Brookes v Borough Care Services and CLS Care Services Ltd, EAT [1998] IRLR 636

The Transfer of Undertakings (Protection of Employment) Regulations - TUPE - provide protection for employees when there is a change of employer.

This focus on the change of employer, rather than the transfer of a business, has been interpreted to mean that TUPE does not apply when there is a share transfer leading to a new owner of a company.

This was the view taken by the EAT in the Brookes case. The case was pursued by UNISON for members employed in homes caring for the elderly in Wigan.

BCS was running the homes. It was a company limited by guarantee set up by the Council.

It was going to transfer the running of the homes to CLS. TUPE would have applied. 
To get round TUPE it was instead agreed that CLS would become the sole shareholder of BCS and members of CLS would become the only directors of BCS. Effectively, CLS took over BCS and with it the running of the homes.

Although the running of the operation was in practice transferred to CLS, the workers remained employed by BCS, a company now owned by CLS. This meant that the legal identity of their employer had not changed.

The EAT said that this meant that TUPE did not apply. There had been no change of employer. The EAT was not prepared to look at the relationship between BCS and CLS, nor was it prepared to accept that in practice there had been a transfer to CLS.

Our laws create the fiction that a company is entirely separate from its shareholders.

The legal identity of the company remains the same, even if there is a 100% change in the shareholders, with significant adverse consequences for workers.

This means that workers in those circumstances have no protection under TUPE. They are treated legally as still employed by the same employer on existing contracts.

This is unsatisfactory. It means there can be a complete change in ownership without protection for workers or consultation with their representatives.

It is a situation which caused the House of Lords concern when it considered the matter in its report [HL Paper 38]. It is an issue which should be dealt with by amending TUPE, but the Government in its consultation document (see Issue 19 of LELR, Amending the Acquired Rights Directive) indicated an unwillingness to do so.

It should be emphasised that the European Commission in its Explanatory Memorandum to the proposed revised Directive in 1994 proceeded on the assumptions that mergers and acquisitions of this nature were covered. In many Member States distinctions of this nature between a business transfer and a share transfer do not arise.

Legal changes are necessary to deal with the situation, otherwise companies will continue to avoid TUPE by arrangements like the one in this case.