No transfer of undertaking where a gap between contracts

The Advocate General considers there was no transfer of an undertaking where there was a break of 5 months between old and new contracts

In the Spanish case of Colino Sigüenza v Ayuntamiento de Valladolid and others, the Advocate General found that there had been no transfer of an undertaking under the Acquired Rights Directive when a contract to run a music school was terminated with one contractor and another commenced five months later with a different contractor.  However, it is possible that the UK courts would reach a different decision under the TUPE legislation.

Background

The Acquired Rights Directive (“ARD”) protects employees' rights on a transfer of an undertaking, business or part of an undertaking or business.

It applies to any transfer of an undertaking, business, or part of an undertaking or business to another employer as a result of a legal transfer or merger.  Under the ARD, a transfer occurs when there is a transfer of an economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary.

In this case, the Advocate General gave his opinion on whether the ARD applied when a contract to run a municipal music school was terminated, and the operation of the music school was resumed by another contractor some five months later, using the same premises, instruments, classrooms and furniture.

Facts

The municipal music school in Spain was historically run by the local public authority (‘the Public Authority’).  The Public Authority outsourced the running of the school from 1997 to 2013 to Musicos y Escuela S.L. (‘the Music Company’). The Music Company was set up exclusively to run the music school.

In 2012/2013, due to a decline in the number of students, the Music Company faced financial difficulties.  In April 2013, the Music Company ceased running the school and the staff were dismissed because it was financially unviable to continue.  The Music Company was then dissolved.  Members of staff unsuccessfully brought unfair dismissal claims against the Music Company.  

The Public Authority terminated its contract with the Music School and the operation of the music school was later outsourced by the Public Authority to In-pulso Musical Sociedad Cooperative (‘In-pulso’).  The new contract began in September 2013, when In-pulso re-opened the music school, using the same premises, instruments and resources.  However, In-pulso employed new staff.

Mr Sigüenza and some of his colleagues brought fresh unfair dismissal claims against all three parties.  They argued that a TUPE transfer had taken place, rendering their dismissals unfair.  The Valladolid social court would not accept the claims as they had previously been litigated (the doctrine of Res Judicata).  The court also noted that five months had passed since the dismissals and the re-opening of the music school by In-pulso.  As a result, it was held there had been no transfer of an undertaking.  Mr Sigüenza appealed.

The appellate court asked the ECJ for a preliminary ruling on several points, including:

  • Was there a transfer of an undertaking for the purposes of the ARD in these circumstances?
  • If so, were the dismissals effected by the Music Company for economic, technical or organisational reasons entailing changes in the workforce, or were the dismissals caused by the transfer, and therefore void?

The Advocate-General’s decision

The Advocate General agreed with the Valladolid social court and found that there had not been a transfer of an undertaking under the ARD.  In coming to this decision, he considered the following issues:

Was there an economic entity?

In this case he found that there had not been a transfer of an undertaking or business.  In order for there to be such a transfer, there had to be an organised grouping of persons and assets, organised with a view to carrying on an economic activity.   In this case, the economic activity was the running of the music school. However, as the Music Company had been set up for the purpose of tendering for the contract, it could be said that its sole purpose was to take part in the tender processes organised by the Public Authority. The existence of the Music Company as an entity depended entirely on the tenders that were awarded for fixed periods of time. Each time the contract with the Public Authority came to an end, the activity of the Music Company came to an end as well. The Advocate General emphasised the need for permanence in the economic entity.   Therefore, the Advocate General concluded that when the new contract was granted to In-pulso several months later there was no longer an economic entity within the meaning of the ARD.  

If an economic entity existed, was its identity retained?

Again, the Advocate’s General’s view was no.  He applied a multi-factorial test.  He found that only the material tangible assets were transferred to In-pulso, being the school buildings, furniture and instruments. 

The relevant intangible asset in this case was described as a concession to operate the music school. However, this was not taken over directly by In-pulso.  The Music Company did not pass on its concession and could not have done so, as its own concession had expired by the point when In-pulso began running the school.  Rather than being a direct transfer of the concession, a different concession was awarded to In-pulso. 

Further, none of the 26 employees were taken on by In-pulso.  In particular, the Advocate General pointed out that 23 of those employees were music teachers.  He felt that this could suggest that a music school run by entirely different staff would have a different identity.   

The Advocate General was also of the view that the fact there was a five-month gap during which no service was being provided did not necessarily preclude a finding that there was a going concern.  For example, for seasonal activities, a dormant phase between active phases will not preclude a transfer.  In this case, however, the period of inactivity was not limited to the summer holiday, and was much longer than the parents and pupils would have expected. If this could be explained as a mere "reorganisation phase", then there could be an element of continuity. However, this was fact-specific and something that would fall to be determined by the national court.

Weighing up all the above factors his view was that entity (if there was one) did not retain its identity. In particular, he was of the view that there cannot be a transfer of an entity where only part of the identity is taken over; the entirety of the entity needs to be transferred.  In this case, neither the staff nor the concession was transferred and only the material assets were taken over.   

Would there have been an ETO reason?

In any event, his view was that there was an economic, technical or organizational reason entailing changes in the workforce for the dismissals, which meant they were not unfair.  The Music Company had become insolvent, and there could be no doubt the dismissals arose as a result of this economic reality.  Even assuming that a transfer took place after the dismissals, there was no causal link between that transfer and the earlier dismissals. His view was that the the change in management which took place in September 2013 could not call into question the legality of the dismissals made in April 2013.

Comment

It remains to be seen whether the ECJ will follow the Advocate General’s view.  His view can be summarised by his statement that "the Directive concerns transfers but does not provide for “resurrections”.  In his view, this claim fell at the first hurdle, because at the point at which a transfer could have taken place, there was no longer any identifiable entity.

However, it is possible that the Tribunals and courts in England and Wales would reach a different decision.  The Advocate General emphasised that the Music Company had been established purely for the purpose of delivering this contract and did not work for other clients. The Advocate General made it clear that this type of case must be distinguished from cases involving contractors working for multiple clients, in which the contractor routinely receives requests for new contracts and seeks new customers.  However, this would not appear to be determinative under current English law.  The service provision change provisions of the TUPE legislation mean that this type of case would be analysed somewhat differently here.  In particular, there is no requirement for a transfer of significant assets or a major part of the workforce for a service provision change to occur. 

That said, the issue of the five month gap would need to be considered too.  In previous decisions, the Employment Appeal Tribunal has found that a temporary absence from work or cessation of the activities does not necessarily mean that TUPE will not apply.  There is nothing in TUPE itself, or in any of the authorities, that requires the organised grouping of employees to be actually engaged in the activity immediately before the service provision change, or that suggests that a temporary cessation of activities would preclude TUPE from applying.  However, the purpose, nature and length of the cessation are relevant in determining whether or not the organised grouping continued in existence.

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