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Legal Minds

3 November 2015 / by / in ,

Hanging employees out to dry in an administration could land former Directors in seriously hot water

Where an employer proposes to make large scale redundancies of 20 or more employees within a period of 90 days or less (collective redundancies) under the Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”), it must consult on its proposal with representatives of the affected employees and also notify the Secretary of State for Business, Innovation and Skills (“BIS”).

In the event of a failure to consult (or to consult properly) an employer faces liability for unfair dismissal and/or the risk of the employment tribunal making a “protective award” to each employee affected by the failure to consult. The protective award is intended to punish the employer for not complying with the collective consultation obligations (rather than to compensate the employee for their individual financial loss) and can be up to 90 days’ actual pay per affected employee, which can add up to a substantial amount.

There has been a recent renaissance in the number of successful employment tribunal claims being brought for breach of an employer’s obligation to collectively consult. However, in October 2015 charges were also brought against company directors of City Link and Sports Direct for failure to provide sufficient notice to BIS of mass redundancies. Whilst a company’s failure to provide notification to BIS of its intention to make redundancies is a criminal offence under section 194 TULRCA, these are thought to be the first criminal prosecutions under TULCRA.

In these circumstances the employer will be liable on summary conviction to an unlimited fine under section 85 Legal Aid, Sentencing and Punishment of Offenders Act 2012 (prior to 12 March 2015, the maximum fine was £5,000). Further, where an offence under this section is proved to have been committed with the consent or involvement of, or to be attributable to neglect on the part of, any director, manager, secretary or other similar officer of the employer (or any person purporting to act in any such capacity) he is also guilty of the offence and liable to be proceeded against and punished accordingly.

In light of BIS’ apparent change of approach in bringing criminal proceedings against former directors for failing to give sufficient (or any) notice of an employer’s intention to make redundancies, coupled with the increased likelihood of employee challenges to consultation procedures in the employment tribunal, it is sensible for employers to remind themselves of the legal requirements for collective consultation, and be aware of the practical steps they can take to minimise their risk of exposure to employee claims and potential criminal prosecution.

What happened at City Link and Sports Direct?

In early 2015 a significant number of USC (a subsidiary of Sports Direct) warehouse staff were made redundant after the chain was bought by another subsidiary of Sports Direct through a pre-pack administration. The affected employees were given 15 minutes’ notice by USC that they were to be made redundant. The chief executive of Sports Direct was therefore charged in October 2015 under section 194 TULCRA.

These charges follow the decision in June 2015 to prosecute three former directors of delivery company City Link, who were charged with the same offence following City Link’s failure to notify BIS over a plan to make around 2,500 employees redundant last Christmas. An investigation into the failure of City Link revealed that administrators wanted to wait four days before telling staff the business could not survive, to protect the company’s assets. Staff were also allowed to keep on working for the business even after it had been determined to be insolvent as it would reduce the cost of winding it up.

What should City Link and Sports Direct have done to prevent these prosecutions?

Given that insolvency is not a “special circumstance” which would negate the need for collective consultation to take place when a company is proposing to dismiss as redundant 20 or more employees at one establishment within a period of 90 days or less, what can be done to minimise employers’ risks of exposure to employee claims in the employment tribunal and potential criminal prosecution?

We suggest that an employer should:

1.Start the planning process early to allow sufficient time for proper consultation with employee representatives. Where 20 to 99 redundancies are proposed within a 90-day period, consultation should begin at least 30 days before the first dismissal is due to take effect. Where 100 or more redundancies are proposed within a 90-day period, consultation should begin at least 45 days before the first dismissal takes effect.

2.Notify BIS of the proposed redundancies before any notices of dismissal are given and at least 30 days (or, if 100 or more dismissals are proposed within a 90-day period, 45 days) before the first dismissal is to take effect.

3.Pro-actively consult about ways and means of avoiding the dismissals, reducing the number of dismissals and mitigating their consequences and reflect this in the minutes of meetings.

4.Ensure all documents and internal communications (including e-mails) are consistent with the redundancies being at proposal stage, rather than a definite plan and avoid taking steps which are inconsistent with redundancies being at proposal stage.

Comment

The decision to prosecute the directors at City Link and Sports Direct serves as an important reminder of the need to consult properly, but more significantly marks a significant development for company directors.

Whilst this shift in approach reinforces the requirement for early notification of a potential business failure, it risks reducing the likelihood of saving jobs or rescuing the business. However, late (or no) notification to BIS in these circumstances risks undermining employees’ rights to participate actively in a consultation process. There is therefore a clear tension between employment and insolvency law.

However, whilst this tension persists it will be important for employers to:

1.continue to follow the correct procedures in a collective consultation exercise in order to avoid a successful employment tribunal claim being brought by affected employees; and

2.notify BIS if it proposes to make 20 or more employees redundant at one establishment within a period of 90 days or less, in order to avoid the risk of criminal prosecution.

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