Buchanan-Smith v Schleicher & Co International Ltd [1995] UKEAT 1105_94_0612

EAT
Buchanan-Smith v Schleicher & Co International Ltd
[1995] UKEAT 1105_94_0612 · 1995-12-06
MR JUSTICE MUMMERY (PRESIDENT) In two recent cases the Employment Appeal Tribunal has answered the question whether, for the purposes of Regulation 5(1) of the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("the 1981 Regulations"), a person is, at the time of the transfer of an undertaking,"employed by the transferor in the undertaking or part transferred".See Michael Peters Ltd v. Farnfield & Anr [1995] IRLR 190 and Duncan Web Offset (Maidstone) Ltd v. Cooper & Ors [1995] IRLR 633 .The main question on this appeal is whether Miss Karen Buchanan-Smith was employed by her employer, Tarnator Ltd, in an undertaking or part of an undertaking transferred by Tarnator to the Respondent, Schleicher & Co International Ltd, ("Schleicher") in February 1993.

The Proceedings

On 14th December 1993 Miss Buchanan-Smith presented an Originating Application claiming a redundancy payment from Schleicher. Her case was that she had been dismissed by Schleicher on 29th September 1993 from her employment as a sales executive. Although that employment with Schleicher had only begun on 12th February 1993, she had been previously been employed by Tarnator from 1982 onwards and she was entitled to 12 years' redundancy by virtue of the application of the 1981 Regulations to the transfer of Tarnator's undertaking of a service department to Schleicher in February 1993.In their Notice of Appearance dated 25th January 1994 Schleicher resisted the application on the grounds that -(1) Miss Buchanan-Smith had no employment rights against Schleicher, because her employment had only commenced on 15th February 1993 and was terminated by giving her four weeks' notice on 29th September 1993 on the grounds, not of redundancy, but because she had failed to achieve agreed targets.(2) There had been no transfer of an undertaking by Tarnator to Schleicher. There was only a transfer of assets, consisting of a stock of spare parts and existing service contracts of customers with the type of machine relevant to the spare parts.(3) Miss Buchanan-Smith's contract of employment with Tarnator was not transferred to Schleicher. She had been issued with a letter of employment by Schleicher on 17th February 1993 after a formal interview for a job in the sales department. There was no continuity of employment.

The Industrial Tribunal's Decision

On 13th September 1994 the Chairman of the Industrial Tribunal, sitting alone at Brighton, heard evidence from Miss Buchanan-Smith and from the Managing Director of Schleicher (Mr J Costello) on a preliminary issue that Miss Buchanan-Smith did not have two years' service in order to claim a redundancy payment. At the hearing Miss Buchanan-Smith conducted her case in person. Schleicher were represented by a consultant, Mr Parkinson. In Extended Reasons sent to the parties on 27th September 1994 the Chairman explained why Miss Buchanan-Smith's claim should be dismissed. In brief, his conclusions were that -(1) Tarnator carried on two identifiable, connected, but different, undertakings, a sales undertaking and a service undertaking.(2) There was a transfer by Tarnator to Schleicher of an identifiable part of Tarnator's business namely, an undertaking comprising service, maintenance and repair on request.(3) Miss Buchanan-Smith was not employed in the identifiable part of the undertaking transferred to Schleicher, although she worked partly in that part of the organisation.(4) In case he was held wrong on that conclusion, the Chairman stated that he was satisfied that there was no break in Miss Buchanan-Smith's employment and that she worked for Tarnator until she began working for Schleicher.

The Appeal

There is an appeal and a cross-appeal. The grounds of appeal were amended with leave after a preliminary hearing before the Appeal Tribunal on 29th June 1995. Schleicher were given an opportunity to object to the amendments, but did not do so. The questions on the appeal and cross-appeal are -(1) Was there a transfer of an undertaking, or part of an undertaking, by Tarnator to Schleicher?(2) Was Miss Buchanan-Smith employed by Tarnator in the undertaking or part transferred?

The Findings of Fact

In order to resolve the conflicting submissions on the interpretation and application of the 1981 Regulations, it is first necessary to summarise the relevant facts found by the Chairman:-(1) Tarnator carried on the business of selling (as agent) shredding machinery, spare parts and accessories made by various manufacturers, including Schleicher. There were sales of both larger commercial shredding machines and smaller ones.2) Tarnator also carried on the business of servicing, repairing and maintaining such machinery, partly under contract and partly simply on request for customers.(3) The workforce of Tarnator was small. It consisted of four employees and a part-time receptionist. Miss Buchanan-Smith, who had a 2% shareholding in Tarnator, was a director and Company secretary. She dealt with sales of the smaller shredding machines and with the organisation and running of the service side of the business. She was "something of a salesperson, an administrator of the business, and an administrator on the pure internal business ie, company side". There was also a service engineer, Mr Brown, and Miss Buchanan-Smith's mother, who was a director of Tarnator and was responsible for the sales of the larger equipment.(4) Financial problems suffered by Tarnator at the end of 1992 led to discussions between Miss Buchanan-Smith and the Managing Director of Schleicher about the possibility of a deal between the two companies. Schleicher could not take on the selling agency of other manufacturers' goods, but were interested in acquiring the service contracts. An agreement was ultimately reached whereby Schleicher would acquire all the service contracts of Tarnator, together with its stock of spare parts at book value. There were a total of 67 service agreements, plus 41 single annual agreements, acquired at their "face value". A formal agreement between Tarnator and Schleicher was signed on 9th February 1993. Physical possession of the spare parts was taken on 11th February and on the same date Tarnator wrote a letter to customers informing them that the service division of Tarnator had been acquired by Schleicher who would carry out all service calls and contracts. (At about the same time the sales side of Tarnator's business ceased to trade. Tarnator was thus left with no business in which to employ any employees.)(5) Miss Buchanan-Smith was appointed to a sales post with Schleicher in accordance with terms of employment due to start on 15th February. A slip was produced to the Chairman of the Industrial Tribunal indicating that she was to be paid from 12th February. Although there is no statement in the decision to this effect, we understand that Miss Buchanan-Smith's mother and the service engineer were also employed by Schleicher.

The Transfer of Undertaking Point

The Chairman of the Industrial Tribunal rejected the submission made by Mr Parkinson, on behalf of Schleicher, that there was no transfer of an undertaking. The Chairman had no difficulty in reaching the conclusion that there was a transfer of an identifiable part of a business ie, the service, maintenance and repair side of the business. The sales side of Tarnator's business was not transferred. It is common ground on this appeal that the sales side was closed down on 12th February. The Chairman stated (paragraph 7) that
"...it is quite obvious that what finished up in the hands of the Respondent was an identifiable part of Tarnator Ltd's business which was carried on without interruption. I find that to amount to a transfer."
Mr Parkinson submitted on the cross-appeal that this conclusion was erroneous in law. He contended that the service side of Tarnator's business was neither purchased nor transferred as a complete entity to Schleicher. Only the contracts and relevant spares were purchased. The service undertaking was not only separate from the sales undertaking. It was also itself split into two distinct parts - the contract side and the general side. Schleicher purchased the contracts from Tarnator. In terms of total turnover the contract side of the business was very small and would not be sufficient to support the staff required to carry out the work, unless subsidised by other activities within the Company. No goodwill was transferred by Tarnator to Schleicher with the sale of the assets.In our judgment, there was no error of law in the decision of the Chairman on this point. There can be no appeal against his findings of fact. The Chairman found as a fact that there was a transfer of an undertaking, not just the transfer of assets. That result was reached without any legal misdirection. On the facts found by the Chairman, there was an identifiable economic entity carried on by Tarnator which retained its identity in the hands of Schleicher who continued the same, or similar, activities previously carried on by Tarnator. Mr Parkinson has failed to establish that the Chairman's decision was flawed by a legal misdirection or by an erroneous application of the law to the facts found.

Employment in the Undertaking or Part Transferred - the Law

Before dealing with the rival submissions on the point central to the appeal, it may be helpful to summarise first the relevant legal principles.(1) The starting point is the Acquired Rights Directive (77/187) which has as its principal purpose "the protection of employees in the event of a change of employer, in particular, to ensure that their rights are safeguarded." Article 1(1) provides -"(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".

Article 3(1) provides -

"The transferor's rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer within the meaning of Article 1(1) shall, by reason of such a transfer, be transferred to the transferee".

(2) The 1981 Regulations, made to implement the Directive, provide as follows:-

Regulation 2(2):
"References in these Regulations to the transfer of a part of an undertaking are references to a transfer of a part which is being transferred as a business ..."
Regulation 3(2):
"Subject to the aforesaid, these Regulations so apply whether the transfer is effected by sale or by some other disposition or by operation of law."
Regulation 5(1):
"... A relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor in the undertaking or part transferred but any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee."
(3) The provisions in the Regulations must be interpreted, if it is possible to do so without distorting their meaning, to conform to the provisions of the Directive, as interpreted by the European Court of Justice. In Arie Botzen v. Rotterdamsche [1985] 2 CMLR 50 the European Court of Justice ruled on the interpretation of the Directive in the context of the transfer of part of a business and the application of the Directive to employees assigned to that part. Three questions were referred to the European Court of Justice. Only the second and third are relevant. The questions were:
"(2) Does the scope of the Directive also extend to the rights conferred upon and the obligations imposed upon the transferor by contracts of employment which exist at the date of the transfer and which are made with employees whose duties are not performed exclusively with the aid of assets which belong to the transferred part of the undertaking?
(3) Does the scope of the Directive also extend to the rights conferred upon and the obligations imposed upon the transferor by contracts of employment which exist at the time of the transfer and which are made with employees who are employed in a staff department of the undertaking (for example, general management services, personnel matters, etc), where that staff department carried out duties for the benefit of the transferred part of the undertaking but has not itself been transferred".Those questions were referred to the European Court of Justice in the context of the transfer of certain departments of the old company such as marine, general engineering, heavy machinery and turbines, but not of others, such as the general administrative and personnel department. The European Court of Justice ruled as follows on the second and third questions considered together -"...Article 3(1) of Directive 77/198/EEC must be interpreted as not covering the transferor's rights and obligations arising from a contract of employment or an employment relationship existing on the date of the transfer and entered into with employees who, although not employed in the transferred part of the undertaking, performed certain duties which involved the use of assets assigned to the part transferred or who, whilst being employed in an administrative department of the undertaking which has not itself been transferred, carried out certain duties for the benefit of the part transferred".In reaching that conclusion the Court upheld the contention of the Commission that -"...The only decisive criterion regarding the transfer of employees' rights and obligations is whether or not a transfer takes place of the department to which they were assigned and which formed the organisational framework within which their employment relationship took effect ... In order to decide whether the rights and obligations under an employment relationship are transferred under the Directive ... by reason of a transfer within the meaning of Article 1(1) thereof, it is therefore sufficient to establish to which part of the undertaking or business the employee was assigned". (paragraphs 14 and 15)(4) The test enunciated in Botzen was accepted by the Appeal Tribunal as the appropriate test to apply in the case of the transfer of an undertaking or part of an undertaking in Michael Peters Ltd v. Farnfield (supra). The conclusion in that case was that the employee had not been assigned or allocated to the part of the undertaking transferred and that therefore the 1981 Regulations did not apply. The employee was the Chief Executive of a Holding Company responsible for overseeing the financial management and operations of all the 25 subsidiary companies. Four of the subsidiary companies were sold, but the Holding Company was not a party to the sale agreement. The Appeal Tribunal reversed the decision of the Industrial Tribunal that, the four subsidiary companies, together with that part of the Holding Company's assets belonging to those companies, formed a single economic unit and that part of the Holding Company was transferred so that the chief executive of the Holding Company was protected on the transfer. The conclusion of the Appeal Tribunal was that the employee could not claim the protection of the 1981 Regulations, because he could not be said to have been assigned or allocated to the part of the undertaking transferred ie, the four subsidiary companies.(5) The test whether an employee was assigned to the part transferred was also applied by the Appeal Tribunal in Duncan Web Offset (Maidstone) Ltd v. Cooper (supra) at paragraph 15 where the Tribunal said, in considering a number of possible factual situations,"(2) X has a business in which he employs a number of people. X transfers part of his business to Y. In order to determine which employees were employed by X in the part transferred it is necessary to ask: which of X's employees were assigned to the part transferred - Botzen [1986] 2 CMLR p.50. In Gale [1994] IRLR 292 it was suggested that the question might be asked whether a particular employee was "part of the ... human resources" of the part transferred, which is the same thing put another way. ... There will often be difficult questions of fact for Industrial Tribunals to consider when deciding who was "assigned" and who was not. We were invited to give guidance to Industrial Tribunals about such a decision. We declined to do so because the facts vary so markedly from case to case. In the course of argument a number were suggested, such as the amount of time spent on one part of the business or the other; the amount of value given to each part by the employee; the terms of the contract of employment showing what the employee could be required to do; how the cost to the employer of the employee's services had been allocated between the different parts of the business. This is, plainly, not an exhaustive list; we are quite prepared to accept that these or some of these matters may well fall for consideration by an Industrial Tribunal which is seeking to determine to which part of his employer's business the employee has been assigned".That case also concerned a parent company which owned a number of subsidiary companies. One of the subsidiaries, which employed all three Applicants, was transferred. The question arose whether their employment was transferred. The Appeal Tribunal upheld the decision of the Industrial Tribunal that their employment was transferred. One of the Applicants was Purchasing Manager of the subsidiary involved in its daily business, mainly in the offices of that company, though he also spent a considerable amount of time in the offices of another subsidiary and acted as Purchasing Manager for the group of companies. A second employee was Head of Resources in the company transferred, spending about 80% of his time with that company. The third employee spent most of the time with the company transferred, though she did, for a while, one day a week with another subsidiary company. The view of the Appeal Tribunal was that the Tribunal were entitled to conclude on the evidence that the Applicants were assigned to the only business which the employing company subsidiary did, even though some of their time was spent looking after other parts of the group in which the employer company was a subsidiary. (See paragraph 22)

Industrial Tribunal Decision

It does not appear that the decision in Botzen was cited to the Industrial Tribunal Chairman. He did not have the benefit of the guidance in the two Appeal Tribunal decisions reported in the Industrial Relations Law Reports 1995, after the Chairman gave his Extended Reasons for his conclusion. Although the Chairman concluded that Miss Buchanan-Smith was not employed in the part of the undertaking transferred to Schleicher, he said (paragraph 9) that -
"It is not without considerable hesitation, and a conviction that this is really a marginal matter, that I look at all the facts and conclude that I cannot say that the applicant was employed in that identifiable part of the undertaking which was transferred. She certainly worked partly in that part of the organisation, as she did partly in several others, but that is as far as I can go."
As explained in paragraph 8., the Chairman was strongly influenced by the fact that Miss Buchanan-Smith was employed generally by Tarnator and could, and did, turn her hand to everything -"as one would have expected in a business of this size. She had a more special role to play in the sale of the smaller shredding machines, and the organisation of service, maintenance and repair. Unless she can be figuratively cut into pieces I do not see how I can conclude that the Applicant was employed in the undertaking that was transferred. I have considered to assist me in reaching that conclusion, a hypothetical situation of the sale of the selling agency part of Tarnator Ltd's business. She might equally well have finished with the purchaser of that part of the business. ... In the event that part ceased to trade, but theoretically it illustrates the problem which faces me".

Submissions of Schleicher

Mr Parkinson, on behalf of Schleicher, supported the Chairman's reasoning and contended that the result was legally correct. He accepted that Miss Buchanan-Smith was involved in the running of the service side of the business, but said that was only a small part of her work. The majority of her time was spent visiting potential customers around the country selling the range of small office machines. The sales side of the business was the area of greater importance. It was in that area that the greater income was generated. It was in that area that Miss Buchanan-Smith declared to Schleicher that she was employed as a sales specialist dealing with the sales of small office machines. Mr Parkinson did, however, contest the Chairman's statement that Miss Buchanan-Smith organised and ran the servicing business.He made the following further submissions:(1) The service side of the business was managed on a day-to-day basis by a service manager with administrative support, where necessary, of a part-time clerk. The input of Miss Buchanan-Smith was minimal.(2) Applying the test in Botzen on the interpretation of the Directive, Miss Buchanan-Smith could not effectively claim to have been "assigned to that part of the business" which was transferred.(3) The 1981 Regulations are intended to protect employees of a company in which the employees had no effect on, or say in, the decisions their employer would make when selling the company or part of that company to a buyer. The Regulations are for the protection of employees who are unable to defend themselves against their employers' actions in cases of a transfer of an undertaking. Miss Buchanan-Smith was not only a director of Tarnator. She was also Company Secretary. She was involved in all the dealings and negotiations between Tarnator and Schleicher prior to the transfer. She had an opportunity to negotiate a suitable and mutually acceptable settlement for herself during those negotiations, but failed to do so and was now trying to "take cover" under the 1981 Regulations, as though she were an employee who had no control over events at the time.(4) She was wrongly claiming to be an integral part of the service side of the business of Tarnator, though she was in fact a salesperson specialising in the sales of small office shredding machines. It was on that basis that Schleicher decided to employ her as a salesperson. She had minimal input in the service side of Tarnator's business.

Conclusion

We have reached the conclusion that, if the very experienced Chairman of the Industrial Tribunal had had the benefit of the guidance contained in the cases cited above, he would have reached a different legal conclusion on the facts found by him and his "considerable hesitation" would have been dispelled. We agree with Mr Reddiford, who argued the case persuasively on the part of Miss Buchanan-Smith, that this appeal should be allowed because the decision is legally erroneous. This means that the claim for redundancy payment will now proceed in the Industrial Tribunal to a hearing on the merits. There is still an issue to be resolved whether Schleicher dismissed Miss Buchanan-Smith for incompetence or whether she was dismissed on the grounds of redundancy.The reasons for concluding that Miss Buchanan-Smith was employed by Tarnator "in the undertaking or part transferred" and had continuity of employment with Schleicher are briefly as follows:-(1) Miss Buchanan-Smith was at all material times down to the date of the transfer employed by the transferor, Tarnator.(2) She worked in the sales side and she also worked in the service side of its business which was transferred to Schleicher. It was found as a fact that she organised and ran the service side.(3) Whether the organisation and running of the service side meant that she was assigned or allocated to that part of the business depends, as stated in Duncan Web Offset (supra), on all the facts of the case ie, time spent, value given, contractual terms, allocation of costs and so on.(4) The Chairman of the Tribunal did not expressly consider the particular factors mentioned in order to decide the question whether Miss Buchanan-Smith was employed in the part of the undertaking transferred. His reasoning was that she was not employed in the service undertaking transferred because she turned her hand to everything in the small business, including her special role in the sale of smaller shredding machines, as well as the organisation of service, maintenance and repair. In other words, she was not employed in the service undertaking, because she was also working in the sales undertaking. In our judgment, that is not a legally correct approach. As illustrated by the case of Duncan Web (supra) an employee may in fact be regarded as assigned to an employer's business, even though that employee spends time looking after another business, even the business of someone other than the employer. In the case of one employer carrying on two undertakings, an employee may be assigned to one of the undertakings, even though engaged in the activities of the other undertaking. In our view, there is nothing in the earlier decisions of this Tribunal or in the European Court of Justice's decision in Botzen to the effect that a person can only be regarded as employed in an undertaking, or part of an undertaking, if he works exclusively in that undertaking or part. The Ruling of the European Court in Botzen was to the effect that the Directive did not protect an employee, who, although not employed in the transferred part of the undertaking, performed certain duties involving the use of assets of that part or who, whilst he was employed in an administrative department not transferred, carried out certain duties for the benefit of the part transferred. The test whether a person is employed in an undertaking or part is simply: was he assigned to that undertaking or part? That is a question of fact to be determined by considering all the relevant circumstances. The discharge of duties involving the use of assets or the discharge of beneficial administrative duties for the part transferred are insufficient to constitute employment in an undertaking.(5) In this case, the facts found by the Chairman lead, in our view, to the conclusion that, for the purposes of the 1981 Regulations, Miss Buchanan-Smith was to be regarded as assigned to and employed in the transferred part at the date of the transfer. The part transferred was the service part. She ran and organised it. At the time when the transfer took place, a decision must already have been made that the only other part of the business in which she had been active, the sales part, would ceased to be carried on. The Chairman held in paragraph 8 of the decision that the sales part ceased to trade. The employees concerned in that part ceased to work for Tarnator and began to work, almost immediately and without a break, for Schleicher. There was no longer any sales part or a sales undertaking to which Miss Buchanan-Smith or any other employee of Tarnator could be regarded as assigned or allocated. There was no more sales work for them to be employed to do.(6) The position is that, if Miss Buchanan-Smith was, as we conclude, employed in the servicing part transferred, and the sales part ceased to trade, her contract of employment with Tarnator would have been terminated by the transfer to Schleicher, if it were not for the effect of the 1981 Regulations. There would, in the words of Mr Reddiford, have been a repudiatory breach on the part of Tarnator connected to or caused by the transfer, because there would have been no work left for her to do in either undertaking of Tarnator. That is a situation in which Regulation 5(1) operates on the contract of employment, so that the contract has effect after the transfer as if originally made between the person employed and the transferee. The application of the principles laid down in the European Court of Justice and in this Appeal Tribunal to the facts found by the Chairman on the transfer of the servicing part and the closing down of the sales part, accompanying the transfer, brings the case within the 1981 Regulations. Miss Buchanan-Smith had continuity of employment and was not disentitled from bringing a claim for redundancy payments. It will be for the Tribunal to decide, at the hearing on the merits, whether she was dismissed for redundancy or for some other reason.For those reasons the appeal is allowed and the cross-appeal is dismissed.