Consult or be damned?

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This article first appeared in the October 2014 edition of Corporate Rescue & Insolvency journal ((2014) 5 CRI 217)

This Sector Focus highlights the potential pitfalls for employers faced with making large scale redundancies:

  • Pending clarification from the courts, employers should take their entire organisation into account when calculating whether the obligation to collectively consult is triggered, rather than looking at individual "establishments".
  • The Employment Appeal Tribunal has invited submissions from the parties involved in the Comet case as to whether individuals who have not issued proceedings in their own right are eligible to receive a protective award, despite their representatives not being properly elected.
  • The administrators who dealt with the Comet insolvency have been referred to the regulator as a result of failing to comply with their collective consultation obligations, adding a further potentially serious sanction for IPs to be aware of.

A number of recent high profile cases have served as a reminder of the potential difficulties that employers may face when making large scale redundancies. The speed at which business restructurings progress can make compliance with a heavily regulated area of the law particularly difficult for insolvency practitioners ("IPs"), who are unlikely to have had significant involvement in workforce planning at the point that key decisions are being taken.

The obligation to carry out collective consultation is contained in section 188 of the Trade Union & Labour Relations (Consolidation) Act 1992 ("TULRCA") which is intended to implement the Collective Redundancies Directive (98/58/EC) (the "Directive"). Where an employer proposes to make 20 or more employees at one establishment redundant within a period of 90 days or less, it is required to consult with appropriate representatives of the affected employees. Consultation must begin in good time, and at least 45 days before the first dismissal takes effect in the case of 100 or more dismissals, or at least 30 days in all other cases. The employer must also notify the relevant Secretary of State, typically done using an HR1 form.

These obligations, as burdensome as they can appear, should not be taken lightly. The recent press surrounding the Comet liquidation has served as a stark reminder of the serious and costly consequences of failing to collectively consult properly. With potential criminal liabilities, compensation for employees of up to 90 days’ uncapped pay, and a risk of referral to ICAEW, it is important for IPs to develop an awareness of their legal obligations. This article examines some recent cases on employee consultation in the insolvency context.

When is a proposal not a proposal?

In contrast to the Directive (which requires consultation to begin when collective redundancies are "contemplated"), under TULRCA, consultation must begin when redundancies are "proposed". At first sight the difference may not appear significant, yet it is an issue which has generated a considerable amount of case law, with the English judiciary struggling to reconcile the position. A redundancy may be contemplated at an earlier stage than it is formally proposed, and employee representatives have tried on many occasions to exploit this perceived disparity. Focus has shifted away from this issue somewhat since a decision of the European Court of Justice ("ECJ") which held that, within the Directive, the phrase "contemplated" referred to an obligation to consult where there was an "intention" to make collective redundancies (Akavan Erityisalojen Keskusliitto AEK ry and others v Fujitsu Siemens Computers Oy (C-44/08)). This has been widely interpreted as closer to the UK concept of "proposing" than initially understood and so has largely settled this issue.

Leaving aside any conflict between EU and UK law, identifying the point at which redundancies are proposed remains fraught with difficulty. An employer who has a settled intention to make redundancies before any consultation begins will clearly have gone too far. Yet at the other end of the scale, it will be hard to pinpoint the precise moment at which an employer moves from having a vague notion that collective redundancies might be needed, to proposing them. This is particularly so in the insolvency context where multiple possibilities for a business’ future may be contemplated, all with different connotations for the workforce. This is a factual, case-specific issue for the Employment Tribunal ("Tribunal") to determine, making guidance difficult. By way of illustration, where such a large number of viable options remain in play, some of which would not lead to collective redundancies, it seems unlikely that a Tribunal would view an employer to have reached a stage where it is proposing redundancies. However, as the Employment Appeal Tribunal ("EAT") made clear in Scotch Premier Meats Ltd v Burns ([2002] IRLR 639), this may not always be so. In that case the employer was still considering one alternative option that would have avoided collective redundancies, but the Tribunal still considered as a matter of fact that the employer had moved to the later stage of a specific proposal to make redundancies. From a practical perspective, therefore, it may be advantageous for employers to start collective consultation processes as soon as they identify mass redundancies as a possible outcome, and update the relevant representatives as matters progress. Although this may unsettle employees, in an insolvency situation where employees will already be aware of the difficulties being faced, consultation may actually aid employee relations. In addition, as highlighted by the recent Comet insolvency, following which the administrators have been referred to ICAEW by Vince Cable for their perceived failure to comply with the law in this area, the potential consequences of getting this wrong may well outweigh any such disadvantage.

"At one establishment"

TULRCA is clear: employers do not need to collectively consult unless they are proposing 20 or more redundancies at "one establishment". Until recently, the settled approach was that employers would group their employees according to their location and/or organisational structure, and not start collective consultation until the threshold was reached in each group. For example, in a retail business where employees worked exclusively at a particular site, each site would be classified as an establishment. Therefore, unless 20 or more redundancies were proposed at any given site, the obligation to collectively consult would not be deemed to have arisen. Location was not the only relevant factor; common management and organisational links could outweigh geography in certain circumstances.

However, last year the EAT rewrote this aspect of the law, in a radical and wide-reaching judgment. This case, USDAW v Ethel Austin Ltd (in administration) and another ([2013] I.R.L.R. 686) (the "Woolworths case"), involved the Woolworths and Ethel Austin liquidations which together had led to several thousand redundancies. The first instance Tribunals had ruled that neither company had complied with their obligations in relation to collective consultation. However, in accordance with the usual "one establishment" approach, they also found that no collective consultation obligations arose with over 4,400 workers who had been employed in stores where fewer than 20 redundancies were made. These employees were therefore denied the protective awards of 90 days’ uncapped pay (in the case of Ethel Austin) or 60 days’ (in the case of Woolworths) awarded to other employees.

The union appealed, arguing that the phrase "at one establishment" in s.188 TULRCA was incompatible with the wording of the Directive. The EAT agreed, and ruled that this should be ignored entirely when interpreting s.188 TULRCA. The implications of this judgment are significant. In the cases in question, the cost of making a further 4,400 protective awards is estimated at £5 million. However, and possibly more significantly, this ruling has also created difficulties for multi-site employers who now need to keep a close eye on all redundancies made across their business. This is likely to be particularly challenging in the retail sector, where companies tend to operate from a number of locations, with fairly small workforces in each. On a positive note, where IPs are closing an entire business, this is unlikely to have a huge impact, because collective consultation obligations will probably arise in any event. However, where they trade the business, with a view to selling it as a going concern, all redundancy exercises, however small, will need to be carefully monitored to ensure that the 20 person threshold is not inadvertently breached.

The Woolworths case is subject to appeal and the Court of Appeal has referred the "at one establishment" issue to the ECJ for a decision on the compatibility of TULRCA and the Directive. However, given that the ECJ’s decision is unlikely to be issued for quite some time, for now at least, employers need to take their entire organisation into account when deciding whether there is an obligation to collectively consult.

An obligation has arisen – what does this mean?

Where collective consultation is necessary, employers must consult with appropriate representatives of the affected employees. If an employee forum or trade union, with authority to undertake redundancy consultation, already exists this body may be used. If not, employees must be given the opportunity to elect their own representatives. S.188A TULRCA sets out specific requirements for these elections, including that the candidates must themselves be affected by the redundancies and that all affected employees must be allowed to vote. Whilst employers may be tempted to circumvent these steps, doing so could be costly as a failure to comply with these rules can lead to compensation being awarded. In the Comet case, for example, management simply nominated certain employees to act as representatives (Akbar and others v Comet Group Ltd (in Creditors’ Voluntary Liquidation) and another (1102571/2012)). As a result, the Tribunal was critical of Comet’s disregard for what was deemed to be a "key ingredient of the statutory scheme" (para. 174), a factor which led to compensation of 70 and 90 days’ uncapped pay being made to different groups of employees.

When consulting, an employer must provide a number of pieces of information including (not exclusively):

  • the reasons for the proposal;
  • the number of redundancies proposed;
  • how any selection will be conducted;
  • the number of agency workers within the business;
  • any steps that have been considered to mitigate the impact of the redundancies (such as job-sharing); and
  • what compensation will be available to redundant employees

The information provided must also be of sufficient detail to enable meaningful consultation to take place. Whether the information provided satisfies this requirement will be assessed on a case-by-case basis. It is not enough for an employer to provide employees with the opportunity to raise particular topics. If they do not, it is for the employer to raise them (Kelly & Jackson v The Hesley Group Limited [2013] I.R.L.R. 514)

In addition to consultation, an obligation to notify the Secretary of State arises where collective redundancies are proposed. This is generally done using an HR1 form on which the employer is required to set out a number of points, including the number of redundancies proposed. Failure to do so is a criminal offence, and one which can attract personal liability for directors (and therefore administrators – s.194(3) TULRCA). In a fast moving insolvency context, where IPs are responsible for the HR1 form, they should ensure that they are fully briefed on workforce planning as a priority. In the Comet insolvency, one of the administrators signed an HR1 form stating that there were no redundancies proposed, despite senior HR managers having already discussed the need for a consultation process. It is unclear why the administrators submitted an HR1 form at all, given that notification is only required where collective redundancies are proposed. However, leaving this to one side, it would appear that additional due diligence would have been advisable prior to making such an important notification to the Secretary of State.

Are there any exceptions?

Where special circumstances render it not reasonably practicable for the employer to actually comply with certain obligations under s.188 TULRCA, such as the requirement to begin consultation in good time and at least 30 or 45 days prior to dismissals, employers are instead required to take all reasonably practicable steps towards compliance. Although this exception does not entirely remove the need to collectively consult, it is an exemption which may prove useful to IPs. Insolvency, by itself, is not a special exception. However, during the course of an insolvency, special circumstances may well arise. For example, a sudden disaster, whether financial or otherwise, which strikes a company and causes it to close down, may be capable of being a special circumstance. Similarly, an insolvency may give rise to circumstances which mean that it is not possible to continue to employ people for the minimum period between the start of consultation and the date of the dismissals. Again, this is likely to be taken into account by Tribunals when considering whether an employer complied with its obligations.

Although the existence of this exception can be useful to insolvency it should not be presumed that special circumstances will exist. Rather, this is something to be aware of and for employers to seek to argue, where circumstances permit, if the process that they do conduct is later challenged in a Tribunal.

What if it all goes wrong?

Where an employer fails to comply with its collective consultation obligations, claims must be presented to the Tribunal within three months of the dismissals. If successful, a Tribunal can make a "protective award" to each claimant (or constituent of any elected representative who has brought the claim on their behalf) of up to 90 days’ uncapped pay. The protective award is punitive, rather than compensatory, in nature and employees are under no obligation to mitigate their loss. Where employers have made no attempt to comply with their obligations, the principles set down by the Court of Appeal in Susie Radin Ltd v GMB [2004] IRLR 400 mean that the Tribunal’s starting point must be to make a 90 day award. Tribunals should also consider whether the employer’s default was a technical breach or a complete failure, and whether it was deliberate. The fact that consultation may have made no difference at all (e.g. in the event of a complete business shutdown) is irrelevant.

One potential lacuna identified in the Comet case related to those eligible to receive the protective award. TULRCA provides that affected employees may bring claims themselves, or alternatively, elected representatives may bring claims on behalf of their constituents. In the latter scenario, despite not having issued a claim, the employee constituents will be entitled to receive any protective award made. In the Comet case, however, the Tribunal ruled that the election process was defective, potentially meaning that any individuals who had not issued proceedings in their own right would not be eligible to receive a protective award. At the time of writing, the Tribunal has not issued a final decision on this point, and has invited submissions from the parties on potential interpretations of TULRCA in relation to this.

Allowing an employer to benefit from its own breach is unattractive from a public policy perspective. Given this, the Tribunal may well rule that the representatives were properly elected for the purpose of bringing claims on behalf of their constituents, because Comet treated them as such, and that the legislation is capable of interpretation in this manner. It is estimated that such a move would bring the total cost to the taxpayer of the Comet protective awards to approximately £25 million. If the Tribunal decides otherwise, an appeal would be anticipated and it could also be an area where the Government looks to implement reform.

In relation to the notification requirements, non-compliance is a criminal offence, punishable on summary conviction to a fine of up to £5,000. This can also attract personal liability and so, as set out above, directors, officers and IPs must exercise caution in completing any HR1 form.

Perhaps even more concerning for IPs is the recent referral of the Comet administrators to ICAEW.  When approving the referral, Vince Cable is reported to have commented that "the taxpayer now faces a multimillion-pound compensation bill as result of the failure to consult employees" and that there "can be no excuse for failing to comply with the law which is very clear in this area."  There will also be an investigation into the conflict of interest that may have arisen as a result of the administrators’ appointment, given that they had advised Comet and connected parties prior to the insolvency.  The outcome of this referral will be watched with interest by all IPs and their advisers.

Despite Vince Cable’s comments to the contrary, the law in relation to collective consultation remains challenging for all employers to grapple with, but grapple they must if they wish to avoid significant liabilities arising. Whilst in the Comet and Woolworths cases, it will be the taxpayer picking up the bill for the companies’ failings, the ICAEW referral must surely serve as a caution for IPs against any desire to short circuit a company’s collective consultation obligations.

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