Wilson & Ors v St Helens Borough Council [1996] UKEAT 641_95_1602

EAT
Wilson & Ors v St Helens Borough Council
[1996] UKEAT 641_95_1602 · 1996-02-16
MR JUSTICE MUMMERY (PRESIDENT) Are parties to an employment relationship entitled to alter the terms of that relationship if the reason for that alteration is the transfer of an undertaking?That is the question for decision on the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("the 1981 Regulations") and the Acquired Rights Directive 77/187 ("the Directive"), as interpreted by the European Court of Justice in Foreningen v. Daddy's Dance Hall A/S [1988] ECR 739 . We are grateful to counsel for their excellent arguments - Mr Randall and Ms Eady for the Applicants and to Mr Alan Wilkie QC for the Respondent, St Helens Borough Council ("the Council").

The Background Facts

The question arises in the context of claims under the Wages Act 1986 ("the 1986 Act") against the Council by the Applicant employees. On this appeal we are not required to deal with the facts of individual cases, which have yet to be finally determined by the Industrial Tribunal. We are only concerned with the question of principle on the relevant terms and conditions of employment applicable generally to the Applicants. In outline the relevant facts are as follows:-(1) The Red Bank Controlled Community Home ("the School") at Newton-le-Willows provides education and care for boys who have committed offences or have other behavioural problems which have led them to being placed in care. The Applicants are employed there either as teachers or carers.(2) The School was formerly owned by Trustees and controlled by the Lancashire County Council ("the County Council"). In 1990 the County Council decided to withdraw and gave 2 years' notice expiring on 30th September 1992. The reason for the withdrawal was that the School cost too much to keep up.(3) In January 1992, the Trustees formally invited the Council to assume control of the School from October 1992. The Council agreed to do that only if the running of the School would involve no charge on the Council's own resources. The County Council said that they would try to deploy any staff at the School who wanted to stay with them and that staff who moved to the Council would be dismissed on 30th September 1992 by reason of redundancy. The Council said that they would ring-fence posts in the new structure in favour of the existing staff. Posts incapable of being filled in that way would be advertised and existing staff, including those whose areas of work were to be discontinued, were eligible to apply for the new posts. The County Council advanced the view in discussions with the Unions (NASUWT) that the 1981 Regulations were not applicable.(4) There were 169 staff employed at the School under the County Council. 102 of them applied for posts with the Council. 76 were offered posts in the new structure. They were informed of the terms and conditions. Upon acceptance, a letter of appointment was sent to the Applicants with a statement with the particulars of appointment.(5) Each of the Applicants, except Mr Sanders, had received from the County Council an Extraneous Duties Allowance (EDA). An additional sum was payable at an agreed rate to an employee required to undertake extraneous or other duties for an average of not less than 15 hours per week, in addition to teaching duties. Before they were appointed by the Council the Applicants knew that EDA would not be available from the Council.(6) Some Applicants secured promotion from teacher to senior teacher or to assistant senior teacher, with additional responsibilities and greater allowances than previously. Others remained at the same level and lost allowances previously enjoyed. Some who lost special allowances obtained other allowances (eg, a Secure Unit Allowance). Some Applicants obtained posts with a reduction in wages.(7) On 30th September 1992 the Applicants were dismissed by the County Council by reason of redundancy. On 1st October 1992 the first term of the School under the Council opened. The Applicants started to work pursuant to new contracts in the posts for which they had successfully applied.(8) On 2nd March 1993, the Applicants' Union (UNISON) representative (Mr Birch) wrote to the Council's Chief Executive and asked that the terms and conditions of the contracts of employment with the County Council should be restored to his members. The claim was based on the contention that there had been a transfer of an undertaking from the County Council to the Council and that that transfer precluded alteration of the terms of employment. The Council's reaction was to dispute the application of the 1981 Regulations.(9) Between December 1993 and June 1994 the Applicants started proceedings in the Industrial Tribunal under the 1986 Act. They claimed that, following a transfer of an undertaking in October 1992, they were paid a reduced salary by the Council as a consequence of the transfer. That was a breach of Articles 5 and 6 of the 1981 Regulations. In the circumstances the Council were making unlawful deductions from their salaries in contravention of S.1 of the 1986 Act.(10) The response of the Council in their Notice of Appearance was to deny that the 1981 Regulations applied. They also disputed the alleged breach of the 1986 Act.

The Decision of the Industrial Tribunal

The Industrial Tribunal dismissed the claim after a hearing over several days in December 1994 and February and March 1995. The Extended Reasons were sent to the parties on 22nd May 1995. The Applicants' claims were rejected. They served Notices of Appeal in June 1995.The reasons for the decision of the Industrial Tribunal for dismissing the Applicants' claims are briefly as follows.(1) It was common ground that (a) there had been a transfer of an undertaking involving the Applicants and (b) there had been changes in the contract of employment of each Applicant at the time of the transfer.(2) The new contracts of employment were agreed between the Applicants and the Council. In the circumstances in which the new contracts were made, those contracts operated to vary the Applicants' terms and conditions of employment previously enjoyed with the County Council.(3) If the Council had dismissed the Applicants on the transfer of the undertaking, they would have been entitled, in defending claims of unfair dismissal, to rely on the economic, technical and organisational reasons referred to in Regulation 8(2) of the 1981 Regulations.(4) The same principle applied to waiver of rights.

(d) -

"... if different rights and liabilities under a contract are accepted by an employee and there is an economic, technical or organisational reason entailing the difference, then it must be that the agreement as to the new rights and liabilities operates as an effective variation of the contract. ... We did not think that it was intended that an employer who dismisses employees should enjoy the advantage of a defence closed to an employer who does not dismiss."
(5) Alternatively, the Tribunal found that if, contrary to their view, new contracts were of no effect and "did not prevent the applicants' former rights and liabilities from continuing through the transfer", there was nothing in the 1981 Regulations or in the Directive to prevent a variation of rights and liabilities by "subsequent agreement".

(c) -

"... If the old terms and conditions continued by virtue of the Regulations, the time might nonetheless come when the applicants affirmed the new contracts notwithstanding that they were not after the transfer expressly agreed. The parties to a contract may always vary its terms."
The Tribunal pointed out that such variations might be express and come about after negotiation, or might be implied from the parties' conduct. That is a right that the general law affecting the parties to a contract of employment.(6) Although the Applicants did not expressly agree any variation after the transfer, they had affirmed the contracts (paragraph 6(d) -
"...After the transfer, they worked them [the contracts] without protest, apparently accepting the new structure, certainly accepting the new salaries, job titles and duties, and not protesting the respondents' failure to make the additional payments they said they were entitled to."
(7) The members of the Union waited until 2nd March 1993 before indicating that they did not accept the new contracts. The members of NASUWT waited even longer, over 18 months until 10th January 1994.

(d) -

"...merely the passage of time, even a very long time: the applicants actively carried out very different jobs from the former ones, and co-operated in a very different disposition of work and an operation on a much smaller scale. Their actions signified their acceptance of the new contracts."
Thus, the Industrial Tribunal held the Applicants had affirmed the new contracts. They replaced the former contracts with the County Council. The Council were not acting in breach of the 1986 Act in failing to pay what was due to the Applicants under the contracts with the County Council.

The Relevant Law

There was little disagreement between counsel about the relevant legislative provisions and the authorities. The dispute focused on the interpretation of the legal materials and their application to the facts of the case.

Regulation 5(1) of the 1981 Regulations provides -

"... 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."

See also Regulation 5(2)(a)

Article 3(1) of the Directive provides -

"The transferor's rights and obligations arising from a contract of employment or from an employment relationship existing on the date of the transfer within the meaning of Article 1(1) shall, by reason of such transfer, be transferred to the transferee."
Article 3(1) in the Directive was interpreted by the Third Chamber of the European Court of Justice, composed of three judges, in the case of Daddy's Dance Hall (supra). In paragraph 14 of the judgment of the Court the Tribunal said -
"As was stressed above, the purpose of Directive 77/187/EEC is to ensure that the rights resulting from a contract of employment or employment relationship of employees affected by the transfer of an undertaking are safeguarded. Since this protection is a matter of public policy, and therefore independent of the will of the parties to the contract of employment, the rules of the Directive, in particular those concerning the protection of workers against dismissal by reason of the transfer, must be considered to be mandatory, so that it is not possible to derogate from them in a manner unfavourable to employees.
15. It follows that employees are not entitled to waive the rights conferred on them by the Directive and that those rights cannot be restricted even with their consent . This interpretation is not affected by the fact that, as in this case, the employee obtains new benefits in compensation for the disadvantages resulting from an amendment to his contract of employment so that, taking the matter as a whole, he is not placed in a worse position than before."The Court pointed out that the Directive was intended to achieve only partial harmonisation, not a uniform level of protection throughout the Community on the basis of criteria and said -
"...Thus the Directive can be relied on only to ensure that the employee is protected in his relations with the transferee to the same extent as he was in his relations with the transferor under the legal rules of the Member State concerned.
17. Consequently, insofar as national law allows the employment relationship to be altered in a manner unfavourable to employees in situations other than the transfer of an undertaking, in particular as regards their protection against dismissal, such an alternative is not precluded merely because the undertaking has been transferred in the meantime and the agreement has therefore been made with the new employer. Since by virtue of Article 3(1) of the Directive the transferee is subrogated to the transferor's rights and obligations under the employment relationship, that relationship may be altered with regard to the transferee to the same extent as it could have been with regard to the transferor, provided that the transfer of the undertaking itself may never constitute the reason for that amendment ."That reasoning led the court to answer the second question referred to them in these words -
"An employee cannot waive the rights conferred upon him by the mandatory provisions of Directive 77/187/EEC even if the disadvantages resulting from his waiver are offset by such benefits that, taking the matter as a whole, he is not placed in a worse position. Nevertheless, the Directive does not preclude an agreement with the new employer to alter the employment relationship, insofar as an alteration is permitted by the applicable national law in cases other than the transfer of an undertaking."
The decision in Daddy's Dance Hall was followed in the European Court of Justice in Rask v. ISS Kantineservice A/S [1993] IRLR 133. Mr Wilkie QC, for the Council, did not challenge the correctness of those decisions. None of the counsel asked for a reference to the European Court of Justice under Article 177.

Submissions of the Council

On behalf of the Council, Mr Wilkie QC submitted that the Tribunal were legally correct in rejecting the Applicants' claims because:(a) the variations in the terms of employment, while in the context, and on the occasion, of a transfer, were not by reason of a transfer, but were for economic, technical or organisational reasons entailing a change in the workforce;(b) there was, therefore, an effective variation of the contracts of employment so as to preclude the claims under the 1986 Act; and(c) even if the variations were not effective at the time of transfer, they were effective by reason of the parties' subsequent conduct, as a post-transfer variation which effectively precluded the claims under the 1986 Act.In brief, the Industrial Tribunal identified the crucial issue in the case: that is, whether, as a matter of fact, the transfer was the reason for the changes of the terms of employment. The Tribunal correctly applied the law as stated in Daddy's Dance Hall (supra) and came to a conclusion of fact (namely, that the reason for the variations was not the transfer) which was open to them on the evidence and which cannot be disturbed on an appeal to this Tribunal.Mr Wilkie made the following additional points:(1) The transfer of responsibility for operating the School was on the basis that there would have to be a reorganisation entailing a change in the workforce.(2) The Applicants applied for jobs in the new structure. They were offered jobs and accepted jobs which they performed and continued to perform with their different responsibilities and payments.(3) The reasons for the change in the terms of employment were within the permissible "area of freedom" identified in Daddy's Dance Hall . Within that area the transferor, the transferee and the employees were entitled to agree to vary the terms of employment.(4) It is correct to identify the "area of freedom" by reference to the statutory scheme in respect of dismissals. Such a reference avoided the anomalies which would arise if an employer were entitled to rely on Regulation 8(2) in circumstances where he insisted on changes and dismissed an employee who refused or failed to agree to them, but could not rely on such matters in cases where the employee had reached agreement on the self same changes.(5) The alternative basis of the decision was also sound. If there was an ineffective attempt at the time of the transfer to waive rights under the Regulations and the Directive, it would still be open to the transferee and the employees to change the terms pursuant to the general law of each Member State. Terms of employment as at the date of the transfer do not remain perpetually immutable.(6) Under English law a variation may result from affirmation by conduct of the continuance of a contractual relationship on different terms. The decision that there was such affirmation in this case is one of fact from which there is no appeal to this Tribunal.(7) If the Council were in continuing and fundamental breach of contract in not paying what was due under the terms of employment, as unamended, an employee could either treat that contract as repudiated and claim what was due to him or, alternatively, could affirm the contract as varied by continuing to perform work under it. The Industrial Tribunal were not in error of law in holding that continuing to work in a different job, on different terms constituted affirmation by conduct of the new terms of employment agreed earlier.

Conclusion

In our judgment, the Industrial Tribunal erred in law in holding that there had been an effective variation in the terms of employment of the Applicants, so as to preclude them from making claims under the 1986 Act. We shall accordingly allow the appeal and remit the Applicants' claims to be determined by the Industrial Tribunal in accordance with the terms of this judgment. It would be necessary for the Industrial Tribunal to find facts in relation to each individual claimant in order to determine the extent, if any, of his entitlement.

Our reasons for allowing the appeal are as follows:-

(1) It is provided by S.8(3) of the 1986 Act that -

"Where the total amount of any wages that are paid on any occasion by an employer to any worker employed by him is less than the total amount of the wages that are properly payable by him to the worker on that occasion (after deductions) then ... the amount of the deficiency shall be treated for the purposes of this Part as a deduction made by the employer from the worker's wages on that occasion."
An unauthorised deduction from wages of any worker is a contravention of S.1 of the 1986 Act. The crucial question is, therefore: what is the total amount of the wages properly payable to the Applicants? Is it, as the Applicants contend, what is due to them under the terms of their contracts of employment with the County Council? Or is it, as the Council contend, what is due to them under the terms of the employment with them which contain variations of the previous terms?(2) It was common ground that the relevant provisions of the 1981 Regulations must be construed, if it is possible to do so without distortion of the language, to conform to the provisions of the Directive, as authoritatively interpreted by the European Court of Justice. On this approach, Mr Randall for Mr Wilson and other Applicants, initially formulated the following legal proposition:-
"The parties to an employment relationship are not permitted to alter the terms of that relationship at any time (whether by variation or affirmation) if the reason which brings about that alteration is the transfer of an undertaking."
(3) Mr Randall's proposition is too wide, at least in its application to a claim, such as this, for unlawful deductions contrary to the 1986 Act. As already pointed out a claim under the 1986 Act cannot succeed unless there has been a deduction. So the principle formulated by Mr Randall could only apply where there was an alteration in the terms of a relationship which resulted in the employee being paid less than he was entitled to be paid under his unamended original terms of employment. If, as a result of a variation in those terms, he is paid more than he is entitled to receive under the original contract, he could not claim that there had been any deduction in respect of which he could make a claim under the 1986 Act. As we understood Mr Randall's position during the hearing, he was prepared to modify the proposition to confine it, in the context of this case, to any alteration in the terms of the relationship "to the detriment of the employee".(4) We agree with Mr Randall and Ms Eady that the crucial point in the case is the identity of the reason for the alteration or variation in the terms of the contracts of employment which the Applicants had with the transferor County Council. The terms of Regulation 5(1) of the 1981 Regulations are mandatory protection for employees on a transfer. The contract of employment "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." Regulation 12 provides that -
"Any provision of any agreement (whether a contract of employment or not) shall be void in so far as it purports to exclude or limit the operation of Regulation 5 ..."
The European Court of Justice have held in Daddy's Dance Hall (supra) that the public policy of the Directive and, therefore, of the implementing 1981 Regulations, precludes even a consensual variation in the terms of that contract if the transfer of the undertaking is the reason for the variation.(5) It is clear from the findings of fact by the Tribunal that the reason for the alterations in the terms and conditions of employment was the transfer. It is common ground that the Council and the Applicants would be free to reach an agreement varying the terms of the contract so long as the transfer of the undertaking was not the reason for the variation. The error of law on the part of the Tribunal was to reach the conclusion that, although the transfer was the reason for the variation, the Council and the Applicants could effectively vary the terms of the contract by agreement and affirmation.(6) The Tribunal erred in its reliance on an argument by analogy from Regulation 8(2) of the 1981 Regulations. Regulation 8(2) does not apply because the Applicants were not dismissed. The reference in Regulation 8(2) to "an economic, technical or organisational reason entailing changes in the workforce of either the transferor or the transferee before or after the relevant transfer" relates only to "the reason or principal reason for dismissing an employee". The Applicant employees were not dismissed. The error on relying in that Regulation, by analogy with the situation where the employees were not dismissed but continued to be employed on varied terms, is that nothing in Regulation 8(2) permits a variation in terms or limits the mandatory scope of Regulation 5(1) of the 1981 Regulations.(7) It is also an error on the part of the Tribunal to conclude that the affirmation of the contract by the subsequent conduct of the parties avoids the mandatory effect of Regulation 5(1), interpreted in accordance with the Daddy's Dance Hall decision. The variations in the contract terms, said to have been affirmed by the subsequent conduct of the Applicants, relate back to the time of the transfer when the variations were made and accepted by reason of the transfer and were therefore prohibited. What happened subsequently was confirmation by conduct of what had already happened on, and by reason of, the transfer. It is true that there may be cases where an effective variation of the terms of employment does take place subsequently either by express agreement or by agreement inferred from conduct. Whether there is such a variation depends on the facts of each case. The reason for the variation depends on the facts of the case. The law, surprising though it may be to English legal tradition, is clear. If the operative reason for the variation is the transfer of the undertaking, then the variation will be ineffective. In this case there was no evidence before the Tribunal that the reason for the variation, which took place at the time of the transfer, was anything other than the transfer itself. The "economic, technical or organisational reason entailing changes in the workforce" did not alter the fact that the variations took place by reason of the transfer at the time of the transfer. There was no subsequent separate agreement varying the terms of employment after the transfer. The subsequent conduct relied on as affirmation was conduct consistent with variations made at the time of and by reason of the transfer. If, as Daddy's Dance Hall holds, there can be no agreement to vary terms and conditions by reason of the transfer, there cannot be any subsequent effective affirmation of that variation. It remains prohibited by the Regulations.In brief, there was no break in the causal link between the variation of the terms and conditions and the transfer of the undertaking. The cause of the variation was the transfer itself. For that reason the variation was ineffective. The terms of the original contracts of employment with the County Council remained in force.In those circumstances it is unnecessary to consider a further point made by Ms Eady in relation to the Applicants she represents that the Tribunal's finding that there was in fact affirmation by her UNISON clients, Mr Sanders and Mr Wallace, was perverse on the evidence before the Tribunal.For those reasons the appeal is allowed and the matter is remitted to the Industrial Tribunal to determine the entitlement of the individual Applicants in respect of their claims under the 1986 Act.