| Date | 21 March 1996 |
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| Judgment | Rygaard -v- Stro Molle Akustik A/S, European Court of Justice 19 September 1995 |
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| The Issue | Whether the completion of building work following insolvency of the first contractor constitutes a transfer of an undertaking. |
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| Implication |
The taking over of works started by another organisation, including staff and materials, does not constitute a transfer of an undertaking. |
printI have recently written about the unexpected impact of the TUPE regulations upon various aspects of business. One such aspect was thought to be that the regulations would cause employment rights to transfer to a firm acquiring the business of another insolvent company. This threat had caused building companies to seriously doubt the commercial wisdom of bidding or negotiating for the completion of construction contracts following the insolvency and termination of employment of the original contractor. The hub of the problem is the European Community Council Directive 77/187/EEC of 14 February 1977, which is aimed at directing "the approximation of the laws of the Member States" relating to the safeguarding of employee's rights in the event of transfers of undertakings, businesses, or parts of businesses. In the UK, effect is given to the Directive by the Transfer of Undertakings (Protection of Employment) Regulations. These regulations are, in effect, our 'approximation' of the EC Directive. Though the wording of the Directive (and our regulations) has left considerable doubt in interpretation, it has been said that the provisions have a completely unambiguous social purpose. In the words of the European Court, in the case of Landsorganisationes -v- Ny Molle Kre (1989): "The purpose of the Directive is to ensure, as far as possible, that the rights of employees are safeguarded in the event of a change of employer by enabling them to remain in employment with a new employer on the terms and conditions agreed with the transferor". Article 1(1) of the Directive provides that: "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." The key question has become, therefore, what is the 'transfer of an undertaking', and would the taking over of an insolvent company's workload fall within the definition? This question has been answered by the European Court of Justice on 19 September 1995 in the case of Rygaard -v- Stro Molle Akustik, that such an event would not normally fall within the net of the Directive. The facts of the case were relatively straight forward. Mr Rygaard, a carpenter, was employed by a Danish company called Svend Pedersen. Pedersen had a contract with another company named SAS Service Partner, which due to severe financial difficulties, they felt unable to fulfil. In order to overcome this difficulty, Pedersen decided to introduce their client to Stro Molle Akustik, a firm they had worked with in the past, with a view to Stro Molle taking over a substantial part of the works. Stro Molle were invited to tender and subsequently their tender was accepted by SAS. In anticipation of this, a few days earlier Pedersen and Stro Molle had themselves entered into an agreement for the completion of the works by the latter. The agreement provided that two of Pedersen's apprentices would be transferred to Stro Molle for a fixed period. On the day after this agreement, Pedersen terminated Mr Rygaard's contract of employment with three months notice, on the ground that the company had been placed in liquidation. The letter went on to say that part of the joinery work had been transferred to Stro Molle, and that until the notice period expired, he would be made available to them. Mr Rygaard in fact continued to work for Stro Molle for a period of nearly four months, at which point he was dismissed. He then brought wrongful dismissal proceedings against Stro Molle in the Maritime and Commercial Court of Copenhagen, which referred to the key question of whether Council Directive 77(187) applied in the circumstances of this case, to the European Court of Justice. In the first instance, the question was referred for the opinion of Advocate-General Cosmas. Judge Cosmas provided a very helpful rehearsal of the line of previous cases which give authority on the scope of the Directive. He indicated that there were four conditions which generally indicated the existence of a transfer of undertaking. Firstly, for the Directive to be applicable there must be a change in the person responsible for the operation of the undertaking. The second requirement is that the economic entity transferred must continue to exist and retain its identity. Thirdly the directive is applicable only when the change in the person responsible is based on a contractual transfer and, fourthly, the transfer must concern an undertaking business or part of a business or economic entity. Having spelled out clearly the conditions which must exist, Judge Cosmas was less then helpful in his opinion. Throwing the whole matter back to Denmark his opinion was: "It is for the national court to determine whether the transfer of an entity or activity has been carried out by way of legal activity." Thankfully, on taking the matter fully to the European Court, a clearer and more definitive decision was obtained: "The taking over, with a view to completing, with the consent of the remainder of the main building contract, works started by another undertaking, of two apprentices and an employee, together with the materials assigned to those works, does not constitute a transfer of the undertaking, business, or part of a business within the meaning of Article 1(1) of the Directive."
CJ-9610
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