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Significant judgment from the UK Supreme Court: Kostal Ltd v Dunkley

  • United Kingdom
  • Employment law

27-10-2021

The Supreme Court clarifies when employers can resolve impasses in collective bargaining by making offers directly to their workers

The Supreme Court has allowed the appeal in Kostal Ltd v Dunkley, which concerns legislation prohibiting inducements which undermine collective bargaining rights. The specific issue in the case is of huge importance to industrial relations – when can an employer, which wants to make changes to pay or other collectively bargained issues but has reached an impasse in negotiations with its unions, lawfully step outside that collective bargaining process and make a direct offer to its workers?

In a majority decision, the Court decided that a direct offer to workers, in relation to a matter which falls within the scope of a collective bargaining agreement, cannot be made lawfully unless the employer has first followed, and exhausted, the agreed collective bargaining procedure. The minority disagreed with this reasoning, taking a stricter approach. Although the Court found against the employer in this case, the decision overall provides a much clearer analysis of the law in this area compared to earlier decisions and will allow employers to navigate the risks with greater confidence.

Background

Seeking to change employees’ terms and conditions of employment, where any of the new terms are less favourable, carries legal, employee relations and reputational risks, particularly in unionised workplaces.

Where a trade union is recognised and the employees' terms of employment are determined by a collective agreement negotiated by the union, the employer will seek to agree the change with the union. If negotiations with the union fail, some employers may decide to approach workers directly with the new terms to seek agreement for the change.

However, such an approach could fall foul of legislation (contained at section 145B of the Trade Union and Labour Relations (Consolidation) Act 1992) which restricts an employer’s ability to change employment terms in a unionised workplace without the trade union’s agreement.

In broad terms, 145B prohibits an employer from making an offer to a member of a recognised union (or one seeking to be recognised) which, if accepted, has the result that either all or any of their terms will not, or will no longer, be determined by collective agreement, where that outcome is the employer’s sole or main purpose. This outcome is referred to as the “prohibited result” in the legislation.

Introduced 17 years ago to prevent employers offering inducements or “sweeteners” to employees to opt out of trade union collective bargaining, section 145B creates the risk of a penal award of financial compensation to affected union members as well as, potentially, the employer being unable to rely on the worker’s agreement as effective to implement the change.

Over recent years, the scope of section 145B has been argued before the courts and tribunals. In particular, whether it is limited in scope to those occasions where an employer is seeking to end collective bargaining for some or all employment terms, or whether it is broader, such as a one-off direct offer to employees with collective bargaining continuing thereafter? A broad scope has significant consequences for employers with unionised workforces.

Facts

In this case, K, the employer, had newly recognised Unite for collective bargaining purposes. During the first annual pay negotiation, K’s offer of a 2% pay increase and 2% Christmas bonus was conditional upon some changes to overtime, sick pay and breaks. The offer was rejected by the union and by members in a consultative ballot. K then wrote directly to employees offering the pay increase, bonus and changes to other terms, with a warning that if the offer was not accepted by 18 December they would not receive the Christmas bonus and that it could not be paid at a later date. In January, a further letter offering a 4% pay increase was sent to those employees who had so far rejected the offer and warned that if they did not accept, K could serve notice in relation to their contract of employment. Some ten months later, collective agreement was finally reached on the pay proposals. K argued that both of the offers made directly to employees were a temporary solution to an impasse with the union, with collective bargaining continuing thereafter.

Broad or narrow scope?

K lost before the tribunal and EAT. Both applied a broad interpretation to the scope of section 145B, with the tribunal awarding approximately £420,000 compensation, based on the then statutory award of £3,800 for each of the two letters, per claimant (the equivalent current statutory award is £4,341). The Court of Appeal disagreed, applying a narrower scope to the provision.

Supreme Court judgment

The Court restored the award against K but, significantly, the majority gave a different reasoning from that of the tribunal and EAT.

The majority emphasised the importance of the “prohibited result” which section 145 aims to prevent. This includes not only those offers which, if accepted, would require union members to relinquish collective bargaining altogether, but also includes, for example, where the employer offers a pay rise conditional on workers agreeing not to have any changes to their pay and conditions determined by collective bargaining in one particular pay round.

As such, it rejected the Court of Appeal’s suggestion that section 145 can be contravened only where union members are asked to surrender collective bargaining rights “on a permanent basis”.

However, the majority also rejected the EAT’s reasoning that any acceptance by a worker of a direct offer, in the context of section 145B, is sufficient to achieve the prohibited result. Importantly, it said: “The consequence [of the EAT’s rationale] would be that, whenever a union refuses to agree to a proposed pay deal or other change to one or more terms of employment so that no collective agreement is reached, the employer could not make a direct offer to its workers without being at serious risk of incurring what may be (if there is a large number of workers) a heavy financial penalty. That is because the offer, if accepted, would automatically achieve the prohibited result. I do not think that the Court of Appeal exaggerated in saying that this would potentially give a recognised trade union an effective veto over any direct offer to any employee concerning any term of the contract, major or minor, on any occasion.”

Instead, the majority interpreted section 145B as allowing direct offers to be made to workers, as long as the collective bargaining process has been followed and the employer has a genuine belief that it has been exhausted. Offers made before that point would “jump the gun” and bypass the agreed process. The Courts said that this interpretation respects the right of unions to have “a seat at the table” for collective bargaining, but also reflects that the law was not intended to give them a right to have changes agreed through that bargaining process (or a veto) nor does it impose a restriction on an employer making direct offers to workers where no collective agreement can be reached. That seat at the table must not be illusory, however, and refusing or failing to engage with the union, and not exhausting the agreed bargaining process, before making direct offers to workers would not allow the union’s voice to be heard.

When can an employer be said to have engaged in sufficient negotiations with a union to satisfy section 145B? The Court said that this would include an employer following its agreed specified bargaining procedure. On the facts in this case, the collective bargaining process was still continuing when the direct offers were made to employees by K.

Key takeaway and practical implications

The majority judgment rejects the union’s arguments that section 145B is triggered by an offer of a term which has not been agreed in collective bargaining (the veto point) – which will be welcomed by employers.

The key takeaway from the majority’s reasoning is as follows:

  • According to the majority “there is nothing to prevent” an employer from making an offer directly to its workers in relation to a matter which falls within the scope of a collective bargaining agreement provided that the employer has first followed the agreed collective bargaining procedure and has a genuine belief that it has been exhausted
  • If the employer has such genuine belief, it cannot be said that, when the offers were made, there was a real possibility that the matter would have been determined by collective agreement had those offers not been made and accepted
  • What the employer should not do is make an offer directly to its workers, including those who are union members, before the collective bargaining process has been exhausted

In practice, employers will be wary of whether they can satisfy the test of exhausting the agreed procedure. Some may not have agreed procedures in place. In response, the Court stated that employers should ensure that collective bargaining agreements clearly define and delimit the procedure to be followed. Employers are advised to review collective bargaining agreements to identify and resolve ambiguities regarding the process (and crucially issues about when the process ends or when each step in the process ends). Additionally, they need to evidence a genuine belief that the process has been exhausted and, therefore, there was no real possibility of the terms offered directly being determined by collective agreement.