A struggle for small businesses in turbulent economic times

As Hertford Store, Focus DIY, is bought by Wickes, Kaajal Nathwani asks what this means for hundreds of employees?

Earlier this year well established Hertford store Focus DIY closed its doors to the public before re-opening as Wickes last month. 

Focus DIY, a privately owned chain of stores plunged into financial difficulty at the beginning of 2010 due to the continuing economic downturn. Despite best efforts to revive the failing business, administrators were brought in, as a last ditch attempt to try and save the reputable business, but they only managed to secure buyers for just over 50 out of 178 stores resulting in an estimated 3000 staff losing their jobs.

Focus DIY based in Hertford was one of the lucky ones, having been bought by rival DIY chain Wickes. Many stores were purchased by well known household DIY retailers such as Wickes and B&Q. The doors opened for the first time last month with a huge sigh of relief from hundreds of employees who managed to save their jobs which were under threat.

The fate suffered by Focus DIY is one many small businesses are facing in these turbulent economic times, leaving them no option but to seek a way out of the struggle and ‘sell up shop’. Whilst this may seem like an easy way out, many businesses fail to acknowledge the onerous obligations on them in selling their business, both as the ‘seller’ and an ‘employer’. Employees are also left bewildered and wondering what this means for them and their employment?

The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) protects employees' terms and conditions of employment when a business is transferred from one owner to another. In this case, employees working at a Focus DIY (transferor) store that was successfully purchased by Wickes or B&Q (transferee) automatically become employees of the purchaser of the business under the regulations.

What happens to existing employees?

Although employees automatically transfer to the new business if TUPE applies, they can refuse to transfer. These employees will remain employed under the same terms and conditions of employment and their continuity of service will also be protected.  They will still have all the rights and/or benefits conferred by their employment with Focus DIY.

A transferee is not allowed to make changes to the terms and conditions of employment of the employees that are inherited. This often makes it difficult, if not impossible, for incoming employers to harmonise terms and conditions of employment of staff after a TUPE transfer.

Information and Consultation

It is not as simple for Focus DIY to have just sold the business to Wickes; both companies would have had to consult with affected employees who could have been indirectly or directly impacted by the transfer.

There are also considerations that need to be had if there is a trade union and consultation may need to be through a representative. Falling foul of consultation obligations could leave the transferor and transferee susceptible to a fine of up to 13 weeks pay if a claim is brought in the Employment Tribunal by the affected employee.

Does TUPE Apply?

Businesses of all sizes need to be aware of when TUPE may apply.  Some examples are as follows:

• Selling or buying part or all of a business as a going concern;

• Outsourcing/ "service provision change" (‘contracting out’)

• Granting or taking over a lease /license of premises but operating the same business

TUPE regulations kick in when there is a "relevant transfer". This is the "transfer of an economic entity which retains its identity".  Questions businesses ought to ask to determine whether a transfer may fall within the ambit of the TUPE regulations are:

i. Have tangible assets been transferred?

ii. What are the activities carried out by the business before and after?

iii. Were intangible assets transferred?

iv. Were any employees taken on by the new employer?

v. Did customers transfer with the business?

As a transferor, it is imperative that a business knows all about the employees they might inherit. They are advised to ensure that the sale and purchase agreement of the business protects them from any liabilities which arose in respect of employees they will inherit. If you are a transferor, you are duty bound to provide to the transferee written details of all employee rights and liabilities.

Automatic Unfair Dismissal

A dismissal will be automatically unfair, if the sole or principal reason is because of the transfer. This is applicable also if it is held to be a reason connected to the transfer, unless it is for an economical, technical or organisational reason (an "ETO" reason) requiring a change in the workforce.

What is an ‘ETO’ reason?

ETO is a defence available to buyers and sellers of a business but is not all encompassing.  Even if an ETO defence is successful, it may be that the dismissal is deemed unfair for another other reason, such as redundancy.

The TUPE regulations are complex and often difficult to understand and it is advisable to take legal advice if you think that TUPE may be applicable in your circumstances.

If you are an employee currently affected by a TUPE transfer, or a business needing advice on the implications of the TUPE regulations, please do not hesitate to contact Ms Kaajal Nathwani of Curwens LLP on 0208 363 4444 or via email on kaajal.nathwani@curwens.co.uk for clear practical advice on this complex area of law.