Appeal No.	 EAT/591/97

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 9 & 10 February 1998
Judgment delivered on 27 February 1998

Before
THE HONOURABLE MR JUSTICE MORISON (PRESIDENT)
MR E HAMMOND OBE
MR A E R MANNERS

CORNWALL COUNTY CARE LTD	APPELLANTS

MRS L BRIGHTMAN & OTHERS	RESPONDENTS

Transcript of Proceedings

JUDGMENT

Revised

	APPEARANCES

For the Appellants	MR PATRICK ELIAS QC
Messrs Stephens & Scown
Solicitors
25-28 Southernhay East
Exeter
Devon
EX1 1RS	
For the Respondents	MR JEREMY McMULLEN QC 
and
MR DAMIEN BROWN
(of Counsel)
Instructed by:
Mr A Creme
UNISON
1 Mabledon Place
London
WC1H 9AJ	

	MR JUSTICE MORISON (PRESIDENT):     This is an important appeal. It concerns the practical application of a recent decision of the Court of Appeal in Wilson & Others v St Helen’s Borough Council and Meade & Baxendale v British Fuels Ltd [1997] IRLR 505. Both cases are going to the House of Lords. We look forward to their judgment in due course. Although bound by the Court of Appeal judgments, we have to confess that we have not found it easy to apply the ratio of the two decisions. 

	A summary of the relevant facts are as follows.    As part of its statutory duties, Cornwall County Council owned and managed a number of care homes.    These were expensive to run, not least because of the staff costs, including what were perceived to be unduly high payments for work during unsocial hours.    The Council were unable or unwilling to re-negotiate the terms on which their staff were working in the homes, and a scheme was devised whereby most of the homes would be transferred to a company created and supported financially by the Council, but which had an independent charitable status.    It was common ground between the parties that the effect of the transaction constituted a transfer of an undertaking within the meaning of the Regulations.    After about six months, and following unsuccessful attempts to re‑negotiate with the Union representatives new terms and conditions, the company served dismissal notices on all its staff and offered them re‑engagement on less favourable terms and conditions.    The employees accepted the new terms under protest and brought proceedings in the Industrial Tribunal claiming a declaration that they were still entitled to enjoy their old terms and conditions, and seeking compensation for unfair dismissal.  Their application came on for hearing before Wilson & Meade had been decided in the Court of Appeal but after the EAT’s judgments.    The Industrial Tribunal concluded that the dismissal were unfair under Regulation 8(1) and that the employees were entitled to continue with their original terms and conditions.

	For the purpose of determining this appeal, the facts as found by the Industrial Tribunal must be elaborated.

	For about two years before the relevant transfer, the Council had been concerned at the cost of providing these homes. It was statutorily obliged to provide care for those in need in its area, but it was “uncompetitive in the market” because of its “relatively high rates of basic pay to the staff including the very high rates of enhanced payments for unsociable hours, sleeping in, weekend work, and bank holiday work.” During the four months prior to the transfer, the Council and the Company together established staffing levels and consulted the relevant trade unions with regard to the proposal, when it was:

“Again specifically pointed out savings in wages had to be made by a review of terms and conditions of service. A broad agreement was sought to these changes but the trade unions were adamant that no change in terms and conditions should be made. The trade unions were informed of the savings resulting from the redundancy exercise.” 
“A vital requirement from the outset was a cut in wages which could be delayed until 1 October 1996 but no later. Negotiations with the trade unions started on 24 April 1996 with a view to a collective agreement for the necessary changes, but the trade unions withdrew on 15 May 1996 following the reporting of the decision in Wilson v St Helen’s Borough Council.”

The Industrial Tribunal continued:

“Cornwall Care was then in a commercial dilemma. As a charity it could not incur the unsustainable loss which would be inevitable if no change in terms and conditions were made. Any agreement to a cut in wages would be open to challenge because of the Wilson decision. Negotiations had failed. [The Company] decided to dismiss all employees by notice on 2 July 1996 effective 30 September 1996, and to offer immediate re‑employment on new terms and conditions from 1 October 1996. Each employee was informed of the new terms and conditions which were less favourable. All of the (approximately) 620 employees concerned eventually accepted.”

	It was conceded by the applicants  that the staff were dismissed on 30th September 1996. Accordingly, the Industrial Tribunal said that they had to establish what the reason was for the dismissal. In paragraph 21 of their decision they said:

“We find that the reason for the scheme being set up in the first place was because the Council was unwilling or unable as a matter of politics negotiate any agreement to cut employees’ pay. It therefore devised a scheme as set out above whereby [the Company] would be used as a vehicle to effect the wage cuts.”

The Industrial Tribunal cited the provisions of Regulation 8(1) and continued:

“In essence the Respondent’s case is that the transfer is irrelevant because negotiations were current long before and continued after the transfer. Regulation 5(2)(b) provides that the actions of the transferor are deemed to be those of the transferee. As the alteration in terms was proposed long before the transfer, the transfer cannot have been the reason for dismissal. The reason for dismissal, according to the Respondent, is the failure of negotiations to achieve the alteration. In our judgment having regard to the clear words of Regulation 8 it is impossible to divorce the dismissals from the transfer. The main object of the transfer was to provide a vehicle for negotiations which ultimately failed and led to the dismissals. Clearly the dismissals were related to the transfer and are therefore automatically unfair.”

	The tribunal then reviewed the Wilson decision and continued:

“Wilson and Meade seem irreconcilable. We are in the position of having to choose between the two. We prefer the ratio in Wilson as falling within the spirit of the Regulations. It is clear in the present case that the transfer was a vehicle to implement the variation in terms. It was adopted by [the Company] after going through the mere form of dismissal. Although the dismissal falls within the definition set out in section 95 of the 1996 Act, it was always the intention that the employees would continue to work for [the Company]. The dismissals can be regarded as no more than a sham.”

	The Industrial Tribunal concluded that the employees were unfairly dismissed but as the variation in their terms and conditions of employment was ineffective, they continued to be entitled to enjoy the terms and conditions of their contracts of employment as at 30th September 1996, and that the purported variation with effect from 1st October 1996 was ineffective.

	On this appeal we had the benefit of submissions of high quality made on behalf of the appellant Company by Mr Patrick Elias QC and on behalf of the applicants (respondents to the appeal) by Mr Jeremy McMullen QC.

	It seemed to us, and the contrary was not seriously argued, that the Industrial Tribunal’s conclusion that there was a dismissal, which was unfair, and yet the old contractual terms and conditions were still continuing, was not logically sustainable. We can understand an argument to the effect that what happened between July and October 1996 was not effective to terminate the contracts of employment so that the old terms and conditions continued, in which case there would be no claim for compensation for unfair dismissal; or, on the other hand, an argument that the dismissal was effective, albeit automatically unfair, and that the new terms and conditions applied as from 1st October 1996, but that the individuals were entitled to compensation for the unfair dismissal. It does not seem to us that the employees can both have been dismissed and entitled to continue with the terms and conditions they enjoyed before the dismissal as though the dismissal had not taken effect.

	We have to say that we have every sympathy with the Industrial Tribunal in this case. They obviously had great difficulty in seeking to identify and apply the ratio of the EAT’s judgments.

Parties’ submissions

Mr Elias on behalf of the appellant Company submitted that the following principles of law were to be deduced from the Wilson & Meade decisions. 

(1)	Where a dismissal is a nullity then the terms and conditions of employment in place prior to the transfer can be relied upon by the employees after the transfer. 

(2)	If however the dismissal is effective as a matter of Community Law, then the employer, whether transferor or transferee, can lawfully enter into new contracts after the dismissals have taken effect.

(3)	If a dismissal is a nullity it cannot be relied upon for the purpose of an unfair dismissal claim. If, however, it is effective as a dismissal, then such a claim can be made.

(4)	A dismissal is effective if either:

(i)	the reason for dismissal is not the transfer itself or a reason connected with it; or
(ii)	although the dismissal is by reason of the transfer it is for an economic, technical or organisational reason entailing a change in the workforce within the meaning of Regulation 8(2).

(5)	Accordingly, a dismissal is a nullity if the reason for the dismissal is the transfer and the exception in Regulation 8(2) is inapplicable.

	He further submitted that where employees transferred upon a transfer within the Regulations, Wilson & Meade did not resolve the question as to whether their agreement to new terms and conditions would constitute a lawful variation or not. He submitted that the cause of the variation was not the transfer itself but the agreement of the parties, which agreement had been reached notwithstanding the transfer. Applying those principles to the present case, Mr Elias submitted that properly analysed:

(1)	There was an effective dismissal in this case.

(2)	The dismissals were fair.

(3)	There was therefore no reason why the appellant Company should not enter into new contracts of employment.

(4)	In any event, the employees voluntarily agreed the variation.

	He submitted that on the Industrial Tribunal’s analysis, the dismissal was by reason of the transfer under Regulation 8(1). As such, it was a nullity. Accordingly, on its own analysis, the Industrial Tribunal could not properly have found that the dismissals were unfair as they were not dismissals at all. He further submitted that even if the dismissals were by reason of the transfer, they were for an economic, technical or organisational reason entailing a change in the workforce within Regulation 8(2). Finally, it was submitted that there was nothing in the European cases or indeed in Wilson & Meade which prevents an employee with knowledge of his rights from agreeing a variation of those rights. Both before and after the transfer the parties were entitled to make consensual variations to their contracts of employment. No question of waiver therefore could arise. 

	For the respondents Mr McMullen argued that:

(1)	We should follow the decisions in Wilson & Meade unless they could be distinguished or unless the Employment Appeal Tribunal referred the question to the European Court. 

(2) 	The case on dismissal was conceded by the appellant Company. Therefore, the onus was on them to prove what the reason was for the dismissal and to prove that it was not a reason connected with the transfer. 

(3)	The reason for the dismissal was entirely a matter of fact for the Industrial Tribunal to determine. It was open to the tribunal to disbelieve the reason given by the employer. Its finding as to this and as to whether the reason was connected to the transfer was pre‑eminently a question of fact not susceptible to challenge on appeal save on grounds of perversity.

(4)	Employees cannot, even by agreement, accept a variation which results in less favourable terms with the transferee than they formerly enjoyed with the transferor, where the reason for the variation is the transfer or a reason connected with it. This principle prevents employees from being adversely affected by any kind of pressure to enter an agreement. Reliance was placed on Daddy’s Dance Hall [1998] IRLR 315, at paragraphs 14 and 15; and Rask [1993] IRLR 133, at paragraphs 24 to 28.

(5)	No economic, technical or organisational reason was advanced by the employers. If the dismissal was effective it was plainly unfair as it took place on account of the transfer. The variation in pay was void by Regulation 12 and reliance was placed on the Meade decision at paragraph 65 and 66.  Counsel indicated that he wished to reserve the right to argue that Wilson was incorrectly decided, and that the proper analysis of the facts in that case should have led to the conclusion that the employees were entitled to succeed in their claims that they were not dismissed and that their terms were altered unlawfully.

The Decision
A.	General Observations
	We are conscious that we have not done full justice to the arguments which were addressed to us and for which we are grateful.  We make a number of preliminary observations.
 
	Although we are bound by the Court of Appeal’s judgment in Wilson & Meade, we have to say that it is the view of the very experienced Lay Members with whom I have sat on this appeal, and of myself, that the decision of the Court of Appeal will produce uncertainty for employees and employers ‘on the ground’.  It is, we think, our duty to spell out those difficulties, whilst appreciating that we must faithfully apply the ratio of the judgment.

	As we understand the judgment, a dismissal which is rendered unfair by Regulation 8(1) has to be regarded as a ‘nullity’; but that if the reason for the dismissal falls within Regulation 8(2), the dismissal would be effective.    It is likely to be the case that employees will simply not know whether the employers have a good case under Regulation 8(2).    As Mr Elias argued, if the dismissal is a nullity, then the employees remain employed and cannot complain of unfair dismissal, because they have not been dismissed in a manner having legal effect. On this assumption, the employees who have purportedly been dismissed in connection with a transfer will be required to bring a complaint under section 23 of the Employment Rights Act 1996 alleging that their employer, the transferee, has made unlawful deductions from [non‑payment of] their wages.    Presumably, the transferee will contend that the complainants were dismissed.   If the complainants then responded that their dismissals were unfair, they would, according to Mr Elias, have accepted their dismissal, and would have turned what was otherwise an ineffective dismissal into one which took effect.

	The concept of a dismissal which is a nullity seems to us, with great respect to the judgment in the Court of Appeal, to have unsatisfactory practical consequences.  It is unrealistic to suppose that employees who have been dismissed should knock at the transferees’ door asking to be let in, and that when told they were dismissed they would not be able to complain of the dismissal without being prejudiced in the relief which they could seek from an Industrial Tribunal.

	We also question whether, in the light of the judgment of the House of Lords in Litster & others v Forth Dry Dock & Engineering Co Ltd (In receivership) and another, the concept has any place in English law. As we understand the speech of Lord Oliver, he regarded the rights of the workers who had been dismissed as effectively safeguarded by reason of the transfer to the transferee by statute of the ‘secondary obligations’, recognising that the primary obligations on both sides were no longer capable of being performed once a dismissal had been effected, even if the reason for it fell within paragraph (1) of Regulation 8. 

	Furthermore, Regulation 8(2) expressly provides that where the reason for the termination falls within Regulation 8(2) then Regulation 8(1) will not apply. It seems to us that this is an indication that the dismissal would but for the provision in 8(2)(a) have been unfair under Regulation 8(1). In other words, it would appear that a dismissal for an economic, technical or organisational reason in relation to a transfer is simply a species of a dismissal which is otherwise to be regarded as automatically unfair under Regulation 8(1). If that is so, it seems to us somewhat surprising that a distinction should be drawn between the effectiveness of a dismissal under 8(1) and the effectiveness of a dismissal falling within 8(2). The relevant provisions of the Directive recognise the existence of a contract of employment or an employment relationship. It might appear, therefore, that Parliament has recognised that an employee’s employment relationship, in the sense that secondary obligations (and perhaps, also, statutory rights) continue to exist and survive a dismissal which is unlawful under Regulation 8(1). In other words, where the dismissal of an employee falls either within 8(1) or 8(2), the employment relationship continues so that the transferee becomes liable to pay the compensation due, if any. If this were the position, the Regulations would provide an employee with fuller protection than was required by Article 4(1) of the Directive, because the transferee would become liable for a dismissal by the transferor which was for an economic etc. reason, but unfair. But as Lord Oliver pointed out in Litster a remedy against an insolvent transferor is largely illusory “unless they can be exerted against the transferee as the Directive contemplates”. 

	If this were the proper approach to these difficult issues, employees and employers would know where they stood. An employee would not be left with uncertainty as to whether or not he remained employed, and with a difficult decision as to whether or not he could or should bring proceedings for unfair dismissal.   He would simply be able to claim compensation and reinstatement in the usual way by bringing proceedings complaining of unfair dismissal and relying on Regulation 8(1).  The complaint would be brought against the transferee. The transferee might wish to assert that the reason for the dismissal fell within Regulation 8(2). That would be an issue of fact for the Industrial Tribunal to determine. If they concluded that the dismissal was for such a reason, then the tribunal would go on to consider whether the dismissal was fair or unfair. 

	In relation to the effectiveness of consensual variations, again the practical effect of the Wilson & Meade decision causes some concern and surprise.    Suppose that a company was in financial difficulties partly due to high wages bills; suppose that it would have to cease trading unless a purchaser could be found; suppose a prospective purchaser was found who indicated that he would buy the business if, but only if, all the employees agreed to a worsening of their terms and conditions of employment; suppose that there was full and proper consultation with all members of the workforce and their representatives and that agreement was reached and on that basis the business was bought and transferred.  If the effect of the Directive were to cause such an agreement to be void, then employees would be worse off, in the sense that they would become redundant and lose their employment altogether.  And, further, does there ever come a point at which a transferee can safely seek to negotiate a change in terms and conditions?  If the variation were achieved by termination and an offer and acceptance of the new, worse, terms and conditions, the transferee could not rely upon Regulation 8(2), as the law is currently understood, because whilst there might have been a good economic reason for the dismissal such did not ‘entail changes in the workforce’: precisely the same number of employees were employed before and after the transfer, carrying out the same functions: see Berriman v Delabole Slate Ltd [1985] ICR 546.

	It seems to us that the following three general principles may be derived from the judgments of the European Court on the workings of the Directive.

1.	The policy of the Directive is to protect employees from the effects of a transfer upon the contracts of employment or employment relationship of those employed in the relevant undertaking at the time of the transfer.

2.	The protection conferred by the Directive cannot lawfully be avoided either

(a) 	by the employer (transferor or transferee) terminating the contract of employment or employment relationship before the transfer and by reason of it; or
(b) 	by the employer (transferor or transferee) using or exploiting the occasion of the transfer itself to worsen the employees’ terms and conditions.

3.	The Directive does not seek to harmonise the employment laws of the Member States, but confers on them latitude in the way they give effect to the policy and principles of the Directive, as explained by the European Court of Justice.

	The House of Lords was concerned in Litster with the way that English Law gave effect to paragraph 2(a).    If, by reason of the impending transfer an employer could lawfully terminate the employment contract or employment relationship so as to avoid the very protection which the Directive required, then the Regulations designed to give effect to the United Kingdom’s Treaty obligations would have been defective.  The House of Lords did not seek to draw a distinction between a dismissal which fell within Regulation 8(1), on the one hand, and 8(2) on the other.   Furthermore, the House did not say that the dismissals were a nullity.    Indeed, the whole tenor of Lord Oliver’s careful analysis was that English Law could accommodate the requirements of the Directive through the transfer of the secondary obligations to the transferee.    It is to be assumed that the House would also have reached the same conclusion in relation to an employee whose employment contract was brought to an end by a week’s notice required by the contract in advance of and by reason of the transfer.    There, the secondary obligations would not exist, save in the sense that a statutory liability would have been created which itself was transferred across to the transferee.

	Mr Tellerup, the manager of Daddy’s Dance Hall was dismissed. There was no suggestion that his employment still continued or that the dismissal was a nullity.  Mrs Rask and Mrs Christiansen did not like the change in the way they were paid and how their pay was calculated (although neither matter could have been described as serious).    They left their employment and sued for unfair dismissal.    No‑one suggested that their dismissal was a nullity; indeed, it is difficult to understand the interplay between a dismissal which is a nullity and a constructive dismissal.   In Wilson & Meade, the Court of Appeal said of the Litster decision that the “appellant employees were no longer employed by the transferee who had taken on different employees.    Accordingly, no question of the terms and conditions of continued employment could arise.”    But, with respect, it is not clear why this should be so if their dismissals were a nullity.   Further, if ‘acceptance’ of a dismissal makes effective what would otherwise be ineffective, then why cannot a variation be ‘accepted’.    In Bork International A/S v Foreningen AF Arbejfdsledere I Danmark [1989] IRLR 41, the transferee took on more than half of the transferor’s employees, but there was no suggestion in the case that those who were dismissed and not taken on were still to be regarded as ‘employed’.

	The protection conferred by paragraph 2(b) is, in English Law, provided by Regulation 12. Mr Tellerup agreed a new notice provision because and only because he was involved in the transfer of the business.  One could infer that he had been ‘taken advantage of’ in the transfer process.   It seems to us that Mrs Rask and Mrs Christiansen were subjected to what is described as a unilateral variation of their contract.   As the Advocate General opined:

“If national law allows an employer to vary unilaterally, in cases where there has been no transfer of an undertaking, the date of payment and/or the composition of a salary, the total of which, nevertheless remains unchanged, Community Law cannot automatically exclude such variations, solely on the grounds that the undertaking or part of the undertaking concerned has, in the meantime, been transferred.    In other words, under the Directive, the employment relationship may be varied by a unilateral decision of the transferee, bearing in mind that the transfer itself cannot constitute a ground for the variation.”

	We agree with Mr Elias that it must be the transfer itself, and nothing else, which causes the adverse change which makes an agreed variation ineffective..  We would welcome guidance from the House of Lords on this issue.   

B.	Decision in the Appeal in question

1.	It is to be noted that in this case the employers did not seek to argue that there was an economic, technical or organisational reason involving changes in the workforce justifying the dismissal. As it was expressly not argued in the Industrial Tribunal, we think that it would be wrong for us to allow it to be raised as an issue at this stage. We are confident that the reason why it was not argued before the Industrial Tribunal was because the decision in Berriman v Delabole [1985] ICR 546 appears to have precluded such an argument in this case.  There, the Employment Appeal Tribunal held that the words in Regulation 8(2) “a reason entailing changes in the workforce” meant a change in the overall number or functions of the personnel employed and accordingly Regulation 8(2) would not apply where the numbers remained the same, the functions remained the same and all that was being effected was a reduction in the rates of pay. But, whether or not this concession was rightly made, the fact that it was made seems to us to lead to the conclusion that there can be no question of any further argument about whether the reason the dismissal in this case, if such there was, fell within Regulation 8(2).

2.	The applicants included within their claim before the Industrial Tribunal a complaint of unfair dismissal. Their IT1 was carefully drafted:

“I consider this purported termination to have arisen by reason of a transfer of an undertaking (namely the management of residential homes for the elderly) from Cornwall County Council to the respondent on 1 April 1996. I therefore consider it to have been ineffective and seek a declaration of my terms and conditions are those which applied to me on/before 30 September 1996. ... 
Further/alternatively, if the respondent did effectively terminate my contract of employment on 30 September 1996 then that termination was by reason of the transfer and was therefore unfair.”

	In their IT3 the Company admitted that the applicant had been dismissed and denied that the dismissal was in connection with the transfer.

3.	The Industrial Tribunal did not have the benefit of the Court of Appeal’s judgment in Wilson & Meade which was handed down on 10th July 1997; the Industrial Tribunal’s decision was promulgated on 11th April 1997.

	It seems to us that the Industrial Tribunal’s approach to the factual issue ‘what was the reason for the dismissal’ cannot be faulted.    As we understand their findings, they have concluded that the transfer was the very means by which the employees’ terms were to be altered, as the Council had originally planned.   The setting‑up of the new company was the mechanism by which the changes were effected.  The transfer and the changes were all part of a piece, carefully planned and executed.  We reject, therefore, as unrealistic Mr Elias’ submission that the transfer may have been the mechanism by which the change was effected but it was not the cause of the change.  The two events are, on the Tribunal’s findings, inextricably entwined.

	That being so, the question arises as to the effect of the dismissal.    Having regard to the fact that the Court of Appeal in Wilson & Meade apparently recognised that a dismissal falling within Regulation 8(1) might become effective if ‘accepted’ by the employees, it seems to us unreal to conclude that, despite having continued to work for the Company on the new terms, the employees are, in fact and in law, still employed on the old ones.   If they have been dismissed and re‑employed, as is the reality in this case, then they should be awarded compensation for a dismissal deemed to have been unfair by virtue of Regulation 8(1).    The compensation will represent a once and for all payment which ‘buys out’ the entitlement to the enhanced but uneconomic terms which they previously enjoyed.   The matter will have to be remitted back to the Industrial Tribunal to determine their compensation in accordance with normal principles.

	Accordingly, the appeal is allowed in part, and leave to appeal is granted..