On what some tabloids dubbed “black Wednesday”, 28 February 2018 saw both Toys “R” Us and Maplin fall into administration. Recent weeks have seen this saga play out further in the broadsheets. Both companies have scrambled in search of potential buyers. Maplin’s search continues and thousands of jobs remain at risk. As of the morning of 15 March 2018, however, Toys “R” Us have crashed out of the race for a saviour investor as it announced it is ceasing its operations and leaving around 3,000 UK employees in a precarious position.
With this in mind, now is an opportunity to remind ourselves of key employment law provisions in place to assist both buyers and sellers of companies engaged in insolvency processes. Particularly, we focus on the position on varying employee contracts in normal business versus insolvency contexts.
Transfer of Undertakings (Protection of Employment) Regulations 2006 – (“TUPE”)
The basic effect of TUPE is well known. Where an organised grouping of economic resources is transferred from one entity to another, employees will benefit from protections against (i) dismissal by reason of the transfer and (ii) their terms of employment being altered in a way that is detrimental to them. All of the transferring businesses liabilities in relation to those employees will also transfer.
In any business merger and/or acquisition it may be commercially attractive to offer or request changes to transfer employee contracts. Recently, for example, we have seen attempts to impose new or more onerous post-termination restrictive covenants and reduce employees’ pay. Although TUPE does permit variations to contracts in some circumstances, proposed variations often fall outside of these exceptions.
Even where an employee is happy to accept a variation to their terms of employment, or where in return for some more detrimental terms of employment the employee receives other benefits with the effect that overall their terms of employment are no less onerous (or even more favourable) than their original contract, businesses must be cautious. Case law is clear that courts and tribunals will not engage in the exercise of balancing an employee’s terms of employment to determine whether overall a package is more or less favourable than pre-transfer. It has been ruled that an employee cannot waive their right to the provision of no less favourable terms if these are connected to a business transfer. This protection is contained in the Transfers of Undertakings Directive 2001/23/EC which is more commonly known as the Acquired Rights Directive (the “Acquired Rights Directive”), which the TUPE Regulations implement.
TUPE in Insolvencies
Where a business is (i) subject to a relevant insolvency process, (ii) being overseen by an insolvency practitioner and (iii) is not looking to liquidate the business assets (meaning the business is looking to trade out of insolvency) Regulation 9 will sometimes substitute the above rules on the variation of the employment terms of transferring employees.
In normal circumstances, for a variation that is because of the transfer or for a reason connected with the transfer to be permitted a business must show that there is an economic, technical or organisational reason entailing changes to the workforce (an “ETO reason”). If Regulation 9 applies, however, subject to certain other conditions being met a business will not be required to show that they had an ETO reason. They only need to show that the proposed variations are “designed to safeguard employment opportunities” by ensuring the transferring business or part of the business survives.
The normal position on the transfer of liabilities from the current to the new employer is also altered. Under Regulation 8, a transfer in the context of a relevant insolvency proceeding will see the liabilities in respect of the transferring employees pass to the Secretary of State rather than to the new employer. These liabilities will be paid by the National Insurance Fund (the “NIF”). However, the amount covered by the NIF is limited to statutory maximums. These are updated in line with RPI at the start of each new financial year and vary depending on the liability in question.
We are told that in the region of 2,500 and 5,500 jobs at Maplin and Toys “R” US UK respectively are at risk in connection with both of their insolvencies. Regulation 8 and 9 are designed to encourage rescue buyers with the ultimate aim of protecting the employees whose positions are in jeopardy.
What about Brexit?
We mentioned above that TUPE was introduced in order to implement the Acquired Rights Directive, which is EU law. Following the referendum in June 2016, it had been suggested that “the UK would no longer be bound by [TUPE]”. Having had the benefit of reading the European Union (Withdrawal) Bill 2017-2019, we know that existing EU law will be transposed into UK law with immediate effect as of 29 March 2019. It follows that unless specific provision in relation to TUPE is made (which is unlikely) TUPE will continue to apply.
Separately, businesses are craving more certainty regarding Brexit. Not least in relation to the terms of any transition period and the inclusion of financial services firms in any transition arrangement. If this is not delivered soon, and possibly in any event, businesses may begin restructuring in ways that would trigger TUPE’s provisions.
If Brexit does translate into increased costs and/or pressures for businesses, we may expect the lesser known Regulation 9 to become more common parlance. We still do not know the terms of the UK’s future relationship with the EU but it is possible that there may be net increases to business costs caused by added trade costs, tariffs, premiums and inflation to name but a few areas of concern. Combine this generally with President Trump’s “trade war”, rising business rates and the other increased costs to employers we have commented on previously, then one can see that there is an increased insolvency risk.
In light of this, the value of seeking advice on or revisiting the lesser known areas of TUPE contained in Regulation 8 and 9 is increasing.
