Appeal No. EAT/1007/00/DA

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 22 November 2002
                                                                                            Judgment delivered on 27 March 2003

Before
HIS HONOUR JUDGE J BURKE QC
MR D NORMAN
MR J C SHRIGLEY

FAIRHURST WARD ABBOTS LTD	APPELLANT

1) BOTES BUILDING LTD 2) MR K VAUGHAN AND OTHERS	RESPONDENTS

Transcript of Proceedings

JUDGMENT

Revised

	APPEARANCES

For the Appellant	JONATHAN SWIFT 
(Of Counsel)
Instructed by:
Clarkson Wright & Jakes
Valiant House
12 Knoll Rise
Orpington, Kent
BR60 ODG	
For the Respondent
Botes Buildings Ltd

For the Respondent employees	DAMIAN BROWN
(Of Counsel)
Instructed by:
DLA
3 Noble Street
London  EC2V 7BE

ANDREW GUMBITI-ZIMUTO
(Of Counsel)
Instructed by:
OL Parsons Partners
Sovereign House
217-224 Shaftesbury Avenue
London  WC2H 8PR	

JUDGE J BURKE QC

The History
1.	On 1 April 1996 the London Borough of Southwark (“Southwark”) entered into a contract, called “The Major Voids Contract”, with Botes Building Limited (“Botes”) pursuant to which it contracted out to Botes the function of carrying out works of maintenance and alteration to Void Domestic Dwellings owned by Southwark for a period of three years, to 31 March 1999.  The employees of Southwark who worked in the function which was thus contracted-out were transferred to the employment of Botes pursuant to the Transfer of Undertakings (Protection of Employment) Regulation 1981 (“TUPE”).  They included all of the eight employees who were the Applicants in these proceedings.  The Major Voids Contract was described by the Tribunal as a building services contract which created a service framework and organisation pursuant to which work would be carried out and material and equipment provided as required by Southwark.

2.	In December 1998 Southwark sent out documentation seeking tenders for the future provision of the services undertaken by Botes under the Major Voids Contract until its expiry; Southwark invited two sets of tenders for those services, one for each of two areas into which, for these purposes, Southwark divided the borough, as shown on a map attached to the tender documentation.  It was not open to a tenderer to be awarded the contract for both areas.  The tender documents set out Southwark’s view that TUPE would apply to the two new contracts and that tenderers would be assumed to provide for TUPE costs in their tenders unless the contrary was stated.  Tenderers were recommended to take their own legal advice.

3.	Botes tendered for both areas but were unsuccessful in either; the contract for Area 2 was awarded to Fairhurst Ward Abbot Limited (“FWA”).  FWA decided that none of the eight employees was assigned to Area 2 and therefore that their contract of employment would not and, from the date on which they took up the contract for Area 2, did not transfer from Botes to FWA pursuant to TUPE.  Accordingly, they refused to take on any of the eight employees.  Botes, on the other hand, took the opposite position, namely that the eight employees’ contracts were transferred under TUPE to FWA; and, therefore, Botes did not continue their employment when the original Major Voids Contract expired.  Thus, on the expiry of the original Major Voids Contract, the eight employees’ contracts of employment came to an end.  FWA gave the employees the opportunity to apply for employment with them which the employees, on advice, did not take up.  Although the original Major Voids Contract was intended to run to 31 March 1999, it must have been briefly extended; FWA took up their role on 8 April (or possibly on 12 April, it matters not which).
 
4.	The eight employees claimed that they had been unfairly dismissed by FWA on the basis that TUPE applied to their cases and, therefore, that their contracts of employment were, by operation of law, transferred to FWA pursuant to TUPE but that FWA had refused to take them on.  Alternatively they claimed that, if TUPE did not apply to their cases, they had been unfairly dismissed by Botes.  Both Botes and FWA denied dismissal; each asserted that they had not but that the other had dismissed the employees; neither claimed that the dismissal of any employee was fair.  It was common ground, therefore, that all had been unfairly dismissed; the Tribunal had to decide by whom they had been unfairly dismissed.  They decided that six of the employees, Mr Vaughan, Mr Marshall, Mr Banton, Mr Searle, Mr Gardner and Mr O’Connor had been unfairly dismissed by FWA and that the remaining two employees, Mr Potter and Mr Salih had been unfairly dismissed by Botes.  

5.	FWA, in this appeal, submit that the Tribunal erred in law in reaching their decision, as they did, against FWA in the case of those six employees whom we have named above and that Botes, not FWA, ought to have been held to have been liable for the unfair dismissal of those six employees.  Botes cross appeal on the basis that the Tribunal ought to have held that FWA and not they were liable for the unfair dismissal of the remaining two employees.

6.	Having set out the nature of this appeal and the general factual context in which the employees’ claims arose, it is necessary to set out some of the facts found by the Tribunal in more detail.  Of the eight employees, Mr Potter alone was a supervisor; the others worked in different trades, as described in paragraph 8 of the Tribunal’s decision.  Botes’ evidence was that they constituted a gang of men who worked together; the analysis carried out by FWA showed that that was not so; and the Tribunal found that they were only a gang in the sense that they had a common sense of identity and had worked together for over a year in 1997/1998, outside Southwark on a site in Bromley, and that when they returned to Southwark in mid 1998 normally only some of them would be working together at any given time.

7.	However, the major disputed issue of primary fact before the Tribunal was not whether the employees worked as a gang but whether they were assigned, before the alleged transfer to FWA, to work in Area 2; FWA asserted that they were not; Botes asserted that they were.  Investigation by Botes showed that, in the three months from October to December 1998, all of the eight employees except Mr Potter had spent 84.29% of their time in Area 2.  However, further investigation showed that, in the period from October 1998 to March 1999, those employees (except Mr Potter and Mr Salih, who was off sick from January 1999) spent 56% of their time in Area 2. 

8.	Botes were concerned that, if they did not secure the contract for Area 2 to which they regarded the employees as being assigned, they would, unless TUPE applied so that their contracts of employment were transferred to the successful tenderers, be saddled with the employees, who, because they had been transferred under TUPE from Southwark to Botes when the first generation contracting-out occurred, were employed on more favourable terms than and were, therefore, more expensive than their other employees.  For this reason, as in the case of another seven of the ten tenderers, their tender for Area 2 was priced at a higher rate than their tender for Area 1.  After they learnt that they had been unsuccessful in their tender for Area 2 and that FWA had been successful, being advised and believing that, in order to ensure the transfer of the employees under TUPE, they had to be working in Area 2 immediately before the end of the original Major Voids Contract and at the start of the contract of their successors, Botes sent all the employees, except Mr Potter and Mr Salih (who was still off sick) to work in Area 2.  The Tribunal found that there were genuine business reasons for that allocation of labour in the case of those employees who worked in that area, wholly or mainly, from 19 March until FWA took up the contract for Area 2 on 8 April.
  
9.	However, Mr Potter, as a contract supervisor, had not worked on the Major Voids Contract, in either area, for many months before January 1999 when he was transferred back to it.  He was treated by Botes as assigned to Area 2 thereafter; but the Tribunal found that that was a “paper exercise” on Botes’ part and that, in fact, he was not employed to work in Area 2 either substantially or exclusively after 11 January.
 
10.	Mr Salih was absent from work because of illness from 4 January 1999; by April he had not returned to work.  Botes’ time sheets showed him as off sick but assigned to Area 2.

11.	Thus Botes had, as we have described, taken steps to ensure the transfer of the employees to FWA and maintained that such steps had achieved their goal; FWA for their part did not accept that the employees were genuinely assigned to Area 2 as Botes maintained; they made it clear that they would not treat the employees as transferred under TUPE and, when they took up the Area 2 contract, they maintained that stance.  The Tribunal found that FWA’s refusal to accept that TUPE applied so as to transfer any of the employees to them was based, firstly, on their honest belief that Botes had deliberately manipulated the situation on the ground to make it appear that the employees were assigned to Area 2 in order to divest themselves of their obligations towards them and, secondly, on the genuine view, based on legal advice, that they were entitled in law so to refuse.  The Tribunal found as a fact that the activity comprised in the Major Voids Contract was the same before and after the change-over.

12.	It may be helpful to the picture as a whole to add that, as we were informed (although the Tribunal did not refer to this in their decision), the total anticipated value of the Major Voids Contract, including Areas 1 and 2, over its proposed three years duration was in the region of £4m - £4.5m.  Botes bid £863,000 per annum for Area 1 and £603,000 per annum for Area 2.

The Tribunal’s Decision
13.	The Tribunal concluded, at paragraph 53, that the building services’ contract constituted an economic entity and, at paragraph 57, that:-

“There was a similarity of the undertaking before and after the change of contractor.  On a partial basis, defined geographically, the support, administration and premises dedicated to the original contract related to the whole of Southwark were continued.”

In paragraph 58 the Tribunal continued:-

“Having regard to the factors which we have set out, and having regard to the overall picture which they create, we find that there was an undertaking which was transferred in two parts, to areas one and two.”

14.	The Tribunal then considered, in the case of each employee, whether he was employed in the part transferred immediately before the transfer.  They found that the employees, except for Mr Potter and Mr Salih, were all employed in Area 2 at the time of the change-over from Botes to FWA.  However, they found in the case of Mr Potter (paragraph 60) that, although Botes purported to assign him to Area 2, he was not employed in that area either substantially or exclusively even after the date in mid March on which Botes took specific steps to ensure that the other employees were so employed.  In the case of Mr Salih the Tribunal found (paragraph 61) that, although he was employed by Botes during the relevant period and was on paper assigned to Area 2, he was not in fact employed in Area 2 because he was off work through illness and had therefore become detached from the remainder of the workforce constituted by the employees.

15.	On the basis of these conclusions the Tribunal decided that Mr Potter and Mr Salih were unfairly dismissed by Botes but that the other employees were unfairly dismissed by FWA.

The Appeal
16.	The appeal of FWA, who were represented by Mr Jonathan Swift, is based on three broad grounds:-

(1)	FWA contend that, although the Tribunal concluded on the facts that the Building Services Contract constituted an economic entity capable of being transferred under TUPE, that economic entity was not transferred to FWA or to anyone else; neither Area 1 nor Area 2 existed before April 1999; and what FWA obtained when they took on a new Building Services Contract for Area 2 was not the same economic entity as that which Botes previously operated under one Major Voids Contract for the whole borough.  Accordingly, there could not have been a transfer from Botes to FWA of the same economic entity; and without such a transfer there could not be a transfer under TUPE.

(2)	Independently of the absence of identity of economic entity, on the facts as found by the Tribunal there could not in law have been a transfer under TUPE.

(3)	The Tribunal erred in concluding that one of the six employees found by the Tribunal to have been transferred to FWA, Mr Vaughan, had been assigned to any undertaking transferred to FWA.

17.	Botes, represented by Mr Damien Brown, resisted all of these grounds; and by cross- appeal they asserted that the Tribunal had erred in concluding that Mr Salih and Mr Potter were not transferred to FWA.

18.	The Employees were represented by Mr Andrew Gumbiti-Zimuto; he broadly supported the arguments presented by Mr Brown on both the appeal and the cross-appeal.

19.	We first heard argument in this appeal on 15 January 2002.  In circumstances which we will describe later in this judgment it became necessary for further oral argument to be heard; and it proved impossible to get all concerned together again until 22 November 2002.  On that date we heard further argument and reserved our decision.
 
Economic Entity
20.	The first ground of appeal raises a point of considerable importance, namely whether, when an undertaking or economic entity operated by ‘A’ ceases to be operated by ‘A’ and continues in the hands of others but is divided into more than one part and one or more of the divided parts is taken over by ‘B’, there can be a transfer of undertakings falling within Regulation 3 of TUPE from ‘A’ to ‘B’.  Mr Swift on behalf of FWA submitted, in short, that there must be an identity of entity prior to and after the supposed transfer, that on the facts of this case the economic entity which FWA began to operate in April 1999 did not even exist before that date and that any decision that there could be a relevant transfer on the facts of this case was inevitably in direct conflict with established UK and European authority.  Mr Brown on behalf of Botes submitted, in short, that there could be a relevant transfer if the entity as a whole retained its identity in the hands of the new operators even if split into more than one part; alternatively he submitted that the Tribunal had found on the facts that there was a transfer of a part of an undertaking which fell within Regulation 3.

21.	It will be immediately apparent that the consequences of Mr Swift’s argument, if it be correct, are potentially substantial.  Where an undertaking is to be transferred, the protection afforded to the employees in that undertaking by TUPE, purportedly implementing in UK domestic law the protection of employees in the event of a change of employer required by Council Directive 77/187/EEC, familiarly called the “Acquired Rights Directive” (now re-enacted with amendments in Council Directive 2001/23/EC) and safeguarding the rights of employees in the event of transfers of undertakings, businesses or parts of undertakings and businesses, would be greatly reduced if, as a result of the division of that undertaking into two or more parts each of which carried on, in relation to that part, the identical undertaking previously carried on by one employer in the whole, there was no relevant transfer of either or any of the parts.  The contracts of the employees previously employed in the undertaking would, because of the absence of a relevant transfer i.e. a transfer falling within Regulation 3 of TUPE, would not be transferred pursuant to Regulation 5(1) to an employer taking on a part of the undertaking; that employer would not have transferred to him any of the previous employer’s duties and liabilities to the employees pursuant to Regulation 5(2); the employment of such employees would terminate without any such transfer; but such employees would not be protected by the provision of Regulation 8 providing (subject to statutory exceptions) for their dismissal to be treated as automatically unfair if the transfer (which must be a relevant transfer within Regulation 3) is the reason or principal reason for the dismissal.  Absent the operation of Regulation 8, such employees would often have very considerable difficulty in establishing unfair dismissal under Section 98(4) of the Employment Rights Act 1996 in circumstances in which the employer could confidently expect to establish a genuine redundancy situation.  

22.	If those results could be achieved by the simple ruse of dividing up an undertaking which has been operated by one employer so that it is no longer to be or may no longer be continued by that employer but is continued in different parts by more than one new employer, it could soon become a popular and common means whereby the protection provided by TUPE could be substantially watered down, whether in the situation of a simple commercial transfer, of a first generation contracting out of services or, as in this case a second generation contracting out of services.  A new employer would be able to tender for part of an existing undertaking at a lower level than hitherto, seemingly safe in the knowledge that he would not have to take on any of the employees working in that existing undertaking even if they worked wholly in the part for which he was tendering and could price his bid at a figure commensurate with the levels of pay and other terms and conditions which he proposed to provide to other workers which might be substantially less than those previously enjoyed by the employees working in the part of the undertaking for which the new employer was tendering.  In the case of contracting-out, a body to which contractors are to render services could obtain lower tender prices by splitting the services between more than one contractor at the expense of the employees working in those services, who would lose the benefit of the important protection provided by TUPE.

23.	We have no comment to make as to any general economic advantages or disadvantages which might result from such a weakening of the protection normally understood to be provided by TUPE; that is not, in any sense, our territory.  And, if Mr Swift’s submissions are correct - and he submits that they are in effect unassailably so - we must set out the law as it is, whether or not we regard the result as one which gravely weakens the protection which TUPE was intended to provide.  On the other hand we are entitled to and do bear in mind the approach to the Acquired Rights Directive and to TUPE which is regularly applied and which is simply expressed in the Opinion of Advocate-General Slynn, followed in the United Kingdom in Kenny v South Manchester College [1993] IRLR 265, at paragraph 11 of his opinion in Spijkers v Gebroeders Benedick and Others [1986] 3 ECR 1119, as follows:-

“‘It is clear that the overriding objective of the Directive is to protect workers in a business which is transferred.  In my opinion, as the Netherlands Government, the United Kingdom Government and the Commission in its oral, though not its written submissions, contends, in deciding whether there has been a transfer within the meaning of Article 1(1) of the Directive all the circumstances have to be looked at.  Technical rules are to be avoided and the substance matters more than the form.  The essential question is whether the transferee has obtained a business or an undertaking (or part thereof) which he can continue to operate.’”

24.	We are bound to consider with great care any submissions which appear to us to be likely to produce or which might produce a weakening of the protection which it is the overriding objective of the Acquired Rights Directive and of TUPE to provide.  This, of course, Mr Swift and Mr Brown both recognised; and we were taken during the course of argument to most of the many leading domestic and European authorities which might bear on the question which we have to decide.  

25.	Our starting point must be the Acquired Rights Directive itself.  We refer, for the purposes of this case, to the original Directive because the relevant events all preceded the replacement Directive of 12 March 2001.  The preamble to the original Acquired Rights Directive provided, in so far as material, as follows:-
“… whereas economic trends are bringing in their wake at both national and Community level changes in the structure of undertakings, through transfers of undertakings, businesses or parts of businesses to other employers as a result of legal transfers or mergers;

whereas it is necessary to provide for the protection of employees in the event of a change of employer, in particular, to ensure that their rights are safeguarded;

whereas differences still remain in the Member States as regards the extent of the protection of employees in this respect and these differences should be reduced; …

whereas it is therefore necessary to promote the approximation of laws in this field while maintaining the improvement described in Article 117 of the Treaty.”

26.	Article 1 of the Directive provided originally:-

“1	This Directive shall apply to the transfer of an undertaking, business or part of a business to another employer as a result of a legal transfer or merger..

2	This Directive shall apply where and in so far as the undertaking, business or part of the business to be transferred is situated within territorial scope of the Treaty.”

27.	As a result of amendments made by Council Directive 98/50/EC Article 1, Article 1(1) of the Directive was amended to read, so far as material, as follows:-

“1.	(a)  This Directive shall apply to any transfer of an undertaking, business, or part of an undertaking or business to another employer as a result of a legal transfer or merger.

(b)  Subject to subparagraph (a) and the following provisions of this Article, there is a transfer within the meaning of this Directive where there is a transfer of an economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary.

(c)  This Directive should apply to public and private undertakings engaged in economic activities whether or not they are operating for gain. …”

28.	Article 3 provides, in so far as material for present purposes:-

“1.	The transferor’s rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer shall, by reason of such transfer, be transferred to the transferee.”

29.	The Transfer of Undertakings (Protection of Employment) Regulations 1981 provide, in so far as material for present purposes, as follows:-

“2(1) … ‘relevant transfer’ means a transfer to which these Regulations apply and ‘transferor’ and ‘transferee’ shall be construed accordingly

3	Subject to the provision of these Regulations these Regulations applied to a transfer from one person to another of an undertaking situated immediately before the transfer in the United Kingdom or a part of one which is so situated.

5(1) … a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor in the undertaking or part transferred but any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee.

(2)	without prejudice to paragraph 1 above … on the completion of a relevant transfer – 
(a)	all the transferor’s rights, powers, duties and liabilities under or in connection with any such contract shall be transferred by virtue of this Regulation transferee …

8(1)	  where either before or after a relevant transfer any employee of the transferor or transferee is dismissed, that employee shall be treated for the purposes of (the unfair dismissal legislation) as unfairly dismissed if the transfer or a reason connected with it is the reason or principal reason for his dismissal.”

30.	Not surprisingly, Mr Swift referred us to the chain of authority in the European Court of Justice which establishes that, for there to be a transfer which falls within the Acquired Rights Directive, there must be a transfer of an economic entity which retains its identity in the hands of the transferee.  In Spijkers (supra) the European Court of Justice, at paragraphs 11 and 12 of its judgment, said:-

“[11]  The last-mentioned view should be accepted.  It appears from the general structure of Directive 77/187 and the wording of Article 1(1) that the directive aims to ensure the continuity of existing employment relationships in the framework of an economic entity, irrespective of a change of owner.  It follows that the decisive criterion for establishing the existence of a transfer within the meaning of the directive is whether the entity in question retains its identity.

[12]  Consequently it cannot be said that there is a transfer of an enterprise, business or part of a business on the sole ground that its assets have been sold.  On the contrary, in a case like the present, it is necessary to determine whether what has been sold is an economic entity which is still in existence, and this will be apparent from the fact that its operation is actually being continued or has been taken over by the new employer, with the same economic or similar activities.”

In Suzen v Zehnacker Gebaudereinigung GmbH Krankenhausservice [1997] IRLR 255 the European Court of Justice said:-

“10	The aim of the directive is to ensure continuity of employment relationships within a business, irrespective of any change of ownership.  The decisive criterion for establishing the existence of a transfer within the meaning of the Directive is whether the entity in question retains its identity, as indicated inter alia by the fact that its operation is actually continued or resumed …

11	Whilst the lack of any contractual link between the transferor and the transferee or, as in this case, between the two undertakings successively entrusted with the cleaning of a school, may point to the absence of a transfer within the meaning of the Directive, it is certainly not conclusive.

12	… the Directive is applicable, wherever, in the context of contractual relations, there is a change in the natural or legal person who is responsible for carrying on the business and who incurs the obligations of an employer towards employees of the undertakings.  Thus, there is no need, in order for the Directive to be applicable, for there to be any direct contractual relationship between the transferor and the transferee: the transfer may also take place in two stages, through the intermediary of a third party such as the owner or the person putting up the capital.

13	For the Directive to be applicable, however, the transfer must relate to a stable economic entity whose activity is not limited to performing one specific works contract …The term entity thus refers to an organised grouping of persons and assets facilitating the exercise of an economic activity which pursues a specific objective.

15	As observed by most of the parties who commented on this point, the mere fact that the service provided by the old and the new awardees of a contract is similar does not therefore support the conclusion that an economic entity has been transferred.  An entity cannot be reduced to the activity entrusted to it.  Its identity also emerges from other factors, such as its workforce, its management staff, the way in which its work is organised, its operating methods or indeed, where appropriate, the operational resources available to it.

16	The mere loss of a service contract to a competitor cannot therefore by itself indicate the existence of a transfer within the meaning of the Directive.  In those circumstances, the service undertaking previously entrusted with the contract does not, on losing a customer; thereby cease fully to exist, and a business or part of a business belonging to it cannot be considered to have been transferred to the new awardee of the contract.”

31.	This approach was repeated by the European Court of Justice in Oy Liikenne AB v Liskojarvi and Juntunen [2001] IRLR 171.

32.	Paragraph 10 of the judgment in the European Court of Justice in Suzen is to be found adopted and repeated wholesale in other decisions of that Court e.g. Sanchez Hidalgo v Asociacion de Servicios Aser [1999] IRLR 136; and the principle embodied in that paragraph is now embodied in the Acquired Rights Directive itself; see Article 1(1)(b) of the original Directive as amended by the 1998 Directive and Article 1(1)(b) of the 2001 Directive.  However, it is important to bear in mind that in none of these cases, nor in other cases in which the same or similar dicta appear, was the European Court of Justice considering expressly the point which arises in the present case in which the transferee is, after the alleged transfer and as a result of it, continuing the undertaking of the transferor but only as to a part of that undertaking and in which the other part of that undertaking is being continued in the hands of a different transferee.  The cases cited to us do not expressly deal with the situation in which a transferee takes over and continues the activity of what was previously an un-separated part of the economic entity undertaken by the transferor.  The slaughterhouse in which Mr Spijkers worked was not one of two slaughterhouses operated by Colaris, only one of which was operated, after Colaris’ activities ceased, by Benedik.  The cleaning contract held by Zehnacker for the secondary school in which Mrs Suzen worked related to that school alone; and Zehnacker’s successors, after the termination of their contract, took on the cleaning contract for that school.  Oy Liikenne took on the operation of seven local bus routes under a contract with the Greater Helsinki Joint Board; their predecessors, had previously operated the same seven routes.  Yet both the Directive and TUPE plainly contemplate the transfer not only of the whole of an undertaking but also of part of an undertaking.  

33.	Mr Swift correctly anticipated that he would be faced with an argument based on the words of Article 1(a) of the Acquired Rights Directive ‘Transfer of an undertaking, business or part of an undertaking or business’ and of Article 2 which also expressly refers to the transfer of an “undertaking, business or part of the undertaking or business” and to the words of TUPE which plainly contemplate and include within a relevant transfer the transfer of part of an undertaking.  He submitted that both under the Directive and under TUPE there could only be a transfer of a part of an undertaking if the part transferred was itself a discrete and identifiable economic entity before the transfer which retained its identity as such after the transfer; in this case, he pointed out, the Tribunal had neither addressed the question as to whether nor found that what became the operation in Area 2 or in Area 1, carved out of the territory previously covered by the Major Voids Contract held by Botes, was a separate economic entity before the transfer; and therefore, he submitted, it was not open to Botes to argue that there had been a transfer to FWA of part of the undertaking which Botes had previously carried on.  In other words, argued Mr Swift, the principal set out in the European Court of Justice’s decisions applies equally to a transfer of part of an undertaking as it does to a transfer of the whole of an undertaking; in either case the economic entity existing in the hands of the transferor must retain its identity in the hands of the transferee - which, in this case, did not take place or was not found by the Tribunal to have taken place.

34.	The specific point which now arises has not been expressly addressed in the United Kingdom decisions any more than it has been specifically addressed in the decision of the European Court of Justice.  In Cheesman v R Brewer Contracts Ltd [2001] IRLR 144 the Employment Appeal Tribunal, having reviewed the principal European and domestic decisions on transfer, synthesized the law derived from both sources, at paragraphs 9 to 12 of its judgment, as follows:-

“9	It is, we think, possible to discover the present state of the law for the purposes of this appeal, without any need to delve to any great depth into earlier cases, by looking only at four recent cases, all decided after the employment tribunal promulgated its decision in the case at hand.  We shall need to make some passing references to some earlier cases than these four but, in large part, in so far as the earlier cases are still relevant, their conclusions are repeated in the four cases which we shall mention.  The four cases are Francisco Hernandez Vidal SA  v Gomez Perez and associated cases [1999] IRLR 232 ECJ decided on 10 December 1998; Sanchez Hidalgo (Supra) also decided on 10 December 1998 and by the same judges who decided Vidal; ECM (Vehicle Delivery Service) Ltd  v Cox [1999] IRLR 559 CA, decided on 22 July 1999 and to which we have already referred; and Allen and others v Amalgamated Construction Co Ltd [2000] IRLR 119 ECJ decided on 2 December 1999.

10	From those four cases we distil the following.  We shall attempt, although it is not always a clear distinction, to divide consideration between those going to whether there is an undertaking and those, if there is an undertaking, going to whether it has been transferred.  The paragraph numbers we give are references to the numbering in the IRLR reports of the ECJ’s judgment.  Thus:

(i)	As to whether there is an undertaking, there needs to be found a stable economic entity whose activity is not limited to performing one specific works contract, an organised grouping of persons and of assets enabling (or facilitating) the exercise of an economic activity which pursues a specific objective …

(ii)	In order to be such an undertaking it must be sufficiently structured and autonomous but will not necessarily have significant assets, tangible or intangible …

(iii)	In certain sectors such as cleaning and surveillance the assets are often reduced to their most basic and the activity is essentially based on manpower …

(iv)	An organised grouping of wage-earners who are specifically and permanently assigned to a common task may in the absence of other factors or production, amount to an economic entity.

(v)	An activity of itself is not an entity; the identity of an entity emerges from other factors such as its workforce, management staff, the way in which its work is organised, its operating methods and, where appropriate, the operational resources available to it …” 
 
11	As for whether there has been a transfer:
(i)	As to whether there is any relevant sense a transfer, the decisive criterion for establishing the existence of a transfer is whether the entity in question retains its identity, as indicated, inter alia, by the fact that its operation is actually continued or resumed - Vidal paragraph 22 and the case there cited; Spijkers v Gebroeders Benedik Abattoir CV [1986] ECJ 1119 ECJ; Schmidt v Spar-und Leihkasse [1994] IRLR 302 ECJ paragraph 17; SanchezHhidalgo paragraph 21; Allen paragraph 23.
(ii)	In a labour-intensive sector it is to be recognised that an entity is capable of maintaining its identity after it has been transferred where the new employer does not merely pursue the activity in question but also takes over a major part, in terms of their numbers and skills, of the employees especially assigned by his predecessors to that task. That follows from the fact that in certain labour-intensive sectors a group of workers engaged in the joint activity on a permanent basis may constitute an economic entity – Sanchez Hidalgo paragraph 32.
(iii)	In considering whether the conditions for existence of a transfer are met it is necessary to consider all the factors characterising the transaction in question but each is a single factor and none is to be considered in isolation – Vidal paragraph 29; Sanchez Hidalgo paragraph 29; Allen paragraph 26.  However, whilst no authority so holds, it may, presumably, not be an error of law to consider ‘the decisive criterion’ in (i) above, in isolation; that, surely, is an aspect of its being ‘decisive’, although, as one sees from the ‘inter alia’ in (i) above, ‘the decision criterion’ is not itself said to depend on a single factor.
(iv)	Amongst the matters thus falling for consideration are the type of undertaking, whether or not its tangible assets are transferred, the value of its intangible assets at the time of transfer, whether or not the majority of its employees are taken over by the new company, whether or not its customers are transferred, the degree of similarity between the activities carried on before and after the transfer, and the period, if any, in which they are suspended – Sanchez Hidalgo paragraph 29; Allen paragraph 26.
(v)	In determining whether or not there has been a transfer, account has to be taken, inter alia, of the type of undertaking or business in issue, and the degree of importance to be attached to the several criteria will necessarily vary according to the activity carried on – Vidal paragraph 31; Sanchez Hidalgo paragraph 31; Allen paragraph 28.
(vi)	Where an economic entity is able to function without any significant tangible or intangible assets, the maintenance of its identity following the transaction being examined cannot logically depend on the transfer of such assets – Vidal paragraph 31; Sanchez Hidalgo paragraph 31; Allen paragraph 28.
(vii)	Even where assets are owned and are required to run the undertaking, the fact that they do not pass does not preclude a transfer – Allen paragraph 30.
(viii)	Where maintenance work is carried out by a cleaning firm and then next by the owner of the premises concerned, that mere fact does not justify the conclusion that there has been a transfer – Vidal paragraph 35.
(ix)	More broadly, the mere fact that the service provided by the old and new undertaking providing a contracted-out service or the old and new contract-holder are similar does not justify the conclusion that there has been a transfer of an economic entity between predecessor and successor – Sanchez Hidalgo paragraph 30.
(x)	The absence of any contractual link between transferor and transferee may be evidence that there has been no relevant transfer but it is certainly not conclusive as there is no need for any such direct contractual relationship: Sanchez Hidalgo paragraphs 22 and 23.
(xi)	When no employees are transferred, the reasons why that is the case can be relevant as to whether or not there was a transfer – ECM p.561.
(xii)	The fact that the work is performed continuously with no interruption or change in the manner or performance is a normal feature of transfers of undertakings but there is no particular importance to be attached to a gap between the end of the work by one subcontractor and the start by the successor - Allen paragraphs 32-33 
12	More generally the cases also show:
(i)	The necessary factual appraisal is to be made by the national court – ECM p.561, 23; Allen paragraph 28.
(ii)	The Directive applies where, following the transfer, there is a change in the natural person responsible for the carrying on of the business who, by virtue of that fact, incurs the obligation of an employer vis-à-vis the employees of the undertaking, regardless of whether or not ownership of the undertaking is transferred - Allen paragraph 16.
(iii)	The aim of the Directive is to ensure continuity of employment relationships within the economic entity irrespective of any change of ownership - Allen paragraph 23 - and our domestic law illustrates how readily the courts will adopt a purposive construction to counter avoidance - see Lord Oliver’s speech in Lister v Forth Dry Dock Co Ltd [1989] IRLR 161 at 167.”

35.	As in the present case, Cheesman was a case in which the alleged transfer arose on the second generation contracting-out of local authority maintenance services; and, again as in the present case, the transferor employer believed that TUPE applied whereas the transferee employer believed that it did not.  The Tribunal, which concluded that there was no transfer, was held to have erred in law in failing in the circumstances of that case to consider whether what was said to have been transferred was an identifiable economic entity.  For this and other reasons the Employment Appeal Tribunal remitted the case to the Employment Tribunal.  However, Cheesman was not a case in which the services were split up at the re-tendering stage; the transferee undertook the same services, albeit from different premises and with different employees and equipment, as those previously undertaken by the transferor.  Accordingly the point now in issue did not arise.  The Employment Appeal Tribunal was considering, as is apparent from the excerpts from the judgment which we have cited, whether there was an undertaking or economic entity and whether there was a transfer of that undertaking or entity.  

36.	Mr Swift submitted that the Tribunal had, in this case, made the same error as had the Tribunal in Cheesman in that they failed to treat separately the tasks of (1) identifying the relevant entity and (2) deciding whether that entity had been transferred; but in our judgment the Tribunal in this case did consider separately, following the submissions made to them on behalf of FWA, whether there was an identifiable economic entity and whether there was a transfer.  The Tribunal in this case plainly concluded that, before the split, there was an identifiable undertaking and then considered whether it was transferred; indeed the Tribunal, at paragraph 52 of their decision, expressly stated that they were considering two questions namely: “Was there an undertaking and was it transferred?”  They had already directed themselves to the importance of the existence of an identifiable economic entity retaining its identity after the transfer by reference to the case of Allen v Amalgamated Construction Co (supra) in paragraph 47 of their decision.  In paragraphs 53 and 57, they concluded that the Building Services Contract constituted an economic entity and that on a partial basis that entity was continued in the hands of FWA. They then proceeded to conclude that there was a transfer of the undertaking carried out by Botes, in two parts, in paragraph 58 of their decision.  In our judgment the Tribunal in this case did not make the same mistake as the Tribunal in Cheesman.  However, that point is, perhaps, a diversion from the main question which we must decide and which remains unanswered by Cheesman which did not need to and did not address that question.  We should add that we entirely accept Mr Swift’s submission that the Tribunal did not find that Area 2 had been a discrete economic entity prior to the end of the original Major Voids Contract.  Had the Tribunal so found, they would have been able without difficulty to proceed to the question of transfer.  However, the potential watering down of the protection provided by TUPE which we have discussed above may arise in cases in which the separate parts into which the pre transfer undertaking has been divided were not of themselves individual economic entities before the division - indeed that is likely frequently to be the case.  Mr Swift accepted that the situation which arises in this case has not arisen for decision before, at least in any of the reported cases.  He submitted that the reason for that was that the answer was obvious, namely that in the absence of identity of economic entity before and after the change in arrangements there could be no relevant transfer within TUPE or within the terms of the Acquired Rights Directive.  

37.	Mr Brown submitted that there is a transfer within Regulation 3 of TUPE if parts of an undertaking are transferred but, viewed as a whole, the undertaking - albeit operated in parts - can be seen to have retained its identity; the fact, he submitted, that there have been changes in the manner in which the undertaking is operated is irrelevant as long as the identity of the undertaking is not fundamentally altered.  A division of the undertaking into two or more parts did not necessarily destroy the identity of the undertaking; here the same undertaking was found by the Tribunal in paragraph 57 of their decision to continue in the hands of FWA in relation to Area 2 and the other successful tenderers in relation to Area 1; there was therefore, on the findings, an economic entity or undertaking which retained its identity but was operated in two different sections.

38.	Alternatively, Mr Brown submitted, there was a transfer of part of the undertaking operated by Botes to FWA which transfer was a relevant transfer within Regulation 3 of TUPE.  It was not the law, he submitted, that for there to be a relevant transfer of part of an undertaking that part had to have been a separate economic entity on its own before the transfer.  The preamble to the Directive, he reminded us, referred expressly to transfers of undertakings, businesses or parts of businesses as did the specific provisions of both the Directive and TUPE which we have set out earlier in this judgment.  Decided cases, he submitted, demonstrated that changes in the structure of the operation of an undertaking were not necessarily inconsistent with a relevant transfer; e.g. Porter v Queens Medical Centre (Nottingham University Hospital) [1993] IRLR 486.

39.	In our judgment the Acquired Rights Directive and TUPE envisaged, when including within the protection, in the case of the Directive, to be provided by Member States and, in the case of TUPE, to be provided in the United Kingdom, the granting of such protection to cases in which the undertaking or entity in the hands of the new employer was structurally different from and was only part of the undertaking or entity in the hands of the old employer.  We do not regard the provisions of the Directive or TUPE which apply that protection to the case of transfer of part of an undertaking as necessarily requiring that the part transferred was of itself a separate economic entity before transfer.  Such a requirement appears to us to be neither logical nor practical; it would not be logical because, if the part transferred had to be an individual entity prior to transfer, there would be no need to treat the case as one of the transfer of a part; the case could be seen simply as a transfer of an entity which did not lose its identity after transfer.  It would not be practical because there must inevitably be cases in which a body decides to contract out one or more of its activities which was or were not, in its own hands, separately operated which become separately operated in the hands of the contractors who take up the activities; similarly in a second generation contracting out.  We do not believe that TUPE does not or cannot apply in such a situation.  

40.	We have already set out the reasons why, in our view, the conclusions for which Mr Swift contends on this issue potentially weaken the protection given to employees by TUPE to a substantial degree.  In choosing between the rival contentions, we are entitled to take into account that those of Mr Brown, supporting the decision of the Tribunal on this issue, preserve at least to an important extent the purposes and intentions of the Acquired Rights Directive and of TUPE in a situation in which, were the contrary contentions to be preferred, those purposes and intentions would be at real risk not only in cases of second generation contracting out, as in the present case, but on a wider basis.  Further, if for there to be a transfer of part of an undertaking, that part has of itself to have been an individual economic entity before the transfer, it would seem that the provisions for protection in the case of a transfer of part of an undertaking would be unnecessary.  

41.	We should make it clear that we do not take the view that in every case as a matter of law where an entity is split into parts there will be a transfer falling within Regulation 3 of TUPE; one can envisage circumstances in which the degree of fragmentation might be such that what emerged was not recognisably the same entity or part of the same entity when viewed as a whole and/or circumstances in which an individual separated part or even all the separated parts were not of themselves stable economic entities; if the Tribunal so found on the facts, it would not be open to them to proceed to consider whether there was a transfer; but on the findings of fact in this case the Tribunal were in our judgment not precluded in principle from so proceeding, as they did, on the basis that the undertaking carried out in Area 2 by FWA from April 1999 was a part of the undertaking or entity operated by Botes up to that time and that therefore, there could in law, on the facts as found, be a transfer from Botes to FWA within Regulation 3 of TUPE of that part of Botes’ undertaking.

42.	In summary, then, we conclude that it is not a prerequisite of a conclusion that there has been a transfer within Regulation 3 of TUPE of a part of an undertaking that that part was a separate economic identity in the hands of the transferor before the transfer.  It was, therefore, open to the Tribunal to resolve in favour of the employees the issue as to economic entity.

43.	We would be inclined to agree, too, with Mr Brown’s alternative submission that, where an undertaking or entity ceases to be operated by one employer and is thereafter operated by more than one employer in more than one part, the Tribunal is not bound to conclude that there cannot have been a relevant transfer under TUPE if, when the parts are viewed as a whole, it can be seen that the entity has retained its identity i.e. is recognisably the same entity as before the transfer, albeit that it is being operated by more than one employer.  It would be a question of fact for the Tribunal to decide whether the entity in its new form had retained its identity.

44.	However, while we are not deterred from so concluding by Mr Swift’s forthright submission to us that such a conclusion would, in effect, be a legislative act on our part and are prepared to express our view that we prefer Mr Brown’s submissions, it is unnecessary for us to express any final conclusion in this area in the light of our conclusions that it was open to the Tribunal to conclude, as they did, on the facts of this case, that what was in the hands of FWA from April 1999 was, a part of the undertaking which had previously been in the hands of Botes, which part was capable of being transferred to FWA under TUPE.

Transfer
45.	The Tribunal found, at paragraphs 32 and 33 and at paragraphs 54 and 55 of their decision, that no assets were transferred from Botes to FWA and that no employees were transferred because FWA honestly believed that Botes had deliberately manipulated the situation on the ground so as to divest themselves of costly employees and because FWA honestly believed, on the basis of legal advice that they were entitled to refuse and to take over the employees.

46.	Mr Swift submitted that, on these findings of fact, it was not open to the Tribunal to conclude that there was a relevant transfer unless they found that FWA had taken on none of the Area 2 employees solely in order to avoid TUPE.  His argument at the original hearing of the appeal can be summarised, we hope, without any disrespect to it or the cogency with which it was put before us, in this way:-

(i)	The mere fact that the service provided by the previous contractor and successor contractor is similar does not of itself support the conclusion that an economic entity has been transferred; an entity cannot be reduced to the activity entrusted to it; and the mere loss of a service contract to a competitor cannot by itself indicate the existence of a transfer.  See Suzen at paragraphs 15 and 16 of the judgment of the European Court of Justice, quoted above at paragraph 30 of this judgment, and repeated in Oy Liikenne at paragraph 34 of the judgment of the European Court of Justice in that case.

(ii)	Where the activity of an entity is based on manpower, there may be a transfer where the new employer in addition to pursuing the activity in question takes over the major part of the employees assigned to that activity; see paragraph 21 of Suzen.

(iii)	In Oy Liikenne A-G Leger stated that, for the identity of the undertaking to have been maintained after the transfer:-

““there must have been the transfer of the means necessary to undertake the activity in question, or of the means required to operate it, having regard to the nature of the entity transferred.  This second condition can be defined as ‘identity of the entity’””

(iv)	These principles were adopted in the United Kingdom in the paragraphs from Cheesman which we have set out earlier in this judgment at paragraph 34 above, and in ADI (UK) Ltd v Willer [2001] IRLR 543, particularly in the judgment of May LJ.

(v)	The only circumstances in which it was open to a Tribunal to conclude that there was a transfer in circumstances in which, as in this case, the successor contractor was providing a similar service to that of a previous contractor but had taken on none of the assets or employees of the previous contractor were those in which the successor contractor did not take on the employees of the previous contractor deliberately in order to avoid the application of TUPE; for this proposition Mr Swift relied upon the decisions of the Court of Appeal in ECM (Vehicle Delivery Service) v Cox [1999] IRLR 559 and ADI (supra).

(vi)	But in this case the Tribunal found no such motive on FWA’s part; FWA did not refuse to take on the employees in order to avoid the application of TUPE but because they genuinely believe they were not obliged to take on the employees to whom TUPE did not, as they understood it, apply.  In other words FWA were not acting deliberately so as to avoid the effects of TUPE but believed that they were acting consistently with TUPE.

47.	After the conclusion of the original hearing it became known to us that an appeal against the decision of the Employment Appeal Tribunal in RCO Support Services v Unison[2000] IRLR 1502, which authority had been relied upon by Mr Brown on the transfer issue, was about to be heard in the Court of Appeal; because that decision was wholly or principally concerned with the circumstances in which there can be a relevant transfer under TUPE in a factual situation similar to second generation contracting out of a labour-intensive service, we thought it right to ask the parties whether they wished to present any further arguments to us in writing or, if they so desired orally, in the light of the decision of the Court of Appeal.  That decision was handed down on 12 April 2002 and is reported at [2002] IRLR 401.  Eventually, FWA decided that they wished to present further oral argument; and it was for that purpose that we held a further hearing in November 2002, it having proved impossible to re-assemble all concerned at an earlier date.

48.	At that hearing Mr Swift submitted that the Court of Appeal’s decision in RCO broadly supported the analysis which he had put forward at the first hearing of this appeal and underlined the errors which, on FWA’s argument, the Tribunal had made in deciding the issue of transfer against FWA on the basis set out in paragraphs 52-58 of their decision.

49.	Mr Brown’s submission, supported by Mr Gumbiti-Zimuto on behalf of the employees, were in outline:-

(1)	The propositions set out in the extract from Cheesman quoted above were accepted as correct.

(2)	Thus the first two principles which we have set out in our summary of Mr Swift’s argument on this issue, which are enshrined within those extracts from Cheesman, were not in dispute.

(3)	But Cheesman also established, in the light of the Court of Appeal’s decision in ECM (Vehicle Delivery Service) v Cox (supra), (a) that the factual appraisal as to whether there has been a transfer is to be made by the National Court - and, in the United Kingdom, by the Tribunal and (b) where no employees are transferred the reason why that is the case can be relevant as to whether or not there has been a TUPE transfer.

(4)	In looking at the reason why no employees are transferred, the Tribunal is entitled to look broadly at the facts; it is not necessary for the reasons given by the successor contractor to be one which involves the specific motive of avoiding, by not taking on any employees of the previous contractor, what that contractor knows or believes will otherwise be the effect of TUPE; an innocent reason, if it has that effect, may be sufficient.

(5)	Whether, having regard to the objective facts and the successor contractor’s reasons for not taking on the employees there is a transfer is a question of fact to be resolved by the Tribunal which may not be attacked on appeal save on the usual and familiar principles on which a factual finding can be attacked.

(6)	In this case FWA had been warned of Southwark’s view that TUPE would apply and that tenders would be assumed to provide for TUPE costs, unless stated to the contrary (Tribunal’s decision paragraph 10); there was no evidence that FWA had expressly tendered on the basis that TUPE did not apply (the tender document permitted tenderers to state whether their tender was or was not based on TUPE); on 11 March FWA asked for details of personnel liable to transfer under TUPE, which details were provided on 16 March; but thereafter FWA changed their mind and decided to take a hard line on the basis of their belief that TUPE would not apply.

(7)	On the facts it was open to the Tribunal to decide the transfer issue as they did and on the basis that they set out in paragraphs 52-58 of their decision.

50.	At the further hearing Mr Brown submitted that the Court of Appeal decision in RCO supported his earlier argument in that the Court of Appeal rejected the argument that there could be no transfer of an undertaking if neither assets nor workforce were transferred, held that whether or not the employees were taken on was only one factor in a multifactorial approach and held that the Court could look at the circumstances of the decision not to take on employees generally and not merely at whether the successor contractor had the specific motive of avoiding the TUPE consequences of taking them on.  He further submitted that the Court of Appeal held in RCO, consistently with the European decisions, that the crucial issue was retention of identity and that the fact that the successor contractor was willing to employ he dismissed employees on its own terms was relevant to that crucial issue.  

51.	In a situation in which there is already a large body of authority at the level of the Employment Appeal Tribunal and the Court of Appeal in which the effect of successive decisions of the European Court of Justice has been fully analysed and the principles which should be applied, having regard to those decisions, in the United Kingdom have been set out in considerable depth and detail, we take the view that it would be unhelpful for us to seek to add to the now established jurisprudence in this area by embarking on a fresh analysis or by restating those principles.  Further discussion of the extent to which the principles set out by the European Court of Justice in Spijkers and other early cases as to transfer under the Acquired Rights Directive were affected unfavourably to employees by the decision in Suzen or as to the extent to which that decision has been clarified by subsequent decisions of the European Court of Justice is unlikely to be fruitful; these issues were fully considered by the EAT in Cheesman and by the Court of Appeal in ECM, ADI and RCO.  In paragraph 20 of his judgment in ADI, May LJ said:

“It is clear that the state of the European and domestic authorities is unsatisfactory.  I think that the underlying reason for this is that there has, as I have said, been judicial emasculation of the concept of legal transfer, but the language of transfer is retained.  It is not necessary for there to be anything which would normally be described as a transfer of an under taking between and first subsequent employer.  Speaking generally, the Regulations can apply when work or services cease to be carried out by one organisation and begin to be carried out by another.  The change can be affected by the person benefiting from the work or services.  The Council Directive and the 1981 Regulations have a general purpose of protecting the employment of the employees of the first organisation.  The definition of when this is achieved and when it is not has lost such clarity as might originally have been achieved from the concept of legal transfer or merger.  The concept of an economic entity which retains its identity and is capable of being transferred within the Directive and the Regulations now resides in paragraph 1(b) of Article 1 of the Amended Directive.  Unfortunately, the amendment scarcely achieves the declared objective of clarifying ‘the legal concept of transfer’ …”

52.	In the circumstances while the invitation to embark on a further analysis of decisions which have been considered by the Court of Appeal on a number of occasions in the last few years is intellectually attractive, we believe that it should be resisted save in so far as it is necessary for the purpose of considering the submissions made to us and the effect, if any of subsequent decisions of the Court of Appeal on the general propositions so fully set out by the Employment Appeal Tribunal in Cheesman.  We therefore approach this case on the basis of the principles set out in Cheesman which we have cited in full above and in particular on the basis that all factors characterising the transaction have to be considered in what is a factual appraisal (Cheesman paragraph 11(iii) and 12(i)) against the background that the aim of the Directive and therefore of TUPE is to ensure continuity of employment relationships within the economic entity irrespective of any change of ownership (Cheesman paragraph 12(iii)).

53.	We do not need to refer in detail to the decision in ECM which pre-dated Cheesman and the effect of which is included within the general propositions set out in Cheesman.

54.	In ADI the applicants were nine security officers employed to provide security services to a shopping centre.  The employers decided to terminate their contract with the operators of the shopping centre for the provision of those services; and they were to be replaced by Firm Security who informed the applicants that they did not intend to make overtime available as their predecessors had done; for this and other reasons the applicants were not keen to be transferred to Firm Security.  Firm Security informed their predecessors that:

““ … it is not our intention to take on the existing staff and [from Suzen and Betts] … it is apparent that the transfer of undertakings is not an issue in this situation”” 

The Tribunal found that there had been no transfer of undertakings both because there was no economic entity and because, in any event, there had been no TUPE transfer because neither assets nor staff had been taken over by Firm Security.

55.	The Employment Appeal Tribunal held, on appeal from the Tribunal, (1) that there was an economic entity but (2) that it was open to the Tribunal to conclude, in the absence of any transfer of assets or employees, that there was no TUPE transfer.  The Court of Appeal, by a majority, held that in the absence of any taking over by Firm Security of the predecessor’s employees in a labour intensive case there would have been no relevant transfer, apart from “the ECM point” i.e. the reasons for Firm Security’s declining to take over those employees.  The majority went on to hold that the Tribunal should have but had not considered and made findings as to the reasons why Firm Security had not taken on the employees and that it was necessary, therefore, to remit the case to the Tribunal to reconsider that matter.  At paragraph 35 of his judgment May LJ said:-

“Consideration does, however, have to given to the ECM point.  As Mummery LJ said in that case, it is necessary to have regard, as a relevant circumstance, to the reason why Firm Security Group did not take on the nine security officers.  Granted that, as is constantly stressed in the authorities, no one factor is determinative of whether there is a transfer for the purpose of the 1981 Regulations, in a labour-intensive case where the work or services are substantially the same and performed in the same place for the person, questions relating to the taking on of employees may tip the scales one way or the other.”

56.	At paragraph 51 Dyson LJ said:-

“But as I read his judgment, Mummery LJ is saying that the approach of the tribunal to the interpretation of the Regulations in the circumstances postulated was correct.  The reason why the employees were not appointed was a relevant circumstance, and the tribunal was entitled to take it into account in deciding whether there had been a transfer within the meaning of the Regulations.  It was not necessarily decisive because all relevant circumstances had to be taken into account: see Suzen and Allen.  But it was relevant.  In a labour-intensive case, whether the majority of the workforce is transferred is often likely to be decisive.  In other cases, the transfer of the workforce may be less significant.

57.	Both May and Dyson LJJ went on to hold that, if the reason had been “an ECM reason”, i.e. in order to avoid the application of TUPE, then there would have been, or would have been a strong case that there had been, a TUPE transfer.  However, we do not read the judgment in ADI as limiting the consideration by the Tribunal of the successor contractor’s reasons for not taking on the relevant employees to the sole reason of deliberate avoidance of the effects of TUPE.  Such a motive would provide strong, if not conclusive, evidence of the transfer; other reasons which might provide less strong evidence but which it might be open to the Tribunal to regard as influencing their decision as to whether or not there was a transfer can, in our judgment, be considered along with all the other relevant facts as part of the multifactorial exercise which the Tribunal must carry out; and paragraphs 35 and 51 in the judgments of May and Dyson LJJ respectively in ADI support this view.

58.	While the focus of the majority of the Court of Appeal in ADI was on the successor contractor’s motive to avoid a TUPE transfer, the entitlement of the Tribunal to look more widely at the successor contractor’s reasons for not taking on the employees of the previous contractor is made more clear in RCO.  In that case the applicants were cleaning and catering staff providing services to in-patients at one of two hospitals in Liverpool operated by the same NHS trust.  The cleaners were employed by contractors, the catering staff by the trust itself.  In- patient care at the first hospital was phased out and transferred to the second hospital; RCO obtained the cleaning contract at the second hospital on a tender put forward on the basis that TUPE did not apply; they already held the catering contract at that hospital.  None of the cleaners from the first hospital was taken on by RCO.  Of the catering staff, most continued to be employed by the trust; but some were made redundant by the trust; two of them were subsequently taken on by RCO.

59.	The Tribunal, having found that the provision of cleaning services and catering services to in patients at the first hospital were economic entities, concluded in the case of each set of services that there was a TUPE transfer.  The Employment Appeal Tribunal dismissed RCO’s appeal; and the Court of Appeal dismissed RCO’s further appeal.  Mummery LJ, with whom Hale and Pill LJJ agreed, identified two areas of debate which he described as “the Suzen point” and “the ECM point”.  As to the former he said, at paragraphs 24-26 of his judgment,:-

“24	The Suzen point: conclusion
I agree that it has become clear from Suzen and later judgments that the Court of Justice now interprets the Directive as setting limits to its application in contracting-out cases, which were not expressly identified in Spijkers [1986] ECR 1119, or in Schmidt and other earlier judgments of the Court of Justice.  In particular, the mere fact that the putative transferee carries on the same activities or supplies the same services as the putative transferor had done does not by itself support the conclusion that an entity retains its identity.  It is not correct to treat that single circumstance as determinative in favour of a transfer.  Indeed, there may be no scope for the application of the Directive in a case where, although the same labour-intensive activities are continued or the same services are supplied by a new contractor, none of the workforce has been taken on.

25	I am, however, unable to accept RCO’s submissions that the limits on the application of the Directive set in Suzen mean that, as a matter of Community law, there can never be a transfer of an undertaking in a contracting-out case if neither case assets nor workforce are transferred; that the only legally permissible conclusion on the facts of this case was that, as none of the workforce were taken on by RCO, no transfer could have taken place; and that the employment tribunal must have erred in law in concluding that there were in fact transfers within the meaning of TUPE.
26	I do not read Suzen as singling out, to the exclusion of all other circumstances, the particular circumstance of none of the workforce being taken on and treating that as determinative of the transfer issue in every case.  That interpretation of the Directive would run counter to what is described in RCO’s submissions as the ‘multifactorial approach’ to the retention of identity test in Spijkers.  Whether or not the majority of employees are taken on by the new employer is only one of all the facts, which must be considered by the national court in making an overall assessment of the facts characterising the transaction.  Single factors must not be considered in isolation.  As the Court of Justice held in the key passages of its judgment in Spijkers [1986] ECR 1119 at 1128-
‘11. …[T]he decisive criterion for establishing whether there is transfer for the purposes of the Directive is whether the business in question retains its identity.
12.  Consequently, a transfer of an undertaking, business or part of a business does not occur merely because its assets are disposed of.  Instead it is necessary to consider, in a case such as the present, whether the business was disposed of as a going concern, as would be indicated, inter alia, by the fact that its operation was actually continued or resumed by the new employer, with the same or similar activities.
13.  In order to determine whether those conditions are met, it is necessary to consider all the facts characterising the transaction in question, including the type of undertaking or business, whether or not the business’s tangible assets, such as buildings or moveable property, are transferred, the value of its intangible assets at the time of the transfer, whether or not the majority of its employees are taken over by the new employer, whether or not its customers are transferred and the degree of similarity between the activities carried on before and after the transfer and the period, if any, for which those activities were suspended.  It should be noted, however, that all those circumstances are merely single factors in the overall assessment which must be made and cannot therefore be considered in isolation.
14.  It is for the national court to make the necessary factual appraisal, in the light of the criteria for interpretation set out above, in order to establish whether or not there is a transfer in the sense indicated above.’

60.	As to the latter Mummery LJ repeated, at paragraph 29 what he had said in ECM at page 562, namely:-

“‘The [employment ] tribunal was entitled to have regard, as a relevant circumstance, to the reason why those employees were not appointed by ECM.  The Court of Justice has not decided in Suzen or in any other case that this is an irrelevant circumstance or that the failure of the transferee to appoint any of the former employees of the transferor points conclusively against a transfer.’” 

61.	Mummery LJ continued, at paragraphs 31-36 of his judgment:-

“31	ECM point: conclusions
The employment tribunal did not, of course, have the benefit of the judgments of this court in ADI.  Its decision is, however, consistent with the view of the majority in ADI that Suzen does not require the national court to exclude from its consideration of all the facts characterising the transaction the circumstances of the decision by the putative transferee not to take on the workforce.

32.	There is a crucial disagreement on the legal consequences of such a decision.  In reliance on Suzen, RCO asserts that the fact that none of the workforce was taken on by it is conclusive against a transfer.  For reasons already explained, I do not regard that submission of law as well founded.  The fact that none of the workforce is taken on is relevant to, but not necessarily conclusive of, the issue of retention of identity.  As it is a relevant factor, it is necessary for the employment tribunal to assess its significance by considering the context in which the decision was made.  In the present case RCO positively said, in the context of a disagreement as to whether TUPE applied, that it would take on the cleaners employed by Initial at Walton, if they resigned from Initial (paragraphs 4(e) and 6(a)-(c) of the extended reasons).  There was no error of law by the employment tribunal in taking this fact into account, in addition to the other facts referred to in the extended reasons and summarised in this judgment.  RCO’s admitted willingness to take on the workforce by way of re-employment on its terms and conditions, in preference to automatic employment on the terms and conditions applicable as a result of a transfer under TUPE, was relevant to the crucial issue of retention of identity.  The fact that RCO needed a workforce to operate the contract at Fazakerley; the fact that RCO was willing to re-employ at Fazakerley the workforce employed at Walton; and the fact that the workforce would have been taken on by RCO, if they had accepted RCO’s offer to re-employ them on its terms and conditions: all this is relevant evidence pointing to, rather than away from, RCO’s own recognition of the reality of the continuity of the entities and the retention of identity.  (I note in passing that in Schmidt, supra, the putative transferee’s offer to re-engage the employee in question was treated as a fact relevant to the issue whether the business in question retains its identity: see paragraph 17 of the judgment on p.247, which refers to Spijkers.)

33	The formulations of the rival arguments on the so-called ECM point revealed that there is a problem in identifying precisely the nature and scope of the point.  There was a dispute as to whether the point had been taken in the tribunal in the sense of ‘actual motive’ on the part of RCO to avoid the operation of the Directive and of TUPE and whether the tribunal had made any finding of fact on that point.

34	In the respondents’ submissions, it was argued that it would be contrary to the principal purpose of the Directive to adopt a construction of it which would enable an incoming contractor to avoid its application by the simple expedient of ensuring that he took on none of the previous contractor’s workforce or to control the extent of his legal obligations by refusing to comply with them in the first place.  The court ought to approach the facts as if the cleaners had been transferred.

35	In RCO’s submissions, the ECM point was treated as a matter of subjective motive of the putative transferee, which was condemned as obviously irrelevant, patently circular and plainly proving too much: the putative transferee has no obligations, unless there is a transfer and, as Suzen makes clear, a transfer cannot take place unless either assets or the workforce transfer.  In a labour-intensive case the employees are the employees are the undertaking and the undertaking cannot be said to have transferred, if they have not.  The putative transferee, who does not receive the benefit of the employees, should not be saddled with the burden of the employment liabilities.  The respondents were, for policy reasons, relying on circumstances in which there was no transfer to establish that there was a deemed transfer.  There was no support for that approach in the Directive or in the decisions of the Court of Justice.

36	As appears from paragraph 30 above, I have reached the conclusion that, as I attempted to indicate in ECM, this is not in truth a separate point.  I am inclined to accept the submissions of RCO that a subjective motive of the putative transferee to avoid the application of the Directive and TUPE is not the real point.  The relevant exercise is that in Spijkers, i.e. objective consideration and assessment of all the facts, including the circumstances of the decision not to take on the workforce.  In this case the employment tribunal was entitled to take into account the willingness of RCO to employ the Walton workforce at Fazakerley, if they first resigned and then accepted the offer supporting the retention of the identity of the cleaning and catering undertakings.”

62.	In our judgment, paragraphs 24-26 of the judgment of Mummery LJ in RCO make it clear that there can be a TUPE transfer in a contracting-out case even though neither assets nor workforce are transferred; the fact that none of the previous contractor’s workforce is taken on, even in a labour-intensive undertaking, is not of itself determinative of the transfer issue.  The Tribunal must apply a multifactorial approach to consider whether, as a whole, the undertaking has retained its identity in the hands of the successor contractors.  

63.	Paragraphs 31-36 of Mummery LJ’s judgment in RCO demonstrate, as we see it, that a successor contractor’s reasons for not taking on any of the previous contractor’s workforce are potentially a relevant factor because they go to the context in which and therefore to the significance of the fact that the workforce was not taken on.  The Tribunal were entitled to take into account RCO’s given reason, that they would only take on the cleaners if they resigned from the employment of the previous contractors.  There was no finding that RCO were deliberately trying to avoid a TUPE transfer; but their reasons for acting as they did were held to be part of the multifactorial approach to the question as to whether the cleaning and catering undertakings retained their identity and were transferred.

64.	In our judgment it follows that, in the light of the decisions of the Court of Appeal in RCO and ADI and the principles set out by the Employment Appeal Tribunal in Cheesman, the Tribunal in this case:-

(1)	were not bound to find that there was no TUPE transfer in the absence of any transfer of assets or employees.

(2)	were entitled and indeed were bound, as part of a multifactorial approach to consideration of the central issue, to consider the context in which and the reasons why FWA did not take on the employees.

(3)	in considering that context and those reasons the Tribunal were not limited to considering, as evidence in support of a transfer, only an intention on the part of FWA to avoid a TUPE transfer.

65.	It is not necessary for us to consider further the more detailed analysis of the facts put forward by Mr Brown and summarised by us above.

66.	The Tribunal, reaching their decision as long ago as February 2000 without the benefit of Cheesman, ADI or RCO, nevertheless at the beginning of their conclusions, at paragraph 52 of their decision, set out accurately the two questions which they had to decide.  Having identified the economic entity, they then considered, consistently with the approach laid down by the Court of Appeal in RCO, whether there was a retention of identity of that undertaking - or part of it (as to which we need not return in this section of this judgment); and they expressed their conclusion on that precise issue in paragraph 58.  In reaching that conclusion, they were entitled to take into account the reasons, in what was obviously a labour-intensive operation, why the employees had not been transferred.  They regarded FWA’s reasons in this case as similar to those of the successor contractor in ECM; they were entitled to do so; in each case it was that reason which led the successor contractor not to take over the employees of the previous contractor and led to their seeking to argue, in a labour-intensive operation, that there was no transfer because no employees had been taken over.  Subject to perversity, which was not argued by Mr Swift, the Tribunal’s conclusion upon the facts was one which, in our judgment, was open to them and which, therefore, cannot be successfully attacked on appeal.

67.	For these reasons we reject this head of FWA’s appeal.

Mr Vaughan
68.	The Tribunal found, at paragraph 61 of their decision, that each of the employees, save for Mr Potter and Mr Salih, was employed in the part of the undertaking transferred to FWA.

69.	Mr Swift accepted that, on the hypothesis that there was a TUPE transfer, the question, in the case of each employee, was whether he was working in Area 1 or Area 2 immediately before the transfer and that the Tribunal had correctly posed that question to themselves in paragraph 59 of their decision; but, in the case of Mr Vaughan, he pointed out that, unlike the other five of the six employees found by the Tribunal to have been working in Area 2 immediately before the transfer, he was found, in paragraph 27 of the decision, in the last week before the transfer to have divided his time between Coburg Road, in Area 2, and Durfy House, in Area 1.  This, said Mr Swift, was a finding of fact which indicated an assignment equally to Area 1 or Area 2; and, in the absence of any further finding or explanation, there was insufficient to support the conclusion as to Mr Vaughan’s case set out in paragraph 62.

70.	This analysis, it seems to us, concentrates only on the last week of Mr Vaughan’s employment by Botes; the Tribunal did not refer only to or make findings only as to that week; the Tribunal in paragraph 27 of their decision prefaced their reference to the last week by finding that in the last four weeks prior to the transfer Mr Vaughan was mainly at Coburg Road i.e. in Area 2.

71.	In our judgment the Tribunal, in considering whether Mr Vaughan was employed immediately before the transfer in Area 2, were not limited necessarily to looking at the last week, day or hour of Mr Vaughan’s work for Botes; they were entitled to look overall at whatever period they felt appropriate; and it was open to the Tribunal, on the factual basis that Mr Vaughan worked mainly in Area 2 in the last four weeks prior to the transfer, albeit that he spent some time (of unspecified duration) outside that area in the last week, to conclude that Mr Vaughan was employed in Area 2 immediately before the transfer.

72.	Accordingly, we also reject this head of FWA’s appeal.

The cross-appeal
Mr Potter
73.	Mr Brown submitted that the Tribunal had not made any finding as to how much of Mr Potter’s time was spent on Area 1 or Area 2 and that, in the absence of such a finding, Botes’ “paper exercise” allocation of Mr Potter to Area 2 could not be ignored but was evidence of his being employed in Area 2 immediately before the transfer.

74.	We do not agree; the Tribunal expressly found in paragraph 23 and repeated at paragraph 60 that Mr Potter continued to work all over the area covered by the original Major Voids Contract and that after 18 March 1999 i.e. in the last few weeks of his employment by Botes, whatever Botes were trying to achieve on paper, he was not even employed substantially in Area 2.  That finding is sufficient to sustain the Tribunal’s conclusion, at paragraph 60, that Mr Potter was not employed in Area 2 immediately before the transfer.

Mr Salih
75.	There is no doubt that Mr Salih was off work through ill health from January 1999 up to the date of the transfer.  The Tribunal found that he remained in the employment of Botes until he was either transferred under TUPE or dismissed; but, the Tribunal found, he was not in fact employed in Area 2 and therefore was not transferred to FWA (paragraph 61).

76.	Mr Brown’s submission in Mr Salih’s case was that he had been part of the loose gang who worked together for a year before mid-1988 and some of whom would be working together at any given time thereafter, as described in paragraph 9 of the decision; Mr Salih was in the same situation, before becoming ill, as the other employees (save for Mr Potter); and in his case the essential question which the Tribunal had to answer but neither posed nor answered was - where would be have been working if he had not been away from work from illness or, to put in another and perhaps more accurate way, what was his contractual place of work immediately before the transfer from attendance at which he was excused by reason of his illness?

77.	Mr Swift submitted that the Tribunal had made a finding of fact that Mr Salih was not employed in Area 2 immediately before the transfer, that when Mr Salih went off work there was no Area 2 and that a sick employee would not be allocated to any area until fit to return to work.

78.	We take the view that the appropriate test in Mr Salih’s case was not whether he was in fact working in Area 2 immediately before the transfer; plainly he was not; but that was not because he was working elsewhere but because he was excused from attendance at his contractual place of work as a result of his illness.  The appropriate test, in our judgment, was whether he was employed to work in Area 2 immediately before the transfer i.e. whether Area 2 was his contractual place of work and that was where Botes would have required him to work immediately before the transfer, had he not been excused from attendance.  The same test would apply to an employee who was on holiday, on study leave or on maternity leave.  However the Tribunal did not ask themselves where Mr Salih would have been required to work had he been fit to do so; and Mr Brown conceded that we could not answer that essentially factual question.

79.	Accordingly, we see no alternative but to remit Mr Salih’s case, if possible to the same Tribunal, for the Tribunal to determine the answer to that question.  It may well be necessary for some further evidence and/or argument to be presented to the Tribunal; whether and to what extent that will be so is for the Tribunal to determine.

Conclusion
80.	For the reasons we have set out, the appeal of FWA is dismissed; the cross appeal of Botes as to Mr Potter is also dismissed; the cross appeal as to Mr Salih is allowed to the extent that Mr Salih’s case is remitted to the same Tribunal to be determined in accordance with the terms of paragraph 79 of this judgment.