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The Supreme Court decision marks the end of a long legal argument around this important industrial relations issues.

When agreement can’t be reached through collective bargaining, is an employer permitted to make an offer directly to trade union members without breaching statute, even if this means that some of the terms of their employment will be determined outside the collective bargaining framework?

In the long-running case of Kostal UK Ltd v Dunkley and others the Supreme Court has confirmed that direct offers may be made, but only where collective bargaining processes have been genuinely exhausted. Any attempt to side-step a collective bargaining process that has not fully run its course will be unlawful, even if the employer does not completely refuse for terms to be negotiated collectively. Even a one-off agreement, or an agreement with only temporary effect, will be sufficient to breach legislation.

The facts

The employer had offered a 2% increase in basic pay and a lump Christmas bonus, in return for a reduction in sick pay for new starters and a reduction in Sunday overtime (among other things). The union felt it could not recommend the offer and gave its members a ‘free vote’. 80% voted to reject the proposal.

The employer then sent a letter to every employee offering the same terms, but giving employees a deadline by which to accept, after which they would not receive the Christmas bonus. In January, after the deadline, the employer wrote again to employees who had not accepted, offering a 4% increase in basic pay if they agreed the changes, and threatening dismissal if they did not. Subsequently, 57 employees brought claims against the employer alleging that these offers were unlawful.

The law

The Trade Union and Labour Relations (Consolidation) Act (TULRCA) (s.145B) prohibits an employer offering ‘inducements’ to employees which, if accepted, would result in them giving up any or all of their collective bargaining rights.

The employer will only be in breach of this provision if their ‘sole or main purpose’ in making the offer is to achieve a ‘prohibited result’, i.e. that the terms of employment, or any of those terms, will not (or will no longer) be determined by collective agreement.

Where an unlawful offer has been made, the tribunal must make a fixed award in respect of each affected employee. This was £3,830 at the time these events took place and has now risen to £4,341. There is no basis upon which this award can be reduced.

Kostal in the lower courts

The employment tribunal that first heard the case held that each of the two letters to the workforce was a separate unlawful inducement. It therefore awarded compensation of £3,830 per person in respect of each inducement; a total of £7,660 per person where an employee had received both letters. This meant that the employer faced a total liability of around £420,000.

The employer appealed to the Employment Appeal Tribunal (EAT) on the grounds that it had never intended to cease collective bargaining. Indeed, collective bargaining did not cease and eventually a collective agreement was reached on the amended terms. Therefore, it argued that its purpose in making the offers was not to achieve the ‘prohibited result’.

The EAT, by majority, dismissed the appeal. It held that the ‘prohibited result’ included situations where any of the terms of employment, even if just one of many, would not have been determined by collective bargaining. There was no requirement for that term to never again be determined by collective bargaining. So, the fact that this result was ‘temporary’, in that it was a one-off direct agreement, was irrelevant.

Further, the EAT also held that the employment tribunal was right to have made two financial awards to each claimant, as there had been two separate unlawful offers, on distinctly different terms.

However, the employer pursued its case further to the Court of Appeal and, this time, its arguments were successful. The Court disagreed with the EAT’s finding that even a one-off or temporary agreement could be an ‘unlawful inducement’. It held that an offer made directly to employees, outside the collective bargaining framework, must have some degree of permanence. The effect of the offer must be that terms of employment would not be determined by collective agreement in the future. Determining a few discreet terms of the contract outside the collective bargaining framework, on a one-off basis, was not sufficient to breach the legislation.

Once again, however this case was appealed to a higher court.

The new Supreme Court decision

The Supreme Court carefully considered the history of the case, and broadly agreed with the EAT. The two letters sent directly to the employees were unlawful inducements.

It rejected the Court of Appeal’s view that an offer would only contravene legislation if union members were being asked to surrender their collective bargaining rights on a permanent basis.

In the Supreme Court’s opinion, there was no difference in principle between asking trade union members to agree terms outside the collective bargaining framework indefinitely/for a long period, or for a very short period. No minimum length of time is specified in the legislation. The only thing that matters is whether, if the offer was accepted, it would have the ‘prohibited result’ that the particular term or terms would not be determined by collective agreement.

What does this mean for employers?

The Supreme Court decision marks the end of a long legal argument around this important industrial relations issues.

This decision is confirmation that you must be particularly careful if you make offers directly to employees where there is a recognition agreement in place which includes collective bargaining. You must be able to demonstrate a genuine belief that the collective bargaining process has genuinely been exhausted before any direct offers are made.

For example, it will not be acceptable to ‘abandon’ collective negotiations simply because a ballot does not give a desirable result, even it you seek to show a renewed commitment to collective bargaining later.

However, where collective bargaining has broken down to the extent that it is genuinely necessary to make the offer directly to employees, then an inducement may lawfully be offered. Clearly though, this leaves some room for interpretation, which in turn results in potential risk. The Supreme Court suggested that employers should reduce their exposure to risk by making sure that any collective bargaining agreement clearly defines and outlines the procedure to be followed. If this is not the case, it will be important to agree the length of any specific consultation period, and any other relevant parameters or important aspects of process, at the commencement of (or even during) such an engagement.

Given that an award of £4,341 will be made in respect of each distinct offer, breaching this prohibition can have significant financial ramifications. Think carefully about your purpose behind your actions before you seek to abandon collective negotiations by making an offer directly to employees.

For further information and guidance, please visit our dedicated Employment services page.

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