Monday, 13 July 2009

Can A Grievance Be Avoided By Winding Up A Company?

Here is a case I heard about over the weekend and is one to vex the legally minded. I may not have all the specific details but the gist is interesting enough. No names, no pack drill, at this stage.

A company is one of 4 operating out of the same building and has at least one director common with all the others, the MD. The company has raced into the recession with all graphs pointing up and is very bullish about its future and so has been taking on staff. The inevitable happens and a brick wall is hit as the recession takes over and so the company figures have a massive and sudden decline. A first step is taken to reduce staff and the MD fires a few people for lack of performance.

Within a quarter, the situation has further deteriorated dramatically. The company has lost half its sales within the period and clearly a commensurate amount of cost needs to be reduced. Dismissal of a swathe of staff is actioned and the staff are 'made redundant' and the selection criteria is based around performance. The company has now reduced staff by 50% within a short period.

Of the outgoing staff, several raise grievances against the employer for different reasons and one female raises a grievance involving sexual harassment. To complicate matters, the officer who needs to answer the grievances is a family member of the MD. The pressure starts to build as the grievances are dealt with, and it is clear that the sexual harassment grievance is one which will not go away easily.

Then the MD does something 'innovative'. Due to financial pressure, he 'winds up' the company that employed all those staff. Under advice, presumably from a lawyer, he believes that there is no longer a company to answer any of those grievances and so all of the claims have to be dropped.

The 3 other companies in the same building are moved to a new building and carry on - in fact some of the remaining staff of the old company move too.

Grievances And The Law

As the details of the dismissals are sketchy, it would be wrong to assume that there was anything untoward happening. Dismissal by redundancy is perfectly allowable under law if a company is not doing well financially. I have argued previously that many companies use redundancy the wrong way in order to 'clear out dead wood' and not focus on the job roles which need to be lost and this becomes the source of many grievances in a situation where redundancies are made.

In an earlier, comprehensive article on redundancy, I highlighted that redundancy should be about making the role redundant due bad finances in the first step. After deciding which roles can be done without, then you start applying objective and fair criteria to the people occupying such roles, particularly if they are many who occupy such roles but only a proportion have to go. Using performance based criteria as an objective measurement for distinguishing which individuals should be made redundant is a potential minefield, particularly if it is the major or only criteria used but also if due management procedure has not been implemented - by that I mean there should have been regular performance reviews documented for all such staff, proper targets set and that all staff have been treated equally under the process.

It could be too easy under such criteria for an affected employee to argue that they were not given the same opportunities as others, or there were extenuating circumstances like a recession or their main customer also suffered a downturn. This latter one becomes a spiral argument - if the company experiences tough times due a major client experiencing a tough time because of a recession as its customers are experiencing a tough time, it is rather stupid to assume the employee could be successful in such an environment and so merely making someone redundant in a recession due to performance becomes a real minefield. Can they be blamed for a recession? Should management have anticipated this beforehand and done something about it?

It easy to see why this company had grievances raised by using performance as a major criterion in making staff redundant. However, the allegation of sexual harassment takes centre stage. This a grievance that has legs and cannot be dismissed easily. Most lawyers start salivating at the prospect of such a case as, if there is a genuine basis to it, it comes with a pathway to unlimited compensation in the eyes of a tribunal.

In this instant, against overwhelming pressure from the grievances, the MD took the step to wind up the company all the complaining staff had worked for and then retrenched his activities on his 3 other companies of which he was a director. By doing so, he effectively killed off the entity against which the former employees had a complaint and so there is no entity to answer the complaint. Game over.

Or is it? In my own comprehensive article on redundancy, in which I argue that redundancy should be the point of last resort for companies managing a recession-affected business, there is an assumption that grievances have to be answered by all companies. But what if a company ceases to exist? Do, in its cessation, all outstanding grievances become null and void? It is hard to get any information on this on the web and so it is clearly a rare subject.

Thinking logically, there are many people who have been made redundant and their employer then goes bust. In such cases, pay outs can be as little as nothing because there is literally no money in the pot left to pay any salaries for anyone. Directors have a habit of rising phoenix-like from the ashes of folded companies and starting again - in fact, there are many 'pre-packs' offered by accountancy firms which allow companies to do this with almost impunity to rid themselves of creditors in a very questionable way, almost over night.

If that can be done with ease, what happens to outstanding grievances? In one way, grievances are potential 'creditors' and so any dispersal of assets in liquidation needs to account for this - or do they? It seems a very convenient and easy method for a company to rid itself of troublesome grievance cases, particularly if they are ones which are likely to be heard sympathetically by any tribunal and may award compensation to the claimants.

And what happens to the directors of the company in question? In winding up a company and carrying on in others, do the directors conveniently deflect the complaints also? Finally, in the case of sexual harassment, the most serious of the complaints in the eyes of the law, does the named individual in the complaint also evaporate when the company is wound up, even if the person named is not a director?

I do not have the answers to those questions. I would appreciate comments and insight from those who have understanding and expertise in these areas or from those who have experienced the same. I will also keep everyone informed as this is the first case I have seen where a company has rather cynically tried to rid itself of its responsibilities to treat staff being made redundant fairly by deliberately winding up a company and carrying in others.

It seems too easy and, having been involved as witness in an industrial tribunal involving sex discrimination, I know that individuals and not the company per se, have to answer to the charges. My suspicion is that this action does not mitigate an individual's responsibility when it comes to sexual harassment.

But I may be wrong.
The Answer To The Question
As I alluded to, life is not that simple. Three aspects of the law come into play in this situation.
Firstly, it is unclear what the ownerships between the company wound up and the other companies are. I suspect that one of the 3 other companies is either the whole or majority shareholder in the wound up company and if so liability for all grievances simply transfers up the chain.
Secondly, if any of the remaining staff of the wound up company have been absorbed into any of the other companies which involves the transfer of business undertakings like servicing a client base, then the laws of TUPE (Transfer of Undertakings) comes into play and again all current claims against the company by former employees have to be listened to in the same way as before.
Finally, as I thought, any claim involving sexual harassment or discrimination names individuals and can be claimed on an individual even if the company no longer exists.

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