Employee rights after a business is bought from administration
And what is going to happen to Thomas Cook employees now?
Buying a business out of administration can be a good option for many reasons. The right buyer, with the right skills and experience, may be able to return it to profit, which means that jobs can be saved. However, there are also scenarios, like with the recent demise of travel giant Thomas Cook, where administration isn’t even an option. Thomas Cook employees have found themselves immediately jobless with hopes of a rescue package no longer on the cards.
What does the future hold for Thomas Cook’s 9,000 employees, and what do buyers of distressed businesses need to be aware of, in terms of employee rights?
Why couldn’t Thomas Cook go into administration?
This is the question many commentators are asking, and there is one simple answer: it was just too big for any professional services firm to take on.
In order for a business to successfully go into administration, a professional services company, such as KPMG or PwC for example, must be willing and able to fund it while the administration team finds a buyer. In the case of Thomas Cook, it was already operating with debts of £1.7bn, while the business itself was incredibly complex, including an airline, a travel retailer and a tour operator.
Although it seemed a valuable bailout was on the cards, a last-minute request for a further £200 million was a step too far and the Civil Aviation Authority announced its immediate fall into liquidation by way of a winding up order issued on Monday 23 September. Some 150,000 holidaymakers were left stranded overseas, while 9,000 employees based in the UK have immediately lost their jobs.
What will happen to Thomas Cook’s employees now?
The Insolvency Service, together with the government, have released some guidance for Thomas Cook employees. The guidance isn’t all that clear for employees, but the gist is that they need to contact ‘special managers’, who are insolvency practitioners from AlixPartners, appointed by the court. These special managers will then provide employees with a case reference number, allowing them to apply online for redundancy money owed to them.
In terms of those employees’ rights though, that’s it. They are now redundant and can start looking for a new job, but many are concerned that they won’t receive backpay. Meanwhile, the chair of the business, energy and industrial strategy committee, MP Rachel Reeves, says an enquiry will be launched into what happened at Thomas Cook.
She explained: “This latest corporate failure has shone a light once again on the use of aggressive accounting methods to aid bumper pay-outs to company executives and the apparent inability of auditors and regulators to curb these practices in the wider interests of shareholders, investors, and the public.”
And for employees of businesses that do go into administration…
WHAT HAPPENS FIRST?
When the administrators are called into a struggling business, it means that there will be attempts to save the business and possibly sell it off – in part or in its entirety. At this point, the administrators have 14 days to decide whether they want to retain their staff or make them redundant. Within this period, staff are not able to launch legal cases against the employer, as a moratorium on legal action applies during this period.
After 14 days, one of the following two scenarios applies:
Scenario 1. Staff are told they will not be kept on and join the list of creditors that can claim monies owed, much like Thomas Cook’s employees.
Scenario 2. They are kept on by the administrators who then become their ‘employer’ and take over responsibility for their employment rights being upheld.
Staff also become ‘preferential creditors’ in this scenario, which means they have a slightly better chance of recovering any unpaid wages in the event of some cash becoming available.
If the administrator agreed to keep staff on, they are able to make some changes to employment contracts under the ‘permitted variation’ rules, providing the changes are deemed essential for the survival of the business. It is up to the staff to then decide whether they want to continue to work under the new terms, which could include, for example, fewer hours or less pay.
WHAT HAPPENS TO EMPLOYMENT RIGHTS AFTER YOU BUY A BUSINESS FROM ADMINISTRATION?
The responsibility for employees’ rights transfers to a buyer, if one can be found. If you are that buyer, you need to be aware of the Transfer of Undertaking (Protection from Employment) Regulations, or ‘TUPE’.
In order to establish exactly what you are taking on, with regard to TUPE, it’s highly advisable to talk to an employment law expert. Buying a business and taking responsibility of its staff and their employment rights is an important undertaking, so you need to go into the process with your eyes wide open.
Here’s a brief guide to how TUPE will impact a new business owner:
You will immediately become responsible for upholding all staff employment rights and will take over the former employer’s duties, powers and liabilities with regards to employees.
Their contracts will transfer to you, and any changes made to these by the former employer or the administrators in the period preceding your purchase of the business will be included in those contracts.
You will be able to negotiate new terms and conditions for the employees only after a year has past following the acquisition from administration. However, these new terms and conditions are not allowed to be less favourable for the employees.
As the new employer, you can change an employee’s contract, but only adjust the terms and conditions if the survival of the business relies upon it. I.e. that there are economic, technical or organisational (ETO) reasons.
If you have existing employees with different contracts to those of the staff you have taken on as a result of buying a business out of administration, you may think it is reasonable to make changes to their contracts to bring them in line with those of your existing employees. However, this is not necessarily the case, especially if you are citing the transfer of ownership as the main reasons for these changes. Instead, there would have to be other clear ETO reasons for the changes.
This is perhaps one of the main problems people face, when buying businesses out of administration in sales that include staff. That’s why it pays to get some legal advice before you embark on a purchase, to ensure you are clear on the impact TUPE will have on you and your existing operations.
The new owner could be found to be unfairly dismissing staff, if they do not have a fair ETO reason for ending staff contracts. If an employee is let go simply because of the transferral, and that employee has had two years’ service with the company, they may be able to claim unfair dismissal in an employment tribunal situation.
As the new owner, you may not receive all the information you expect on the employees you are taking on, when you acquire a business out of administration. The former employer is only compelled to provide ‘employee liability information’, which, for example, includes details of the employees past disciplinary action or grievances relating to the employee.
There’s no getting around the fact that the TUPE regulation can have major impact on an incoming owner of a distressed business. If you are considering taking on staff in this situation, don’t underestimate the impact of this legislation. However, it is in no way a reason to put you off embarking on a turnaround project, providing you have the right legal help and advice in place. It is, a major responsibility to both save jobs and then become an employer, and it’s a decision not to be taken lightly.
We imagine the employees at Thomas Cook would have been grateful for the chance to keep their jobs through the administration process and if the business had been managed more effectively, this may have been possible.
Administration List published an article ‘what rights employees have when a business is bought from administration?’ on the 2nd July 2019 and has subsequently updated this article on 9th October 2019.