Post Transfer Dismissals – ETO Reasons

The primary purpose of the EC (Protection of Employees on Transfer of Undertakings) Regulations 2003 (“TUPE Regulations”) is to prohibit a purchaser of a business from dismissing employees because of the transfer of a business.

However, that prohibition is not absolute. Regulation 5(2) provides that a dismissal for economic, technical or organisational reasons, which entail changes in the workforce, is permitted (“ETO reasons”).

Accordingly, a potential purchaser of a business may consider relying on the provisions of regulation 5(2) to dismiss employees after the purchase of a business taking redundancy costs into account when determining the purchase price of the business.

What is an economic, technical or organisational reason? 

While there is no statutory definition of the phrase “economic, technical or organisational reasons entailing changes in the workforce”, it has been held to encompass a redundancy situation.

Accordingly, if redundancies take place following the transfer of a business, there should be no difficulty provided that there is no unfair selection for redundancy and proper procedures are followed in effecting the redundancies.

Potential purchasers need to bear in mind that the vendor’s employees and the purchaser’s employees have to be pooled together for consideration for redundancy selection. This is extremely important. It is not a case of selecting those employees who have just transferred to the purchaser for redundancy.  Instead, what is required is that the transferred employees are pooled with the purchaser’s employees for redundancy selection.  Failure to correctly pool the employees for redundancy selection could leave the purchaser exposed to a successful claim under the TUPE Regulations or the unfair dismissals legislation.

Generally it is accepted that the ETO reasons are as outlined below:-

Economic grounds are those which concern the profitability or market performance of the business post-transfer and the cost of running the business.

Technical grounds are those concerned with a need for different technical skills which will be required in running the business post transfer.

Organisational reasons refer to reorganisation of the work done such that it is different in some structural, departmental, administrative or managerial way.

Reasons of Purchaser and not the Vendor 

ETO reasons must be those of the purchaser rather than the vendor.  In order for employers to rely on the ETO reasons for a dismissal, they must be able to show that their decision was genuinely based on a change to the workforce, after the transfer, based on one of the relevant grounds.

While in some circumstances a pre transfer dismissal by a vendor, at the request of the purchaser, may be justified for ETO reasons, it leaves the vendor at risk of being drawn into litigation with affected disgruntled employees.  In order to defend such a claim, the vendor needs to rely on the purchaser’s reasons for needing to change the workforce and it must be in a position to ensure those reasons come within the ETO reasons.  Given the risks involved to the vendor and that the reasons must be those of the purchaser, dismissals for ETO reasons should, if possible, be dealt with by the purchaser.

Harmonising Terms and Conditions and ETO Reasons

The TUPE Regulations provide that transferring employees transfer on the same terms and conditions of employment to the purchaser.  Variation of terms and conditions of employment arising from, or connected with the transfer are not permissible.

However, it is permissible to make changes to terms and conditions of employment where the changes are unrelated to the transfer.  These can be done by achieving agreement to the change from the employees concerned.

Whether a change is transfer related will depend on the circumstances.  However, where employees refuse to agree to the harmonised terms, and are dismissed, it is unlikely that an employer will be able to rely on the ETO reason as a defence.  This is because it is unlikely that the harmonisation (and resulting dismissal) will entail a “change in the workforce”. While reducing a transferred employee’s wage may be for economic reasons for example, there is unlikely to be a concomitant “change in the workforce”.

In order to rely on ETO reasons for a dismissal, an employer must not only establish an economic, technical or organisational reason, but that dismissal must also involve a change in the workforce. Essentially, this means that changes to the workforce numbers or job functions must be the objective, not just a possible consequence of some action in order for a purchaser to rely on the ETO defence.

For further information on this topic, please contact Laura Graham at lgraham@reddycharlton.ie