Employers with unionised workforces will welcome the Court of Appeal's judgment in Kostal UK Ltd v Mr D Dunkley and Others in which it held that laws on unlawful inducement relating to collective bargaining do not give trade unions a veto over any changes being agreed directly with the workforce.

Here we consider the first Court of Appeal judgment on just what is and is not within the scope of the unlawful inducement statutory provisions and what this means for employers with unionised workforces.

Lawful variation or unlawful inducement?

If the source of a contractual employment term is a collective agreement with a trade union, then the obvious mechanism for change will be to seek the trade union's agreement to that change. Where the trade union's agreement to the proposed change cannot be reached, is it possible to seek agreement directly from the employees?

In such a scenario, an employer may consider seeking agreement directly with the employees through individual offer and acceptance of the new contractual term(s). Unsurprisingly, trade unions are not a fan of an employer adopting such a course and have increasingly argued that such a course would amount to a breach of section 145B of the Trade Union and Labour Relations Consolidation Act 1992.

Under section 145B, employers are prohibited from making offers to employees with the sole or main purpose of undermining collective bargaining by the union (the prohibited result). If a complaint is upheld for breach of s145B, the award is £4,193 (revised annually) per union member receiving the offer. Where an offer is made to a large number of union members, the cost can be considerable. If a union member is dismissed for not accepting the offer, their dismissal is automatically unfair.

But just how wide is the scope of section 145B? Section 145B was introduced in 2004 following a ruling by the European Court of Human Rights (ECtHR) in Wilson v United Kingdom to address concerns around employers offering financial inducements to employees to opt out of collective bargaining altogether. Can, as the unions argue, section 145B include the situation of an employer who is otherwise committed to collective bargaining, but for economic/business reasons wishes to make adjustments to particular contractual terms derived from the collective agreement? In particular, if acceptance of a direct offer would mean that at least one term of employment will be determined by direct rather than collective agreement, is that sufficient to amount to an unlawful inducement, even if only for a limited time and/or other terms continue to be determined collectively?

What happened in this case?

Kostal UK Ltd recognised Unite for collective bargaining purposes in 2015 including agreement to undertake formal annual pay negotiations. Later that year the company proposed a pay deal offering a 2% increase to basic pay but saw some entitlements, such as Sunday overtime and sick pay for new starters, reduced. Unite balloted its members and the deal was rejected by 80%.

Kostal then wrote directly to each employee in November, advising them that failure to sign and return a letter agreeing to the deal would result in them losing their Christmas bonus and pay increase. A second notice was sent after Christmas to the staff that had not responded to their first letter, stating that if no agreement was reached 'this may lead to the company serving notice on your contract of employment'. The union (via its members) claimed each of these notices amounted to an unlawful inducement aimed at undermining collective bargaining.

In December 2017, the Employment Appeal Tribunal (EAT) by a majority upheld an employment tribunal's decision that Kostal had offered employees unlawful inducements under section 145B. Taking a broad interpretation, the EAT confirmed that, if the acceptance of a direct offer would mean that at least one term of employment will be determined by direct agreement, that is sufficient to amount to an unlawful inducement even if other terms continue to be determined collectively. The fact that the result is temporary (in the sense of being a one-off direct agreement) rather than permanent is irrelevant. The EAT rejected the employer's argument that it never intended to cease collective bargaining and, indeed, collective bargaining did not cease - eventually a collective agreement was reached as to pay and amended terms and conditions. Therefore, its purpose in making the offers was not to achieve the 'prohibited result'.

As to the award, the EAT considered the pre-Christmas notice and post-Christmas notice as two separate offers. Taking into account the 56 claimants, with some having received both offers, the employer was left with a liability of just over £420,000.

Court of Appeal restricts scope of section 145B

The Court of Appeal has now overturned the employment tribunal and EAT. As stated by the Court, such a broad interpretation of section 145B, "would amount to giving a recognised trade union…a veto over even the most minor changes in the terms and conditions of employment, with the employers incurring a severe penalty for overriding the veto'. Furthermore, it would go beyond the "mischief" identified by the ECtHR in Wilson.

In setting out the scope of section 145B the Court confirmed:

  1. Types of cases within scope:
    1. "where an independent trade union is seeking to be recognised and the employer makes an offer whose sole or main purpose is to achieve the result that the workers' terms of employment will not be determined by a collective agreement"; and
    2. "where an independent trade union is already recognised… and the employer makes an offer whose sole or main purpose is to achieve the result that the workers' terms of employment (as a whole), or one or more of those terms, will no longer be determined by collective agreement."

In scenario b, the "no longer" requirement clearly indicates a change taking the term or terms concerned outside the scope of collective bargaining on a permanent basis;

  1. Types of cases not in scope
    1. "where an independent trade union is recognised, the workers' terms of employment are determined by a collective agreement negotiated by or on behalf of the union, and the employer makes an offer whose sole or main purpose is to achieve the result that one or more of the workers' terms of employment will not, on this one occasion, be determined by the collective agreement."

The Court concluded that the facts in Kostal clearly fell within the type of cases not in scope. The members of the union were not being asked to relinquish, even temporarily, their right to be represented by their union in the collective bargaining process. All that happened was that the employer had gone directly to the workforce, having exhausted collective bargaining with the union, and asked each individual to agree a particular term on this occasion.

What should employers be doing now?

The Court of Appeal rejected arguments that such an interpretation renders the union powerless. The Court points out that it remains open to them (for example) to ballot their members for industrial action, as Unite did in this case.

This judgment will come as welcome relief to employers with unionised workforces. As the Court states, had it agreed with the union's broad interpretation, it would have given recognised unions essentially a veto over even the most minor changes in terms and conditions of employment with employers facing a severe financial penalty for overriding the veto.

From a good industrial relations perspective, employers seeking to change terms and conditions with a unionised workforce should seek agreement with the union, in the ordinary course, as required by their recognition agreement. If an employer has a clear business reason for making a change and has reached an impasse with the union, this decision allows them to seek agreement directly with the employees through individual offer and acceptance without risking claims under section 145B.

However, this may not be the end of the story - Unite, the union funding the litigation, has confirmed its intention to seek permission to appeal to the Supreme Court.