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EAT Unpacks the Pre-pack and Departs from Oakland

The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") preserve the terms and conditions of employment of employees when the business or "undertaking" (or part of one) that they work for changes hands. TUPE effectively obliges the incoming business to employ those assigned to that undertaking, or part of the undertaking, and restricts changes to their terms and conditions of employment.

Changes were introduced with the revised 2006 regulations to incorporate a ‘rescue culture'. Regulation 8(7) provides that in cases of a terminal insolvency the business acquiring the undertaking from the insolvency practitioners may do so without the burden of having to comply with TUPE, so the new employer can effectively ‘cherry pick' the best employees and even offer different terms under a new contract of employment.

Under Regulation 8(6), in cases of ‘non-terminal' insolvency, where the undertaking changes hands as a going concern, the new employer is assisted by the National Insurance Fund, which takes liability for specific debts due to the employees, up to a certain limit.

But which types of insolvency fall within Regulation 8(7)? It was unclear as to whether it applied to Administrations, and in particular pre-pack Administrations, where the assets of a company placed in Administration are sold, the sale having been arranged prior to the administrators being appointed. The Employment Appeal Tribunal ("EAT") in Oakland decided that a ‘fact based' approach should be used. That is, the Tribunal should consider each Administration on its facts in order to decide if that arrangement was a terminal insolvency and fell within Regulation 8(7), so that TUPE was dis-applied to that arrangement. The EAT decided that the pre-pack in Oakland did fall within 8(7) and so TUPE did not apply. This meant that the business acquiring the undertaking had no obligation to employ the employees assigned to it and (even where their employment did continue) the existing terms and conditions enjoyed by the employees were not protected by TUPE.

In the more recent case of Olds v Late Editions and others (also known as OTG Ltd v Barke) the EAT departed from this and applied a different approach, the ‘absolute approach' by which they decided because of the various possible outcomes of an Administration, not all of which resulted in liquidation, an Administration can never fall within 8(7) and all of the protection that TUPE affords would be given to the employees assigned to that undertaking.

The EAT also said that for the purposes of Regulation 8(6), which passes some liability for unpaid wages, holidays pay, redundancy pay etc to the National Insurance Fund, the date of dismissal is crucial. The NIF will not be required to pay any debts incurred after the date of the transfer to the new employer.

So where does this leave us? In Olds, the EAT drafted their decision as to make it seem definitive, stating that Oakland was wrong. However, the reality is that we now have two opposing decisions of equal authority (both being EAT) and it will be for each Employment Tribunal to decide which approach to follow. Certainly, the decision in Olds brings potential problems, in that it greatly discourages the rescue culture, and so jobs may be lost if Administrators are unable to sell undertakings because of the potential inherent liabilities to employees. Ultimately, it is likely that a case on this issue will be appealed to the Court of Appeal, which will give us greater clarity. Until then businesses which acquire part of an undertaking from a company in Administration should make provision for the possible liability to employees.

For more information on the above or for advice on any other employment issue please contact our employment department on 020 7354 3000 or e-mail employment@colmancoyle.com

Author Profile: Linda Quinn

Date published: 12th March 2011

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