.26. Accordingly, the fact that the majority of the staff were dismissed when the transfer took place is not sufficient to preclude the application of the Directive. The dismissals might have taken place for economic, technical or organisational reasons, in compliance with Article 4(1). In any event, failure to comply with that provision could not affect the existence of a transfer for the purpose of the Directive".[45]I confess that I do not find the last sentence of paragraph 26 very clear. Simon Brown LJ suggests that the words "could not affect the existence of a transfer" mean "could not affect a transfer that already exists". I think that the better interpretation is that they mean "could not have any effect on whether a transfer exists". I take this view because the issue that the court was considering at this point of its judgment was whether the dismissal of the staff at the time of transfer supported the argument that there was no transfer of the undertaking. However that may be, I do not consider that this single sentence is a sufficiently secure foundation on which to base a conclusion as to the ECJ jurisprudence on the ECM point. I note in passing that Merckx was not cited in ECM .[46]I turn to the case of ECM itself. This has already been referred to in some detail by May LJ. The Employment Tribunal found as a fact that the major reason why the transferee decided not to employ any of the transferor's employees was the belief that the workers' representatives would proceed with a claim for unfair dismissal if it did not engage them. The Tribunal said: "It was true to say that ECM....did not take on any of Axial's staff but, if this in itself was taken to be a good reason for saying the Regulations of 1981 do not apply, this would give an opportunity for any employer to avoid the Regulations simply by not giving an employee a contract. The tribunal decided that this was not an appropriate way of interpreting the Regulations".[47]It is clear that the Tribunal decided that the Regulations (properly interpreted) do not preclude a transfer of undertaking merely because there has been no transfer of workers, if the reason why there has been no such transfer is that the transferee wished to avoid the effect of the Regulations.[48]At page 1167D of his judgment, Mummery LJ recorded the criticism by counsel for the appellant of the part played in the decision of the tribunal by the reference to the reasons why the staff had not been taken on by ECM. It is right to point out that this was not the only criticism made of the tribunal's decision. At page 1167G, he said that there was no error of law in the decision. At page 1168A, he said generally of the tribunal's approach that they: "..were entitled to conclude that, even though ECM did not take on any Axial staff, the identity of the economic entity in the hands of Axial was still retained in the hands of ECM after the loss of the VAG contract. This justified the finding of a transfer".[49]Finally, at page 1169E, he said: "The transfer was established by the employment tribunal looking at all the relevant facts and concluding that this undertaking was based on the VAG contract and that it continued in different hands, even though no employees of Axial were appointed by ECM. The tribunal were entitled to have regard, as a relevant circumstance, to the reason why those employees were not appointed by ECM. The Court of Justice has not decided in Suzen or in any other case that this is an irrelevant circumstance or that the failure of the transferee to appoint any of the former employees of the transferor points conclusively against a transfer".[50]The EAT in its judgment in the present case said: "But what the Court of Appeal in Betts did not say, and indeed the Court of Appeal in ECM did not say, is that if there be a finding of fact by a tribunal that there was a deliberate decision by a possible transferee not to take on any of the possible transferor's staff, in order that, or with the intended result that, the 1981 Regulations should not apply, then in such circumstance all the employees are deemed to have been transferred".[51]But as I read his judgment, Mummery LJ is saying that the approach of the tribunal to the interpretation of the Regulations in the circumstances postulated was correct. The reason why the employees were not appointed was a relevant circumstance, and the Tribunal was entitled to take it into account in deciding whether there had been a transfer within the meaning of the Regulations. It was not necessarily decisive because all relevant circumstances had to be taken into account: see Suzen and Allen . But it was relevant. In a labour intensive case, whether the majority of the workforce is transferred is often likely to be decisive. In other cases, the transfer of the workforce may be less significant.[52]It seems to me that, if the circumstances of an alleged transfer of undertaking are such that an actual transfer of labour would be a relevant factor to be taken into account in deciding whether there has been a transfer of undertaking, then the tribunal will not only be entitled, but will be obliged, to consider the reason why the labour was not transferred, if that has been raised as an issue. If that reason is as was found by the tribunal in ECM ("an ECM reason"), then for reasons that I shall explain shortly, in my judgment it will be obliged to treat the case as if the labour had been transferred. I am not sure whether Mummery LJ went this far. I consider that the fact that labour has not been transferred for an ECM reason should be given no less weight than the facts (where it is the case) that labour has in fact been transferred. The fact that workers have not been transferred for an ECM reason is either relevant or irrelevant to the ultimate question of whether there has been a transfer of an undertaking. If it is relevant, this is because what occurs in such circumstances is to be treated as equivalent to an actual transfer of labour. I do not believe that there is any warrant for according to a failure to transfer for an ECM reason a half way house between irrelevance and the full relevance that would be accorded to an actual transfer of labour.[53]It may well be asked: how can it be relevant to whether there has been the transfer of an undertaking to take into account the reasons why an essential component of that undertaking has not been transferred? Either the workforce has been transferred or it has not. If it has, then that is one of the relevant factors to be taken into account in deciding whether there has been a transfer of the economic entity which comprised the undertaking. If it has not, how can it be relevant? This is a powerful argument, but I cannot accept it.[54]It is necessary to interpret the Directive and Regulations in such a way as will promote the purpose to which I referred earlier in this judgment. We were referred to Litster v. Forth Dry Dock Co Ltd [1990] 1 AC 546 . This case concerned the construction of regulation 5 of the Regulations which safeguards employees' rights on the transfer of an undertaking. Regulation 5(3) includes the words "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...". Lord Keith said at page 554G "So there must be implied in regulation 5(3) words indicating that where a person has been unfairly dismissed in the circumstances described in regulation 8(1) he is to be deemed to have been employed in the undertaking immediately before the transfer or any of a series of transactions whereby it was effected".[55]This interpretation was required "in order that the manifest purpose of the Regulations might be achieved" (Lord Keith page 554B): see also Lord Templeman (page 558E-H). Lord Oliver dealt with the point at page 576D-577D. He referred to the purpose of the Directive and the Regulations as being to safeguard the rights of employees on a transfer, and said: "The remedies provided by the Act of 1978 in the case of an insolvent transferor are largely illusory unless they can be exerted against the transferee as the Directive contemplates and I do not find it conceivable that, in framing Regulations intending to give effect to the Directive, the Secretary of State could have envisaged that its purpose should be capable of being avoided by the transparent device to which resort was had in the instance case".[56]I accept, of course, that in Litster , there had been a transfer of the undertaking, so that the Regulations applied, and the issue was whether the applicants could bring a claim for unfair dismissal against the transferee on the basis of Regulations 5 and 8. Simon Brown LJ says that it does not answer the question at issue in the present appeal. I agree that it does not answer the question directly. But in my view, it sheds considerable light on the correct approach to the problem. It shows that, if necessary, the Regulations must be interpreted in a way which is quite at odds with their literal language in order to achieve the fundamental purpose of the Directive of protecting the rights of workers on a transfer. As Lord Oliver said at page 576F:
"If this provision fell to be construed by reference to the ordinary rules of construction applicable to a purely domestic statute and without reference to Treaty obligations, it would, I think, be quite impermissible to regard it as having the same prohibitory effect as that attributed by the European Court to article 4 of the Directive."
[57]The Directive and the Regulations will be interpreted so as to ensure that employers cannot defeat that purpose by a "transparent device". It followed in Litster that the Regulations were construed in such a way that the protection afforded by regulations 5 and 8 was not to be denied to employees by their being dismissed at the time of a transfer.[58]In my view, the same reasoning requires the Regulations to be construed so as to ensure that the protection afforded by them where an undertaking is transferred is not denied by employers preventing a transfer of labour for the purpose of avoiding the effect of the Regulations. In the case of Litster , the Regulations were interpreted as providing that (contrary to the facts) the employees were deemed to have been employed until immediately before the transfer. In the present case too, the Regulations must be interpreted as providing (again contrary to the facts) that the employees are deemed to have been employed until immediately after the transfer. In both cases, the Regulations should be construed so as to create a fiction in order to prevent the purpose of the Directive and the Regulations from being thwarted by an employer who dismisses his labour in order to avoid the effect of the Regulations.[59]I would hold, therefore, that the mere fact that FSG did not take on any of ADI's labour force is not determinative of this appeal. For the reasons given earlier in this judgment, I am of the opinion that, since this is a labour intensive case, if the reason why FSG did not take on the nine security officers was (as the Employment Tribunal minority found) in order to avoid the application of the Regulations, that would suggest very strongly that there was a transfer of undertaking in this case. But since the majority of the Employment Tribunal made no finding on this issue, it is necessary for the case to be remitted to the tribunal for reconsideration. I would allow this appeal.

LORD JUSTICE SIMON BROWN:

[60]This appeal raises in sharp form the question whether, in labour-intensive cases of the present kind, an incoming contractor can avoid the Acquired Rights Directive (77/187) and the Transfer of Undertaking (Protection of Employment) Regulations 1981 (TUPE) simply by choosing not to take on any of the previous contractor's workforce.[61]Although this Court in ECM (Vehicle Delivery) Limited v. Cox [1999] ICR 1162 appeared to conclude that he cannot, and although the EAT (presided over by Lindsay J) in a succession of subsequent decisions have clearly so held, I for my part am unable to reconcile this view with the ruling ECJ jurisprudence on the issue and accordingly find myself in respectful disagreement with my Lords on the outcome of this appeal.[62]May LJ's judgment contains a full exposition of the governing law and authorities in this field, the particular circumstances of the present case and the rival arguments advanced upon it. This happily enables me to express my own dissentient view altogether more shortly.[63]I take as my starting point, not the language of the Directive which, as my Lord had explained, even in its amended form has been heavily glossed by the ECJ cases, but rather Suzen v. Zehnacker Gebaudereinigung [1997] ICR 662 which, as Kennedy LJ accepted in Betts v. Brintel Helicopters [1997] ICR 792 , "does represent a shift of emphasis or at least a clarification of the law, [so] that some of the reasoning of earlier decisions, if not the decisions themselves may have to be reconsidered."[64]Suzen concerned a school cleaner whose employers lost their cleaning contract when it was awarded to a rival company. The most material parts of the ECJ's judgment are for present purposes these:
"15. As observed by most of the parties who commented on this point, the mere fact that the service provided by the old and the new awardees of a contract is similar does not therefore support the conclusion that an economic entity has been transferred. An entity cannot be reduced to the activity entrusted to it. Its identity also emerges from other factors, such as its workforce; its management staff; the way in which its work is organised; its operating methods, or indeed, where appropriate, the operational resources available to it. 16. The mere loss of a service contract to a competitor cannot therefore by itself indicate the existence of a transfer within the meaning of directive (77/18/EEC). In those circumstances, the service undertaking previously entrusted with the contract does not, on losing a customer, cease fully to exist, and a business or part of a business belonging to it cannot be considered to have been transferred to the new awardee of the contract. ... 20. ... it should be borne in mind that the factual circumstances to be taken into account in determining whether the conditions for a transfer are met include in particular, in addition to the degree of similarity of the activity carried on before and after the transfer and the type of undertaking or business concerned, the question whether or not the majority of the employees were taken over by the new employer: Spijkers v. Gebroeders Benedik Abbatoir C.V. [1986] ECR 1119 , 1128-1129 para 13. 21. Since in certain labour-intensive sectors a group of workers engaged in a joint activity on a permanent basis may constitute an economic entity, it must be recognised that such an entity is capable of maintaining its identity after it has been transferred where the new employer does not merely pursue the activity in question but also takes over a major part, in terms of their numbers and skills, of the employees specially assigned by his predecessor to that task. In those circumstances, as stated in Rygaard's case [1996] ICR 334, 346 para 21 the new employer takes over a body of assets enabling him to carry on the activities or certain activities of the transferor undertaking on a regular basis."
[65]Much of what was said in Suzen was later repeated by the ECJ in Allen v. Amalgamated Construction Co Ltd [2000] ICR 436. Let me read just one paragraph of the Court's judgment:
"29. The court has thus held that, since in certain sectors in which the activity is based essentially on manpower, a group of workers engaged in a joint activity on a permanent basis may constitute an economic activity, such an entity is capable of maintaining its identity after it has been transferred where the new employer does not merely pursue the activity in question but also takes over a major part, in terms of their numbers and skills, of the employees specially assigned by his predecessor to that task. In those circumstances the new employer takes over a body of assets enabling him to carry on the activities or certain activities of the transferor undertaking in a stable way: Suzen , p.672 para 21 ..."
[66]The similarity between paragraph 21 of Suzen and paragraph 29 of Allen needs no emphasis, and both seem to me of central importance on this appeal. What the ECJ are saying is that when one has a group of workers engaged in a joint activity based essentially on manpower on a permanent basis (typically in cleaning and catering cases, but equally in the present case),(a) that enterprise may constitute an economic entity, and(b) that entity may properly be regarded as transferred when the new contractor takes over a major part, in terms of their numbers and skills, of that group of workers.[67]Critical to the appellants' argument, however, is the proposition that, whether or not the incoming contractor takes over a major, or indeed any, part of the previous contractor's workforce is in law immaterial, at any rate if his principal reason for not doing so is to avoid the Directive. But clearly that can be right only if the court is to deem an undertaking to have been transferred when ex hypothesi it has not been. Does the ECJ jurisprudence support such an approach? To my mind it does not. It is one thing to say, as the ECJ said in Landsorganisationen I Danmark v. Ny Molle Kro [1989] ECR 330, 338 at paragraph 12, that the purpose of the Directive is: "to ensure, so far as possible, that the rights of employees are safeguarded in the event of a change of employer by enabling them to remain in employment with the new employer on the terms and conditions agreed with the transferor".[68]It is quite another to deem there to have been a "change of employer" and to deem employees "to remain in employment with the new employer."[69]I readily recognise the policy considerations here in play. These are admirably identified by Lindsay J in the EAT's judgment in RCO Services Limited v. UNISON [2000] ICR 1502, 1515 (a decision presently under appeal to this Court):
"There is a real danger, were Suzen [1997] ICR 662 to be given the unqualified force that has been argued for it, that in labour-intensive areas of employment such as cleaning and catering, where contracting-out is now common and where significant assets are often unnecessary or unlikely to be moved, an incoming contractor would be able to avoid Directive 77/187 by the simple expedient, often easy of achievement, of ensuring that he took on none of the previous contractor's workforce. The protection of employees' acquired rights, a basic objective of the Directive, would not only be jeopardised but ... would be jeopardised in relation to perhaps the most vulnerable of all classes of workers, those with only relatively simple and commonly-available skills which, on that account, the incoming contractor could readily choose to supply by way of others in the labour market. There are, of course, economic arguments that incoming contractors should be free to bid for their contracts as competitively as they may dare, and should thus be entirely free to avoid all obligations to entrenched employees. However such economic arguments are not for us and, had they been intended to hold sway, the acquired rights Directive 77/187 would surely never have been called into existence."
[70]How far, then, does the underlying policy take one? Is it really the case that the Directive would "never have been called into existence" if an incoming contractor could avoid it in this way in these cases? One should recognise that it will still be effective in non labour-intensive cases (which appear to be the majority of those decided) and perhaps also where the previous contractor has "cease[d] fully to exist" - see paragraph 16 of the judgment in Suzen above - that in fact being the position in Spijkers itself. There are also the countervailing economic arguments to which Lindsay J referred. Not always, moreover, do all employees wish to be deemed to be taken on by the incoming contractor. Merckx v. Ford Motors (Belgium) [1997] ICR 352 was a case in point: 2 of the employees whom the original employers wished to transfer (amongst 14 out of a total of 64) sought to reject the decision and instead sue them for breach of contract; their wish was thwarted by the ECJ's decision that they had been transferred with the undertaking. Merckx , however, is a decision much relied upon by the appellants, notably for the final sentence in the following three paragraphs of the Court's judgment:
"24. Thirdly, the plaintiffs claim that the fact that the majority of the staff had been dismissed on the transfer of the dealership indicated that the Directive did not apply. 25. Article 4(1) of Directive (77/187/EEC) provides that the transfer of an undertaking, business or part of the business does not in itself constitute grounds of dismissal. However, that provision is not to stand in the way of dismissals that may take place for economic, technical or organisational reasons entailing changes in the workforce. 26. Accordingly, the fact that the majority of the staff were dismissed when the transfer took place is not sufficient to preclude the application of the Directive. The dismissals might have taken place for economic, technical or organisational reasons, in compliance with article 4(1). In any event, failure to comply with that provision cold not affect the existence of a transfer for the purposes of the Directive."
[71]I have some difficulty with that final sentence. A failure to comply with article 4(1) means the dismissal of one or more employees for other than economic, technical or organisational reasons on the transfer of an undertaking. There can be no such failure, therefore, unless the undertaking is in fact transferred. Read literally the sentence is correct; if a transfer exists, a failure to comply with article 4(1) (which predicates such a transfer) will not affect it. Read as the appellants invite us to understand it, however, the reasoning is entirely circular.[72]The only other ECJ decisions on which the appellants seek to rely are Schmidt v. Sparkasse Bordesholm [1995] ICR 237 and Sanchez Hidalgo v. ASA [1999] IRLR 136. Schmidt concerned a sole cleaner who in the event rejected the incoming contractor's offer of employment. The critical paragraph in the court's judgment is this:
"17. According to the case law of the court - see Spijkers , at p.1128, para. 11, and Dr. Sophie Redmond Stichting v. Bartol (Case C029/91) [1992] ECR I-3189 , 3220, para. 23 - the decisive criterion for establishing whether there is a transfer for the purposes of the Directive is whether the business in question retains its identity. According to that case law, the retention of that identity is indicated, inter alia, by the actual continuation or resumption by the new employer of the same or similar activities. Thus, in this case, where all the relevant information is contained in the order for reference, the similarity in the cleaning work performed before and after the transfer, which is reflected, moreover, in the offer to re-engage the employee in question, is typical of an operation which comes within the scope of Directive (77/187/E.E.C.) and which gives the employee whose activity has been transferred the protection afforded to him by that Directive."
[73]It is evident from reading the decision as a whole that the court there was not purporting to address the question posed at the outset of this judgment and it seems to me impossible, consistently with the later ECJ judgments in Suzen and Allen , to read it as supporting a negative answer to that question. Schmidt appears subsequently to have been regarded rather as relevant to the question whether a particular business retains its identity i.e. whether it constitutes an economic entity, and as establishing that the transfer of an undertaking is not precluded by the non-transfer of tangible assets.[74]As for Sanchez Hidalgo - which the appellants contend shows the ECJ to be treating Schmidt and Suzen as consistent - I do not read it so. In Sanchez Hidalgo the employees of the previous contractors were taken on by the incoming contractors. The question there was whether the relevant service constituted an economic entity. Schmidt was relevant only in that connection and was mentioned in a single introductory paragraph (paragraph 3) of the court's judgment.[75]Turning then to the domestic authorities, I must first briefly consider the House of Lords' decision in Litster v. Forth Dry Dock Co. Ltd. [1989] ICR 341 . There it was held that on the purposive construction appropriate for TUPE, regulation 5, which safeguards employees' rights on the transfer of an undertaking, should be read as applying not only to those "employed immediately before the transfer" (the language of regulation 5(3)) but also to anyone who "would have been so employed if he had not been unfairly dismissed in the circumstances described by regulation 8(1) [i.e. dismissed on a transfer for other than economic, technical or organisational reasons]".[76]The appellants submit on the basis of that authority that "it cannot be open to incoming contractors to achieve by unilateral action what he is forbidden from achieving by agreement with the outgoing contractor". The argument is fallacious. The facts of Litster were that the applicants had worked for the transferor who then became insolvent and went into receivership. The receiver agreed to sell the business assets to the transferee and one hour before the transfer told the workforce that they were to be dismissed with immediate effect and no further payments for subsequent wages or accrued holiday pay or damages for failure to give them the statutory period of notice. That the undertaking was transferred so that the Directive and TUPE applied was never in dispute. Litster , therefore, begs rather than answers the question now at issue. It seems to me one thing to say that TUPE, where it applies, must be construed purposively; quite another to hold that it must be deemed to apply rather than an incoming contractor be permitted to escape it.[77]The Court of Appeal authorities are not, I think, decisive of the present point and certainly do not address it squarely. Betts , although broadly helpful to the respondents' argument, did not in the event decide whether an incoming contractor's ban on engaging the previous contractor's employees precludes their relying upon the employee's non-engagement in contending that no transfer has taken place. The case was concerned not with a labour-intensive operation but with a substantially asset-rich undertaking where there was no transference of the tangible assets. Kennedy LJ concluded:
"[even] if the ban had not been imposed and a modest number of Brintel employees had gone to KLM [the incoming contractor] that would not have led to a different conclusion [as to whether the undertaking had been transferred]."
[78]ECM clearly represents the highwater mark of the appellants' argument in reliance upon English authority: as I observed at the outset of this judgment, the Court of Appeal there appeared to conclude that an incoming contractor cannot avoid the Directive and TUPE simply by choosing not to take on any of the previous contractor's workforce. I would, however, make four comments upon it. First, Mummery LJ's ultimate conclusion is couched in apparently limited terms:
"The Tribunal was entitled to have regard, as a relevant circumstance, to the reason why those employees [of the previous contractor] were not appointed by ECM [the incoming contractor]."
[79]Secondly, even that limited conclusion I find impossible, for the reasons already given, to reconcile with the ruling ECJ jurisprudence. Thirdly, Mummery LJ it was who gave permission to appeal in the instant case. Fourthly, Lindsay J in RCO recognised that "tensions, if not conflicts, exist" between ECM and Betts , but, in following ECM , to my mind erred in supposing that Suzen did not represent a step back from earlier decisions of the ECJ (including Schmidt if that case is to be understood as the appellants contend).[80]As I understand May LJ's conclusion on "the ECM point", it is that where, as here, "there is no transfer if the workforce is not taken on, but there would be if there were, there will be a transfer if, although the workforce is not taken on, the reason or principal reason for this was in order to avoid the application of the Regulations." The expression "the reason or principal reason" my Lord takes from regulation 8 of the TUPE where it is used in the context of deeming any dismissal before or after a transfer unfair "if the transfer or a reason connected with it is the reason or principal reason for his dismissal" (regulation 8(1)), unless "the reason or principal reason" for the dismissal was an economic, technical or organisational one (regulation 8(2)).[81]I confess to some difficulty with this approach, not merely because, as I have already sought to explain, its consequence appears to me to involve treating an undertaking as transferred when in fact it has not been, but also because the concept of "the reason or principal reason" strikes me as altogether more difficult to apply to the non-taking on of employees than to the reasons for dismissing employees. What reason, one wonders, other than an economic, technical or organisational one (which my Lord does not require), would not also qualify as a reason referable to a wish to avoid the Regulations? And how does this approach apply if some workers are taken on but not others?[82]Be that as it may, the consequence of my Lord's approach would, as it seems to me, generally be to protect employees' rights whenever essentially the same job continues to be carried on by a different contractor. If the EU really wishes to go that far, then in my judgment it should legislate to that effect. I simply cannot accept that such a situation is properly attainable even by the most enthusiastically purposive construction of the existing legislation.[83]In my judgment the all-important fact in the present case is that Firm Security Group did not take on any of ADI's workforce. The reason why is immaterial. I would have dismissed this appeal.

ORDER

Appeal allowed by a majority to the extent indicated in the Judgments. The matter to be remitted to the Employment Tribunal, differently constituted. The respondent to pay the appellant's costs, summarily assessed at £19,481.50. (Order does not form part of approved Judgment)

Cited in 1 later judgment