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 lawful 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 (TULRCA).

Under section 145B, employers are prohibited from making offers to employees with the sole or main purpose of undermining collective bargaining by the union, known as the 'prohibited result'. If a complaint is upheld for breach of s145B, the award is £4,341 (revised annually in April) per union member receiving the offer. Where an offer is made to a large number of union members, the cost can be considerable.

But just how wide is the scope of section 145B? When can lawful variation tip into being an unlawful inducement? 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 a particular contractual term 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?

The Supreme Court in Kostal UK Ltd v Dunkley and others has held that an employer's direct pay offer to workers, bypassing collective bargaining with the recognised trade union for that particular term, constituted an unlawful inducement within the meaning of s145B. The question is whether there was a real possibility that, had the offer not been made and accepted, the relevant term for the period would have been determined by a new collective agreement. If there was no such possibility then it cannot be said that making the individual offer has caused the "prohibited result". Accordingly, an employer may make an offer directly to its workers in relation to a matter which falls within the scope of a collective bargaining agreement but only where the employer has first followed, and exhausted, the agreed collective bargaining procedure (this is likely to involve a considerable length of time). What an employer cannot do with impunity is what the employer did in this case: make a direct offer to its workers, including union members, before the collective bargaining process had been exhausted.

In detail…

Unlawful inducement under TULRCA - key provisions

Under s145B [Inducements relating to collective bargaining],

  1. A worker who is a member of an independent trade union which is recognised, or seeking to be recognised, by his employer has the right not to have an offer made to him by his employer if -
    1. acceptance of the offer, together with other workers' acceptance of offers which the employer also makes to them, would have the prohibited result, and
    2. the employer's sole or main purpose in making the offers is to achieve that result.
  2. The prohibited result is that the workers' terms of employment, or any of those terms, will not (or will no longer) be determined by collective agreement negotiated by or on behalf of the union.

Under section 145D(4),

"In determining whether an employer's sole or main purpose in making offers was the purpose mentioned in section 145B(1), the matters taken into account must include any evidence-

  1. that when the offers were made the employer had recently changed or sought to change, or did not wish to use, arrangements agreed with the union for collective bargaining,
  2. that when the offers were made the employer did not wish to enter into arrangements proposed by the union for collective bargaining; or
  3. that the offers were made only to particular workers, and were made with the sole or main purpose of rewarding those particular workers for their high level of performance or of retaining them because of their special value to the employer."

Under section 145E,

Where a complaint is upheld, a tribunal shall make a declaration to that effect and award £4,341 (since 6 April 2021) for each claimant union member receiving the offer. In addition, dismissals as a consequence of rejecting an offer which contravenes section 145B are automatically unfair.

The case of Kostal UK Ltd v Dunkley and others

In November 2014, the majority of the 700 workers at Kostal, which makes advanced electronic equipment for the car industry, voted in favour of Unite being their recognised union for collective bargaining purposes. A recognition agreement was then signed with the company. In November 2015, a pay offer of two percent for the year 2016 and a £270 Christmas bonus was put to union members and rejected in a consultative ballot by Unite. Instead of continuing with negotiations with Unite, on 10 December the employer wrote to all their employees individually (including 57 who were members of the union) setting out the pay offer and pointing out that if they did not accept it by 18 December, they would not receive the Christmas bonus. On 29 January a second letter was sent to those who did not agree following the December letter, saying if they accepted the offer by 4 February the pay increase offered would be backdated to the first of the year and failure to accept could lead to termination of their employment.

In response to the offers, 57 employees who were Unite members brought employment tribunal claims against Kostal alleging that each letter constituted an unlawful inducement contrary to s145B. The tribunal upheld the members' claims and awarded compensation of £3,830 (the statutory limit at the time) in respect of each unlawful inducement (i.e. a total of £7,660 per claimant - see Note below). Kostal appealed, contending (among other things) 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'.

The EAT dismissed the employer's appeal. In its view, if acceptance of a direct offer to workers means that at least one term of employment is determined by direct agreement, that is sufficient to establish the prohibited result. However, the employer successfully appealed to the Court of Appeal. The Court of Appeal held that s145B will only be engaged if the employer's purpose is to achieve the result that one or more of the terms of employment will no longer be determined by collective agreement on a permanent basis. The Court of Appeal therefore dismissed the union members' claims.

Note: The 10 December and the 29 January letters where seen as two separate offers. If an identical offer is repeated on a number of occasions that might well be viewed as a single offer. Recently, the EAT sitting in Scotland held that the three-month time limit for presenting an unlawful inducement claim starts to run from the date the employer makes the offer of the new terms and conditions, not on any later date when the employer indicates its intention to impose the new terms on employees who have refused the offer (Scottish Borders Housing Association Ltd v Caldwell and ors). However, in Kostal, the tribunal had found that two different offers were made: the first made provision for payment of a Christmas bonus, whereas the second linked the change to a backdated pay award. Also the second communicated a threat of dismissal if not accepted, whereas the first did not.

The judgment of the Supreme Court

Before the Supreme Court, the employer argued that the scope of s145B only extended to offers which, if accepted, would require workers who are trade union members to agree to forego or relinquish collective bargaining rights permanently, as held by the Court of Appeal. The union member claimants argued for the wider interpretation accepted by the majority of the EAT whereby it is enough to bring an offer within section 145B that, if the offer is accepted, at least one term of employment would be directly and not collectively agreed, at least for the time being and until the term is subsequently varied or replaced by one negotiated through collective bargaining. On this interpretation, any offer made directly to workers who are trade union members to make any change which has not been collectively agreed to a term of their employment falls within section 145B.

The Supreme Court unanimously allowed the appeal, however, the majority of the Supreme Court rejected both parties' proposed interpretation of s145B. Both parties wrongly focused solely on the content of the employer's offer rather than the 'prohibited result'. What section 145B prohibits is not an offer with a particular content but an offer which, if it was accepted by all workers to whom the offer is made, would have a particular result - the 'prohibited result'. What is required is a causal connection between the presumed acceptance of the offers and the 'prohibited result'. The question is whether there was a real possibility that, had the offer not been made and accepted, the relevant term for the period would have been determined by a new collective agreement. If there was no such possibility then it cannot be said that making the individual offer has caused the 'prohibited result'. Accordingly an employer may make an offer directly to its workers in relation to a matter which falls within the scope of a collective bargaining agreement but only where the employer has first followed, and exhausted, the agreed collective bargaining procedure. What an employer cannot do with impunity is what Kostal did in this case: make a direct offer to its workers, including union members, before the collective bargaining process had been exhausted (in this case only one month into the negotiations and not all stages of the process set out in the collective agreement completed).

The Supreme Court rejected arguments by the employer that it may be difficult to say with certainty whether the collective bargaining process has been exhausted. The Court states this should not be an issue as:

  1. Firstly, employers should ensure that the collective bargaining agreement made with the union "clearly defines and delimits the procedure to be followed". If the procedure is clearly set out, it should be clear when the process has been exhausted. In the Kostal case, the relevant recognition agreement specified when the process would be exhausted, but the letters were sent before then.
  2. Secondly, s145B will not be contravened unless the employer's sole or main purpose in making the offers is to achieve the prohibited result. If the employer genuinely believes that the collective bargaining process has been exhausted, it cannot be said that the purpose of making direct offers was to procure the result that terms will not be determined by collective agreement when that otherwise might well have been the case.

The minority of the Supreme Court also allowed the appeal but preferred an interpretation closely aligned with that of the employment tribunal and EAT. They did not think that it necessarily follows that an employer can escape liability just because the collective bargaining process has been exhausted, as to avoid liability it would be for the employer to establish that its sole or main purpose in making the offer was a genuine business purpose.

Where does this leave employers?

Turning back to our opening questions: Just how wide is the scope of section 145B? When can lawful variation tip into being an unlawful inducement? Well, s145B appears very wide indeed, though employers do have an ability to lawfully vary terms without it amounting to an unlawful inducement where collective bargaining has genuinely been exhausted with all stages of the procedure set out in the collective agreement having been concluded.

As a starting point, an employer seeking agreement directly with the employees through individual offer and acceptance in a unionised workforce should carefully consider their business reason for doing so. Does it have a credible business reason? This will assist in the negotiations themselves and keep the focus on what is trying to be achieved. Crucially now, has the collective bargaining process genuinely come to an end? Such a course of action should only be taken after the collective bargaining process has genuinely been exhausted and not done simply to marginalise the trade union. If the employer cannot demonstrate that it genuinely believed the collective bargaining process has been exhausted, it will not be able to show its sole or main purpose was not the 'prohibited result' of bypassing collective negotiation. This is likely to require a period of time over which negotiations take place and employers with more onerous and lengthy collective bargaining arrangements are likely to be in a more difficult position in implementing contentious changes than those with a lighter touch agreed approach. Employers should review agreements to ensure the process clearly sets out when the process will be exhausted and avoids as far as possible stalling tactics being used to delay matters artificially.

This judgment does not mean that unions essentially get 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. But it does mean that bypassing the union will only be possible if the employer can demonstrate that they genuinely believed that collective bargaining had been exhausted. As such, employers will need to factor in time for the collective bargaining process or face potential heavy penalties. In the case of Kostal, this amounted to just under £440,000.

If you have any questions about this insight, or about employment law in general, please contact Jane Fielding or Connie Cliff.