Reporting redundancies—lessons from City Link

Reporting redundancies—lessons from City Link

If insolvency looms, how should redundancy be reported? Sarah Rushton, employment partner at Moon Beever, comments on the recent case in which three City Link directors were acquitted of criminal charges in relation to their alleged failure to give 45 days’ notice to the Secretary of State of their intention to make mass redundancies.

Original news

BIS v Smith, Peto and Wright [2015] Lexis Citation 274

What offence were the directors charged with?

Under section 193 of the Trade Union And Labour Relations Consolidation Act 1992 (TULR(C)A 1992), if an employer is proposing to dismiss as redundant 20 or more employees within a 90-day period at one establishment, then the Secretary of State must be notified at least 30 days before the first of the dismissals takes effect where 20 or more redundancies are contemplated, and 45 days before the first dismissal where there are 100 or more redundancies.

Failure to comply with TULR(C)A 1992, s 193 is a criminal offence under TULR(C)A 1992, s 194.

Section 194 provides that individual directors, company secretaries and managers are personally liable for offences committed by the employer if it can be shown that the offence was committed with their ‘consent or connivance’ or if it was attributable to their neglect.

If convicted each individual is liable to a fine exceeding level 5. The £5,000 limit for level 5 fines was removed in respect of offences committed after 12 March 2015 (see section 85(1) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012)—the fine can now be unlimited.

Why were the directors charged with this offence?

In this case, the prosecution had alleged that it became obvious that redundancies would have to be made on 22 December 2014, when a turnaround plan to inject more money into the business failed. The business continued trading until 24 December 2014, when administrators took over.

Does this offence apply to all failures to notify about redundancies? Or is it limited to certain categories of employees?

The offence applies to all redundancies where there is a proposal by an employer to dismiss at least 20 or more employees at one establishment within a 90-day period. The definition of redundancy under TULR(C)A 1992 is wider than the ordinary meaning of redundancy.

‘Normal’ redundancy means where an employee is terminated because there is a workplace closure, or a role is no longer needed, or where fewer employees are needed to carry out a particular role.

Under TULR(C)A 1992, redundancy is defined as a dismissal ‘not related to the individual concerned or for a number of reasons all of which are not so related’. This means that there may be a dismissal which counts as a redundancy under TULR(C)A 1992—which is not immediately obvious to the man in the street. For example, enforcing changes to terms of employment by terminating employees and offering re-employment on new terms will count as redundancies for TULR(C)A 1992—voluntary redundancies may also count, as may withdrawing job offers from new employees.

Conversely, since April 2013, dismissals arising out of the termination of a fixed term contract on its due date do not count.

Is it common to see directors charged with this offence in an insolvency context?

It is thought that this case is the first prosecution under TULR(C)A 1992 since it was brought into force 20 years ago. However, there is probably a high chance that prosecutions (or at least the threat of prosecution) will become more common for this reason:

Where businesses fail to notify the Secretary of State, there is also usually a failure to inform and consult with employee representatives regarding the redundancies.

The failure to inform and consult with employee representatives entitles each affected employee to a protective award of up to 90 days’ gross pay. If the business cannot pay, this burden then falls on the state to discharge. The liabilities can be massive.

To put this in context, in 2012 the retailer Comet failed. Seven thousand employees were made redundant without having had the necessary consultation periods. Protective awards were made for thousands of staff. When the business could not pay due to its insolvency, the costs then fell on the National Insurance Fund. The total costs were estimated at more than £50m when unpaid notice pay and redundancy payments were taken into account.

As a consequence, the then Secretary of State ordered an investigation and reportedly threatened to report the administrators to their professional body for their failing (allegedly) in relation to their professional duties. That move was fairly unprecedented and caused shock waves at the time.

Why were the directors acquitted?

In this case, the court accepted that there were no plans by the directors to make redundancies on 22 December 2014 and that the directors had hoped that, by placing the business into administration, the company might have been saved.

What impact will this case have on sales of businesses in a distressed/pre-pack scenario?

A decision like this has to pile pressure on both directors and insolvency practitioners (IPs) who will be concerned to protect their own professional reputations, regardless of any threat of prosecution.

It does seem to run contrary to the ‘rescue culture’ that the individuals who are trying to turn a business around can have their decision-making process second-guessed months after the events have taken place. TULR(C)A 1992 is a notoriously difficult area of the law so even the best-intentioned individuals can get into difficulty.

The obligation to notify the Secretary of State is triggered when ‘an employer is proposing to dismiss as redundant 20 or more employees at one establishment within a period of 90 days or less’.

To demonstrate some of the problems:

  • ‘an employer’ is the actual legal entity who employs the employee. So in a group company, where the employee is employed by the subsidiary, the obligation falls on the subsidiary, even where the parent company may not notify the subsidiary of its intentions until late in the day. This also means that, where subsidiaries share premises and have separate workforces, the trigger points for notifying the Secretary of State may differ depending on which subsidiary employs which group of employees
  • ‘proposing to dismiss’ is generally thought to occur at an earlier stage than an actual decision to make redundancies. Legally, redundancies may be proposed even where an employer is genuinely considering alternatives to redundancy. Further, the wording in TULR(C)A 1992 does not follow exactly the wording of the directive from which it is derived, which leads to the potential for dispute
  • the meaning of ‘one establishment’ was itself the subject of lengthy and expensive litigation in the Woolworths case. Again, in that case the administrators were criticised for failing to inform and consult with employees who worked in individual shops where fewer than 20 employees were employed. The argument was that the entire undertaking of the business was ‘one establishment’ and so protective awards should have been made to thousands more employees. It took a referral to the Court of Justice of the European Union and the Court of Appeal, to resolve that issue in the employer’s favour.

What steps should directors take in light of these developments? Are IPs and those advising the company also potentially at risk?

There is usually some pressure on businesses which are in distress to avoid announcing large scale redundancies too soon for fear that it will destabilise the workforce, or that it will allow a competitor to take advantage—by approaching clients or picking off key members of staff.

The decision may mean that there will be a need to assess the likelihood of finding a buyer for the business (which would save jobs) much sooner and, if this seems unlikely, to start redundancy consultations and make the necessary notifications. This seems to run contrary to the idea of a rescue culture because directors and IPs will have to be far more conservative than they might otherwise be and thus may feel pressurised to call time on businesses that might otherwise have been saved, if there had been a little more breathing space.

When looking at the issues of large scale redundancies, directors and IPs need to have in mind the following:

  • the duty to notify the secretary of state is separate to the duty to inform and consult with employees. It is possible that the trigger dates for each obligation may be separate
  • TULR(C)A 1992 is a difficult piece of legislation because it does not provide definite trigger points, rather it looks at what was done and then counts back to see if the act has been complied with—this means that the only sensible advice is to act conservatively in relation to notification requirements and consultation
  • although easier said than done, the key when dealing with TULR(C)A 1992 is to plan in advance as much as possible—make a realistic assessment at an early stage as to whether or not redundancies will be necessary
  • it will always be sensible to take legal advice at an early stage if it looks as if TULR(C)A 1992 may apply—the law is fluid and it is difficult for individuals to stay up to date

It is likely that actual prosecutions will remain rare and it is debatable as to the extent that IPs and those advising companies will be at personal risk of prosecution (as opposed to possible negligence claims or complaints to their professional bodies). There were calls following the collapse of Comet for the administrators to be prosecuted for filing an inaccurate HR1. Nothing materialised in relation to that. It would however be a brave solicitor who advised an IP that they could safely ignore the requirements to file a form HR1 in a timely manner.

Interviewed by Lucy Trevelyan.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.