Franchising TUPE obligations?

The recent case of Meter U Limited v Hardy, Ackroyd and others, on the application of TUPE to franchisors has ruled that if an organisation's business model operates by use of corporate franchisees, rather than employees, TUPE will not protect unwanted transferring employees from dismissal.  

Background

The Claimants were employed as meter readers.  Following a re-tendering process, their employment was transferred under TUPE to a new sub-contractor, Meter U Ltd ("Meter U").  Under its business model, Meter U did not employ meter readers as individuals but rather insisted that those carrying out the service were limited liability companies, engaged through franchise agreements with Meter U.  The employees refused to operate under a franchise agreement and were dismissed by reason of redundancy.  They then claimed unfair dismissal.

Under Regulation 7(1) of the TUPE Regulations 2006, the dismissal of a transferring employee is automatically unfair if the sole or principal reason for the dismissal is the transfer itself or a reason connected with the transfer that is not an economic, technical or organisational reason entailing changes to the
workforce (an "ETO reason").  The Claimants argued that there had been no such ETO reason.

The Employment Tribunal found that the word "workforce" included franchisees as well as individual employees.  On this basis, they agreed with the Claimants that there had been no 'change' in the workforce which would qualify as an ETO reason, as Meter U had not changed the number of people reading meters.  The dismissals were therefore automatically unfair. Meter U appealed.

The approach of the Employment Appeal Tribunal (EAT)

In a judgment given in February 2012, the EAT disagreed with the Tribunal's definition of "workforce".  It ruled that the common sense meaning of the term would not include corporate franchisees but would instead be limited to workers and employees.  This meant that there had indeed been a change in the workforce, as, now that only franchisees were engaged, the number of people in the workforce had reduced.  The dismissals were therefore potentially fair on the grounds of redundancy. 

The EAT upheld the appeals and the cases will return to the Tribunal for a decision as to whether the employees were fairly dismissed.

Significance

The EAT has identified a potential route for organisations to dismiss transferring employees in a TUPE situation.  All that may be required is a legitimate business decision to use independent contractors or franchisees rather than employees.  Undoubtedly, it will incentivise others to consider entering into similar contracting or franchise arrangements to rid themselves of unwanted workforces.  However, the EAT warned against entering into sham franchise arrangements, which might conceal a true employment relationship.  Employers should still exercise caution before running the risk of automatic unfair dismissal claims.  

James Warren is a Partner and Rebecca Fisher is a Trainee Solicitor in the Employment and Pensions Group at Field Fisher Waterhouse LLP.