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Employment Law

Legal guidance - compliance - software

11 FEB 2014

Staff restructuring and efficiency savings

In Hazel and Huggins v Manchester College [2014] EWCA Civ 72 the Court of Appeal has dismissed the College's appeal against a majority Employment Tribunal decision that the dismissals of two lecturers at HMP Elmley in Kent, Mrs Hazel and Mrs Huggins ("H&H") were not for an "economic technical or organisational" (ETO) reason that entailed a change in the workforce, but were because they refused to agree to new, reduced terms, and this was connected to a TUPE transfer, making their dismissals automatically unfair. Regulation 7 of TUPE provides that where, either before or after a "relevant transfer", any employee (of the transferor or transferee employer) is dismissed, that employee shall be treated, for unfair dismissal purposes, as unfairly dismissed if the sole or principal reason for dismissal is the transfer itself or "a reason connected with the transfer" that is not an ETO reason "entailing changes in the workforce".

The College is a provider of further and higher education courses and vocational skills-based training. Among other things it provides offender learning in prisons. In 2009 it successfully bid for contracts to provide services in six regions of the Prison Service. In August 2009 it took over, under TUPE, the employment contracts of about 1,500 staff, including H&H, in addition to about 2,000 already employed in offender learning and about 3,000 in the rest of the organisation.

A few months later the College's Board agreed to a package of proposals set out in two reports from its Principal for what were described as "staff restructuring and efficiency savings" and "contract change for Offender Learning and other related staff'. The impetus for the proposals came from a number of factors. The general economic situation facing the further education sector was challenging. There had also been changes in the funding allocation machinery. Moreover, there were particular problems in Offender Learning. Hidden costs had been encountered following the bid. In addition, employees in Offender Learning were on very disparate terms and conditions of employment, as a result of the College having built up this part of the business by absorbing a large number of different entities whose staff brought their previous terms with them. Apparently they had to deal with no fewer than 37 sets of terms. Such a state of affairs was plainly very undesirable from the point of view both of effective management and of staff relations. There was no doubt also a risk of equal pay claims. The total costs saving which it was planned to achieve from all aspects of the package was £5million.

Against this background, the package had a number of different elements. These includedg redundancies and other restructuring of roles, efficiency savings, and the proposed standardisation of contractual terms, including a single pay-scale for all staff in Offender Learning. The number of potential redundancies notified to the DWP was 300. As regards the changes in terms and conditions, the plan was to ask staff to sign new contracts of employment. If they did not agree they would be dismissed and offered re-engagement on the new terms. The various elements in the package were in practice inter-related. The College made the point in the course of the process that the introduction of the standard terms and conditions which it was offering would produce costs savings which would reduce the number of redundancies required.

The process of implementation of the proposals was complex. It required much negotiation and consultation both with the University and College Union and with individual employees. H&H were initially warned that they were at risk of redundancy or a reduction in contractual hours, but in due course it became clear that they would retain their existing jobs. Both were sent letters explaining the new terms being offered and enclosing contracts for their signature. It was explained that they were at risk of dismissal if they did not sign. The proposed salaries were 18.5% less than the current level for Mrs Hazel and 13.2% less for Mrs Huggins, though there would be a one-year period of protected pay. That was not acceptable to either of them. There was a period of further consultation, during which they in due course confirmed that they would agree to all the proposed changes except those affecting pay. Eventually they were sent notices of dismissal, but before those took effect they accepted the new terms, albeit under protest and expressly "without prejudice". On that basis they continued to work for the College, but they were paid only at the reduced level. They then brought their proceedings in the Employment Tribunal complaining that they had been unfairly dismissed.

Underhill LJ said (para 22) that in a case where Regulation 7 of TUPE, and, more particularly "the ETO defence" is in play, three questions (the last with two sub-questions) arise: (1) What is the reason, or principal reason for the employee's dismissal? (2) Is that reason the TUPE transfer itself, in which case the dismissal will be automatically unfair, or a reason "connected with the transfer" or neither? (3) If it is "connected with the transfer", (i) is the reason ETO and (ii) does it "entail changes in the workforce"?

As to the second question, it was common ground that the dismissals were connected with the TUPE transfer. The Court concluded that the answer to the first question was that the reason for their dismissals was that H&H had refused to agree to the new pay terms, and that the answer to the third question followed (as will generally be the case) from the first, namely that the refusal to agree to new terms and conditions was not a reason which entailed changes in the workforce, applying the Court of Appeal decision in Berriman v Delabole Slate Ltd [1985] ICR 546.

The College had argued with respect to the first question that the reason for the dismissals was the entirety of the package of proposals agreed by the College's Board and that the package incorporated proposed redundancies that did "entail changes in the workforce". The Court of Appeal accepted that the proposed harmonisation of terms was "in a general sense" related to the proposal for redundancies. They were adopted as part of the same package of proposals. Both were intended to contribute to the required costs savings. The achievement of the standardisation of terms would reduce the number of redundancies needed.

However, said Underhill LJ (para 23) "the fact that there was a relationship of this kind has no bearing on the statutory question" of what was the reason for the dismissals. It is trite law that what matters is the factors that operate on the employer's mind as to cause him to dismiss the employees. The College's need for redundancies played no part in its reason for giving H&H notices of dismissal. Their dismissals had nothing to do with the other elements of the package or the fact that some other employees had been, or were proposed to be, made redundant. The Employment Tribunal had adopted the correct approach and had been entitled to find as a matter of fact that in the sequence of events the principal, indeed the only, reason why H&H were dismissed was that they had refused to agree to the new terms of pay.

James Goudie QC

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