Replacing Employees with Franchisees Can be an “ETO Reason”

Where a transferee dismissed transferring employees and offered them work as franchisees, there was an economic, technical or organisational reason for the dismissals entailing changes in the workforce, making the dismissals potentially fair. 

In Meter U Ltd v Ackroyd, MU provided meter reading services under contract. Rather than employ meter readers, it subcontracted the work to individual meter readers who provided their services through their own independent limited companies as franchisees. When MU won the tender for two contracts, the meter readers who had been working on those contracts transferred to MU. MU offered them the opportunity to set up individual companies to operate under its franchise arrangement and when they refused, it dismissed them for redundancy. The employees argued that their dismissals were for a reason connected to the transfer and were automatically unfair. 

The tribunal agreed. It rejected MU’s argument that it had an ETO reason for the dismissals. An ETO reason must entail changes in numbers or job functions of the workforce. It interpreted "workforce" as including all persons working in the employer’s business, whether as employees, franchisees or otherwise. Since the overall numbers in the workforce had not changed following the transfer, there could not be an ETO reason for the dismissals. 

The EAT upheld MU’s appeal. Although neither TUPE nor the Directive define "workforce", all possible definitions refer to individuals i.e. people, employees or workers – and common sense suggests it does not include limited companies. Since on this basis there had been a reduction in the numbers in the workforce, an ETO reason for the dismissal had been established and the claims were remitted to the tribunal to determine their fairness.

The decision in this case opens up a loophole for contractors to exploit. Using a franchise business model enables them to dismiss transferring employees without incurring liability for automatic unfair dismissal and to maintain service levels without having to continue the pay and conditions that applied prior to the transfer. This can provide a competitive advantage over contractors operating a more traditional "employment" business model as their reduced cost base enables them to price the contract more cheaply. However, contractors need to be aware that sham arrangements will not work - courts will always look at the substance of the relationship rather than the label applied.