Tuck & Ors v BSG Property Services & Anor [1995] UKEAT 993_95_2911

EAT
Tuck & Ors v BSG Property Services & Anor
[1995] UKEAT 993_95_2911 · 1995-11-30
MR JUSTICE MUMMERY (PRESIDENT) The Transfer of Undertakings Regulations 1981 ("the 1981 Regulations") continue to yield fresh problems, particularly in the area of contracting out of services by public authorities: questions whether there is an undertaking; whether there is a relevant transfer of an undertaking; whether the transfer is the reason or principal reason for the dismissal of employees; whether the reason for the dismissal of employees is an economic, technical or organisational reason entailing changes in the workforce; and, if so, whether the dismissal is fair or unfair within S.57(3) of the Employment Protection (Consolidation) Act 1978. These two appeals potentially raise all these questions in respect of the contracting out of Council housing maintenance services by the Mid-Bedfordshire District Council ("the Council").The Council have taken no part in the appeal on which we have heard excellent arguments from Mr J McMullen QC, on behalf of BSG Property Services ("BSG"), and from Mr Brian Langstaff QC, on behalf of Mr Tuck and 13 other employees who claim that they were unfairly dismissed on the transfer of an undertaking.

The Background Facts

The overall result of the proceedings in the Industrial Tribunal was that the employees failed in their claims. In rejecting the claims the Industrial Tribunal found the following facts:-(1) Mr Tuck, a carpenter, and the 13 other Applicants were all employed by the Council in the Housing Maintenance Direct Services Organisation ("DSO"). They were engaged in bricklaying, carpentry and plumbing work.

(2)

On 30th April 1992 the DSO Board decided to terminate the contract and not put in a bid for a further contract, as they had failed to make the required 5% return on capital. The DSO could not operate the housing maintenance services economically.(3) On 12th February 1993 the Council gave notice to the Applicants terminating their contracts as on 15th May 1993. The Council believed that they would no longer have any use for the Applicants and would not therefore continue to employ them.(4) On 14th May 1993, the Council concluded a contract with BSG for the provision of day-to-day jobbing maintenance work in Areas 1 and 2 of the Council. The work previously done by the Applicants, in the employment of the Council, would now be done by self-employed tradesmen in BSG's workforce engaged under contracts for services. Both the Council and BSG believed at that time that there was no transfer of an undertaking within the 1981 Regulations. There was no transfer of any of the Council's depots, vehicles, plant or stores. None of the employees in the DSO were engaged by BSG as employees.(5) On 15th May 1993, the employment of the Applicants terminated and the DSO ceased completely to provide the housing maintenance services. Thereafter BSG's workforce was used to do that work. The work done was the same type of work, in the same area, for the same pool of tenants of the Council. That work could only be economically carried out by BSG using self-employed members of their workforce. BSG successfully tendered for the contract on that basis.

Decisions of the Industrial Tribunal

The Industrial Tribunal decided the case in two parts.

A. The 1994 Decision

The first hearing of the applications in the Industrial Tribunal on 17th October 1994 resulted in a decision notified with Full Reasons on 3rd November 1994. The decision was that -(1) there was a relevant transfer of an undertaking within the 1981 Regulations by the Council to BSG on 14th May 1993;(2) the Applicants became employees of BSG pursuant to that transfer;(3) The Applicants' dismissal on 15th May 1993 was a dismissal in connection with that transfer.BSG appealed against that decision by a Notice of Appeal served on 9th December 1994.

B. The 1995 Decision

The second hearing in the Industrial Tribunal took place on 23 and 24th March and 5, 6th and 7th June 1995 and resulted in a decision notified to the parties with Full Reasons on 9th August 1995. The decision was that the Applicants were not unfairly dismissed as -(1) the dismissal was by the Council on 15th May 1993;(2) the dismissal was for redundancy, because BSG did not engage any employees under contracts of service and could not operate economically except with the use of a self-employed workforce;(3) that reason for dismissal was an economic or organisational reason within Regulation 8(2)(b) of the 1981 Regulations;(4) BSG did not act unreasonably in treating that redundancy as a sufficient reason for dismissing the Applicants. The dismissals were "to be regarded as having been for a substantial reason of a kind such as to justify the dismissal of the Applicants holding the position which they held, and were not unfair". (paragraph 14).The Applicants appealed against that decision by a Notice of Appeal served on 25th September 1995.With the benefit of hindsight it would have been preferable for all the points to be argued at one hearing and determined in one decision.

The Issues on the Appeal

Both appeals have been argued together. At our request Mr Langstaff QC argued his appeal against the 1995 decision first, as the combined effect of the two decisions was that the Applicants lost their case. In substance it was, therefore, their appeal. Mr McMullen QC did not oppose that course. We are indebted to both leading counsel and their diligent juniors for the arguments on each appeal. The following questions were argued:(1) Did the Council carry on an undertaking capable of being transferred for the purposes of the 1981 Regulations?(2) If so, was there a relevant transfer by the Council to BSG?(3) If so, were the dismissals of the Applicants unfair? That question has been conveniently sub-divided into a number of sub-questions:-(a) Who dismissed the Applicants?(b) When did the dismissals of the Applicants take place?(c) In determining the reason for the dismissals of the Applicants, at what time must the analysis be carried out?(d) For what reason were the Applicants dismissed?(e) Was that reason capable of being an economic or organisational reason?(f) Were the dismissals by reason of an economic or organisational reason?(g) If so, were the dismissals fair in all the circumstances?In our judgment, the Industrial Tribunal answered questions(1) and(2) without any error of law. BSG's appeal against the Industrial Tribunal's decision is dismissed. We have reached the conclusion that the Industrial Tribunal erred in law in holding that the dismissals were fair. The Applicants' appeal is allowed. On the facts found by the Industrial Tribunal we conclude that the only possible decision is that the dismissals were unfair. It is unnecessary to remit the matter to the Industrial Tribunal to find further facts relevant to that decision. It is now for the Industrial Tribunal to determine the amount of compensation, if any, payable by BSG to them. It appears that, on the question of compensation, there are some areas of common ground, such as that, in the assessment of any basic or compensatory award against BSG, the Applicants must give credit for the sums paid to them by the Council in respect of the termination of their employment.

The Undertaking Point

In order to decide this point and the transfer point, it is unnecessary to repeat the analysis of the Acquired Rights Directive ("the Directive"), the 1981 Regulations and the case law of the European Court of Justice and of the English Courts and Tribunals set out in two recent decisions of this Tribunal ie, Council of the Isles of Scilly v. Brintel Helicopters Ltd [1995] ICR 249 and Kelman v. Care Contract Services Ltd [1995] ICR 260.The Industrial Tribunal held that there was a relevant economic entity ie, " the provision of maintenance services to the Council's tenants in the Area concerned" (paragraph 7). The Industrial Tribunal rejected the contention that it was only the provision of services from a specific depot, using specific vehicles, with specific employees. As pointed out by Mr Langstaff QC, who supported the Industrial Tribunal's decision on this point, the authorities demonstrate that the provision of a service, such as cleaning, transport, education, medical services or maintenance services, may constitute an "undertaking".In his arguments criticising the Tribunal's decision, Mr McMullen QC made the following points.(1) The Tribunal were required to identify an "economic entity" said to have been transferred. An economic entity was likely to consist of a number of parts - assets, employees, activities, though he accepted that no one factor was decisive in determining whether there was an identifiable economic entity capable of transfer. He accepted that an economic entity might only consist of activities and employees.(2) The recent decision of the European Court of Justice in Rygaard (C.48/94 19th September 1995) [1996] IRLR 51 was cited for the proposition that there must be a " stable economic entity". The performance of a particular works contracts was insufficient to constitute a stable economic entity. There must be a body of assets enabling the activities in question to be carried on in a stable way. The Industrial Tribunal decided the undertaking point and promulgated their decision before the judgment of the European Court in Rygaard. The Tribunal had not, therefore, considered whether the activity of the Council's DSO, in which the Applicants were employed, was capable of constituting a " stable " economic entity. Mr McMullen QC submitted that, on the facts found by the Tribunal, it was not. The entity was merely that of providing maintenance services to Council tenants. It lacked organisational stability. There had been changes in the services provided by the DSO in 1989 and again in 1991. The market for the services was not stable. At best the "activity" amounted to "the opportunity to carry out response maintenance work essentially under a series of works contracts, as and when required". Mr McMullen QC submitted that "response" work of that kind did not constitute a stable business activity. It was not "programmed maintenance".

Conclusion on Undertaking Point

Although the Tribunal did not have the guidance of the European Court of Justice decision in Rygaard , it does not follow that the Industrial Tribunal took the wrong legal approach or applied the incorrect test in determining this point. The approach adopted by the Tribunal was that laid down by the Court of Appeal in Dines v. Initial Healthcare Services [1994] IRLR 336 and the decisions of the European Court of Justice discussed in the Court of Appeal judgment. That approach was not altered by the Court's later decision in Rygaard . In that case there was a contract of short duration for specific building works. A new contractor was appointed to complete the unfinished works, following the liquidation of the first contractor. It was held that the new contractor did not take over an "undertaking". The requirement of "the stable economic entity" has to be read in the context of that case and is apt to exclude activities under a short-term, one-off contract. The continuing and recurrent maintenance activities in this case were more like those held to be undertakings in the cases of Dines , Brintel Helicopters , Kelman and Dr Sophie Redmond Strichting v. Bartol [1992] ECR, 1-3189.In our judgment, there was no error of law in the Industrial Tribunal's conclusion that the activities of the Council's DSO constituted an undertaking within the 1981 Regulations.

The Transfer Point

The Industrial Tribunal held that there was a relevant transfer on 14th May 1993. They took into account all the circumstances: on the one hand, they observed that the labour force employed by BSG was not the same as that employed by the Council's DSO and that no premises, capital, plant or equipment were transferred by the Council to BSG; on the other hand, the Tribunal held that the work was the same, the place of work was the same (Council houses), the customers were taken from the same pool (Council tenants), and the Council was the same. The Tribunal considered the identity of the undertaking and held that it was the provision of maintenance services to the Council's tenants in the area concerned. The Tribunal then asked whether that identity was the same before and after the alleged transfer and concluded that it was. There had therefore been a relevant transfer. Mr Langstaff submitted that there was no legal error in the Tribunal's conclusion on this point. The only change was in the person responsible for the undertaking. That undertaking had retained its identity. Similar activities continued after the transfer. The jobs previously done by the Applicants were still in existence. The fact that no employees were in fact taken on by BSG to do that work does not falsify that conclusion. The fact was that the Council's DSO ceased completely at the same time as BSG began to conduct activities covering the same area. There were letters written to the employees on 22nd April and 5th May 1993 in which BSG first indicated an interest in taking them on as workers for BSG on a self-employed basis, but later declined to take them on. There was no suggestion that BSG intended to use its existing workforce only to perform the contract.Mr McMullen argued that there was no transfer on the test laid down in the Rygaard case namely, (see paragraph 21) that
"Such a transfer could come within the terms of the Directive only if it included the transfer of a body of assets enabling the activities or certain of the activities of the transferor undertaking to be carried on in a stable way."
He repeated much of his argument on the undertaking point to the effect that it was not possible to identify a stable economic activity in the "response maintenance work" provided to council tenants on a "when required basis". He added that -(1) The factors which might have given stability to the Council's activities - the depot, plant and equipment - were not transferred to BSG.(2) It was impossible to identify the activities previously undertaken by the Council as now undertaken by BSG. BSG operated with a "fluid pool" of self-employed workmen, not an employed team. The correct interpretation of the situation, applying the European Court of Justice decisions, as explained in Rygaard , was that the Council had not made a relevant transfer of the undertaking. They had simply sub-contracted response maintenance works for Council tenants to a number of self-employed tradesmen operating through the agency of BSG. It was impossible to identify in BSG an undertaking previously carried on by the Council's DSO.In our judgment, these criticisms of the Industrial Tribunal's decision do not constitute an error of law by the Tribunal. The Tribunal conducted the exercise required in Rygaard and the earlier European Court cases: they asked whether the undertaking or economic entity of the Council retained its identity in the hands of BSG. They thought that it did (paragraphs 6 and 7). They considered whether the operation of the activities was continued with the same or similar economic activities. They considered all the facts characterising the transaction in question - the type of undertaking, the position with regard to immoveable and moveable property and intangible assets, the taking over of personnel, the transfer of customers and the degree of similarity between the activities carried on before and after the alleged transfer. On their findings of fact they were, in our view, entitled to conclude that there was a relevant transfer. Their conclusion was not perverse or irrational or unsupported by evidence or flawed by a misdirection of law.

The Unfair Dismissal Point

As already indicated the issue of unfair dismissal potentially involves a number of different, though inter-related, sub-questions. In order to identify the reason for dismissal and to decide whether it was automatically unfair or was for a potentially fair reason and, if the latter, whether in all the circumstances it was in fact fair to dismiss for that reason, it is necessary to ask who dismissed the Applicants, when their dismissal occurred and what was the reason for dismissal. The Tribunal's conclusions on the relevant questions are as follows:-A. Who dismissed the Applicants ?

The Industrial Tribunal held in the 1995 decision (paragraph 3) that

"... the applicants were all dismissed by [the Council] "

(on 15th May 1993). (See also paragraphs 8 and 10).Mr McMullen QC contended that it was BSG who dismissed the Applicants. The basis of his submission was that, as a matter of law, as well as a matter of common sense, only an employer can dismiss an employee. He referred to S.54(1) and 55(2) of the 1978 Act. The dismissal took place on 15th May 1993. If there was a transfer of an undertaking, which he disputed, BSG was the employer on that date . The effect of Regulation 5(2)(b) of the 1981 Regulations was that what the Council had done before the transfer on 14th May was deemed to have been done by BSG, as transferee. The Tribunal found that BSG has in fact dismissed the Applicants. In paragraph 7 of their decision they had said that as Mr Tayler [junior counsel for the Applicants] accepts"We should treat the dismissal of the applicants as having been done by [BSG], their employment terminating on 15th May 1993". (See also paragraph 14)B. When were the Applicants dismissed?The Industrial Tribunal held that the Applicants were dismissed on 15th May 1993. That was the date given in the Applicants' Originating Applications and was found as a fact in both decisions.C. What is the date for determining the reason for dismissal?Mr McMullen QC argued that the date for analysing and determining the reason for dismissal was the date of termination of the contract, not the earlier date when notice of termination was given. He agreed that in most cases the reason existing at the date of the notice of termination and the reason existing at the date of termination would be identical, but that was not necessarily so. The reason for the notice of termination need not constitute the reason for the dismissal. He referred to S.55(2) as providing that dismissal is the termination of the contract, not the giving of notice of termination. Section 55(3) of the 1978 Act was consistent with this. The authorities supported the proposition that an employee, in an unfair dismissal case, could rely on all matters up to the date of dismissal on the actual termination of the contract. He referred to Devis v. Atkins [1977] ICR 662 and Stacey v. Babcock Power Ltd [1986] ICR 221. at 225, 229D. What was the reason for dismissal?The Industrial Tribunal found in the 1994 decision that the dismissal of the Applicants was a dismissal in connection with the transfer of the undertaking. The question was whether the reason for the dismissal fell within Regulation 8(2)(b). The Tribunal found as a fact that "...the reason for dismissal in the minds of [the Council] at the date of dismissal did not by itself come within Regulation 8(2)(b)". (See paragraph 8).The Council and BSG both believed that there was no transfer of an undertaking. When dismissing the Applicants the Council were under the impression that "the mere fact that they no longer had any use for the services of any of the Applicants and was unable to employ them any longer was a sufficient reason for dismissing them because of redundancy". They gave that as a reason for dismissal in the belief that there was no transfer. The Tribunal went on, however, to reject the Applicants' claim for unfair dismissal on the ground that both the Council and BSG knew additional facts which made the Applicants redundant because of the transfer, namely the fact that the transferee did not employ any employees under contracts of service.E . Was there an economic or organisational reason?The Tribunal held that the reason for the dismissal fell within Regulation 8(2)(b). That reason was, according to paragraph 14 of the decision,
"...redundancy arising partly from the fact that the [Council] could no longer employ them under contracts of service and partly from the fact that [BSG] could not offer them employment under contracts of service."
This decision was against the background (see paragraph 11) that "the DSO were unable to operate economically and had to give up the work", that BSG had tendered on the basis that all work was done by self-employed workmen and that BSG "could not do the work economically on the same basis that the DSO had been doing it, or indeed on any basis other than their workers being self-employed."F. Was the dismissal for that reason fair?In paragraph 14 of the decision the Industrial Tribunal concluded that BSG "(either themselves or insofar as they can rely on the acts of [the Council] did not act unreasonably in treating redundancy as a reason for dismissing the applicants (as, in law, Mr Tayler accepts, [BSG] must be assumed to have done)". On this part of the case the Industrial Tribunal accepted Mr McMullen's submission (see paragraph 12) that BSG "can rely on acts by [the Council] as well as by themselves".On that basis the Industrial Tribunal found that there was no work for the Applicants with the Council after 15th May. There was adequate consultation with the Applicants by the Council. The Council had given consideration to alternative employment. The dismissals were about to occur, because BSG could not run their business and make the contract economically viable with the workforce organised on any basis other than self-employment. The size and administrative resources of BSG were small at the relevant time. The Industrial Tribunal had found that BSG complied with S.57(3). Reference were made to evidence given by Mr Nunn of BSG about what he would have done if he had realised that the Applicants were employed by BSG as a result of the application of the 1981 Regulations.

BSG's Submissions

We have set out the conclusions of the Industrial Tribunal on these points in detail because they were adopted by Mr McMullen in his submissions in resisting the Applicants' appeal against the finding of fair dismissal. Mr McMullen summarised his arguments in support of the Industrial Tribunal's conclusions as follows:-(1) As it was BSG who dismissed the Applicants on 15th May 1993 it is their reason for dismissal, not the Council's reason for dismissal, which is relevant to Regulation 8(2)(b) of the 1981 Regulations.(2) BSG's reason for dismissal was redundancy due to the fact that they could not make the contract viable with the workforce organised on any basis other than self-employment. BSG could not employ the Applicants under contracts of service. That fact was communicated to the Applicants prior to their dismissal in letters sent by BSG. This was a set of facts or beliefs which constituted BSG's reason for dismissal. Those facts and beliefs existed at the relevant time (ie, the date of dismissal on 15th May 1993) and were sufficient to constitute BSG's reason for dismissal. See Abernethy v. Mott, Hay and Anderson [1974] ICR 323 at 330 B-D. The facts and beliefs were present then, even though BSG did not in fact believe that the 1981 Regulations applied and therefore did not actively assume the employer/employee relationship or do anything expressly to terminate it.(3) That reason was capable of being an economic or organisational reason within Regulation 8(2)(b). The change from 14 employed workers to 60 - 70 self-employed persons was an organisational reason. The change to payment by the job was an economic reason: that was the only economically viable way to operate the contract. Both entailed changes in the workforce. The dismissal was for those reasons.(4) The dismissals were fair. On the transfer the transferee, BSG, inherited benefits, as well as liabilities, such as the protection against liability for unfair dismissal by the relevant consultations conducted by the Council. The dismissal could be fair in all the circumstances, even if the transferee had not itself considered whether or not to consult in addition to what the Council had done: Duffy v. Yeoman's [1995] ICR 1.

Conclusion

In our judgment, BSG's arguments are ingenious and erroneous. The Tribunal erred in law in the interpretation and application of the 1981 Regulations to the facts found by them. In our view, the correct legal position is as follows:-(1) The Council gave notice of dismissal terminating the Applicants' contracts of employment on 15th May 1993. That notice could not be unilaterally withdrawn by the Council. It could only be withdrawn with the agreement of the Applicants. It was not withdrawn.(2) Even though the contracts did not terminate until Applicants ceased to be employed by the Council, it is legitimate to enquire, as the Industrial Tribunal did, what was the Council's reason for the dismissal notice. (Even if a reason had not been given, the Applicants would have been entitled to require the Council and the Council would have been bound to provide a written statement of particulars of their reasons for the dismissal: S.53 of the 1978 Act).(3) The Tribunal found as a fact that the dismissal was connected with the transfer and that the Council did not have, as the reason for dismissing the Applicants, any economic or organisational reason entailing changes in the workforce. They did not believe that they had to have such a reason, because they did not believe that the 1981 Regulations applied. Their reasons were simply that they would cease to employ the Applicants to do the housing maintenance work and would thereafter contract it out for someone else to do.(4) When the transfer of the undertaking from the Council to BSG took place on 14th May 1993 Regulation 5 of the 1981 Regulations applied with the following consequences:(a) The Applicants' contracts of employment were not terminated by the transfer. Regulation 5(1). Instead, the contracts had effect as if originally made between the Applicants and BSG.(b) On completion of the transfer on 14th May two other things happened - (i) All the Council's rights, powers and liabilities under or in connection with the contracts of employment were transferred to BSG. In this case that included the rights and liabilities in connection with the notice to terminate the contract given by the Council to the Applicants. See Regulation 5(2)(a).(ii) Anything done before the transfer by or in relation to the Council in respect of the contracts of employment or the persons employed in the undertaking is deemed to have been done by or in relation to BSG: Regulation 5(2)(b). Thus, the notice of termination given by the Council for the reason of the Council is deemed to have been a notice given by BSG for that reason.(5) On 15th May 1993 the Applicants' employment terminated not as a result of any act or decision of dismissal by BSG for any reason of its own. BSG did nothing, except stop paying or providing work to the Applicants. They did nothing, because they did not believe that they had to do anything about the dismissal of the Applicants. They believed that the 1981 Regulations did not apply, so that they never became a transferee or employer of the Applicants. By operation of law, however, (Regulation 5 of the 1981 Regulations) BSG were deemed to have given the notice of termination already given by the Council. They were subject to all the liabilities of the Council in connection with the contracts of employment. If there was no transfer, the Council alone would be liable for the dismissal. If there was a transfer (and there was), the Council's liability for dismissal in connection with the transfer passed to BSG.(6) The fallacy in the decision of the Industrial Tribunal and in the arguments of BSG is that BSG itself did not actually dismiss the Applicants for any reason of its own, let alone for an economic or organisational reason. It had no reason in mind. It did not believe it was the employer. If BSG is liable for dismissing them, it is for a reason fixed by the deeming effect of the Regulations. The deeming effect of the Regulations is to make BSG legally responsible for what the Council had done. What the Tribunal has in fact done in its decision, as Mr Langstaff QC submitted, is to add the non-qualifying reason of the Council for terminating the contracts of the Applicants to the absence of any reason on the part of BSG, so as to create a fictitious composite reason characterised as a potentially fair reason of an economic or organisational kind which BSG could have had, but did not in fact have, in mind. That is a legal construct with no basis in fact or law. For that reason alone the Tribunal's decision is erroneous and BSG are liable to the Applicants for unfair dismissal.In those circumstances it is not necessary to express any concluded view on further submissions of the Applicants as to(a) whether the fact that BSG only employed people under contracts for services constituted an economic or organisational reason entailing a change in the workforce; or(b) whether the dismissal for such a reason was fair in all the circumstances.For all those reasons the appeal of the Applicants is allowed and BSG's appeal on the transfer of undertaking point is dismissed. The case is remitted to the Industrial Tribunal to assess compensation.