Case Facts
The appellants were William Forsyth Litster and eleven other former employees of Forth Dry Dock and Engineering Co Ltd, twelve in total. The respondents were Forth Dry Dock and Engineering Co Ltd (first respondent) and Forth Estuary Engineering Ltd (second respondent).
Forth Dry Dock and Engineering Co Ltd was placed into receivership. On 6 February 1984, the receivers dismissed all of the company's employees at 3.30 pm, informing them that there was no money available to pay the statutory period of notice or accrued holiday pay. One hour later, at 4.30 pm on the same day, the business was transferred to Forth Estuary Engineering Ltd. The new owners had wished to replace the existing workforce with workers from another shipyard that had recently closed, who were prepared to work for lower wages than the applicants.
The dismissed employees brought complaints of unfair dismissal to an industrial tribunal. On 27 February 1985, the industrial tribunal upheld their complaints and held the new owners — Forth Estuary Engineering Ltd — liable to pay compensation based on 26 weeks' loss of employment. The Employment Appeal Tribunal dismissed the new owners' appeal.
The new owners appealed further to the Court of Session (Second Division), which allowed their appeal on the ground that the applicants were not employed "immediately before the transfer" within the meaning of reg 5(3) Transfer of Undertakings (Protection of Employment) Regulations 1981 (SI 1981/1794), and ordered the new owners to be dismissed from the proceedings. The employees appealed to the House of Lords.
Held
The House of Lords reversed the decision of the Court of Session and allowed the appeal. The central question was whether the applicants, having been dismissed one hour before the business transfer took effect, fell within the protection of reg 5 Transfer of Undertakings (Protection of Employment) Regulations 1981.
The House of Lords held that reg 5 must be construed purposively, in conformity with EC Council Directive 77/187 of 14 February 1977, so as to apply not only to employees who were employed in the undertaking at the precise moment of transfer, but also to employees who would have been so employed but for having been unfairly dismissed before the transfer for a reason connected with it. It was not open to the seller and buyer of a business to arrange for the seller to dismiss employees shortly before the transfer became operative so as to enable the buyer to avoid liability in respect of unfair dismissal or redundancy claims that would have accrued had the dismissals occurred after the transfer.
Ratio Decidendi
The ratio of the decision turns on two related points: the purposive construction of reg 5 Transfer of Undertakings (Protection of Employment) Regulations 1981, and the technique by which that construction was achieved.
The duty of conforming construction. Transfer of Undertakings (Protection of Employment) Regulations 1981 were expressly laid before Parliament as domestic legislation designed to give effect to EC Council Directive 77/187 of 14 February 1977 on the safeguarding of employees' rights in the event of transfers of undertakings. The object of that Directive was to protect the rights of employees on a change of employer. In those circumstances, the court was under a duty to construe reg 5 in a manner that accorded with decisions of the Court of Justice of the European Communities on the corresponding provisions of the Directive.
The Bork decision. The CJEC decision in Case 101/87 P Bork International A/S (in liq) v Foreningen af Arbejdsledere i Danmark was directly in point. That decision established that where employees are dismissed by the transferor for a reason connected with the transfer, at a time before the transfer takes effect, they are to be treated as still employed by the undertaking at the time of the transfer for the purposes of art 3(1) of Directive 77/187. A domestic construction of reg 5 that produced the opposite result could not be sustained.
Implying words into reg 5(3). The House of Lords achieved its purposive construction not merely by interpreting the existing text broadly, but by implying additional words into reg 5(3). This technique followed that established in Pickstone v Freemans [1989]. The implied words provided that where a person has been unfairly dismissed in the circumstances described in reg 8(1) Transfer of Undertakings (Protection of Employment) Regulations 1981, that person is to be deemed to have been employed in the undertaking immediately before the transfer. Regulation 5, read in conjunction with reg 8(1), therefore applied to the dismissed employees and the new owners inherited liability for their unfair dismissal.
The mischief of literal construction. The House of Lords emphasised that a literal reading of reg 5(3) would render the protection conferred by reg 5(1) capable of easy evasion: a transferee could simply arrange with the transferor to dismiss employees a short time before the transfer took effect, thereby stripping them of the protection the Regulations were designed to provide. This risk was particularly acute in insolvency situations — which are common in transfer transactions — because employees would be left with worthless claims against an insolvent transferor and no claim against the solvent transferee.
Obiter Dicta
Not applicable.