Criminal prosecutions under employment legislation are rare. Under previously scarcely used provisions in the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA), 2015 has seen two separate prosecutions instigated for alleged failure to notify the Secretary of State of proposed collective redundancies - the City Link and USC cases.

The prosecutions in the City Link were against three directors and in USC it has been reported that prosecutions were brought against a director and also an insolvency practitioner (IP).

On 12 November, the three directors of City Link were acquitted of the criminal charge. But this cannot be treated as blanket comfort for directors or insolvency practitioners (IPs) involved in a potential redundancy situation, as the judge stressed the verdict was dependent on the facts of the case.

Obligations to inform and consult with staff regarding large-scale redundancies are well known, as is the need to notify the Secretary of State via the Redundancy Payments Service (RPS). Failure to properly consult staff under section 188 TULCRA has been the subject of numerous tribunal claims with employers for the most part aware of the potential penalty of a hefty protective award being made in favour of the employees, and in high-profile insolvencies these have been well reported.

HR1 form

However, the obligation to notify the RPS by using the HR1 form is largely seen as an administrative task with employers unaware of the potential criminal penalty for failing to do so.

Failure to give the Secretary of State the requisite notice is a criminal offence under section 194 TULRCA. Individual directors, company secretaries and managers (or anyone 'purporting to act' as such) are personally liable for offences committed by the employer if it can be shown that the offence was committed with their 'consent or connivance' or if it was attributable to their neglect. If convicted each individual can face an unlimited fine (prior to 2012, fines were capped at £5,000).

It has been reported that an IP has also been charged in the USC case. This is a worrying development for IPs and raises the stakes when deciding on appointment how to manage the employees and whether (or when) they may need to make redundancies.

It is well established in relation to consultation that insolvency in itself is not a defence against failure to comply with the obligation to consult. It has been confirmed by the judge in the City Link case that the same applies to the obligation to notify the Secretary of State by way of submission of the HR1.

In detail...

The obligation to notify the Secretary of State is triggered when the employer first 'proposes to dismiss' as redundant 20 or more employees within any period of 90 days or less. The same wording is used in relation to the obligation to inform and consult employment representatives under section 188. But when does an employer first "propose" to make redundancies? That would seem to be the key question and was the focus of the prosecution in the City Link case.

The City Link case

Following a failed attempt to restructure and secure £25 million of investment, the directors of loss making City Link realised on 22 December 2014 that the company would become insolvent by mid-January. On the same day, they took the decision to place the company into administration and they believed that this would make a sale more attractive and highly probable.

The directors continued to trade until the administrator was appointed on 24 December 2014 at 7pm. The administrator traded the company briefly, but as a quick sale failed, he filed the HR1 on 26 December 2014. Approximately 2,400 employees were made redundant on New Year's Eve.

The Government considered that the requirement to notify the Secretary of State arose when the board of directors took the decision on 22 December to put the company into administration, claiming that the company was effectively 'dead in the water' at that point. Their view was that the decision to put the company into administration made large-scale redundancies 'inevitable' or 'almost inevitable', triggering the notification requirement.

On 12 November 2015, the three directors of City Link were acquitted of the criminal charges as the court accepted that the directors genuinely believed as at 22 December that a sale of the business was probable and that accordingly there would be no redundancies.

Rejecting the charges, the judge stated:

"A director cannot be expected to put a crystal ball on his or her desk, at a time of huge shock and turmoil, and predict the likely consequences of an action unless a consequence is either the only foreseeable one, or is the only consequence that can reasonably be envisaged in the circumstances."

What is "proposing to dismiss as redundant"?

This is the key question and notoriously difficult to determine.

As mentioned, the same wording is used in relation to the obligation to inform and consult employment representatives under section 188. As such, the case law surrounding s188 is seen as being relevant to the obligation to notify the Secretary of State.

"Proposing" means more than a mere contemplation of the possibility of redundancies but is still generally found to occur at an earlier stage than an actual decision by the employer to make redundancies. In City Link, the judge referred to the reasoning in the case of UK Coal Mining Ltd v National Union of Mineworkers. This confirmed that an employer must consult about a strategic decision that would foreseeably or inevitably lead to collective redundancies such as a site closure. However, the judge in City Link seems to have focussed on whether redundancies are 'inevitable' rather than 'foreseeable' and so arguably has applied a narrower test than a Tribunal would apply under section 188 in the context of a protective award claim.

Redundancies can be 'proposed' even when a company is considering alternatives and hoping that they will be achieved, such as a sale. Therefore, consultation should be started even if redundancies would only happen should the sale prove unsuccessful.

In City Link, the judge accepted that the directors had given credible evidence that they genuinely believed that a sale in administration was not only possible, but quite probable and on that basis decided that no proposal had been formed on 22 December 2014. However, we suggest that it is likely that a Tribunal considering the same question would have come to a different answer. Until a sale is confirmed, it can fall through. Therefore, if redundancies would have been necessary should any sale be unsuccessful, a proposal has been made. This issue will be tested in the protective award claims which have been brought by ex-City Link employees which are being heard next year.

A more difficult question arises when a company is seeking a solvent solution to financial difficulties and restructuring on that basis. At what point is the obligation triggered? If the solution itself is likely to involve 20 or more redundancies, a proposal is clearly made. But if redundancies are likely should the solution fail, arguably this would also trigger notification. In any event, the situation should be kept under careful review.

Information provided to the RPS should also be kept updated as the situation changes, for example if the number of proposed redundancies increases.

Are these prosecutions part of a new approach by the government?

Of course, in an insolvency situation, early consultation is often unwelcome as making information public about the company's financial position can worsen it. However, a failure to comply with section 188 is likely to result in a protective award of up to 90 days' gross pay for each affected employee.

If the employer cannot pay, a large proportion of this burden (up to 56 days' pay) then falls on the State. Collectively, the liabilities can be huge; for example the collapse of Comet is estimated to have cost the taxpayer more than £50 million. In addition, the unions are becoming increasingly vocal about the human cost that results when employees are dismissed by text or on Christmas Eve with no warning. As a result there seems to be a push to try to 'encourage' employers to comply, by using the powers to prosecute for failure to notify the RPS.

Although a copy of the HR1 form must be provided to employee representatives at the start of consultation, the obligations to notify and consult are separate. Therefore, forcing compliance with notification will not necessarily result in earlier consultation. However, even if it doesn't achieve its intended purpose the threat of criminal proceedings in itself should not be ignored.

What can directors and IPs do to protect themselves from liability?

  • Consider carefully whether the obligation to notify has been triggered at regular intervals and err on the side of caution if unsure. This will involve consideration of the number of redundancies proposed by an employer within 90 days or less, and in each 'establishment', or separate business unit of the employer.
  • Notify the Secretary of State and submit a HR1 even if consultation is not going to be started. Notice is given by completing an online, HR1 form submitted to the Redundancy Payments Service. A copy has to be given to employee representatives at the start of consultation, but until then, it remains confidential. If the dates of redundancy are not known, as the company is in precarious financial position and redundancies may need to be made any day, employers are advised to insert the 'worst case' scenario into the form and an email update can be made to the RPS when more information is known.
  • Keep the situation under regular review, as the financial situation can change rapidly when a company is in difficulties.
  • As soon as an insolvency practitioner is appointed, the company's responsibility to notify the RPS ends. Therefore, on appointment, an IP must consider whether it is necessary to submit an HR1 form, and also carefully consider what information to include so as not to mislead the RPS.

The spotlight will now be on the pending prosecutions in relation to the closure of a USC warehouse for which staff were given 15 minutes' notice of their redundancy. The prosecutions of former director David Forsey and administrator, Robert Palmer are due to be heard by the Chesterfield Magistrates Court 14 to 16 March next year.

Last month, a full 90-day protective award was made. In granting the maximum award, the tribunal criticised the employer for "disgraceful and unlawful employment practices". It will be interesting to see what, if any, the impact of a protective award already having been made will have on the USC prosecutions.