Redundancies Or Transfer For Economic Reasons. Risky Business

The purpose of the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) is to safeguard the employment rights of employees when a business is sold. If a person employed immediately before the relevant transfer of a business is dismissed for a reason connected with the transfer, the dismissal is automatically unfair unless the employer can show that it was for ‘economic, technical or organisational reasons entailing changes in the work-force’.

In Dynamex Friction Ltd. v Amicus, the Court of Appeal had to decide whether the Employment Tribunal (ET) had been justified in concluding that employees who were dismissed by the administrator of a company had been dismissed for economic reasons rather than for a reason related to the transfer of the business.

Following a strike, Friction Dynamics Ltd. had dismissed 86 of the employees involved. An earlier Tribunal held that the workers had been unfairly dismissed and the compensation due to them was estimated to be approximately £3 million. The company did not have the money to pay this and the managing director, Craig Smith, decided to try to sell the business as a going concern. Shortly afterwards, whilst the factory was closed for maintenance during August 2003, he decided to petition for an administration order. An administrator was appointed, who decided that the company could not carry on in business. It had no available cash with which to pay the wages and he therefore dismissed the employees.

However, the ET heard evidence that the administrator may have been the ‘unwitting tool’ of Mr Smith’s plan to carry on in business without any liabilities to the company’s former employees. A purchaser was found only a week or so after the employees were dismissed. A few months after the new company, Dynamex, had been incorporated, Mr Smith acquired a 60 per cent interest in it. The ET accepted that there had been no collusion between the administrator and those involved in Dynamex. 

The ET was satisfied that there was no certainty that the sale of the business would go ahead when the employees were dismissed and held that the principal reason for the dismissals was an economic one and not due to the transfer of the business. However, on appeal the Employment Appeal Tribunal criticised the ET for failing to resolve material disputes as to the facts of the case, regarding whether or not the events had been ‘stage-managed’ by Mr Smith, and for failing to explain adequately the reasons for the conclusions it reached.

The Court of Appeal, by a two to one majority, allowed the appeal. The ET was wholly justified in its judgment based on the findings of fact. Furthermore, ‘in deciding whether the reason for dismissal was an economic or a transfer-related one, one has to identify whose thought process is the subject of the analysis. It has to be he who took the decision’. In this case it was the administrator’s decision that came under the microscope. He had decided that he had no option but to dismiss the employees because there was no money to pay them. This was an economic decision, taken independently. There was nothing to suggest that the administrator had taken the view that he had to dismiss the staff in order to have a better prospect of selling the business. Nor was there any collusion between the administrator and Mr Smith.

This publication contains information which is intended for general guidance only. The information is provided in a concise form and is not substitute for obtaining legal advice. If you would like advice specific to your circumstances, please contact us.