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When can collective redundancies lead to criminal prosecutions?

The press has recently reported the Insolvency Service’s decision to prosecute a director and administrator of USC (a division of Sports Direct) and the directors of City Link following collective redundancies that occurred as a result of business failure. This has no doubt worried company directors, insolvency practitioners and turnaround executives alike. Our article explains how these prosecutions have come about and what you can do to minimise the risk.

How can criminal prosecutions occur in a redundancy situation?

The Trade Union and Labour Relations (Consolidation) Act 1992 governs the process that employers must follow where they are proposing to make 20 or more redundancies at one establishment within a period of 90 days or less. Redundancies of this number are known as “collective redundancies”.

Most employers will be familiar with the requirement to inform and consult with affected employees for a minimum period before which the collective redundancies cannot take effect. For 20-99 proposed redundancies, consultation must begin at least 30 days before the first redundancy takes effect. For 100 or more proposed redundancies, consultation must begin a minimum of 45 days before the first redundancy takes effect.

The sanction for failing to comply with the information and consultation obligations is an award of up to 90 days' gross pay per affected employee, which can add up to a significant amount. However, no criminal liability follows from failing to inform and consult.

Where an employer is proposing collective redundancies, in addition and separate to the duty to inform and consult, there is also an obligation on the employer to notify the Secretary of State for Business, Innovation and Skills of the proposed redundancies. It is here that criminal liability can arise.

Notifying the Secretary of State

The obligation is for the employer to notify the Secretary of State (via the Insolvency Service) in writing, usually on form HR1 (and a copy must be provided to the employee representatives). The form asks for various pieces of information, such as the number of proposed redundancies, the date they will take effect and the reason for them. This advance notification is required so that the government can fulfil its statutory obligation to help employees facing redundancy. 

The information contained on form HR1 is collected and distributed to the appropriate government departments and agencies who offer job brokering services and/or training services. The information about the company itself is commercially confidential and can be used only for the purpose of assisting the employees facing redundancy. 

Once a form HR1 is received, the next step is for the local Jobcentre Plus and other local service providers to contact the employer with offers of assistance during the period of notification and consultation.

In terms of when to file form HR1, similar timescales apply as to the duty to inform and consult. Notification should be received by the Secretary of State 30 days before the first dismissal takes effect where 20-99 collective redundancies are proposed, and 45 days before the first dismissal takes effect where 100 or more collective redundancies are proposed. These timescales are qualified by a recognition in the relevant legislation that there might be special circumstances preventing compliance with the specified period of notice. In that case, the duty becomes one of taking all such steps to comply as are reasonably practicable in the circumstances.

Failure to provide this notice is a criminal offence punishable by an unlimited fine (the fine was previously subject to an upper limit of £5,000, but this cap was removed on 12 March 2015).

The employer or any person purporting to act in its capacity (eg insolvency practitioners or, conceivably, turnaround executives) can be guilty of the offence and can be prosecuted and punished accordingly.

The recent criminal prosecutions commenced by the Insolvency Service against a director and administrator of USC and the directors of City Link result from their failure to notify the Secretary of State of the proposed redundancies that arose as a result of the failure of their respective businesses. The prosecutions are thought to be the first of their kind.  

The City Link directors have since been acquitted (see more below) but the USC prosecution is still proceeding, expected to be heard in March 2016.  

How to minimise the risk of criminal prosecution and protective awards

One of the main reasons behind the recent prosecutions is the fact that the Insolvency Service (via the taxpayer) has recently had to bear the cost of protective awards for failure to inform and consult where the employers had not done so due to their imminent insolvency. This is in addition to other associated costs such as unpaid notice monies and statutory redundancy payments, which can add up to a significant sum. The prosecutions therefore act as both a public reminder and a warning to employers that they cannot disregard their legal obligations to employees in a business failure situation on the presumption that the Insolvency Service will pick up the tab without further action.

Failure to inform and consult

It is appreciated that one of the major concerns in an insolvency situation, or where turnaround executives have been appointed, is that informing and consulting with affected employees will alert the market to the financial dire straits of the business. The worry is that this may accelerate its failure when the aim is to try to prevent this. However, these sorts of considerations are not a defence to failing to inform and consult.  

It is possible to establish a “special circumstances” defence to failing to inform and consult. However, insolvency as such is not a defence and nor is the assertion that keeping a lid on the circumstances will more likely lead to a successful sale (to the benefit of creditors) and/or preserve more jobs (to the benefit of the affected employees). To amount to “special circumstances” there must be something out of the ordinary. As a result, certain unforeseen circumstances may arise in an insolvency type situation, which may be enough to qualify as a “special circumstances” defence, however this cannot be relied upon. Commentary indicates that it is a very restricted defence. 

With the reliance on the special circumstances looking unlikely, businesses will no doubt want to avoid protective awards. Consultation with employee representatives, who can be trade union representatives or directly elected employee representatives, should therefore begin at the earliest opportunity. Consulting with such representatives, rather than with the entire affected workforce, is not only required by law; it will offer a more workable solution (from a business saving point of view) than disseminating information about potential redundancies to the entire workforce.  

In addition, case law shows us that, even in an insolvency context, the expectation is for effective consultation still to take place. It will no doubt be difficult to build in time for consultation, but this should be achieved as far as possible given the context. Having said that, the imminent threat of insolvency can be a mitigating factor when calculating the amount of a protective award, which may help in limiting liability.

Criminal prosecution

The key issue in the City Link case was whether the duty to notify the Secretary of State arose when the decision was taken to put the company into administration. To decide whether a proposal to make collective redundancies had been formed at that time, the Judge applied the previous decision in UK Coal Mining v NUM. In that case it was held that to amount to a “proposal” there needs to be a “plan where dismissals will inevitably, or almost inevitably result…provided the plan is fixed as a clear, albeit provisional, intention”. It is this threshold that has to be met before the duty to notify the Secretary of State arises.  

The prosecution case was that City Link must have known that the decision to go into administration was a plan where redundancies would inevitably, or almost inevitably, result. The Judge did not agree. It was emphasised that there is no expectation on directors to look into a crystal ball and predict the likely consequences of an action, unless a particular consequence is either the only foreseeable one, or is the only one that can reasonably be envisaged in the circumstances. On the evidence it was found that, at the relevant time, the directors believed that a sale of the business while in administration was quite probable and the jobs could be saved. As a result, redundancies were neither the only foreseeable consequence of going into administration, nor the most likely one. The directors were therefore found not guilty.  

It may be that criminal liability can be avoided in similar circumstances; however this is by no means certain and should not be relied upon. In fact, the Judge in the City Link case gave an express warning that his decision should not be taken as precedent that an employer can avoid its responsibility to notify the Secretary of State by going into administration. It was emphasised that the decision was based on the particular facts of the case and not on any general principle in relation to administration.

In the meantime, the Insolvency Service may have more success in its case against USC, the outcome of which is yet to be determined. 

In the event that a decision to undertake collective redundancies seems likely, the only way to mitigate the risk of future criminal prosecutions is to comply with the notification obligations as if a decision to undertake collective redundancies had been taken. The reason for this is that, in practice, there may not be time to evaluate whether a decision to undertake collective redundancies is required, take that decision, and then give the Secretary of State the required notice before the first redundancy takes effect. 

No adverse consequences derive from sending an HR1 form if the decision to undertake collective redundancies is later revoked and fewer or no redundancies are required. Indeed, the Judge in the City Link case expressly stated that sending the HR1 form to BIS would not have been a final decision to make the employees redundant, it is simply a notification. However, employers will no doubt be keen to keep the publicity and workforce relationships aspects of that communication in check.

In summary, to minimise the risk of both criminal prosecution and protective awards, when a decision to make collective redundancies seems likely, at the earliest opportunity, you should:

  • invite employees to appoint employee representatives (if there are no trade union representatives) and begin consultation with them; and
  • send an HR1 form to the Secretary of State.  

The future

In March 2015, the Insolvency Service published a call for evidence to understand how directors and insolvency practitioners approach employee consultation when a company is facing insolvency. The responses have recently been published and highlight the difficulties of complying with the consultation obligations in an insolvency context. In particular, the key factors inhibiting effective consultation were identified as:

  • tensions between the legal obligations to inform and consult in employment law and the offence of wrongful trading in insolvency law;
  • the conflict of interest between safeguarding creditor interests and consulting with employees;
  • the need to protect commercially sensitive information;
  • the impact that information disclosure would have on the company’s survival or value;
  • the lack of time and/or money.

Another identified inhibitor to consultation was the lack of effective sanctions. Interestingly, the main reason why protective awards were seen as an ineffective sanction was the fact that the impact of such awards does not fall upon the employer or its agents, but on the unsecured creditors and the taxpayer. As identified above, recognition of this fact will have fed into the recent decisions by the Insolvency Service to prosecute. 

In terms of inhibitors to notifying the Secretary of State, the responses indicate that the need to maintain confidentiality was seen as the biggest factor, followed by the fact that the information required in form HR1 is often not available in an insolvency situation.

The government states that it will now carry out further work with the aim of addressing the points raised in the call for evidence. The hope is that the current conflict between the need to maintain the business as a going concern and the collective redundancy obligations can be resolved. We will have to wait and see.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com

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