The human cost

The growing weight of both national and European legislation in relation to employee and worker rights has forced employers to become increasingly alert to their obligations in this respect. The cost of failing to adhere to such obligations can be significant, both financially and practically.

Accordingly, the employment elements of many commercial transactions are now important considerations, whether they are mergers and acquisitions involving privately-owned companies or the outsourcing of public services under the Government’s controversial private finance initiative (PFI) and public-private partnership (PPP) programmes. So much so, in fact, that dealmakers and commercial lawyers are beginning to acknowledge that employment lawyers have central roles to play in such transactions. The Transfer of Undertakings (Protection of Employment) Regulations 1981 (Tupe) has had a major part to play in employment lawyers evolving into transaction lawyers. However, irrespective of Tupe, the risks that are attached to a workforce nowadays are of such magnitude that it is not uncommon for the structure of deals to be dictated by employment-related issues.

It is common knowledge that the past couple of years have been quiet for corporate practices. However, 2004 promises to see more activity. Nevertheless, other areas of commercial practice have not been as slow. The Government’s PFI/PPP programmes, for example, have been relatively unaffected by the financial and economic peaks and troughs of the global economy. Accordingly, this has kept project departments throughout the UK very busy. In 2002, for example, the capital value of PFI projects was approximately £7.6bn spread over 65 projects, primarily in the health, education, defence and transport sectors.

These areas of activity have a number of things in common, most notably issues affecting employees (and frequently a large number of employees) being high on the agenda of importance. In addition to individual rights, employees now have significant collective rights in circumstances when Tupe applies and when a collective redundancy situation arises (that is, a threat of redundancy to 20 or more employees within a 90-day period and one establishment). As a result, the ongoing cost associated with a workforce – its retention, reduction or further recruitment – can amount to significant sums.

The huge increase in employment legislation over the past 10 years has seen employees’ rights multiply. In addition to the expansion of employment rights, the value of the risk attached to such rights for employers has also increased considerably. An unfairly dismissed individual now has a claim worth potentially in excess of £50,000. Successful unlawful discrimination claims can result in compensation into the hundreds of thousands of pounds (and potentially millions, as the recent claims against Sinclair Roche & Temperley (SRT) illustrate – a Reading employment tribunal ruled that the firm could have to pay almost £7m in damages for a sexual discrimination claim, although SRT is appealing the decision). Additionally, the UK now has legislation regulating the minimum wage, working time (and holidays), family-friendly policies and anti-discrimination extended to sexual orientation and religious belief (and in the next couple of years, age).

Added to the seemingly endless protection for individual employees is a regime of collective obligations. The advent of works councils for pan-European businesses will soon be complemented by the introduction of national works councils in the UK. Furthermore, the unions have begun to make their presence felt again.

All these factors, particularly when taken together and applied to a sizeable workforce, mean that employment issues are potentially costly matters to take into consideration when weighing up the pertinent issues in a deal.

Moreover, the implications of Tupe have played a major role in the growing influence of employment practitioners in both M&A work and outsourcing (in both the public and private sectors). Despite the national and European courts’ and tribunals’ inconsistent interpretation of Tupe, more often that not purchasers of businesses (with the exception of share sale transactions) and outsourcing contractors have to accept that they acquire not only a business and its assets, but the incumbent workforce and its associated costs.

The need to allocate the risk and liability for such workforces now means that employment lawyers have a central role to play in commercial negotiations. A failure to identify the potential liabilities associated with a particular category of employee can result in an avoidable transfer of risk to a party to a transaction.

Indeed, the integral element of employment issues in some PFI/PPP transactions has led to employment lawyers playing influential parts in such matters. In December 2002, the ‘Retention of Employment Model’ was finalised as part of the Walsgrave Hospital PFI project.
This process, designed to prevent the transfer of certain employees of the NHS to the private sector under Tupe, necessarily involved employment lawyers negotiating the provisions of commercial documentation.

Even when matters are not subject to Tupe, such as M&A work involving share transactions, commercial lawyers are alert to the fact that the contingent liabilities of a target business may include significant employment risk. In fact, employment lawyers involved in the pre-acquisition due diligence process of commercial transactions are frequently in demand after the deal has been completed.
Headcount reductions, rationalisation exercises and standardisation of terms and conditions of employment are matters commonly carried out after a business has been acquired. The employment adviser’s participation is no longer limited, therefore, to a little due diligence.

It seems, then, that the days of employment practitioners being considered as specialists to turn to if an unfair dismissal claim arises, or if a few employees are to be made redundant following a takeover, are long gone. Deal teams in commercial transactions now require employment advisers as integral members. The impact of employment-related issues in an acquisition or a PFI project are hugely significant. Accordingly, the importance of ensuring that employment issues are satisfactorily addressed is at the forefront of the minds of dealmakers. Employment lawyers are often now required to advise on the risk before the deal takes place, be involved in the commercial negotiations regarding the transaction itself and then address the question of a rationalisation or redundancy exercise at a later stage.

Peter Holt is a partner at Kilpatrick Stockton