16 Aug 2018

In Colino Sigüenza v Ayuntamiento de Valladolid and others (C-472/16), the European Court of Justice considered whether a five month gap between contracts to manage a music school prevented there being a transfer of an undertaking, and whether dismissals of the outgoing contractor's staff were for an economic, technical or organisational reason entailing changes in the workforce.

Background

The Acquired Rights Directive (ARD), which is implemented in the UK by the Transfer of Undertakings (Protection of Employment) Regulation 2006 (TUPE), applies where there is "a transfer of an economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary". 

Unlike under TUPE, there is no concept in the ARD of a service provision change. However, under case law, the ARD has been found to apply to situations which can amount to service provision changes, such as contracting out, second-generation contracting out and insourcing, provided that there is a transfer of an economic entity that retains its identity. 

Under case law, whether there is a transfer of an economic entity will depend on a multi-factorial approach, in particular the nature of the activities being carried out. If the activities being carried out are "asset reliant", a transfer of the assets will be important; if the activities being carried out are "manpower reliant", the transfer of employees will be important. 

Like TUPE, the ARD precludes dismissal because of a transfer, except where the dismissal is for an economic, technical or organisational reason entailing changes in the workforce.

Facts

Mr Colino Sigüenza was employed as a music teacher at the Municipal Music School of Valladolid (the School). Originally, the School was directly managed by the municipal administration of Valladolid (the Administration) but was outsourced to Músicos y Escuela (Músicos) on a series of contracts from 1997 until 31 August 2013. Músicos managed the premises, facilities and instruments necessary for the provision of the service but the Administration retained ownership.

Due to the reduction in the number of students in the 2012 - 2013 school year, the School was no longer profitable. Following a dispute between Músicos and the Administration about unpaid sums claimed by Músicos, the Administration terminated the contract with Músicos.  

Músicos commenced the collective dismissal process required under Spanish law to dismiss its entire staff.

On 31 March 2013, a few months before the end of the academic year, Músicos ceased its activities and, on 1 April 2013, returned the premises, instruments and facilities for the School to the Administration. All Músicos staff were dismissed with effect from 8 April 2013 and Músicos was declared insolvent on 30 July 2013.

In August 2013, the Administration assigned the management of the School to In-pulso Musical (In-pulso). Like Músicos, In-pulso was permitted to use the premises, instruments and equipment needed to manage the School. In-pulso began managing the School in September 2013 and was again awarded the contract for the 2014 – 2015 and 2015 – 2016 academic years. None of the Músicos employees who had been collectively dismissed in April 2013 was employed by In-pulso. 

Mr Colino Sigüenza brought a claim against Músicos, the Administration and In-pulso, challenging his dismissal. The claim failed because there had been an earlier collective claim brought by representatives of the Músicos employees and the court considered that Mr Colino Sigüenza was bound by the outcome of that claim. However, the court also held that there had been no transfer of an undertaking because there had been a gap of five months between the dismissal and In-pulso taking over the management of the School.

Mr Colino Sigüenza appealed and the appellate court referred a number of questions to the European Court of Justice (ECJ) for a preliminary ruling, including:

  • Was there a transfer of an undertaking for the purposes of the ARD?
  • If so, were the dismissals for an economic, technical or organisational reason entailing changes in the workforce (ETO reason)?

Opinion of the Advocate General

The Advocate General considered that there had been no transfer of an undertaking for the purposes of the ARD because, at the time of the putative transfer on 1 September 2013, no entity existed. Further, even if such an entity did exist, there was no causal link between such transfer and the employees' dismissal. However, the ECJ is not bound by the opinions of the Advocates General. 

European Court of Justice decision

The ECJ considered two questions:

1. Was there a transfer of an undertaking for the purposes of the ARD?

The ECJ held that the circumstances could amount to a transfer of an undertaking for these reasons: 

  • The ECJ took into account that the material resources, such as musical instruments, facilities and premises, appeared to be essential to the activity in question (namely the management of the School) and that these were made available to In-pulso as they had been to Músicos. 
  •  As the activity did not appear to be based essentially on manpower (because a significant amount of equipment was required), the fact that In-pulso did not take on any staff did not preclude there being a transfer. 
  • The fact that ownership of the assets belonged at all times to the Administration was not relevant.
  • As regards the gap of five months between dismissal and the resumption of the management of the School, it was clear from previous case law that a temporary suspension of an undertaking's activities could not preclude the possibility that the economic entity retained its identity. 
  • The facts that the undertaking was at the time of transfer temporarily closed and had no employees were factors to be taken into account but did not of themselves preclude the possibility of a transfer of an undertaking. The ECJ found it particularly relevant that three of the five months' closure were school holidays. 

The case was therefore remitted to the Spanish court to determine whether, in the circumstances, there was a transfer of an undertaking.

2. Were the dismissals for an ETO reason?

In reaching a decision as to whether a dismissal is because of a transfer or for an ETO reason, it is necessary to take into consideration the objective circumstances in which the dismissal occurred. 

In this case, the ECJ noted that the dismissal took place well before the date of the transfer of the management of the School to In-pulso, and that the reason for the dismissal was because Músicos could not pay its staff. This would appear to suggest that the dismissal was for an ETO reason, provided that the dismissals and delayed appointment of a new service provider were not a deliberate measure intended to circumvent the ARD. 

The question of whether the dismissal was for an ETO reason was also remitted to the Spanish court for determination. 

Comment

This case is a useful reminder that a cessation in activities does not automatically mean that there cannot be a transfer of an undertaking. 

It is, however, interesting that the ECJ reached a different decision from the Advocate General as to whether there was a potential transfer of an undertaking in these circumstances, as the ECJ usually agrees with the opinion of the Advocate General. The cessation of services was also longer than has typically been seen in previous case law. 

As TUPE implements the ARD, the principles in this case will apply to the concept of a transfer of an undertaking under TUPE. 

However, as mentioned in the background section, there is also the concept of a service provision change under TUPE. A service provision change does not require a transfer of assets or staff – what is required is the transfer of responsibility for activities which remain fundamentally the same. This may make UK courts and tribunals more ready to accept that suspension of activities does not preclude a transfer for the purposes of TUPE. 

Indeed, the findings of the ECJ in this case are consistent with an Employment Appeal Tribunal case in the UK in which it was held that there is no requirement for the organised grouping of employees to be actively engaged in the activity immediately before the service provision change. Whether there is the required continued existence of the organised grouping where activities have been suspended will depend on a number of factors, including the reason for and length of the cessation. 

Whether a dismissal is for an ETO reason is, like the question of whether there is a TUPE transfer, fact specific. The finding of the ECJ in this case that the dismissals were probably because of an ETO reason may nonetheless provide some comfort for incoming contractors who replace a contractor in financial difficulty and who may be concerned about inheriting liability in respect of dismissals carried out some time previously.