Dynamex Friction Ltd & Anor v Amicus & Ors

This appeal concerns the construction and application of the Transfer of Undertakings (Protection of Employment) Regulations 1981 ("TUPE"), in particular regulations 5(3) and 8. The central legal question was whether the dismissals of employees after an administrator was appointed were for an economic reason (so covered by regulation 8(2)) or for a reason connected with the transfer (so unfair under regulation 8(1) and caught by regulation 5(3) as construed in Litster).

The Court of Appeal (majority) upheld the Employment Tribunal’s findings that the joint administrator, acting independently and properly, dismissed employees because the company had no funds to pay wages and that there was no collusion with the transferees or with the former director. On those primary facts the administrator’s economic reason for dismissal prevailed and regulation 8(1) did not apply; accordingly the dismissed employees were not treated as employed "immediately before the transfer" for the purpose of regulation 5(3) and liability rested with the insolvent transferor (statutory guarantor the Secretary of State).

The majority emphasised that the decisive inquiry is the reason in the mind of the person who effected the dismissal (here the administrator) and that absent collusion or evidence that the administrator’s decision was a device to evade TUPE protection, the administrator’s economic rationale governs.

Background and parties: Friction Dynamics Ltd carried on a brake and clutch friction-parts business. Financial difficulties following awards to dismissed strikers led to the appointment of joint administrators on 7 August 2003. The administrators dismissed the workforce on 7–8 August 2003 because there were no funds to pay wages. Within days the business and assets were sold to entities (Dynamex and Ferotec Realty Ltd) associated with members of the Smith family; many former employees were later re-employed. The unions and some employees claimed protective awards, unfair dismissal and redundancy payments; the Secretary of State was drawn in as the statutory payer in insolvency.

Procedural posture: The Shrewsbury Employment Tribunal held that regulation 5(3) applied so that, on the Tribunal's findings, the employees were not employed immediately before the transfer and the Secretary of State was liable. The Employment Appeal Tribunal (EAT) allowed appeals by the unions and the Secretary of State on the ground that the Employment Tribunal had failed adequately to resolve disputed facts and to give reasons, and remitted the matter for rehearing. The Court of Appeal heard an appeal by Ferotec Realty Ltd against the EAT decision.

Nature of the claims and issues: (i) claims included protective awards under the Trade Union and Labour Relations (Consolidation) Act 1992 and individual claims for unfair dismissal or redundancy payments; (ii) legal issues were whether employees were employed "immediately before the transfer" per regulation 5(3) and whether dismissals were for an economic, technical or organisational reason (regulation 8(2)) or for a reason connected with the transfer (regulation 8(1)); (iii) factual issues included whether the administration and dismissals had been "stage-managed" by the Smith family so as to evade TUPE, and whether there had been collusion between the administrator and transferees.

Court’s reasoning and result: The majority of the Court of Appeal (Ward LJ and Rimer LJ) restored the Shrewsbury tribunal's decision. They held that the decisive inquiry is the reason of the person who effected the dismissals; the Employment Tribunal had found that the administrator acted independently, followed proper procedures, had no cash to pay wages and therefore dismissed for economic reasons. Those factual findings were binding, there was no collusion and no evidence that the administrator dismissed with a view to a pre-arranged transfer to evade TUPE. On those findings regulation 8(2) excluded regulation 8(1) and the Litster gloss on regulation 5(3) did not operate to catch the employees into the transferee. The EAT’s criticisms about insufficiency of reasons were rejected as, on the majority view, the Tribunal had in fact considered the relevant arguments. Lawrence Collins LJ dissented, taking the view that because of the purposive construction required to give effect to the EU Directive the tribunal should have examined whether the wider circumstances and alleged "stage-management" meant the dismissals were transfer-related, and therefore he would have dismissed the appeal and retained the EAT order for rehearing.

Wider context: The judgment discusses and applies Litster v Forth Dry Docks and related European case law on the purposive interpretation of TUPE and the need to guard against transparent devices designed to defeat the protection of employees on transfers. The majority, however, concluded that the factual findings here negatived any such device and that the administrator's economic reason for dismissal governed the outcome.

Appeal allowed. The majority restored the Shrewsbury Employment Tribunal’s decision because on its primary factual findings the joint administrator dismissed employees for an economic reason (no funds to pay wages), there was no collusion with the intended transferees, and consequently regulation 8(1) did not apply; the dismissed employees were not treated as employed "immediately before the transfer" under regulation 5(3) and liability rested with the insolvent transferor (statutory guarantor). (Two judges in the majority; one judge would have dismissed the appeal and remitted for further fact-finding.)

Employment Tribunal (Shrewsbury) decision (promulgated 22 June 2006) finding no transfer-protection for dismissed employees; Employment Appeal Tribunal allowed appeals by the unions and Secretary of State and remitted for rehearing (judgment 28 March 2007, UKEAT/0435/06/RN; UKEAT/0447/06/RN); Court of Appeal [2008] EWCA Civ 381 restored the Shrewsbury tribunal in a 2–1 majority.