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International Corporate Rescue: Woolworths and the ECJ case review

Woolworths and the ECJ
David Reade QC 
This article was first published in International Corporate Rescue.

A central feature of many insolvencies is the need to make a significant proportion, if not all, of the workforce redundant. Economic pressures within the insolvency typically require those redundancies to be made over a very short time scale. Collective redundancies potentially engage the requirements, as implemented into individual Member States, of Directive 98/59 on the approximation of the Law of Member States on Collective Redundancy. In USDAW v WW Realisation Ltd (In Liquidation) and Ethel Austin Ltd, Lyttle v Bluebird UK Bidco 2 Ltd. and Raba Cañas v Nexea Gestión Documental SA Case c-80/14, Case C-182/13 and Case c-392/13, the ECJ has considered the obligations under the Directive with important practical consequences for collective redundancy in insolvency, particularly in the United Kingdom. The case, in part, arose out of the insolvency of the retail chain ‘Woolworths’. 

In the United Kingdom the Directive has been implemented through the requirements of S.188 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA), which provides that the obligation to collectively consult on redundancies arises where there are 20 or more dismissals ‘at one establishment’ within a period of 90 days or less. If engaged the employer, and an insolvency practitioner as agent of the employer, is required to consult with representatives of the workforce before the redundancies are implemented. If there are no existing employee representatives, such as a recognised trade union or works council, the Act requires the election of employee representatives before the consultation can commence. The period of the consultation is determined by the number of the redundancies. The consultation period should not be less than a period of 30 days, if between 20 and 100 redundancies are proposed, and a period of 45 days if more than 100 employees are being made redundant. 

The need to pay staff through the consultation period has meant that in insolvent situations, certainly in the UK, the obligation has frequently not been complied with. The remedy in the UK in the event of breach is the making of a Protective Award which requires payment of remuneration for the employees for a period of time up to a maximum of 90 days. The insolvent employer  may not be in a position to pay this, as the liability does not rank above the claims of any secured creditors. Partial recovery of the award can however be achieved by the employees in the UK against the Redundancy Payments Office which provides a state backed security for some liabilities of an insolvent employer. It should be noted that it is a defence to a claim that there has been a breach of the consultation obligation that there were ‘special circumstances’ which rendered it not reasonably practicable for consultation to have taken place. Insolvency is not of itself a special circumstance and it has practically proved difficult for the defence to be successfully argued. 

As noted above the key phrase within S.188(1) is that the number of proposed redundancies is calculated on the basis of the number of employees at an ‘establishment’. Establishment was understood to mean a smaller unit than the entire employer. This can lead to what appear superficially to anachronistic results. These are exemplified by the insolvency of the Woolworths chain. The insolvency of Woolworths led to redundancies across all of the stores. The decision to make the redundancies was a central decision of the administrators. If S.188 was engaged then consultation should have been with a trade union, USDAW, which was the recognised representative body for the employees. USDAW brought claims for a protective award on the basis that the consultation requirements had not been complied with. Each shop was treated by the employment tribunal hearing the claims as a separate establishment. This had the consequence that whether a protective award was made in relation to an employee would depend on the number of employees who were proposed to be made redundant at each store. Thus, as we will see, the union argued before the European Court of Justice that the effect was that two employees might be employed at separate stores and both be subject to the same failures as to consultation over their redundancy but whether they were compensated through the making of a Protective Award would depend on the number of employees employed at their store. If there were less than 20 employees they would not be subject to the a Protective Award although  practically their position was the same as that of an employee in a store with more than 20 employees. 

The Union sought to argue that S.188 had not properly implemented the Directive. In order to understand the issue it is necessary to consider the Directive itself. Article 1(1) defines when the Directive is engaged. 

For the purposes of this Directive: 

‘”collective redundancies” means dismissals effected by an employer for one or more reasons not related to the individual workers concerned where, according to the choice of the Member States, the number of redundancies is: 

either, over a period of 30 days:

(1) at least 10 in establishments normally employing more than 20 and less than 100 workers;

(2) at least 10% of the number of workers in establishments normally employing at least 100 but less than 300 workers;

(3) at least 30 in establishments normally employing 300 workers or more; 

or, over a period of 90 days, at least 20, whatever the number of workers normally employed in the establishments in question.’

The thresholds are alternatives and Member States were free to decide for themselves which they chose to adopt. For convenience I will describe them as Option 1 (the at least 10 and subsequent sub clauses) and Option 2 (the at least 20). Most Member States adopted Option 1, whereas the UK, with Sweden, Luxembourg, Netherlands and Portugal, adopted Option 2. It will be noted that Option 1 may be triggered by as few as 10 redundancies if that represents 10% of the workforce at an ‘establishment’. The word ‘establishment’ therefore appears in the Directive but not explicitly in Option 2 other than in the context of the sentence ‘whatever the number of workers normally employed in the establishments in question’. The Union therefore argued that the intention of the Directive was not to limit Option 2 to the concept of the ‘establishment’ but that it was intended that the test was to be applied to the employer as a whole and that Option 2 required only consideration of whether 20 or more redundancies had been made in a 90 day period across the whole workforce of the employer. In the specific example of the Woolworths case itself the number of employees at each store would then be an irrelevance; Option2 would be engaged because more than 20 employees had been made redundant across the whole business. In the case of an insolvency that would significantly increase the breadth of any protective award. 

Before the Employment Appeal Tribunal in the UK UCATT succeeded in persuading the Appeal Tribunal that their construction of the Directive was correct and that S.188 had not properly implemented the Directive; in that it had incorporated the concept of ‘establishment’ which was not intended to apply to Option 2, see USDAW v Ethel Austin Ltd (in administration) and WW Realisations (in administration) [2013] IRLR 686. In order to give effect to this construction of the Directive the EAT gave a purposeful interpretation to S.188 applying it as if ‘establishment’ were not present. 

In the context of insolvency, where there is likely to be a central decision on redundancies, the decision is not difficult to implement, although as noted it potentially increases the scope of any protective award. In the context of normal industrial relations, within a continuing business, the decision presented many problems. A employer had to consider whether in any 90 day period there had been more than 20 redundancies across the whole of the workforce. These might consist of wholly disconnected smaller groups of redundancies in different locations. Equally there was the conceptual problem of the employer whose workforce spanned more than one Member State, it was unclear whether it was necessary to count redundancies in other Member States, which may in fact themselves have adopted the Option 1 regime. The decision therefore caused consternation amongst UK employers. As the decision involved an insolvent company and the protective award in the case was being underwritten by the State the UK Government intervened in the case and appealed the issue to the English Court of Appeal. 

The same issue had arisen in Northern Ireland in connection with redundancies within a chain of shops called Bonmarché, which were operated by a company called Bluebird UK Bidco 2 Limited. The legislation on collective redundancies in Northern Ireland mirrored S.188. In Northern Ireland the Employment Tribunal had stated a reference on the issue of the requirements of the Directive directly to the ECJ. The English Court of Appeal referred further questions. These references were then heard together with a reference from Spain, Rabal Cañas v Nexea Gestión Documental SA, which raised separate but related issues; the Spanish Legislation implementing the Directive has used the term ‘undertaking’ rather than establishment. 

The Advocate General identified that the main issue in the references was to identify the relevant unit for the purpose of calculating whether the thresholds for consultation applied. 

The ECJ confirmed that ‘undertaking’ and ‘establishment’, which are both terms of EU Law, have distinct meanings. Referring to previously decided case law of the Court, in particular Rockfon (C-449/93) and Athinaïki Chartopoiïa (C-270/05), it stated that establishment means the unit to which the workers made redundant are assigned to carry out their duties. Further that it was not essential in order for there to be an ‘establishment’ that the unit in question is endowed with a management that can independently effect collective redundancies. ‘Establishment’, in the context of an undertaking, may consist of a distinct entity, having  a certain degree of permanence and stability, which is assigned to perform one or more given tasks and which has a workforce, technical means and a certain organisational structure allowing for the accomplishment of those tasks. Thus an undertaking may consist of a number of separate ‘establishments’. 

On the apparent difference between Option 1 and Option 2 the Court concluded that establishment was intended to have the same meaning in both parts of the Directive and that Option 2 did not mean that the threshold was to applied considering the number of redundancies across all the establishments of an employer; it was concerned with each specific establishment. To construe Option 2 otherwise would greatly increase the burden of the impact of Option 2 over Option 1 and this was not consistent with the objective of the Directive to bring about the approximation of the laws of Member States on collective redundancy. 

The effect of the decision is then to confirm what had been the understanding of the Directive in the UK prior to the decision of the EAT in Ethel Austin: that the duty was triggered by considering the number of employees made redundant in each establishment. Thus in the case of Woolworths the duty could not arise where less than 20 employees were employed at a particular shop. 

The issues raised through the collective redundancies effected by administrators in the Woolworths case and other large scale redundancies carried out in the course of insolvencies in the recent times have raised wider issues in the UK. As noted above the effect of a failure to consult is likely to be that a substantial proportion of the protective award will be borne by the State through the Redundancy Payments Office. Thus it might be said that where consultation has not taken place in order to more quickly reduce salary costs the interests of secured creditors are being placed above those of the employees with financial consequences for the State. This has led to the UK Government calling for evidence from stakeholders on whether changes are necessary to the collective consultation in insolvency situation. The UK Government is presently considering the submitted evidence but it would appear likely that changes will be contemplated which will directly impact on redundancies within insolvency in the UK.

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