Kelman v Care Contract Services & Anor [1994] UKEAT 992_93_1205

EAT
Kelman v Care Contract Services & Anor
[1994] UKEAT 992_93_1205 · 1994-05-19
MR JUSTICE MUMMERY (PRESIDENT) This appeal raises a question of general interest on the interpretation and application of the Acquired Rights Directive EEC/77/187 ("the Directive") and the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("the Regulations").The appeal was argued in Edinburgh on 11th and 12th May 1994. At that date the Court of Appeal in England had heard argument, but had not delivered judgment, in the case of Dines v. Initial Healthcare Services . By consent directions were given at the conclusion of the appeal hearing for the parties' advisers to supplement their oral submissions by written submissions on the effect of the Court of Appeal judgment when given. The Court of Appeal handed down written judgments on 19th May 1994 now reported at [1994] IRLR 336 . The parties' written submissions were completed by the end of June 1994. The final version of the judgment was postponed until the Employment Appeal Tribunal had heard and given judgment in another case in which the effect of the Court of Appeal's decision in Dines was also argued. The judgment in the other case was handed down by the Employment Appeal Tribunal at the beginning of October. ( Council of the Isles of Scilly v. Brintel Helicopters Ltd ).

The Appeal

The appeal is from the decision of the Industrial Tribunal held at Aberdeen over four days in August 1993. For Full Reasons notified to the parties on 3rd November 1993 the Tribunal dismissed the complaint of unfair dismissal and of unfair selection for redundancy made by Mrs Phyllis Kelman, a school cleaner at Banchory Academy ("the School") from 12th March 1986 until 31st December 1992. The claim was made against her former employers, the Grampian Regional Council ("the Council") and against Care Contract Services Ltd ("the Company") who became responsible as from 1st January 1993 for the provision of cleaning services at the School. Mrs Kelman was disappointed with the failure of her application and appealed by a Notice of Appeal dated 9th December 1993.

The Factual Background

There was no serious dispute about the relevant facts at the Tribunal hearing:-

(1) The Council is the statutory Authority charged with the provision of education in the Grampian region at a large number of educational establishments, including secondary and primary schools, of which the School is one.(2) Prior to 1st January 1989, the schools were cleaned by cleaners employed for that purpose by the Council.(3) In consequence of the requirements of the Local Government Act 1988 the Council set up a Direct Services Organisation (DSO) to tender for certain activities, including the cleaning of school buildings in the region which was divided, for the purpose of competitive tendering, into five geographical areas. The DSO successfully tendered for the contracts in all five areas. The Company was one of the unsuccessful tenderers.

On 1st January 1989

(5) On 31st December 1992, the initial contract of DSO expired. The Council invited competitive tenders for the same designated areas. DSO intended to retain, if possible, cleaning contracts for all five areas, but on 14th September 1992 DSO wrote to employees engaged in the cleaning of educational establishments that, should DSO be unsuccessful in winning the contract for the area in which the individual cleaner worked, a formal redundancy situation would apply and his current employment contract would terminate on 13th December 1992.(6) In mid-October 1992, the Council announced that DSO's tender for four areas had been successful, but that the contract for Area 3 had been awarded to the Company. Five or six meetings were organised in different locations in area 3, attended by the Cleaning Manager, area supervisors, elected members of the Council and union representatives. About 110 employees were affected. Details of about 57 existing vacancies within the DSO were given to employees. Applications for transfer to those vacancies were invited.(7) After the award of the contract the Company transferred a number of existing employees to Area 3 from a contract of theirs which had not been renewed. Meetings were held by the Company at 2 of the Council's schools at which they made presentations to a number of the Council's existing staff in Area 3. The object of the presentations was to inform Council staff that the Company was recruiting in Area 3 and that it would be conducting interviews. Union representatives attended the meetings. The meetings, which were not well attended, were unproductive from the Company's point of view. Few applications were received. However, through personal contacts about 60% of the staff which the Company required for Area 3 was recruited from existing Council employees. The remaining 40% were transferred staff and new recruits. The Company employed a total of 180 in Area 3 as opposed to between 160 and 170 previously employed by the DSO in the same schools.(8) Mrs Kelman was employed by the Council in March 1986 as a cleaner at the School in Area 3. From 1st January 1992 her employment continued through the DSO. She was appointed site supervisor at the School and at Banchory Primary School. On 1st September 1992 she received a redundancy notice and was subsequently informed that the DSO had lost the contract for Area 3. She attended the presentation by the Company which was offering an hourly rate of £3.28 as compared with the £3.46 paid by the Council. She declined an offer of employment as a cleaner at the School. The position of supervisor had already been filled.(9) On 31st December 1992, Mrs Kelman's employment with the Council terminated. She was unable to find any position in the lists supplied to her by the DSO and the Director of Personnel which was suitable for her. Split shifts and the time and expense of travel made it impracticable for her, as well as many others, to accept employment outside Area 3.(10) Prior to 31st December 1992, all cleaning equipment and materials in the education establishments in Area 3 was removed by the Council and replaced with equipment and materials of the Company manufactured to its own specification and purchased specifically for use in Area 3. Training in the use of new equipment was provided by the Company. The Company made changes: a night shift was introduced; the method of allocation of work among cleaners was altered; new restrictive clauses were inserted in contracts. The Company introduced its own procedures and quality control systems, though, by restrictive clauses in the contract, the Council retained a significant degree of control over the manner in which the Company provided building cleaning services to the Council.

The Tribunal's Decision

The Industrial Tribunal noted that the material facts were not in dispute. Over 80 cases and other sources were cited to the Tribunal which summarised the rival submissions and decided the case against Mrs Kelman for the following reasons:-(1) It was common ground that the reason for the dismissal of Mrs Kelman was redundancy and the Council had acted reasonably in treating redundancy as a sufficient reason for dismissing her. She was not unfairly selected for redundancy.(2) In the context of the Regulations and the Directive, the Tribunal decided that nothing could be said to have been transferred from the Council to the Company on 1st January 1993 when the Company's contract with the Council commenced. In the case of the Regulations and of the Directive there had to be a transfer for the relevant provisions to apply. On the facts of Mrs Kelman's case there was no "recognisable economic entity" transferred by the Council to the Company.(3) The fact that the majority of employees working for a party to a transaction are employed by the other party to the transaction after it "must be a factor pointing to a transfer of an undertaking, but it was just one factor among many which had to be taken into account." In the present case there had to be more than the admitted fact that 60% of those employed by the Company to clean some of the Council schools had formerly been employed by the Council in the same area to clean the same schools. "The Regulations and the Directive apply to the transfer of a business or an undertaking, not to the transfer of employees from one business or undertaking to another".(4) The Tribunal considered the factors identified as relevant in decisions of the European Court of Justice and of the Employment Appeal Tribunal. It decided that cleaning of the school buildings was not a "recognisable and identifiable part" of the Council's undertaking pursuant to the statutory obligation of providing education. Even after DSO was formed, it had no employees, buildings, vehicles or equipment of its own. All those were supplied by the Council to DSO between whom no money passed. Looking at the substance, not the form, the Tribunal concluded that the cleaning of the school buildings was not a separate and identifiable part of the Council's undertaking either before or after the Local Government Act 1988. The cleaning of school buildings in Area 3 could not be part of an undertaking. Therefore the Regulations and the Directive could not apply.(5) Even if wrong in the conclusion that the cleaning of the school buildings could not be said to be an identifiable part of the Council's undertaking, the Tribunal concluded that no part of it was transferred to the Company. No tangible assets, no buildings, no intangible assets were transferred by one to the other. No employees were "taken over", either in the terms of the contract or by a "permissive arrangement". No goodwill was valued or transferred. No contracts for the supply of material or the leasing of equipment or vehicles or any other like contracts were assigned. The fact was that the Company cleaned some of the schools formerly cleaned by the Council. They used staff to do it on different terms and conditions of employment. As for the terms and conditions of the contract between the Council and the Company, they did not suggest that either party considered that part of the Council's undertaking was being transferred to the Company. There was reserved to the Council a significant degree of control over the manner in which the Company exercised the rights conferred on them by the contract.(6) In those circumstances there was nothing to suggest that an identifiable, economic activity was transferred to the Company by virtue of the contract with the Council.
"All that could be said was that the same activity was continued by Care and that they employed for the purpose of continuing that activity some staff who happened to have been employed by the Council and who could not be redeployed by them, but Care could only carry out that activity within the confines of their contract. They were not free to do as they thought fit."
The Council retained responsibility for building cleaning, but employed the Company as their agent to perform it for them.The Tribunal's view was that nothing was transferred by the contract between the Council and the Company, except a conditional right to clean some of the schools previously cleaned by the Council through DSO. The change of employer was not brought about by a relevant transfer.In view of this decision the Tribunal did not need to consider the application of the "commercial venture" proviso or provisions in Regulation 8(2) under which, if there was a transfer, the Company might be entitled to contend that the dismissal of Mrs Kelman was for an economic, technical or organisational reason and not therefore unfair.

The relevant Law

At the time when it reached its decision the Industrial Tribunal did not have the benefit of guidance contained in two recent decisions: the first decision is of the European Court of Justice Christal Schmidt v. Spar (14th April 1994) [1994 IRLR 302 and the second is the decision of the Court of Appeal in M A Dines & Ors v. Initial Healthcare Services Ltd and Anr (19th May 1994) [1994] IRLR 336 . Those two decisions have clarified the relevant legal principles and the way in which they should be applied in determining the question whether there has been a transfer of an undertaking under the Directive and the Regulations. See the analysis by Morison J. in Council of the Isles of Scilly v. Brintel Helicopters Ltd . We wish to highlight the following points:-

(1) After stating in the preamble that

"It is necessary to provide for the protection of employees in the event of a change of employer, in particular, to ensure that their rights are safeguarded"

the Directive provides in Article 1 that

"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."
The Directive provides in Article 3 that, where it applies, the transferor's rights and obligations arising from a contract of employment or from an employment relationship existing at the date of the transfer within the meaning of Article 1, shall, by reason of such transfer, be transferred to the transferee. Article 4 provides that the transfer of an undertaking, business or part of a business shall not of itself constitute grounds for dismissal by the transferor or the transferee. The evident purpose of the Directive is to protect the rights of employees in an undertaking where there has been a change of employer in consequence of a transfer of the undertaking.(2) It is common ground that the Directive has direct effect but is only enforceable in national courts by an individual against the state or an emanation of the State. In the present case Mrs Kelman is not entitled to rely on the Directive as against the transferee Company.(3) The Regulations were made for the purpose of implementing the Directive. Decisions of the European Court of Justice and of the House of Lords establish that United Kingdom legislation made for the purposes of implementing Community legislation must be construed purposively to accord with the Community legislation, so far as it is possible to do so without distorting the wording of the Regulations.(4) A line of decisions of the European Court of Justice on the Directive culminating in Schmidt v. Spar establishes that the decisive criterion for determining whether there has been a transfer of an undertaking is whether, after the alleged transfer, the undertaking has retained its identity, so that employment in the undertaking is continued or resumed in the different hands of the transferee. In order to determine whether there has been a retention of identity it is necessary for the Industrial Tribunal to examine all the facts relating both to the identity of the undertaking and the relevant transaction and assess their cumulative effect, looking at the substance, not at the form of the arrangements. The mode or method of transfer is immaterial. The emphasis is on a comparison between the actual activities of and actual employment situation in an undertaking before and after the alleged transfer. A change of employer responsible for the activities of an undertaking which continues to be identifiable will usually mean that there has been a relevant transfer.(5) The cumulative effect of the decisions on the Directive is that a transfer of an undertaking may occur for the purposes of the Directive even though -(a) There has been no transfer of the ownership of assets, tangible or intangible. What matters is the transfer of responsibility for the operation of the undertaking in which the employees are employed. It may even remain under the ultimate control of the transferor.(b) The size of the undertaking may be small. For example, in the case of Schmidt v. Spar there was only one employee in the undertaking.(c) The undertaking may consist only in the provision of or the right to provide services.(6) The Directive and the Regulations may apply in the context of competitive tendering procedures whereby a contract for the provision of services, such as cleaning, is granted or where, having been granted, it terminates and is re-granted to a different contractor. The provisions may apply even though there is no transfer by the contract of management structure, stock, supplies or equipment between contractors. If the cleaning services are carried out mainly by the same staff at the same premises for the benefit of the same authority or company, there may be a transfer of an undertaking for the purposes of both the Directive and the Regulations. The theme running through all the recent cases is the necessity of viewing the situation from an employment perspective, not from a perspective conditioned by principles of property, company or insolvency law. The crucial question is whether, taking a realistic view of the activities in which the employees are employed, there exists an economic entity which, despite changes, remains identifiable, though not necessarily identical, after the alleged transfer. Although concepts of identity, change and continuity may pose difficult philosophical problems, the law, adopting a pragmatic approach, is well able to grapple with the notion that even important changes in constituent parts or attributes may not affect the persistence of identity of an economic entity. If, despite the changes resulting from the alleged transfer, jobs are still there to be done, though for a different employer, the Directive and the Regulations may apply.

Conclusion

The arguments have concentrated on the decision on the Directive by the European Court of Justice in Schmidt (supra) and the decision on the Regulations by the Court of Appeal in Dines (supra). In our view, the reasoning and result of those decisions point to only one conclusion on the facts of this case, namely(a) That the cleaning of the School buildings in Area 3 by employees of the Council through the DSO was ancillary to the Council's functions in the provision of educational services and was part of its undertaking; and(b) That there was a transfer of that part of its undertaking to the Company on 1st January 1993 when, as a result of a competitive tendering procedure, the Company was awarded a contract under which it took over from the Council and became responsible to the Council for the cleaning of school buildings in Area 3, using a substantial number of the same employees for that purpose. The identity of the undertaking previously carried on by the Council survived the change of responsibility for its operation. It is a case of a transfer of an undertaking, rather than the cessation of one business and the creation and commencement of a different one.The reason for our conclusion is that we find it impossible to distinguish this case from Schmidt . Mrs Schmidt was the only cleaner employed by a bank for the purpose of cleaning a building which housed one of its branches. She was dismissed because the bank made a contract with an outside cleaning firm, which already cleaned other branch buildings, to carry on the cleaning activities at that branch. There was no transfer by the bank to the cleaning firm of any tangible or intangible assets, management structure, stock, supplies, contracts, equipment or goodwill. The European Court of Justice nevertheless held that there was a transfer of an undertaking within the meaning of the Directive. A comparison of the decision in Schmidt with this case prompts the question: If Mrs Schmidt's employment rights were protected under the Directive, why are Mrs Kelman's employment rights not protected under the Regulations? It is true, as pointed out by counsel for the Company and for the Council that in Schmidt the ECJ relied on earlier cases cited to the Industrial Tribunal and did not doubt their correctness. It was submitted that the Industrial Tribunal did not err in law in applying legal principles laid down in the earlier ECJ decisions. It was argued that the Tribunal did what was required by the earlier decisions, namely look at all the factors to determine whether the undertaking had retained its identity after the alleged transfer. We see the force of these arguments, but they ignore the fact that in Schmidt the ECJ carried the interpretation of the Directive further than any of the earlier cases. The decision was not so much a departure from the legal principles laid down in the earlier cases, cited to and relied on by the Tribunal, as an extension of them to a case which, in our view, is indistinguishable from the present.In paragraph 20 of the judgment in Schmidt the ECJ decided that the Directive was to be interpreted as covering a situation where "an undertaking entrusts by contract to another undertaking the responsibility for carrying out cleaning operations which it previously performed itself." The employee "whose activity has been transferred" is given the protection of the Directive (paragraph 17). The judgment makes it clear that the Directive applies to the contracting out of functions and activities; and that it is not excluded by the fact that the undertaking transferred is only part of the transferor's undertaking or by the fact that only one person is employed in the activities conducted within the undertaking. Such activities may constitute an economic entity capable of being transferred and in fact transferred if the retention of identity test is satisfied.We conclude that it is possible, without distorting the words of the unamended Regulations, to interpret them to conform with the interpretation placed on the Directive in Schmidt . It must follow that there was in this case a transfer of an undertaking within the meaning of the Regulations and that the Tribunal erred in law in concluding that there was no transfer. As the facts of the case were not, and are not, in dispute there is no need to remit this issue to the Industrial Tribunal. We reverse their decision on the point that there was a transfer of an undertaking subject only to the commercial venture point and to the possible application of Regulation 8(2) of the Regulations. As the Tribunal never dealt with those points this case must be remitted to the Industrial Tribunal to determine any remaining issues as to whether the commercial venture proviso applies and whether Regulation 8(2) is applicable. If it is agreed or determined that they are not applicable, it will be necessary for the Tribunal to decide what remedies should be granted to Mrs Kelman against the Company and the Council.