TUPE Applies When A Parent Company Takes Over the Assets of Its Subsidiary
The European Court of Justice has confirmed that a business which had been broken up and assimilated into its parent company's organisational structure had retained its identity, bringing it within TUPE.
Legal Background
TUPE is intended to apply where there is a sale of a business as a going concern or where there is a 'service provision change' (for example an outsourcing).
On the sale of a business, TUPE will only apply where the business 'retains its identity' after the transfer. This has not been an easy test to apply in practice and the case below is the latest in a long line of ECJ decisions on the point.
Factual Background
In February 1993, Air Atlantis SA (AIA), a charter flights airline, was wound up following a resolution by its main shareholder, Portuguese airline TAP. This resulted in the dismissal of a number of AIA's employees (the claimants).
Following the winding up, TAP subsequently:
- took over AIA's ongoing charter contracts
- developed its own charter flight business on routes previously served by AIA
- assumed responsibility for the leases of some of AIA's assets
- took over AIA's office equipment
- kept TAP employees who had previously been seconded to AIA in the same roles
The claimants brought an action seeking reinstatement and compensation, claiming that their contracts of employment has transferred to TAP under the Portuguese equivalent of TUPE. The claimants' failed in the Portuguese courts, with the Portuguese Supreme Court holding that there had been no business transfer as AIA's business had not retained its identity when incorporated into TAP's structure.
The case was referred to the ECJ.
ECJ's Decision
The ECJ held that the business did retain its identity and, as a result, the employees had transferred to TAP.
A key factor in determining this was the fact that tangible assets were transferred, enabling TAP to pursue business activities previously carried out by AIA. Other factors included the transfer of AIA's charter flight customers, development of the charter flight business and the assignment of TAP seconded employees to the roles they have previously held at AIA.
The ECJ found that it was irrelevant that AIA's business had been assimilated into its parent company's organisation without retaining its own autonomous structure. There remained a 'functional link' between the assets, staff and business activities previously carried on by AIA.
Best Practice
This is not an overly surprising decision on the facts. However, it is a useful illustration of how attempts to avoid the application of TUPE can be risky. The case suggests that where there is a transfer of tangible assets TUPE may still apply, even though the autonomous business unit that existed before the transfer has been broken up and assimilated into the parent company's/purchaser's own organisational structure.