Much has been written about the various new and different provisions of the Transfer of Undertakings (Protection of Employment) Regulations 2006. The new Regulations came into force on 6 April 2006 and supercede the 1981 Regulations. As predicted, those of us who advise clients on this subject are now coming across whole new areas of uncertainty. These seem bound to keep us, the Tribunals and courts busy for some time. Elizabeth Lang reports.

One of these areas is apparently new concept of dismissal contained in Regulation 4 (9). This provides “where a relevant transfer involves or would involve a substantial change in working conditions to the material detriment of a person whose contract of employment is or would be transferred under paragraph (1), such an employee may treat the contract of employment as having been terminated, and the employee shall be treated for any purpose as having been dismissed by the employer”.
Where this applies, Regulation 4(10) says that “no damages shall be payable by an employer as a result of a dismissal falling within paragraph 4(9) in respect of any failure by the employer to pay wages to an employee in respect of a notice period which the employee has failed to work.” Essentially, the position seems to be that the employee can resign with or without notice. If he gives notice and is willing to continue to work during the notice period he must continue to be paid by his employer in the usual way. Otherwise he may still be able to recover non wage-related benefits for the notice period in any event.

Background

It is necessary to outline some of the background in order to understand the meaning of Regulation 4 (9).

The overriding purpose of the Acquired Rights Directive (ARD) is to ensure, following a business transfer, that the terms and conditions of the employees who have transferred are protected. For this reason, employees were given a potential remedy against their employers in the event of a change in terms and conditions to their detriment.

Article 4(2) of the 2001 ARD says “If the contract of employment or the employment relationship is terminated because the transfer involves a substantial change in working conditions to the detriment of the employee, the employer shall be regarded as having been responsible for the termination of the employment of the contract of employment or the employment relationship".

When the 1981 Regulations enacted this particular provision in Regulation 5(5), it referred to the right of an employee “to terminate his contract of employment without notice if a substantial change is made in his working conditions to his detriment”, mirroring the terms adopted in the ARD.

There followed considerable debate about the meaning of this provision. In Rossiter v Pendragon Plc, the Court of Appeal resolved this by deciding that what was intended to make regulation 5(5) bite was a repudiation of the employment contract by the employer. Although the words used in the ARD do not express this, it was left for member states to determine the appropriate test which has to be met to satisfy the constructive dismissal test. In the UK, this requires a repudiation of the employment contract by the employer.

Traditional constructive dismissals

The right of an employee to claim ‘traditional’ constructive dismissal survives in Regulation 4(11) of the 2006 regulations, which now codifies the Rossiter, as follows:

“Paragraphs [(1), (7), (8) and (9)] are without prejudice to any right of an employee arising apart from these regulations to terminate his contract of employment without notice in acceptance of a repudiatory breach of contract by his employer”. Employers can continue to expect such claims where they plan or implement changes to an employee’s terms and conditions in a way which represents an actual or anticipatory breach of the employment contract.

As we know from University of Oxford v Humphreys, in certain circumstances the liability for such a claim will rest with the transferor employer. (see below).

New type of dismissal under the 2006 regs

The fact that there is a new and additional right contained in Regulation 4(9) indicates that this is to be interpreted differently to the right under Regulation 4(11). The “substantial change to working conditions” wording is similar to that in Article 4(2) ARD, although the requirement that the detriment must be a “material” one is a modification which was introduced following the consultation document in 2005.

When does such a claim arise?

Crucially, it is not necessary to show any breach on the part of the employer, let alone a fundamental one, in order for the employee to show an actual or perceived future change in working conditions which he considers to be to his material detriment.

The subject matter of complaint is the employee’s working conditions. This would seem potentially to cover a wide range of issues beyond financial detriment. One can see that for some employees, relocation resulting in a relatively small increase in commuting time could be considered to be both a substantial change and also to represent a material detriment. This may particularly be the case for someone who works regular hours and has made long standing domestic arrangements based on this. While the employee’s contract may require some flexibility and the employer may be reasonable in its requirement that the employee should relocate, it is not inconceivable that the employee may be successful in persuading a Tribunal that there is a valid dismissal claim under regulation 4(9). Indeed, the Department of Trade and Industry guidance states that this will be for courts and tribunals to determine in the light of each case: “What might be a trivial change in one setting might constitute a substantial change in another”.

Of real concern is the issue of benefits such as share options, which a transferee employer may seek to replicate in accordance with its obligations under TUPE. As decided by MITIE Managed Services Ltd v French the obligation on the transferee is to give the transferring employees the right to participate in a scheme of substantial equivalence to the one they had pre-transfer. One can think of many cases where employees transferring from an employer with a well established and lucrative share option scheme may legitimately argue that they believe that the transferee’s scheme will be less advantageous to a material extent. Again, no breach will have been committed by the transferor or transferee employer, but the conditions for a claim under Regulation 4(9) would appear to be potentially met.

Where does this place any detriment in relation to pensions? As was the case under the 1981 regulations, the current position is that those rights under an occupational pension scheme which relate to old age, invalidity or survivors benefits do not transfer with the employment contract (though transferee employers have, since April 2005, had an obligation to provide certain minimum benefits to transferring employees).

Regulation 10(3) of the 2006 regulations provides that an employee in these circumstances ‘shall not be entitled to bring a claim against the transferor for (a) breach of contract; or (b) constructive unfair dismissal under s95(1)(c) of the 1996 Act, arising out of a loss or reduction in his rights under an occupational pension scheme in consequence of the transfer’.

It does not seem that a dismissal under regulation 4(9) can be construed as falling within s95(1)(c) since this covers a dismissal in circumstances in which the employee is entitled to terminate “without notice by reason of the employer’s conduct”. In other words, this covers traditional constructive dismissal where there is a repudiation of the contract on the part of the employer. This would seem to mean that an employee could bring a claim of unfair dismissal based on the loss of pension rights, where the requirements of regulation 4(9) are made out. Does this mean, therefore, that employees have been given a potential remedy by the back door to seek to recover loss of future pension rights resulting from a business transfer? One can see that it may not be hard for an employee to persuade a tribunal of a material detriment in this respect when armed with appropriate actuarial tables.

Automatically unfair dismissal - who has the liability?

A regulation 4(9) dismissal seems likely to be on the grounds of, or connected to, the transfer. (It applies “where a relevant transfer involves or would involve” the relevant substantial change in working conditions). If so, regulation 7(1) provides that the dismissal will be automatically unfair. This means that any arguments about reasonableness would be rendered academic. However, this interpretation would be contrary to the DTI Guidance, which states that “to determine whether the dismissal was unfair, the tribunal will still need to satisfy itself that the employer had acted unreasonably and there is no presumption that it is unreasonable for the employer to make changes”.

It is not clear how the principle of reasonableness on the part of the employer comes into the equation. This is a situation in which an employee may use subjective arguments to persuade a tribunal of the material detriment of the change and in which there is no requirement of unlawful action on the part of the employer in order for his claim to succeed. It will be interesting to see how case law on this subject develops.

If the dismissal is on the grounds of or connected to the transfer, the automatic transfer provisions contained in regulation 4(2) would seem likely to apply and transfer liability to the transferee in ordinary circumstances. This would be the case even where the changes to the terms and conditions were introduced pre-transfer. Having said this, regulation 4(7) gives employees the right to object to the transfer (this preserves the right contained in regulation 5(4A) of the 1981 regulations). Exercising such a right stops the automatic transfer provisions in regulations 4(1) and 4(2) from applying.

In University of Oxford v Humphreys, the employee realised that post-transfer there would be several variations to his terms, including a fundamental change that would result in a shorter tenure than envisaged. He combined his constructive dismissal claim (based on an anticipatory breach of contract) with an objection to the transfer. Even though it was the transferee who was imposing the change, the Court of Appeal found that there was no employment relationship between the employee and transferee which was capable of being breached. Under regulation 4(2) “employer” could be interpreted as either transferor or transferee and the Court deemed the transferor to be responsible for the anticipatory breach. In these circumstances the transferor remained liable for the breach.

By the same principle, it would seem feasible that employees could combine an exercise of their right under regulation 4(9) with an objection to the transfer under regulation 4(7) and bring a claim against the transferor. Indeed, where an employee believes that a change (whether actual or anticipatory) is fundamental enough to justify a claim of constructive dismissal under regulation 4(11), a claim could be brought on this basis, with an alternative claim under regulation 4(9) as a back up measure. In this sense, employees seem to have been given a relatively low risk legal remedy.

In an alternative scenario, if an employee is generally unhappy with a proposed transfer, albeit there is no indication of any breach of contract on the part of the transferor or transferee (let alone a fundamental one), there seems nothing to stop the employee from resigning pursuant to regulation 4(9) on the basis of some perceived material detriment which may arise from a substantial change to the working conditions. In these circumstances, the employee could offer to work his notice during which period he must be paid as usual, thereby limiting his financial risk. At the end of this he could lodge a claim of unfair dismissal. As long as the employee has not exercised the right to object to the transfer the notice period could quite possibly span a pre- and post- transfer period of employment. In such circumstances transferee employers would need to deal with the practical industrial relations issues associated with employing disenchanted employees, as well as the subsequent unfair dismissal claims.

Employers will no doubt seek to deal with the apportionment of any financial liabilities by way of appropriate indemnities. However, who should be responsible for these may not always be clear. Transferee employers may have done nothing unlawful but receive claims brought pursuant to regulation 4(9). On the other hand, transferors may be reluctant to provide any form of warranties or indemnities in relation to the risk that their employees may bring regulation 4(9) claims since this matter is unlikely to be within their control.

Other issues

It is not clear whether employees must raise a statutory grievance in order to proceed with a claim of dismissal pursuant to regulation 4(9). This will depend on whether the dismissal can properly be classified as one falling within s.95(1)(a) Employment Rights Act 1996 (under Regulation 6(5) of the Employment Act 2002 (Dispute Resolution) Regulations 2004, the SGPs will not apply where the grievance is the employee’s dismissal as defined in section 96(1)(a) (or (b)).

Having ruled out a regulation 4(9) dismissal as one falling within s.95(1)(c) - which refers to traditional constructive dismissal - it must therefore either be deemed to be some new form of statutory dismissal (as yet undefined), which would not be excepted from the SGPs, or it will be interpreted by tribunals as falling within s.95(1)(a), which is excepted from the SGPs. If the latter position was adopted by the courts this would mean that employees would not be required to raise a grievance before lodging a claim (subject to the argument that the grievance is about the anticipated or actual detriment, rather than the dismissal itself). Until this is resolved, it will not be clear when an employee resigns that there is any intention to subsequently bring a claim and there may be no opportunity for the employer to address the employee’s concerns. This is contrary to the purpose of the Dispute Resolution Regulations.

Conclusion

In its response to the consultation document in June 2005, ELA suggested that regulation 4(9) should be deleted, failing which a number of ambiguities should be addressed. However, the only change in the final regulations was the requirement that the detriment in question should be a “material” one (as referred to above).

Early clarification needs to be given to this subject. The matters set out above are not abstract concepts. Many of us will be familiar with situations where transferring employees perceive that they will be worse off post-transfer, despite the fact that both transferor and transferee employers are behaving lawfully (and reasonably) in all respects. Such employees would seem ideal candidates to bring claims against transferor and/or transferee employers under regulation 4(9), particularly if they are not risking the loss of enhanced future redundancy or pension rights.


Cases referred to:
Rossiter v Pendragon plc [2002] EWCA CIV 745
University of Oxford v Humphreys [2000] ICR 405
MITIE Managed Services Ltd v French [2002] ICR 1395

Published as a Special Feature in Employment Lawyers Association Briefing, 6th July 2006

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