Case law: Parent company 'taking control' of newly acquired subsidiary's activities can make parent liable under TUPE rules

Companies acquiring the share capital of another company should beware exercising significant control over their new subsidiary's activities, or risk a finding that the subsidiary's employees have transferred to the parent under the TUPE rules.

A company sold all the shares in a subsidiary company to a new parent company. As usual in such cases, the acquired company's employees continued to be employed by it. However, the company struggled under its new owner, and its sole director eventually resigned, leaving it in disarray.

The CEO of the new parent company immediately sent his Chief Technical Officer to the newly acquired subsidiary to take over the day-to-day running of it, giving him specific instructions on steps to take. This included passing specified information about the business back to the new parent company, and stopping payments by the subsidiary pending discussions about its potential liquidation.

Shortly afterwards, 54 of the subsidiary's 110 employees were dismissed by reason of redundancy. The remainder were told their employment was to transfer to the parent. The subsidiary went into liquidation and did not pay either notice payments or redundancy payments to the employees who had been dismissed.

The Employment Tribunal ruled that all the employees had, in fact, transferred to the new parent company under the TUPE rules before their dismissal. The owner was therefore liable for their notice and redundancy pay, amounting to £3.5m.

The TUPE rules are designed to protect employees in certain circumstances – by preserving their jobs and their terms and conditions of employment – when a business or undertaking they work for is transferred from their current employer to a new one.

They do not usually apply if it is shares in an employer company, rather than the employer's business or undertaking, that are transferred to a new owner. In those circumstances the company's employees simply continue to be employed by it.

However, exceptionally, TUPE can apply on change of ownership of a company if the new owner takes over, for example:

• responsibility for carrying on the company's business
• the company's obligations as employer, and/or
• the day-to-day running of the business

Each of these is an important indicator that the new owner has stepped into the shoes of the employer (the company), although none is decisive on its own.

In this case, the Employment Appeal Tribunal ruled that a TUPE transfer of employees from the subsidiary to the parent company had taken place as soon as the Chief Technical Officer of the parent company arrived at the company and started to put the instructions given by the parent's CEO into effect.

When that happened, the parent company had, as the Employment Tribunal had said, taken over responsibility and assumed day-to-day control of the subsidiary's business ‘in a way that went beyond the mere exercise of ordinary supervision or information gathering between parent and subsidiary’.

The employees had therefore transferred to the parent under TUPE, and were its employees when they were dismissed. The parent was therefore liable to make the necessary notice and redundancy payments to them following their dismissal.

Operative date

• Now

Recommendation

• Companies acquiring the share capital of another company should beware exercising any control over their new subsidiary beyond the mere exercise of ordinary supervision or information gathering between parent and subsidiary company, or risk a tribunal finding the subsidiary's employees – and the associated liabilities – have transferred to the parent under the TUPE rules.

Case ref: Guvera Ltd v C Butler & Ors [2017] UKEAT 0265_16_2111