In considering this case, it is important to note that whilst the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) normally transfers all liabilities relating to any transferring employees to the transferee, where a transfer occurs from an insolvent employer, in order to promote a rescue culture, the normal rules are relaxed and certain debts, including arrears of pay for up to 8 weeks, can be claimed from the National Insurance Fund (NIF).
Back in 2007, 86 female employees of Liverpool City Council working in catering roles in various schools across Liverpool brought a claim for Equal Pay against the Council. Before the claim was heard, the Council outsourced the catering work and the employees transferred firstly to Hopkinson Catering Ltd and then to Duchy Catering Ltd. In 2009, two years after the employees transferred to Duchy, Duchy went into administration and the assets of Duchy were purchased by Graysons, and the claimants' contracts of employment transferred to Graysons under TUPE. At that time, the Equal Pay claims had still not been determined. The case was finally heard in the Employment Tribunal in 2016 and the Employment Judge was asked to determine:
The Employment Judge held that the equal pay arrears were not a debt until such time as the equal pay claims had succeeded, but also found that if they were a debt, then liability for the debt, in excess of any sums guaranteed by the NIF, would transfer to Graysons.
Graysons appealed to the EAT and the Secretary of State, who administers the NIF, was joined as a party. The EAT determined that since the law on equal pay requires the claimants' contracts to be treated as if modified by an equality clause throughout the life of the contract, then unless the claim for equal pay was defeated, the sums claimed were arrears of pay that were due to the claimants throughout the period for which comparators were paid more, and were therefore a debt at the date of Duchy's insolvency. Accordingly the EAT found that the first 8 weeks of arrears were guaranteed by the NIF and the remainder of the liability transferred to Graysons.
The Secretary of State then appealed to the Court of Appeal. Although Graysons settled their litigation with the claimants prior to the appeal being heard; the Court of Appeal proceeded to hear the case to consider the Secretary of State's grounds of appeal. The Court of Appeal upheld the EAT's findings that the arrears of pay were a debt at the time Duchy became insolvent, even though the case had yet to be determined, and therefore held that 8 weeks arrears of pay was due from the NIF.
Although the Court of Appeal decision focused on the liability of the NIF, the case overall makes it clear that any arrears of pay owed to the transferring employees that exceeds statutory limits is not extinguished by the insolvency, but will pass to the transferee.
Often in TUPE situations the transferee will be able to obtain indemnities from the transferor to mitigate against liabilities such as arears of pay, but in a transfer out of insolvency, such indemnities are not an option. It is therefore even more important for potential purchasers to ensure that they carry out thorough due diligence to establish any potential liabilities that they could be inheriting in order to assess whether a purchase should proceed and, if so, to ensure the purchase price adequately reflects the risks.