HR issues in turnaround

Helen Farr, a recent addition to the hrlaw team, attended a round table discussion with Baronsmead Consulting and PILOTpartners about the latest government initiatives regarding TUPE, employee shareholders and tribunal reforms especially as they affect turnarounds. Below is a summary of the discussion as prepared by Helen Farr, Ian Gray, Ben Gray and PILOTpartners.

Duped by TUPE? Government’s employment plans wide of the mark.

Over the years, governments of different hues have introduced employment legislation, much of which has focused on protecting the employee. Some new laws have been the result of European legislation, including Transfer of Undertakings (Protection of Employment), “TUPE”, the Working Time Directive, and Redundancy Consultation, and all have increased the need for compliance, HR departments and employment lawyers. The additional workload for companies has been significant.

For turnaround specialists, much of this legislation has simply added to the administrative procedures involved when dealing with ailing organisations. However some of the Coalition Government’s new proposals – which aim to make life better for businesses – could have more far-reaching implications. We look at three employment changes that are unlikely to help companies in difficulty.

Review of TUPE Regulations

TUPE Regulations ensure that employees of a business sold as a going concern have their employment rights protected. The Government considers that TUPE is overly bureaucratic and unnecessarily “gold-plates” the EU directive which is the basis for the Regulations – the Acquired Rights Directive.

Although the Government proposes change, it does not intend to amend the specific Regulations that apply to businesses that are being sold through an insolvency process.

The recent Court of Appeal case of Spacewright Europe Ltd v Ballavoine certainly does not make life easier for those involved in the rescue of insolvent businesses. In this case, the administrators decided that they should sell the business as a going concern. The enterprise was to keep trading while offers were sought. One of the administrators’ first acts was to dismiss some employees, including the CEO. At the time of dismissal no purchaser was identified, but the administrators believed that if a purchaser were identified it would want to put in place a new CEO. The business was ultimately sold to Spacewright.

The ex-CEO issued proceedings against Spacewright claiming that he had been automatically unfairly dismissed under the TUPE Regulations and that the new owner was liable for his dismissal. He argued that, even though at the time of his sacking no purchaser had been identified, the dismissal was nevertheless by reason of a ‘relevant transfer’. The Court of Appeal agreed. It concluded that the CEO was unfairly dismissed and that the liability for his dismissal transferred to Spacewright, even though they had no part in the dismissal decision. Looking at the language of the TUPE Regulations, it was possible for dismissal to be by reason of a TUPE transfer even if, at the time of the dismissal, no particular transfer or transferee was in existence or contemplation.

The Court of Appeal also decided that the only defence an employer can use to avoid liability in a TUPE scenario (an economic, technical or organisational reason entailing changes in the workforce) did not apply in circumstances where an administrator was making a business more attractive to potential purchasers. Whatever the legal merits of these elements of the judgment, they seem impractical for those working on the ground with businesses in administration.

Another recent Court of Appeal decision, Key2Law (Surrey) LLP v De’Antiquis, now upheld by the Supreme Court, confirmed that the full extent of TUPE will always apply to administration proceedings. Previously, there was some suggestion that the escape clause from TUPE offered in cases of businesses subject to insolvency proceedings ‘with a view to’ liquidation of the business might also apply in certain administrations, dependent on their purpose. Key2Law scotched that suggestion, holding that this escape clause is a matter of the process used rather than the substance. Administration is not one of those processes. The Key2law decision, combined with Spacewright, increases the level of risk for those buying businesses in difficulty.

Both these cases will serve to discourage potential purchasers from rescuing insolvent businesses. Any purchaser faced with the risk of liabilities from employees in the business who will transfer, and former employees whose pre-transfer liabilities they may inherit, is going to take a cautious view when deciding to buy an insolvent business. Defensive practice could become best practice. Purchasers may have to seek information from administrators in relation to any dismissals made following their appointment. Likewise, administrators who wish to make dismissals to ensure the overall saleability of the business will face further costs through litigation risk and compromise agreements.

Surely this cannot have been what the Government intended? It is concerning that, despite these recent decisions, the Government will not take the opportunity to make changes to TUPE Regulations to make life better for those dealing with businesses in financial difficulty.

The introduction of Employee Shareholders

Another planned change that the Government believes will make life better for business is the introduction of a new staff class called “Employee Shareholders”, who are due to appear by the end of 2013.

To qualify as an Employee Shareholder, individuals will be awarded shares in their company valued between £2,000 and £50,000. The Government believes that this will encourage these Shareholders to take an interest in the future success of the company in which they work. The concept has been explained as being particularly good for small- and medium-sized enterprises.

However, in exchange for the shares the employees will lose a number of statutory employment rights. They will not be entitled to claim unfair dismissal on termination, a redundancy payment if made redundant, or the right to work flexibly. They also have to give more notice when returning from maternity leave. They will be able to claim protection from discrimination but, given that all workers currently enjoy this right, this is no concession on the part of the Government.

This policy raises a number of practical issues:

1. Are individuals really prepared to give up their statutory rights for a, relatively speaking, low amount of compensation? Shares worth £2,000 are unlikely to adequately compensate for the loss of such significant employment protection.
2. How are the shares valued, and what happens if they reduce in value below the £2,000 threshold? If an Employee Shareholder is dismissed when the shares fall below this point, can they claim to have employ ment protection?
3. Given that the shares must be bought from exiting employee shareholders on termination, how will private companies manage this? Will this create a separate class of shares specifically for Employee Shareholders? If so, this defeats the legislation’s purpose of encouraging employees to feel part of the business and be incentivised for increased engagement.
4. The Government has said that, whilst there will be a CGT exemption, the shares will still be subject to income tax. Given that some employee shareholders will be offered shares significantly below the current CGT threshold, unless there is a considerable gain in value this is no benefit to the employee concerned.
5. In organisations with large work forces, what is the potential impact of offering such shares? Will the employees gain the full rights of shareholders? If so, could granting them to a sizeable amount of the workforce result in their becoming the largest owners of the company? Is this the Government’s intention? If it is not, will the shares have to be of a class that do not result in ownership of the Company? If so, in what sense can they meaningfully be said to be shares that hold value?

Until business has more clarity on these points there is unlikely to be significant take up of this idea. Equally, even if businesses are attracted by the idea of employing staff without the ability to claim unfair dismissal and/or a redundancy payment, well-advised individuals may be reluctant to accept the status of an Employee Shareholder.

When the pension liability becomes a crippling burden on the sponsor, compromise or ring fencing options come into play. This may result in the pension scheme being separated and entering the PPF, or the pension scheme remaining ongoing with an equity stake in the business but with a crystallization of the liability to the company.

Reforms of the Tribunal Service

The Government is committed to streamlining the Tribunal Service. New tribunal rules are planned to be introduced in the summer with the requirement that claimants pay a fee for issuing proceedings and then for continuing to a final hearing.

However, it is debatable whether the introduction of issue fees will deter people from issuing proceedings. The fee for issuing a claim of unfair dismissal and/or discrimination is planned to be only £250. It is likely that many claimants will still decide to issue proceedings in the hope of achieving a financial settlement that is significantly greater than their initial investment. Equally, having some ‘skin in the game’ via the investment of personal funds at the issuing and hearing stages is likely to make claimants require higher payments before agreeing to withdraw a claim.

It seems that until the rules are changed to make it easier for the successful party to claim their legal costs, many individuals will still pursue claims, however unmeritorious, because of the perception of employment litigation as low risk.

Conclusion

Though the desire to make employment law more business- friendly is welcome, there remain areas of significant concern for those working in turnaround. Recent decisions of the higher courts pose significant practical problems for restructuring professionals, and there appears to be little appetite from the Government for reform in this area. Other changes, though superficially attractive, may also have less impact than the Government hopes.

This article originally appeared in full on Pilot’s Log.