What is the law?

Under section 145B of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA), employers are prohibited from making offers to employees who are members of its recognised trade union(s) which, if accepted, would mean that their terms and conditions will not or will no longer be determined by collective bargaining. This outcome is known as the “prohibited result”.

An employer will only be in breach of section 145B if the sole or main purpose of making the offer is to achieve the prohibited result.

However, the Supreme Court has confirmed in the leading case of Kostal (which we wrote about here) that, in order for an offer to be capable of having the prohibited result, there must at least be a real possibility that the relevant terms would otherwise have been determined by collective bargaining. The upshot is that if an employer has exhausted the collective bargaining process, it is free to make direct offers to employees without incurring liability under section 145B.

The penalty for unlawful inducements in breach of section 145B is currently £5,993 per offer per union member, meaning these claims can be punitively expensive for large, unionised employers.

What happened in this case?

Virgin Trains East Coast Limited (VTEC), the claimants’ employer at the time, recognised four unions – Unite, the TSSA, ASLEF and the RMT – under the same collective agreement. This agreement provided for business-wide negotiations through a Joint Committee known as the JNC. The agreement did not prescribe a specific procedure for collective bargaining or clearly define the point at which it would be exhausted.

VTEC engaged in pay negotiations with Unite, the TSSA and the RMT in 2017, having already reached a separate deal with ASLEF. The deal was eventually accepted by the TSSA and Unite but rejected by the RMT on 13 November 2017, following an internal ballot of its members.

On the same day that the RMT rejected the offer, VTEC wrote directly to its entire workforce, announcing the pay award. The letter said that all employees would be paid this award in December, but RMT members could opt out of receiving it. The letter went on to say, “Please think carefully before making a decision and bear in mind that if you opt out in the hope the deal will improve – it won’t”. VTEC continued to engage in negotiations with the RMT, starting the following day, and eventually reached a deal a year later on mostly the same terms as the 2017 offer.

The Employment Tribunal decision

The RMT brought claims for breach of section 145B on behalf of 1,250 of its members. Those claims were stayed by the Employment Tribunal for several years, pending the conclusion of the Kostal litigation.

The Tribunal held that VTEC’s communication about the pay award breached section 145B, finding that:

• Offer: the employer’s communication about the pay award was an offer within the meaning of section 145B, as it was capable of acceptance or rejection by the RMT members who received it. In making this finding, the Tribunal endorsed the EAT’s approach in Ineos, rather than the conflicting decision in Caldwell.
• Prohibited result: VTEC could not unilaterally decide that the collective bargaining process was exhausted, especially where no dispute resolution mechanism had been initiated. Objectively, the parties were close to agreement and negotiations were ongoing - there was also no reason why the JNC could not have been reconvened, either with or without the other unions. There was therefore a real possibility that the terms could have been determined by collective bargaining, as indeed they eventually were.
• Prohibited purpose: the Tribunal found that VTEC did not genuinely believe that the collective bargaining process had been exhausted, and instead made the offers because it no longer wished to continue the pay negotiations. As a result, its purpose in making the offers had been to achieve the prohibited result.

The Employment Tribunal made an award of £3,907 (the applicable value of the penalty at the time of the offers) to each of the claimants - an award of nearly £5 million. We understand this is the largest penalty ever awarded for breach of section 145B.

What did the EAT decide?

The successor employers to VTEC, who assumed liability for the claims following a TUPE transfer, appealed to the EAT on two principal grounds:

• the collective bargaining process had been exhausted under terms of the collective agreement when the offer was made, so there was no prohibited result - the subsequent negotiations between VTEC and the RMT took place outside the JNC and therefore outside of the procedure under the collective agreement; and
• the employer’s purpose in making the offer was for legitimate business reasons, namely to ensure that employees received the backdated pay award before Christmas, and the offer was therefore not made to achieve the prohibited result.

The prohibited result

The EAT noted that the Tribunal had made a finding of fact (which the employer did not contest) that there was a real possibility of reaching agreement via the collective process on the terms of the offer. The collective bargaining agreement in this case was “unstructured and flexible” and expressly contemplated that negotiations might continue outside of the JNC. This flexibility was borne out in practice, as negotiations could occur at the JNC without all parties participating (as in 2017, where ASLEF was not present, having negotiated a separate pay deal for its members). The JNC was therefore not the only forum in which collective bargaining could take place.

Given the lack of clarity provided by the agreement, the Tribunal was entitled to conclude that agreement through collective bargaining was still possible, and this meant that the offer would have had the prohibited result if the RMT members accepted it. VTEC could not simply decide that negotiations were over, and therefore that section 145B did not apply, on a unilateral basis.

The prohibited purpose

The EAT placed emphasis on the Tribunal’s finding of fact that the employer’s directors had not genuinely believed collective bargaining to be at an end when they decided to make the offers. Rather, the company had taken a business decision that it no longer wished to participate in collective bargaining.

The EAT also held that the Tribunal had correctly taken into account the factors prescribed in section 145D(4) of TULRCA, noting that it had found that the only relevant factor was that the employer had not wished to use the agreed arrangements for collective bargaining when it made the offers.

In the EAT’s view, it was irrelevant that VTEC may have had legitimate business reasons for no longer wishing to participate in collective bargaining. Rejecting the employer’s arguments as “anti-purposive”, the EAT said that having regard to the wider commercial rationale for any offers would make it virtually impossible to bring a successful claim under section 145B, as employers will invariably have a business reason for wanting to bypass collective bargaining. This stands in clear contrast to the more employer-friendly approach taken by the Tribunal in Adams & Ors v Walsall Housing Group Limited (which we have previously written about here). In light of this reasoning, it’s unclear in what circumstances an employer could successfully argue that an offer which had the prohibited result was not made for the prohibited purpose (save for where the employer mistakenly but genuinely believed that collective bargaining had been exhausted).

For these reasons, the EAT dismissed the appeal and upheld the seven-figure award.

Implications for employers

This is a decision which will be welcomed by the union movement. It serves as a stark reminder of the significant legal and financial risks for unionised businesses which make direct pay offers to employees before collective bargaining has been exhausted.

This case is notable as only the second appellate decision to determine the purpose of offers for the purposes of section 145B (after Ineos, which turned on an exceptional set of facts involving an aggressive attempt to de-recognise a union). It is also significant that the EAT disregarded the underlying commercial rationale for the offers. Unless this decision is successfully appealed, this means that in future it will be very difficult for businesses to successfully defend section 145B claims based on having had a legitimate business reason for making direct offers to their workforce.

With the trade union reforms in the Employment Rights Act - and in particular the new right of trade union access – aiming to significantly increase the extent of collective bargaining coverage, more employers are likely to face the risk of section 145B claims. All unionised employers should bear in mind that:

• Failure to first objectively exhaust negotiations is likely to result in Tribunal claims for unlawful inducement under section 145B.
• Loosely-drafted collective agreements which do not prescribe the process for collective bargaining significantly increase this risk. Businesses should review their collective agreements to ensure that they clearly define the point at which negotiations are exhausted.
• If employers decide to unilaterally impose a pay award, they should take care to ensure that they have a contemporaneous paper trail (including board minutes and communications with the union and the workforce) demonstrating that talks have been exhausted and there is no realistic prospect of reaching agreement through collective bargaining.
• Otherwise, doing what may feel like the right thing - both for your employees and for industrial relations - may be punished by punitively expensive Tribunal claims. In this case, the employer’s decision to push through pay awards before Christmas, only to then get back around the table with their recognised union, has led to a penalty of approximately £5 million.

London North East Railway Ltd & Another v Nimu Jiwanji and Others – judgment available here.