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Does TUPE Ever Apply To Share Sale?

Background

Where a TUPE transfer takes place, the "affected employees" employed by the transferor will transfer to the transferee under their existing terms of employment and with their continuity of employment unbroken. Following the transfer, the transferee will automatically assume liability for all rights and obligations in relation to the employment of the affected employees. Any dismissal of the employees for a transfer-related reason that is not an "economic, technical or organisational reason entailing changes in the workforce" will be automatically unfair.

It has always been the case that where a business transfers by way of the sale of shares in a company, TUPE does not apply because the identity of the employer remains the same - i.e. only the identity of the shareholders will change, not the legal entity that employs the staff.

So has this changed?

The recent case of Millam v The Print Factory (London) 1991 Limited (2007) has shown that a more cautious approach is needed when analysing a corporate structure in connection with a share transfer and/or TUPE transfer.

Mr Millam was employed as a printer by Fencourt Printers Limited (Fencourt). Fencourt was sold to McCorquodale Confidential Print Ltd (McCorquodale) in 1999 by way of a sale of shares. Both Fencourt and McCorquodale subsequently went into administration. In May 2005, The Print Factory acquired the asset of McCorquodale (the holding company), excluding its share in Fencourt. Mr Millam was dismissed one day before the transfer.

Mr Millam argued that, immediately before the acquisition, he was not an employee of Fencourt at all, but was in fact an employee of McCorquodale. If this was the case, then his employment should have transferred to The Print Factory in accordance with TUPE.

A Pre-Hearing Review was held to determine the identity of Mr Millam's employer at the time of his dismissal.

The Tribunal found that Fencourt and McCorquodale had: Separate registrations at Companies House; Separate VAT registrations; Separate accounts; Combined Board Meetings;

Following the takeover of Fencourt by McCorquodale, McCorquodale began to handle Fencourt's sales function and a single sales representative moved from Fencourt to McCorquodale. All other Fencourt staff continued to carry out their functions at Fencourt's premises. At the same time however, work was transferred from McCorquodale to Fencourt, partly to make Fencourt appear a more attractive purchasing opportunity for potential buyers. PAYE documents showed that McCorquodale paid the employees' wages and administered the pension scheme. Indeed, Fencourt had no payroll department of its own.

The Tribunal held that the business in which Mr Millam worked was not actually in the hands of the legal entity in whose name it was run (Fencourt). In reality, McCorquodale directed Fencourt's affairs and therefore McCorquodale was Mr Millam's real employer.

The Print Factory (who obviously did not want liability for Mr Millam) appealed to the Court of Appeal. They argued that it was quite usual for a parent company to have some degree of control over its subsidiary, and it did not follow that employees of the subsidiary could be deemed to be employees of the holding company. For example, it would not be unusual for pension arrangements to be administered by a holding company.

However, on the facts, the Court of Appeal held that Fencourt's business activities were actually being carried out by McCorquodale. According to the Court of Appeal, the corporate structure was important, but not conclusive, in determining whether businesses were separate entities or not. What is needed is an examination of the actual business activities in order to determine whether control has transferred.

Conclusion

The general rule remains that, in the majority of share sales, there will be no change to the legal identity of the employer. However if, following the acquisition of the shares of a target company, the business activities of that target are sufficiently integrated into the purchaser's business, then the entire business (including its employees), and not merely the shares, could be deemed to have transferred into the hands of the purchaser.

Millam also serves as a warning that, when acquiring the assets of a target business which is part of a group structure, a more detailed consideration of the business integration is needed in order to meaningfully assess the potential TUPE liabilities.

Tim Davies http://employment.michelmores.com/pages/team.asp is an Associate Solicitor at Michelmores Solicitors http://employment.michelmores.com in the Employment Law Department. Contact Tim on tjd@michelmores.com for info.

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