The Liverpool Law Review Vol.

XVII(2) [1995]

THE EMPLOYER R I G H T T O MAKE UNILATERAL CHANGES

T O EXISTING CONTRACTS OF EMPLOYMENT AND T H E EC
REGULATED TRANSFERS DIRECTIVE

Kevin Wardman *

I. Introduction

It is intended in this article, through an examination of some of the

more recent court decisions in the area, to address the question of the
extent to which, under U.K. law, existing employer rights to make
unilateral changes to contracts of employment have been affected by the
Acquired Rights Directive 77/187.1 Also, closely linked to the latter, how
the defence of dismissal for economic, technical or organisational reasons
contained in the Directive, 2 operates and affects this particular employer
right.
It soon became apparent after the Danish case, Rask and Cbristensen
v. Iss Kantineservice A/S 3 that the Directive had a wide and potentially far
reaching application. Virtually all forms of employer organisational re-
structuring can be affected; 4 not only do transfers of complete
organisations come within the Directive, but also most situations where
any individual activity is transferred from one undertaking to another. 5

* LL.B., LL.M., A.C.I.S., Senior Lecturer in Company Law, Liverpool John

Moores University.
1 Council Directive 77/187/EEC of 14th February 1977, incorporated into
U.K. law by the Transfer of Undertakings Regulations 1981 as amended by
the Trade Union Reform and Employment Rights Act 1993; hereinafter
referred to as the Directive.
2 Article4(1) of the Directive.
3 [1993] I.R.L.R, 133, following Dr Sophie Redmond Stichting v. Bartol
[1992] I.R.L.R. 336, ECJ and the Spijkers Case 24/85.
4 In either the public or private sector, Dr Sophie Redmond Stichting v. Bartol
[1992] I.R.L.R. 336, ECJ.
5 European Commission proposals for a re-drafting of Directive 77/187
adopted by the Commission on 8th September 1994 (hereinafter referred
to as the New Draft Proposals) would specifically exclude an activity
transferred which does not attach to an economic entity (see Draft Proposal
for a Directive (1994) Article 1 (1)). The precise meaning of this exclusion
198 The Liverpool Law Review Vol. XVII(2) [1995]

It was shown in the Rask Case6 that where a particular activity is

being transferred it is not necessary to show that the activity is a central
part of an employers' business undertaking, thus, ancillary functions will
also be covered. Nor is there a requirement that there be a profit motive
for the transfer, or even a physical transfer of assets, clients or customers
associated with a particular function. 7 The key criteria is simply whether
a particular function, previously carried on within an organisation, is
now being continued or resumed under the control of another, that is,
whether a discernable "economic entity" is transferred. 8 One
commentator has remarked that the point has now been reached where,
"if people are interested in bidding for or taking over (some function or
activity) ... it may have many of the characteristics of an economic
entity, and if what is being carried on is essentially the same .... it will
have many of the characteristics of a regulated transfer having
occurred".9 The debate has therefore now shifted from one of what can
constitute a transfer for purposes of the Directive to the consequences
which attach for existing rights and duties of those employees and
employers involved. A central issue for present purposes will be the
effect which the Directive has upon an employer's powers, duties and
liabilities existing prior to a transfer which, by virtue of the Directive, are
thereby passed on to a new employer; in particular, any rights of an
employer to make unilaterally changes to the contracts of employment of
those employees affected by a transfer coming within the Directive. The

is unclear, but it appears to be an attempt to make a distinction between a

particular organisational activity - - for example the provision of catering
services for employees, which could constitute an economic e n t i t y - and
an individual job activity carried on within that organisational function
for example, contracting out of the making of sandwiches, which would not
be sufficient to constitute an economic activity. There needs to be a "self
contained set of elements pursuing a specified economic (organisational)
objective", para. 18. It is apparent, however, that, at the moment, most
forms of"contracting out" and "market testing" will be covered.
Supra n.3.
Kenny v. South Manchester College [1993] I.R.L.R. 265, amongst others.
Most recently shown in Charlton v. Charlton Thermosystems [1995] I.C.R.
56 following the earlier decisions of Raskv. ISS Kantineservice A/S [1993]
I.R.L.R. 133, Dines v. Initial Services [1993] I.C.R. 978, Kenny v. South
Manchester College[1993] I.C.R. 935, at 940.
M. Rubenstein, "Editorial", Industrial Relations Law Review 23/7 (1994),
315.
 Employer Rights and the Acquired Rights Directive 199

importance of previously existing employer/employee rights was

recognised in Rask, 10 where it was held that the Directive could be relied
upon, in addition to the right not to be dismissed for reasons solely
relating to the bringing about of a transfer, 11 only to the extent allowable
within existing employment terms. 12 It follows that any pre-transfer
employer rights to make unilateral changes to original terms and
conditions of employment linked to that transfer, will, in part, operate
and be governed by existing U.K. law. In addition, there will be the
related issue of the meaning and extent to which the employer defence of
"justification", contained in the Directive, 13 will add to an employer's
ability to dismiss 14 where changes imposed may be shown to be fair. 15

II. Existing Employer Rights to Make Unilateral Changes to Employee

Contracts of Employment and the Directive

The Court in Rask16 attempted to make a difficult distinction

between those occasions where national law allowed an employer to
make changes to existing contracts of employment, and those instances
where changes were made principally for the purposes of enabling a
regulated transfer to take place. The latter, the court thought, would not
be allowed. It is now well established under U.K. law that a dismissal
because of an employee's refusal to accept necessary changes to his or her
contract of employment, which are reasonable and required in the
interests of the organisation as a whole, can constitute an admissible
reason to dismiss within the category of "some other substantial reason"
under s.57(1)(b) of the Employment Protection (Consolidation) Act

10 Supra n.3.
11 As discussed inAllan v. Stirling D.C. [1994] I.C.R. 434, at 439.
12 Alsoconfirmed in Kenny v. S. ManchesterCollege [1993] I.C.R. 934, at 941.
13 Article4 (1).
14 Either directly or constructively in accordance with Article 4(1), that is,
substantial changes in working conditions which are to the detriment of the
employee showing the employer to be, thereby, responsible for the
dismissal.
15 In the sense of being an admissible reason to dismiss under Section 57(2) of
the Employment Protection Consolidation Act 1978; now added to by
Article 4(1) where they are dismissals for economic, technical or
organisational reasons requiring changes in the work force.
16 Supra n3.
200 The Liverpool Law Review Vol. XVII(2) [1995]

1978. 17 Where a transfer is an integral part of some longer term

organisational re-structuring process, it may be difficult to distinguish
those changes made in order to, principally, facilitate a transfer, from
those which, although linked to a regulated transfer, form a part of some
broader management plan to carry out reasonable and necessary changes
for the benefit of the organisation as a whole. Only in the former case is
it clear that such unilateral alterations to employees' contracts will not be
allowed under the Directive. It will not be easy, as was suggested by the
Advocate-General in D'Urso v. Ercole Marelli Elettromeccanica Generale
SpA, 18 to determine those changes which would have occurred anyway,
irrespective of any transfer, from those primarily carried out in order to
bring about a ,ransfer. 19 It can be argued therefore, that to the extent
allowable under U.K. law, there is an ability on the part of an employer
to make unilateral changes to employee contract terms, and that,
provided such changes are not made primarily to facilitate a transfer,
they can be exercised legally and be capable of transfer to a new
transferee employer. It follows that there is scope for an employer to
make reasonable and necessary changes to contract terms 2~ even where
such changes are linked to a regulated transfer. 21 Can the additional
defence of "justification" contained in the Directive 22 add to or in any
way help clarify these existing employer rights, particularly as to their
compatability with Community Law?

17 Ellis v. Brighton Co-operative Society [1976] I.R.L.R. 419, George l~mpey v.

Cooper [1977] I.R.L.R. 205, Hollister v. National Farmers Union [1979]
I.C.R. 542, Chubb Fire v. Harper [1983] I.R.L.R. 311, Evans v. Elemeta
Holdings [1982] I.C.R. 323, Gilham v. Kent County Council (No 2) [1985]
I.C.R. 233, Murphyv. Epsom College [1985] I.C.R. 80,
18 [1994] I.R.L.R. 136.
19 Suggested as being a suitable criterion for determining whether or not the
employer defence under Article 4(1) of economic, technical or
organisational reasons entailing a change in the workforce, would have an
application.
20 Either short of dismissal, or for dismissals that follow any changes under
"some other substantial reason" contained in Section 57(1)(b) of the
Employment Protection Act 1975.
21 This may be a better case for an employer to argue than economic,
technical or organisational reasons under the Directive.
22 Article 4(1)of the Directive.
 Employer Rights and the Acquired Rights Directive 201

III. The Defence of "Justification" and the Management Perogative: The

"Right to Manage"

The leading U.K. case on the application of the employer defence of

"justification" for dismissals made for economic, technical or
organisational reasons requiring a change in the workforce contained in
the Directive, is an early decision, Berriman v. Delabole Slate Ltd 23 Here
employees of a transferor employer had imposed upon them new
contract terms by the new transferee employer. The terms were less
favourable but necessary in order to bring the new employees into line
with the existing employees of the transferee. The Employment Appeal
Tribunal and Court of Appeal held that such a reason was not within the
scope of the justification defence contained in the Directive, there had to
be evidence of some economic, technical or organisational reason which
required a change in the workforce as a whole. This might be evidenced,
for example, by a need to reduce the overall numbers of employees
required (as in a redundancy situation), or some significant change in
job functions.24 This early decision puts a considerable limitation on
the employers' ability to rely upon the defence in the Directive. It is
unlikely that any transfer will take place in a vacuum, there will almost
always be some economic, technical or organisational reason associated
with a transfer. If only those economic, technical or organisational
reasons which require changes to be made to the whole of the workforce
of either the transferor or transferee are required, then transfers of single
discrete activities, though linked to an economic entity, are unlikely to
qualify. If we add to this the opinion of the Advocate General in
D'Urso 25 that "only dismissals which would have been made in any case"
are capable of falling within the defence contained in the Directive, then
Article 4 will have a very limited application indeed. 26 Given the

23 [1985] I.C.R. 546.

24 This has led to the criticism that "the more disadvantaged an employee is
by the change, the less well protected he is", J. McMullen, "Takeovers,
Transfers and Business Re-Organizations", 21/1 Industrial Law Journal
(1992), 24. This approach, however, has been followed in other U.K.
decisions, most notably Lanev. Dyno Rodplc [1985] COIT 17833/85, also
Crawfbrdv. Swinton InsuranceBrokers [1990] I.C.R. 85.
25 [1992] I.R.L.R. 136.
26 If the current (1994) Draft proposals of the Commission for changes to be
made to the Directive are accepted, this will further limit any application of
Article 4 in that Member States would be allowed to provide that the
202 The Liverpool Law Review Vol. XVII(2) [1995]

purpose of the Directive 27 and the difficulties of distinguishing changes

solely based upon a transfer from changes which are only transfer related,
it is a surprising limitation.
A more recent case on the application of the justification criteria is
Porter and Nanayakkara v. Queen's Medical Centre. 28 Here a transferee
employer argued that the Directive did not apply because of changes in
the way in which it was intended to provide the service transferred: such
changes, it was argued, altered significantly the nature of what had been
transferred, making it no longer an identifiable "economic entity". In
addition it was argued that those employees affected were dismissed
because they were considered to be no longer suited to carrying out this
new activity; there was in effect, it was claimed, a redundancy situation.
The High Court found that the services transferred did constitute a legal
transfer of an undertaking within the meaning of the Directive,
primarily because the same organisational objective had remained after
the transfer. What had changed was the way in which that objective
would be achieved. The Court pointed out that in the provision of any
service, particularly as in the present case, medical services, there will
often be a need to make changes to the way in which a particular task is
carried out, often in the light of new and emerging knowledge and best
practice. This does not mean that the "economic entity" transferred
ceases to exist. Overall objectives might well (as they did in the present
case 29) remain unchanged. Also, there was a change in the person
"responsible for operating the undertaking", 3~ therefore a regulated
transfer had occurred. The dismissals were found to be as a direct
consequence of the transfer and without more would not have been

protection against a transfer related dismissal will only be available to those

who qualify for unfair dismissal protection (in the U.K., two years'
continuous employment).
27 Principally one of "ensuring peaceful and consensual economic and
technological restructuring whilst allowing organisations to pursue
objectives specific to a market economy of establishing the most appropriate
sites of businesses capable of implementing the large-scale economic
operations which a large market is likely to require." See European
Commission ProposalsFor A Directive Amending Directive 77/187 Sept 1994.
28 [1993] I.R.L.R. 486.
29 The providing ofpaediatric and neo-natal services.
30 Following Foreningen af Arbejddedere i Danmark v. Daddy's Dance Hall A/S
[1988] I.R.L.R., 315, E.C.J.
 Employer Rights and the Acquired Rights Directive 203

permitted under the Directive. However, the court, in referring to

Article 4, stated that such dismissals must not stand in the way of
changes in the workforce needed for economic, technical or
organisational reasons, and that the organisational changes which the
transferor intended to introduce did amount to such a reason. The
court did not refer to the Berriman decision 31, and the changes sought to
be introduced by the employer certainly did not require changes to be
made to the whole of the workforce of either transferor or transferee.
However, the changed methods which the transferee intended to
introduce in order to provide a more efficient and effective service,
meant that the original employees had become no longer suitable; in
such circumstances the dismissals were justified for reasons of
redundancy, quite apart from the transfer itself. 32 The decision can only
be reconciled with the Berriman Case if the changes introduced by the
employer are seen as being a part of existing rights, given under U.K.
law, 33 for the employer to unilaterally introduce changes. Redundancy
is a fair reason to dismiss and although the changes were linked to a
regulated transfer, they were not introduced by reason only of that
transfer.
It is clear that there is an overlap between the employer defence of
dismissal for economic, technical or organisational reasons, contained in
the Directive, and the U.K. employer right to make unilateral changes to
existing contracts of employment. For purposes of U.K. law Article 4
will constitute a new fair reason for an employer to dismiss, 34 and it will
be subject to the overall U.K. statutory test of reasonableness. 35 This
being the case, factors such as, whether an employee is being reasonably
required to adapt to new methods and techniques within the
management prerogative to manage, 36 will be relevant. Also, when

31 Supra n.23.
32 What appears to have occurred is an alteration in the employer's require-
ments for employees to do work of a particular kind, Murphy v. Epsom
College [1985] I.C.R. 80. This will amount to a redundancy situation.
33 Supra n.15.
34 Under Section 57(1)(b) of the Employment Protection Consolidation Act
1975.
35 Ibid., section 57(3).
36 Cresswellv. Board oflnland Revenue [1984] I.C.R, 508, and also Dryden v.
Greater Glasgow Health Board [1992] I.R.L.R. 469, recognising an
employer's discretion to establish working rules.
204 The Liverpool Law Review Vol. XVII(2) [1995]

applying the criteria as to the reasonableness of an employers' actions, 37

it will be necessary for the employer to show good business reasons for
any changes introduced which affect employees' contracts. 38 This might
require that the employer at least consider the legitimate needs of the
business in the light of any disadvantages which might result for
employees. 39 Clearly adequate consultation will be a part of any
assessment of employer reasonableness under U.K. law, 4~ and the
Directive itself requires of a transferor or transferee employer that they
inform and consult with representatives of employees affected by a
transfer. 41
It might at first appear important for employers contemplating any
form of re-structuring of their operations, which will involve a transfer of
some specific function to an outside party, to seek agreement with those
employees affected, and so reduce the likelihood of any subsequent
action. 42 However it is clear, following D'Urso v. Ercole Marelli
Elettromeccanica Generale SpA 43 that it is not possible for employees to
waive the rights conferred upon them by the Directive, nor can such
rights be restricted even with their consent and even where an employee
receives compensation from the employer for accepting the transfer
changes. It will certainly be a challenge to construct a contracting-out

37 Falling within an acceptable band of reasonableness as set out by Browne-

Wilkinson, P., in IcelandFrozen Fooetsv. Jones [1982] I.R.L.R. 439.
38 Ellis v. Brighton Co-operative Society Ltd [1976] I.R.L.R. 419, subsequently
modified in Hollisterv. National Farmers' Union [1979] I.C.tL 542.
39 Chubb Fire Securityv. Harper [1983] I.R.L.R. 311.
40 Polkeyv.A E Dayton Services [1988] I.C.R. 142.
41 Article 6. An area where the U.K. Government has recently come in for
criticism in not meeting the requirements of the Directive, see Commission
of the European Communities v. United I~ngdom [1994] I.C.R. 664, at 710,
which will require changes to be made to existing U.K. law shortly, see The
Commission New Draj~Proposals 8 September 1994.
42 This is envisaged by the Directive in Article 6, at least where there is an
independent trade union recognised by the employer. The requirement for
a recognised independent trade union is not contained in the Directive, but
where no employee representatives exist Member States may require that
employees concerned must be informed in advance of at least the date of
any intended transfer. This has not been expressly incorporated into the
U.K. Regulations though clearly it would be an important factor when
assessing an employer's reasonableness within section 57(3) of the
Employment Protection (Consolidation) Act 1975.
43 [1992] I.R.L.R. 136.
 Employer Rights and the Acquired Rights Directive 205

scenario which is intellectually and legally defensible as one which falls

outside of the Directive. 44

IV. Conclusion

If the justification provisions contained in Article 4 of the Directive

are seen as being a part o f the general U.K. employer right to make
unilateral changes to existing employment relationships, then U.K. case
law on what constitutes "reasonableness" on the part of an employer,
will provide a much needed clarification to an important part of the
Directive, Article 4. 45 Changes to employment contracts by an
employer for economic, technical or organisational reasons would be just
one occasion upon which an employer, provided he acts reasonably, may
exercise the right to introduce unilateral changes to the contracts of
employment of his employees, a right transferable to a new employer. 46
Although it may now be difficult to identify a transfer situation which
will not be regulated by the Directive, at least U.K. case law can help
employers discover which changes to the contract terms of their
employees may be acceptable.

44 Rubenstein, supra n.9.

45 There will, in the near future, be a presumption of economic, technical or
organisational reasons within the Directive, existing where elected employer
representatives by agreement change the terms and conditions of employ-
ment as a means of ensuring the survival of an undertaking, New Draft
ProposalsArticles 4(3) and (4).
46 It will be important, at the current talks under way between the U.K.
Government and the Commission regarding the New Draft Proposals for
amending the Directive, that a dearer definition be given to what amounts
to economic, technical or organisational reasons for purposes of Article 4,
for at the moment there are no plans to alter this in the New Draft Proposals
Articles 4(3) and(4).