Philip Paget on the effect of share transfers on employees

Philip Paget is an employment partner at Keeble Hawson Moorhouse.

A recent case in the Employment Appeal Tribunal has challenged a long-standing anomaly in employment protection legislation.

Employees are protected by the Transfer of Undertakings (Protection of Employment) Regulations 1981 (Tupe) regulations when their employer company changes identity, but not when control of the company transfers by a transfer of shares. Regulations refer specifically to a change of employer, and the identity of the employer is not changed by a transfer of shares.

However, although the employer is the same and the contract between employee and employer retains the same parties, there may be a world of difference between the work practices of those controlling the employer before and after the transfer.

In the case of Brookes and Ors v Borough Care Services and CLS Care Services, a company which managed care homes for the elderly transferred from the public to the voluntary sector. Borough Care Services decided jointly with the Wigan Metropolitan Borough Council, which had set it up, to transfer its homes to the voluntary sector.

CLS, one of the companies which put in a bid, wanted to improve efficiency and profitability by renegotiating the contracts of employment of the employees concerned.

However, just before the transfer took place, an Employment Appeal Tribunal (EAT) case hit the headlines. The case of Wilson v St Helens appeared to outlaw any change to employment contracts following a transfer of a company, if those changes were imposed because of the transfer, and even if those changes were consensual.

Borough Care Services and Wigan Metropolitan Borough Care Services therefore decided to transfer the company by transferring shares.

Brookes (one of the employees) claimed the Tupe regulations should apply to Borough Care's employees, and argued that the employment tribunal and EAT should "pierce the corporate veil" and adopt a "purposive approach" toward the regulations.

However, EAT held there was nothing about the transaction designed to avoid Tupe, nor any aspect of the applicant's contracts which the "new" employer was seeking to evade.

In such a situation, the normal principles governing changes to contractual terms applied to the "new" emp-loyer. In short, unless the employee consents to the change, or unless the emp-loyer has a substantial business reason and acts reasonably in making the change, there will be a risk that any action taken might otherwise amount to constructive dismissal.