This month’s article from the Labour Court Case Law Review Panel was written by Barry Walsh, Partner, McDowell Purcell and his colleague Julie Austin. It concerns a claim to the Workplace Relations Commission by 61 former employees of Clerys department store in Dublin over their employer’s failure to consult with their staff representatives over potential redundancies in relation to the store’s closure.

The award of nearly €120,000 in this case was made in respect of a breach by the employer of the Protection of Employment Act 1977 to 2014 as amended (the “1977 Act”) which provides that an employer has a duty to consult staff representatives and provide them with certain information in collective redundancy situations before any decision on redundancy is formalised.

The article considers the decision in the context of insolvency law and practice and also in the light of the expert report by Kevin Duffy, Labour Court Chair, and Neasa Cahill BL that provided a comprehensive analysis of the relevant provisions of employment law and company law in situations where valuable assets in a company are separated from the operating entity, and how the position of employees can be better protected in such situations. That report was published on 11 March 2016.

McDowell Purcell’s article includes links to the WRC decision and the expert report.

Expert Report issued following Closure of Clerys

On 28 January 2016, a cumulative award of nearly €120,000 was made by the Workplace Relations Commission (the “WRC”) to 61 former Clerys workers. A copy of the decision can be found here. The award was made in respect of a breach by the employer of the Protection of Employment Act 1977 to 2014 as amended (the “1977 Act”) which provides that an employer has a duty to consult staff representatives and provide them with certain information in collective redundancy situations before any decision on redundancy is formalised.

The high profile closure of Clerys and the subsequent decision highlighted a number of shortcomings in the protections available to employees in certain corporate restructuring situations. As a result, Kevin Duffy, Labour Court Chair, and Neasa Cahill, BL, were appointed to prepare an Expert Report (“the Expert Report”) providing a comprehensive analysis of the relevant provisions of employment law and company law in situations where valuable assets in a company are separated from the operating entity, and how the position of employees can be better protected in such situations. The report was published on 11 March 2016.

Background to the case

In June 2015, OSC Operations Limited (“OSC”), which had run Clerys since 2012, was sold. A provisional liquidator was appointed to OSC later the same day. Prior to the sale and subsequent insolvency, the OSC Group had restructured its business which involved a separation into a trading company (OSC) and a property owning company (OSC Properties Limited). The trading company, OSC , acquired the assets of the business and the staff was transferred to the trading company under the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 (“the TUPE Regulations”). However, the trading company did not acquire the title to the Clerys store.

When OSC was put into liquidation, the provisional liquidator almost immediately informed employees that the store was closing and that their roles were redundant with immediate effect. P45s were issued to staff on 18 June and the company’s liquidation was confirmed by the High Court on 6 July 2015. The employees were dismissed without notice and, it is claimed, the liquidator did not engage in any consultation in accordance with sections 9 and 10 of the 1977 Act.

Due to the fact that the primary asset, the Clerys store in O’Connell Street, had been transferred to another entity within the wider OSC Group, there was no money in the employer company liquidation to pay the statutory redundancy lump sums to which employees were entitled under the Redundancy Payments Acts 1967 to 2014 or any other amounts due to the employees such as payment in lieu of notice and compensation in respect of accrued holidays.

As a result, the State became obliged to pay those debts, out of the Social Insurance Fund which is mainly funded by PRSI contributions (as, in due course, it became obliged to pay the award made by the WRC,). The Social Insurance Fund then becomes a preferential creditor in the liquidation and is paid in accordance with the normal order of priority from whatever assets (if any) are available to meet such a claim.

While the restructuring in itself was lawful, given that the tab was ultimately picked up by the taxpayer, the Government may be eager to avoid a similar situation occurring in the future. The high profile nature of the event and the iconic status and long history of the Clerys store led to many media and political questions. To that end, in addition to commissioning the Expert Report, in a twin-track approach, the Company Law Review Group was asked to review company law with a view to recommending ways in which company law could potentially be amended to ensure better safeguards for employees and unsecured creditors. That Company Law Review Group report is expected to be published in the coming months.

The Law

The main provisions of the 1997 Act are as follows:

• Section 9 of the 1977 Act provides that, in a collective redundancy situation, consultation must commence at the earliest opportunity and at least 30 days before the notice of redundancy is given.
• Section 10 of the Act provides that, for the purpose of the consultation, employee representatives must be furnished with all relevant information in relation to the redundancies. Breach of these provisions can result in awards of up to 4 weeks’ pay (in a statutory claim by employees) or a fine of €5,000 on summary conviction (in the event of a criminal prosecution).
• Section 12 of the Act obliges an employer to notify the Minister for Jobs, Enterprise and Innovation as soon as possible and in any event at least 30 days before the first redundancy takes effect.
• Section 14 of the Act provides that redundancies cannot take effect before the expiry of the 30 day period commencing on the date of the notification to the Minister. “Take effect” has been held by other case law to mean the individual giving of notices of redundancy to affected employees. A failure to comply with this provision constitutes an indictable offence subject to a potential maximum fine of €250,000. However, section 14 does not apply in the case of collective redundancies arising from the employer’s business being terminated following bankruptcy or winding up proceedings. Somewhat confusingly, a similar exemption is not provided in sections 9, 10 or 12 of the Act.

The WRC Decision

The complaint brought before the WRC was a claim that the employer, OSC, had breached the EC (Protection of Employment) Regulations 2000 (which amended the 1997 Act) by failing to consult with the employees. There were 61 claimants in total and it was agreed before the hearing at the WRC that those claimants present (unclear how many of them were there) were treated as representative of all claimants, effectively making it a “test case”.

The employees claimed that OCS was required to consult with them in accordance with the legislation notwithstanding the fact that a liquidator was appointed. Technically, this was undoubtedly correct. As is often the case in insolvency situations, OSC (in liquidation) did not make any submissions at the hearing. However, they subsequently wrote to the WRC through the liquidator stating that that the powers of the provisional liquidator, as granted by the High Court, did not include a power to enter into consultation with the employees in accordance with legislation.

This argument was rejected by the WRC which found that, in failing to consult with the employees, OSC had breached the legislation. The WRC relied on the decision of the Court of Justice of the European Union (the “CJEU”) in Claes (C-225/10) which held that the EU Directive 89/59 on the approximation of the laws of the Member States relating to collective redundancies:

“must be interpreted as applying to a termination of the activities of an establishment that is an employer as a result of a judicial decision ordering its dissolution and winding up on grounds of insolvency, even though, in the event of such a termination, national legislation provides for the termination of employment contracts with immediate effect.”
The WRC held that the EU Directive applies in insolvency situations even where national legislation provides that employment contracts terminate automatically when a company is wound up.

The CJEU judgment went on to find that:

 “the employer’s obligations pursuant to those provisions must be carried out by the management of the establishment in question, where it is still in place, even with limited powers of management over that establishment, or by its liquidator, where that establishment’s management has been taken over in its entirety by the liquidator”.
Relying on the Claes decision, the WRC made awards ranging from €394 to €3,408 per employee, totalling approximately €120,000 There is no explicit explanation in the decision as to how this was calculated or what it represents but it may well be the maximum of 4 weeks’ pay.

What the decision means for employers and liquidators

⦁ The literal implication

It appears from a decision that liquidators are required to consult with staff for at least 30 days in advance of the termination of their employment.

However, as the law currently stands, it is difficult to see how the technical requirements of the legislation can be compatible with insolvency practice and procedure in this jurisdiction. Most insolvency practitioners believe that employees automatically become redundant when the petition to wind up a company is successfully presented to the court. This is because section 589 of the Companies Acts 2014 provides that:

“the winding up of a company by the court shall be deemed to commence at the time of the presentation of the winding-up petition in respect of the company”.

Therefore, by the time that the liquidator is appointed, the employees have arguably already been made redundant. If that is the case, the consultation process would arguably need to be commenced by the employer at least 30 days before the petition is presented and before the liquidator is appointed. It is difficult to envisage that this is what is intended by the legislation (or that this is what would actually occur in practice) and it serves to highlight the disparity between employment law, and actual insolvency practice.

The alternative would be for the liquidator to recognise the continuation of the employees’ employment following his or her appointment and consult with the workforce for at least 30 days thereafter. In effect, this could ultimately increase the notional payments due to employees. It is not something that frequently occurs in practice in insolvency situations.

⦁ The commercial reality

The reality of the situation is that, until such time as the law changes, employers and particularly liquidators are unlikely to change the way in which they deal with employees in insolvent or compulsory liquidations where there are insufficient assets to meet liabilities. If an employee has accrued statutory entitlements or a statutory claim which is ultimately successful before the WRC any amounts or award is usually paid from the Social Insurance Fund as was the case in the Clerys situation.

Expert Report Recommendations

Because employers and insolvency practitioners may be unlikely to change the manner in which they deal with staff in insolvency situations on foot of the WRC decision, any change may only occur if the State reforms the law in this area having considered the recommendations contained in the Expert Report which include:

• Removing the exemption for liquidators in section 14 of the 1977. This would mean that liquidators would not be entitled to terminate employment until the 30 day consultation period has lapsed.
• If this consultation period is not afforded to employees, compensation payable should be increased from four weeks’ pay to two years’ pay.

The above recommendations, if implemented, would be a major change to employer / insolvency practitioner obligations to employees in insolvency situations. Any increase in the jurisdiction to award compensation for failure to consult from 4 weeks’ pay to 2 years would represent a significant potential liability. The recommendation does not appear to be restricted to insolvency situations but seems to be proposed for all collective redundancy situations.

The proposals have been welcomed by ICTU who view such changes, if implemented as “very helpful”, However, IBEC has described any such potential new laws as “unhelpful” and “draconian”. It has pointed to existing employment law and company law measures (including potential consequences for individual directors under existing company law) and has argued against imposing any additional burden on employers.

However, perhaps the most significant recommendation is that, if an employer transfers assets out of the business with the effect of perpetrating a fraud on the employees, there should be a mechanism for recovering the asset or the proceeds of its sale. The Expert Report state that certain related mechanisms already exist under the Companies Act 2014 If introduced, this is likely to be seen by the corporate community as an extreme remedy. Establishing “fraud” as a matter of proof, even in civil proceedings is usually a very high bar and, one suspects, likely to be a very contentious issue. The Expert Report noted the complexity and potential severity of such a remedy and note that any such order should only be made when it is “just and equitable”.

It is unclear whether the new minority government intends to implement the recommendation into law but any such developments will be watched with interest by many parties.