September 4, 2008
Welcome to the third Quarterly Executive Summary of 2008, in which we highlight key developments in UK Employment and Labour law since our last Quarterly Executive Summary.
A summary of cases and developments is provided below. For further details concerning cases and developments discussed in this Quarterly Executive Summary or for assistance on any UK Employment or Labour matter, please contact James Cox, Daniel Pollard or Steven Cochrane in Gibson Dunn’s London office.
Headlines
- Temporary Agency Workers to get same terms as Permanent Employees. The European Council of Ministers has agreed to legislate to require temporary agency workers to receive the same pay and certain other conditions of employment as the client’s own staff. Click for details.
- House of Lords limit the scope of Disability Discrimination legislation. In a controversial landmark decision, the House of Lords overturns a well settled line of authority concerning the application of "indirect" disability discrimination laws which may lead to changes in the way that employers manage employees absent due to long term sickness. Click for details.
- Disability Discrimination extended to Carers of the Disabled. In a widely publicised case, t he European Court of Justice extend disability discrimination protection to those persons who suffer discrimination due to an association with a disabled person. Employers considering requests from employees who care for a disabled person (whether an adult or child) will need to carefully consider its response if it is minded to reject the request in order to avoid having to pay substantial compensation. Click for details.
- Dismissals ahead of Business Sale Fair. Under the UK "TUPE" regulations, which automatically transfer the employment of employees in certain business sale and outsourcing transactions, employees may be fairly dismissed without compensation if the reason for the dismissals is because the employer has run out of cash to pay the employees rather than due to a desire to make the business more attractive to potential purchasers. Click for details.
- Seconding Employees to escape TUPE. A recent decision of the Employment Appeal Tribunal casts further doubt upon the use of secondment type arrangements, where employees object to a prospective transfer, in order to contract around the provisions of TUPE. Click for details.
- Restrictive Covenants – recent developments. Following three recent decisions of the High Court considering the enforceability of non-compete, non-solicitation and "garden leave" clauses we set out the key principles that apply. Click for details.
Set out below are details of the key cases and legal developments appearing in this Quarterly Executive Summary.
Temporary Agency Workers to get same terms as Permanent Employees: On 10 June 2008, Ministers at the European Union Employment, Social Policy, Health and Consumer Affairs Council reached agreement on the long awaited directive which will require equal treatment between temporary agency workers and permanent workers in relation to "basic working and employment conditions". The UK is expected to implement the directive with a partial derogation whereby the equal treatment rule will only apply after the agency worker has been with the end user for a period of 12 weeks. The UK Government will consult on whether UK implementing legislation should extend beyond basic pay and holidays to benefits such as share options, health insurance, enhanced maternity pay and the like. It is, however, unlikely that UK regulations will extend to occupational pensions. Whilst the directive has a long way before it becomes law and is unlikely to be implemented in the UK before 2010, the announcement is a culmination of a major campaign by UK trade unions to put an end to what they describe as "two tier" workforces.
House of Lords limit the scope of Disability Discrimination legislation: The Disability Discrimination Act 1995 ("DDA") introduced anti-discrimination laws in the UK, protecting disabled employees and job applicants who suffer unlawful discrimination. A common form of disability discrimination arises where the disabled person receives less favourable treatment for a reason related to their disability. The DDA also protects disabled tenants against unlawful discrimination in connection with the management of the premises they occupy.
The DDA was amended in 2003 in order to implement the European Directive 2000/78/EC ("Framework Directive") which established a general framework for equal treatment in employment and occupation for persons working in member states of the European Union.
Disability Discrimination extended to Carers of the Disabled: In Mayor and Burgesses of the London Borough of Lewisham -v- Malcolm the House of Lords considered a claim of disability discrimination brought by Mr Malcolm against his landlord, the London Borough of Lewisham. Mr Malcolm, who suffered from schizophrenia, was evicted for unlawfully sub-letting the residential premises which he occupied. Mr Malcolm’s actions resulted from his illness which was a disability. Accordingly, Mr Malcolm claimed unlawful discrimination on the grounds that he had suffered less favourable treatment (i.e. eviction from his premises) for reasons relating to his disability. Mr Malcolm relied on the judgment of the Court of Appeal in the case of Clark -v- Novacold which established the principles for determining whether a disabled employee had suffered less favourable treatment for a reason relating to their disability.
In Clark the court held that the treatment of a disabled person should be compared with the treatment of a person who is neither disabled nor facing the particular circumstances of that disabled person. By way of illustration, in Clark, the comparator for a disabled employee on long term sickness absence was determined to be a non-disabled employee who was not absent but was, in fact, working during the period of the disabled employee’s sickness absence. If the disabled employee was dismissed for sickness absence in circumstances where his comparator (a non-disabled employee at work) would not be dismissed, then the claim of less favourable treatment is made out and the burden falls upon the employer to establish that the discrimination in question (i.e. dismissal) was justified.
Consistent with the decision in Clark, Mr Malcolm argued that his comparator should be a non-disabled tenant who had not unlawfully sub-let his premises. If successful, the burden would have fallen upon Lewisham to establish that Mr Malcom’s eviction was justified. However, the House of Lords disagreed, overturning the Clark decision. The House of Lords identified the correct comparator for Mr Malcolm to be a non-disabled tenant who had unlawfully sub-let his premises (i.e. a person in similar circumstances to Mr Malcolm). The House of Lords was satisfied that Mr Malcolm had been treated no less favourably than his proper comparator and his claim therefore failed.
This case has significant implications for disabled employees, making it harder to establish discrimination on grounds of less favourable treatment. However, employers must continue to be cautious. Firstly, the Malcolm decision does not impact upon the so called "duty to make reasonable adjustments" which arises in circumstances where a provision, criteria or practice of the employer or any feature of its premises places a disabled person at a substantial disadvantage compared to a non-disabled person. Secondly, the decision concerned the provisions of the DDA relating to landlords and there may be a reluctance to follow the decision in the employment arena where the corresponding provisions are derived from European legislation and where there is a broader justification defense. Finally, the Equality and Human Rights Commission, who intervened in the case on behalf of Mr Malcolm, are likely to press the Government to reverse this decision as part of the proposed Single Equality Bill.
In Coleman -v- Attridge Law, the Employment Appeal Tribunal sought guidance from the European Court of Justice as to whether a non-disabled employee enjoyed protection against discrimination suffered due to her association with a disabled person. Ms Coleman, who does not suffer from a disability, claimed disability discrimination alleging that she had been treated less favourably by her employer due to her responsibilities as carer for a disabled child. The Employment Appeal Tribunal referred a series of questions to the European Court of Justice in order to determine whether an employee is entitled to protection under the Framework Directive against discrimination through association with a disabled person.
The European Court of Justice confirmed that a person who suffers discrimination because they are associated with a disabled person has been treated less favourably on grounds of disability, even if it is not their own disability. Accordingly, they are entitled to protection under the Framework Directive. In the circumstances, the UK Courts will interpret the DDA in line with the Framework Directive in order to protect the rights of those employees who suffer discrimination due to their association with a disabled person.
Whilst Ms Colman succeeded in her reference to the European Court of Justice on this important point of law, the final decision on the facts has yet to be reached by the Employment Tribunal at first instance and the eventual decision will almost certainly be impacted to an extent by Malcolm.
Dismissals ahead of Business Sale Fair: The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") protect the rights of UK based employees who are assigned to a business or part of a business that is sold or changes ownership. TUPE also protects the rights of employees on the transfer of activities which are outsourced from one service provider to another (whether a first generation outsourcing, insourcing or re-tendering). On a TUPE transfer, an employee who is assigned to work in the transferring business, service or undertaking will transfer to the transferee entity, unless the employee objects to the transfer. Furthermore, an employee who is dismissed in connection with a TUPE transfer will be able to claim unfair dismissal unless he or she is dismissed following a fair process and for an economic, technical or organisational reason entailing changes in the numbers or functions of employees.
In Dynamex Friction Limited and Another -v- Amicus and Others, the Court of Appeal considered whether a group of employees who were dismissed by a joint administrator of a company facing insolvency were dismissed for a reason connected with a subsequent TUPE transfer of that business. Joint Administrators were appointed over Friction Dynamics Limited ("FDL"), immediately dismissing all of the employees of FDL on the grounds that FDL could not afford to pay their wages. A large part of the business and assets of FDL were subsequently purchased by Dynamex, a company formed by the previous owner of FDL. A number of former FDL employees were hired by Dynamex. A group of former FDL employees who were not hired by Dynamex subsequently brought claims against Dynamex under TUPE. In order to succeed in their claims, the employees needed to establish that they were dismissed by FDL in connection with the planned sale to Dynamex. If successful, each employee stood to recover unfair dismissal compensation (capped at approximately £60,000 per employee) as well as compensation for lack of collective redundancy consultation (capped at 90 days pay per employee) from Dynamex. If unsuccessful, their claims would lie against FDL, an insolvent company, with limited scope to recover certain sums from the UK Secretary of State under UK insolvency laws.
The Court of Appeal dismissed the employees’ claim on the basis that the Court was satisfied that the Joint Administrators dismissed the employees because FDL could not afford to pay their wages and not because of any planned future sale to Dynamex.
The decision in Dynamex is a neat contrast to the similar case we reported in last Quarter’s Summary in which the opposite decision was reached. In CAB Automotive Ltd -v- Blake the pre-transfer dismissals were found to be automatically unfair. The reason for the difference in outcome was because in CAB Automotive the underlying reason for the dismissals was found to be a desire to "slim down" the business with a view to making the business more attractive to potential purchasers whereas the reason for the dismissals in Dynamex was, simply, the fact that the employer had run out of cash to pay its wages.
Seconding Employees to escape TUPE: In Capita Health Solutions -v- BBC and McLean, the Employment Appeal Tribunal considered what it means to object to transfer under TUPE. Mrs McLean, an occupational health nurse employed by the BBC, was in scope to transfer under TUPE to Capita in connection with an outsourcing of the BBC’s Occupational Health Service. Mrs McLean objected to her employment transferring to Capita but agreed instead to be seconded to work for Capita during a 6 week hand-over period after the transfer. The BBC continued to pay her wages during this period although during the hand- over period she worked as part of the Occupational Health Service which had transferred to Capita. Whether an objection is valid will depend on the facts and circumstances surrounding the objection and, in the present case, the Employment Appeal Tribunal found that Mrs McLean was "agreeable" to working for Capita and did in fact do so for a short period after the transfer. The Employment Appeal Tribunal found that Mrs McLean’s objection was not effective and, accordingly, her employment transferred to Capita under TUPE. This case highlights the risks which can arise where parties to a TUPE transaction (such as an asset purchase) attempt to avoid TUPE by means of contractual arrangement, for example involving the secondment of employees or the provision of employees through a transitional services agreement.
Restrictive Covenants – recent developments: Restrictive covenants operate as a restraint of trade and are therefore generally unenforceable under English law as a matter of public policy. In certain circumstances, a restrictive covenant which is proven to be reasonable in the interests of the parties will be enforced by the Courts provided that it affords no more than adequate protection of the party in whose favour it is imposed. As a result, a party seeking to enforce a restrictive covenant must demonstrate that the covenant:
1. protects their legitimate business interests (e.g. confidential information and/or customer connections); and
2. does so in a manner which is no more than adequate to protect such interest.
Covenants which do not protect a legitimate business interest or which do so in a manner which is excessive are unenforceable.
Furthermore, an employment contract may permit an employer to place an employee on paid suspension known as "Garden Leave", most commonly during the employee’s notice period. Garden Leave is so called because, during Garden Leave, the employee continues to be paid but is assigned no duties, must remain away from work and is prohibited from undertaking other work and so, with nothing better to do with their time, the employee is imagined sitting at home in their garden, waiting for the period of leave to end. Garden Leave is considered to be a form of restrictive covenant. It is often argued that, in order to be enforceable, the duration of the non-compete clause should be reduced by any period of Garden Leave served by the employee.
In Norbrook Laboratories (GB) Limited -v- (1) Adair (2) Pfizer Limited, WRN Limited -v- Ayris and SG&R Valuation Services Co. -v- Boudrais and Ors the High Court gave the following guidance in relation to the enforcement of Non-Compete clauses, Garden Leave and other Restrictive Covenants against UK based employees:
- A Non-Compete restriction can be used to protect valuable confidential information (such as price and discount lists) even if that information is not so confidential as to amount to a trade secret;
- Whilst the Court would, as a matter of principle, have enforced a 12 month Non-Compete against Ms Adair it declined to enforce the Non-Compete in Ms Adair’s employment contract because the restriction was wider than reasonably necessary to protect its interests. This was because Ms Adair’s Non-Compete prevented her from working for a business whose products competed with those Norbrook products with which she had been concerned 5 years previously;
- When considering the reasonableness of a restrictive covenant, the employee’s earnings are not a major factor (Ms Adair earned £25,000 per annum yet this was not considered to be a barrier to the potential enforcement of 12 month restrictive covenants);
- An employee cannot be restricted from having contact or dealings with customers of his former employer with whom he or she had no recent dealings;
- Mr Ayris was not, according to the evidence, judged to have taken confidential business information from WRN when he emailed customer contact details to his home computer and removed customer business cards from his office rolodex as this information was available in the public domain. However, his actions did amount to a breach of his obligation not to remove company property without authorisation.
- When considering whether a restrictive covenant is enforceable, the Court should focus on the reasonableness of the covenant at the time it was entered into and having regard to the role of the employee at that time. Accordingly, a covenant which is reasonable having regard to the role of the individual at the date of termination of employment may be unenforceable if considered unreasonable at the time it was entered into.
- In certain circumstances, an employer may be entitled to place a senior employee on Garden Leave without an express power in the employment contract to do so. Such circumstances include where the employer has no work to give the employee or, as was the case in SG&R -v- Boudrais, where the employee has shown that he is not willing and able to perform his duties. Mr Boudrais and his colleague, Ms Smith, were judged by the Court to have acted in a way that was hostile to their employer, SG&R in planning to take SG&R’s confidential information and divert business opportunities to a competitor. In the circumstances, the Court was prepared to enforce a period of Garden Leave notwithstanding the absence of an express power in their contracts of employment.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details concerning cases and developments discussed in this Quarterly Executive Summary or for assistance on any UK Employment or Labour law matter, please contact the Gibson Dunn attorney with whom you work, James A. Cox (+44 (0)207 071 4250, [email protected]), Daniel E. Pollard (+44 (0)207 071 4257, [email protected]) or Steven F.C. Cochrane (+44 (0)207 071 4275, [email protected]) in the firm’s London office, or any member of Gibson Dunn’s Labor and Employment Practice Group.
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