PART I: INSOLVENCY OF AN EMPLOYER
INTRODUCTION
The Black’s law dictionary defines insolvency as the condition of
being unable to pay debts as they fall due in the usual course of business.
Insolvency of an employer, therefore, is the inability of an employer to pay
debts as they fall due in the course of employment or contract of hire. Once an
employer becomes insolvent, the employees’ rights arising from the contract of
employment and those guaranteed by statute have to be protected[1].
THE LEGAL POSITION OF INSOLVENCY OF AN EMPLOYER IN KENYA
An employer under the Employment Act of Kenya[2]
becomes insolvent in the following circumstances[3];
a)
When he has been adjudged
bankrupt or has made a composition or arrangement with his creditors.
b)
He has died and his estate is
to be administered in accordance with the Law of Succession Act; and,
c)
If the employer is a company,
i.
A winding up order or an
administration order has been made, or a resolution for voluntary winding up
has been passed, with respect to the company;
ii.
A receiver or a manager of the
company’s undertaking has been duly appointed, or possession has been taken, by
or on behalf of the holders of any debentures secured by a floating charge, of
any property of the company comprised in or subject to the charge.
In the event of the insolvency of an employer, the entitlements of
the employees arising from the employment contract have to be protected. The
Employment Act provides that an employee whose employer is insolvent can apply
in writing to the Minister so as to be paid any amount owed by the employer out
of the National Social Security Fund.[4]
The Minister must be satisfied that the employer indeed is insolvent, that the
employee’s contract has been terminated and that the employee is owed by the
employer.[5]
To do this, the Minister is allowed to make a request, in writing, to the
employer of the aggrieved employee for records and information on the same.[6]
An employer who fails to oblige commits an offence and is liable to
imprisonment for six months or a fine not exceeding one hundred thousand
shillings or to both.[7]
Similarly, if the employer knowingly or recklessly gives false information, the
said employer commits an offence.
The amount payable by the Minister is restricted to apply to[8]:
i)
Salary arrears for a period not
exceeding six months
ii)
Any compensation award for unfair
dismissal
iii)
Payment in lieu of notice of termination
of the contract of service for contracts where payment is made periodically at
intervals of less than one month
iv)
Payment in lieu of leave for annual
leave days earned but not taken
The amount payable to the employee should not exceed ten thousand
shillings or an amount that is half of the monthly salary the employee usually
earns, whichever is greater. This reflects an attempt by the law to balance the
interests of the employee and those of the government.
Prima facie, this provision could disadvantage employees who are
owed more than the amount limited by the Act. However, the law provides a
remedy for such situations in two ways:
Firstly, any employee who is paid by the Minister an amount less
than entitled is allowed to present a complaint thereof to the Industrial
Court, but must do so within three months of receiving communication from the
Minister regarding the amount awarded.[9]
The Industrial Court has the power to declare the amount that the Minister
should have paid the employee.[10]
Secondly, the input of a relevant officeris accommodated.[11]
A relevant officer can be a liquidator, an administrator, a trustee in
bankruptcy or a receiver.[12]
In situations where such a relevant officer has been appointed or is required
to be appointed, the Employment Act requires the officer to present to the
Minister a statement advising on the amount payable by the insolvent employer.[13]
The Minister in such cases is not allowed to make the payment until the
relevant officer’s statement is received.[14]
However, where the statement is unnecessary and an imputation of the amount due
can be done without it, the Minister is allowed to make a decision without
receiving the statement from the officer.[15]
Employees who have not received payment even after applying to the
Minister are allowed to present a complaint thereof to the Industrial Court
within 3 months.[16]The
Industrial Court in these cases has the power to order that such payment be
made.[17]
Where a company placed under receivership continues to engage the
services if its employees and subsequently dismisses them, the employeescan
either claim unfair dismissal or seek payment of any amounts accruing under the
provisions for insolvency in employment.
In Joseph Mburu Kahiga & another v Kenatco Taxis Limited &
another.[18] The
petitioners were employees of the 1st Respondent. In 2006, the
company was placed under receivership. The 2nd Respondent, the
Receiver Manager, took over management of the company and continued employing
the services of the petitioners. In 2013, the petitioners’ employment was
terminated on grounds of gross misconduct following a lock-out. The dispute
(that had prompted the lockout) was forwarded to the Minister for Labour for
conciliation under the Labour Relations Act. However, conciliation failed.
Thereafter, the petitioners, along with other colleagues, instituted a claim
(Industrial Cause No. 1524 of 2011) at the Industrial Court claiming
compensation for unfair dismissal. The petitioners subsequently withdrew from
the suit which was still proceeding at the time, instead opting to institute a
petition (the current one) at the Industrial Court. They alleged that by
failing to pay them their terminal benefits upon placement of the company under
receivership, the receiver had infringed their constitutional right to fair
labour practices.
Their petition was dismissed on account of duplicity of suits. The
judge pointed out that at the time the matter was referred to the Minister for conciliation;
it was within the requirements of Section 66 of the Employment Act on
insolvency. Therefore, the petitioners should have claimed their terminal
benefits from the Minister of Labour at the time. Further, the petitioners
should not have withdrawn from Industrial Cause No. 1524 of 2011 as it was the
proper matter in which to claim compensation for unfair dismissal.
Lastly, once the Minister makes the payment out of the NSSF, any
rights and remedies in respect of the employee’s debts become the Minister’s.[19]
In common law jurisdiction in the case of Mann v Secretary of State For Employment[20]
it was observed that ‘employees should be able to choose the particular eight
weeks in respect of which they were claiming arrears of payment against the
guarantee institution, thus choosing eight weeks in which they had not been
paid at all instead of the last eight weeks when they might have received some
payments’.[21]
In
the case of Robins v Secretary Of State For Work And Pensions[22]
Robin had been employed by a now insolvent company. He had a final salary
pension. The company terminate the scheme an then told everyone there was not
enough money. Upon request by the UK courts for interpretation by ECJ the ecj
stated that member states did not require pension funds to be fully guaranteed,
because member states could oblige insurers to buy insurance.
In
the European Court Of Justice (ECJ) in Regeling v. Bestuur van de
Bedrijfsvereningvoor de Metaalnijverheid,
Mr.Regeling a Dutch welder, received sporadic pay from January 1991
until August 1991 when, with notice, the contract was terminated and the
employer went bankrupt. He claimed pay from the Bestuur van de
Bedrijfsverenigingvoor de Metaalnijverheid, the guarantee institution for
employee’s claims in the Netherlands. This was turned down because the period
guaranteed was 13 weeks before termination, and in that period, making up for
prior shortfalls, more than normal wages were paid.
The
European Court of Justice held that Mr.Regeling still had a good claim, because
the employer’s late payments should be set off first against the outstanding
wage debt. To do otherwise would undermine the minimum protection of the
guarantee.
Kenya should
however embrace the international conventions which it has not ratified
involving protection of employeesduring insolvency which provide detailed
information. These include
.
International Labour Organization Termination
of Employment Convention[23] enacted by, the ILOin
1982. The Convention requires that employers provide employees on the verge of
unemployment with either reasonable notice of such termination or compensation for
the lack of reasonable notice[24].
The ILO also seeks strong and direct participation by worker representatives in
employment termination, particularly in light of major restructuring,
downsizing or terminations due to employer insolvency.
The Protection of Workers' Claims (Employer's Insolvency) Convention
was enacted in 1992 as a revision of the Protection of Wages Convention, 1949.
Part II of the
convention provides for the protection of workers' claims by means of a
privilege which involves the payment of their claims arising out of employment
before non-privileged creditors can be paid.[25]
The privileges include;
1. The
workers' claims for wages relating to a prescribed period, that is not less than three months, prior to
the insolvency or prior to the termination of the employment;
2. The
workers' claims for holiday pay due, as a result of work performed during the
year in which the insolvency or the termination of the employment occurred, and
in the preceding year;
3. The
workers' claims for amounts due in respect of other types of paid absence
relating to a prescribed period, which shall not be less than three months,
prior to the insolvency or prior to the termination of the employment;
4. Severance
pay due to workers upon termination of their employment’.[26]
The Conventionprovides
for the protection of workers' claims by a guarantee institution[27].
Where payment cannot be done to the employee by the insolvent employer, payment
of the guarantees shall be made by a guaranteed institution.[28]
The claims protected by a guaranteed institution are the same as those found
under Article 6 of the convention. The claims may also be limited under this
part but payment shall be done in a socially acceptable level.
To ensure a
justification in the strengthening of the employees’ rights on insolvency
employees are viewed as unsecure creditors who owing to a lack of bargaining
power, needs assistance in achieving a fair distributive outcome[29].
PART II: THE LEGAL POSITION ON THE TRANSFER OF UNDERTAKINGS
The term transfer
of undertakings refers to either the transfer of the shares of a company[30]
or of an economic entity[31].
The sale of shares of a company does not constitute a transfer of an
undertaking because the identity of the employer does not change in such a
case.
Where an economic
entity is transferred, employees assigned to that economic entity will come
under the direction of the transferee.[32]
Outsourcing is a related concept to the transfer of an economic entity in that
there is an organised grouping of human resources, the employees, dedicated to
provision of a service. Similarly, these employees are affected because they
come under the direction of the new service provider.
In
Kenya, there is no legislative framework governing the transfer of undertakings.
The High Court has however had to address this issue. The case of Elizabith Washeke & others v Airtel
Networks (K) Ltd[33]
involved the decision by Airtel Networks (K) Ltd (Airtel) to outsource its customer care services. To reduce the
hardship upon its employees in the customer care department, Airtel entered
into arrangements under which the employees would be employed on similar terms
by the new customer care service provider as they had with Airtel. The
employees were however rushed into signing new contracts that terminated their
employment with Airtel. Under the new employer, the employees stopped enjoying
some of the benefits they had with Airtel such as bonuses, regular appraisals
and insurance covers on pre-existing medical conditions. The employees claimed
for unfair dismissal by Airtel on the basis that there was no notice given of
the termination and that they signed the new contracts under undue influence.
The Court held that while there was no legislative framework governing
outsourcing, recourse must be had to Article 41 of the Constitution of Kenya
which provides for the right to fair labour practices. Fair labour practices
mean that conduct may be lawful yet unfair. In this case, the employer was not
legally prohibited from outsourcing. Indeed he had a legitimate right to carry
out his business in a manner he deemed economically feasible. This interest of
the employer however had to be weighed against the employees’ right under the
Employment Act. From the facts there was no notice that the employees’ signing
of the new contracts would terminate the previously existing contracts.
Furthermore, the contracts were not freely entered into. The outsourcing
arrangements therefore amounted to unfair dismissal.
The
High Court in this case did not hold that an employee has a right to be taken
up by the new employer. In fact, the court advised employers that they could
terminate the employees under the redundancy provisions of the Employment Act.[34]
This situation contrasts sharply with the legal position in the United Kingdom
as governed by the Transfer of Undertakings (Protection of Employment)
Regulations (TUPE). A transfer is governed by TUPE if it involves an economic
entity composed of ‘an organised grouping of resources’ dedicated to achieve a
business objective and which retains its identity after the transfer.[35]
Outsourcing is governed by TUPE if it involves an ‘organised grouping of
employees’ performing certain activities.[36]
For an employee to be protected by these regulations, they must be assigned to
the organised grouping of resources or employees.[37]
The
transfer or an outsourcing arrangement does not terminate the contracts between
the employees and the transferor. The transferee is taken to have entered into
contract with the employees.[38]
Accordingly, Regulation 4 (2) (b) treats any omission or act that amounts to
unfair dismissal as that of the transferee. An employee under the transfers
governed by TUPE is therefore protected just as he would be if the transfer
merely involves the shares in the ownership of a company carrying out the
undertaking. This is because the mere change in the identity of the employer
just like a change in the identity of the shareholders does not translate into
a change in the employee’s contract.
Despite
the fact that the transferee is liable for acts or omissions in the transfers,
he is nevertheless protected under TUPE. To ensure that the transferee is not
prejudiced by the transfer, TUPE places an obligation on the transferor to
inform the transferee of the details of the employees assigned to the organised
grouping of employees or resources.[39]
TUPE also protects the transferee’s interests as secured in the employee’s
contract with the transferor. In Morris
Angel & Sons Ltd v Hollande,[40]
an employee’s contract with the transferor prohibited the employee, during a
period of one year following his termination, from transacting with the
transferor’s clients. The English Court of Appeal held that this prohibition
was favourably available to the transferee.
The transfer of undertaking should occur at one specific point in
time as opposed over a period of time. This was decided in the case of North
Wales Training and Enterprise Council Limited t/a Celtec Ltd V Astley and
others (2006)[41]. The issue to be determined in this case was
when the transfer occurred. The case arose out of a dispute between Celtec and
a group of its employees about the length of their continuous employment with
the company for the purpose of establishing redundancy entitlements and other
accrued rights. Celtec had long accepted that the date of effective transfer
was September 1990, but this was a matter partly of law and of facts. However
the employees did not did not think that they became employees of Celtec on
that effective day.
In its ruling the ECJ stated that the date of transfer was a
particular point in time which could not be postponed to another date at the
will of the transferor or transferee. It cited previous case law, stating that
contracts of employment existing on the date of employments between the
transferor and the workers assigned to the undertaking transferred are deemed
to be handed over on that date from the transferor to the transferee regardless
of what has been agreed between the parties. Its purpose was to ensure that the
contract of employment continues unchanged with the transferee, in order to
prevent them from being placed in an unfavourable position solely as a result
of the transfer.
G4S Justice Services (UK) Ltd V Anstey &Ors[42].
Two claimants were summarily dismissed for
alleged gross misconduct on 13th April 2005. They lodged internal
appeals against the dismissal. On 1st May 2005, G4S took over from
GSL, and at this time of transfer, the claimant’s appeals were yet to be
determined. Both appeals were successful and their dismissals overturned.
However, GSL no longer had work for them as their contracts were over. The
issue thus to be determined was who was the correct employer. Judge Clark
stated “It depended on whether
the appeals against dismissal succeeded and reinstatement was ordered. GSL did
uphold the appeals and revoked the earlier dismissal. The Claimants under TUPE
were in no worse position than their colleague”
In
conclusion, TUPE transfers the rights and duties subsisting between the transferor
and the employees to the transferee and the employees. It prohibits the use of
the transfer as a reason for dismissal. The employee may however object to be
transferred. In this case, the transfer shall operate as a dismissal unless the
working conditions with the transferee are substantially different from those
with the transferor. It is submitted that the Elizabeth Washeke Case where the employees lost their benefits
would fall under such a situation of substantial changes in the working
conditions.
BIBLIOGRAPHY
1.
Bell, AC (2006) Employment Law: Textbook series London: Sweet & Maxwell.
2.
European
Commission. Retrieved from
Employment, Social Affairs & Inclusion: http://www.ec.europa.eu/social/main.jsp?catId=706&intPageId=198&langId=en Accessed 24 March 2015
3.
Gordon
W. Johnnson. (2006). Insolvency and Social Protection: Employee Entitlements
in the Event of Employer Insolvency. France
4. Directive 2008/94/EC of the European Parliament and of the
Council of 22 October 2008 on the
protection of employees in the event of the insolvency of
their employer (codified version)
5. Derbyshire,
W & Hardy, S (2014) TUPE: law and
practice: a guide to the TUPE Regulations London: Spiral Press Ltd.
6. Transfer
of Undertakings (Protection of Employment) Regulations
CONVENTIONS
1. International
Labour Organization Termination of Employment Convention
2. The
Protection of Workers' Claims (Employer's Insolvency) Convention
3. Protection
of Wages Convention 1949
LAWS
1.
The Constitution of Kenya 2010
2.
The Employment Act 2007, Kenya
[1]The Employment Act 2007 provides for the rights
of employees under a contact of service.
[2]The Employment Act of Kenya 2007, Chapter 22 of
the Laws of Kenya
[3]Section 67 of the Employment Act 2007
[6] Section 73(1) and (2) of the Employment Act 2007
[13] Section 70(1) of the Employment Act 2007
[14] As above
[15] Section 70(3) of the Employment Act 2007
[16] As above Section 71
[17] As above
[18] [2013] eKLR
[19] Section 72 of the Employment Act
[20](1999)IRLR 566 (HL)
[21] n 10 Labour Law Text And Materials 2nd Edition 2005 1032
[22] (2007) ICR 779, (2007) C-278/05
[23]International Labour Organization (1982) C158
Termination of Employment Convention.
[24]Part II, Article 11 of the Council of European
Union Directive Relating to the Protection of Employees in the Event of
Insolvency of their Employer.
[25] Article 5 of the Protection of Workers' Claims (Employer's
Insolvency) Convention 1992
[26] Article 6 the Protection of Workers' Claims (Employer's Insolvency)
Convention 1992
[28] Article 9 of the Convention
[29] Hugh Collins, K.D. Ewing And Aileen Mccolgan Labour Law Text And
Materials 2nd Edition 2005 1029
[30] W Derbyshire & S Hardy, TUPE:
law and practice: a guide to the TUPE Regulations (2014) 2.
[31] This expression is borrowed from Regulation 3 (1) (a) of TUPE, see
n 6 below. This is because it refers to a transfer that involves changes in the
identity of the parties to an employment contracts. At Regulation 3 (2), an
economic entity is defined as ‘an organised grouping of resources which has the
objective of pursuing an economic activity.’
[32] Or as would be the case in the Common Law of England, the
employee’s contract with the transferor (that is the employer before the
transfer is effected) is terminated. See, Nokes
v Doncaster Amalgamated Colliers Ltd [1940] A.C. 1014.
[33] [2013] eKLR
[34]N 4 above 30.
[35] Regulation 3 (2) of the Transfer of Undertakings (Protection of
Employment) Regulations (TUPE).
[36] Regulation 3 (3) (a) (i) of TUPE.
[37] Regulation 4 (1) of TUPE.
[38]N 8 above.
[39] Regulation 11 (1). The information is labelled ‘Employee Liability
Information’ and includes the identity and age of the employee and any
disciplinary procedures taken against the employee.
[40] 1993 ICR 71, CA.
[41] (2006) UKHL 29 United
Kingdom House Of Lords Decisions- http://www.bailii.org/uk/cases/UKHL/2006/29.html
accessed on 2/04/2015
[42] (2006) IRLR 588- http://www.employmentcasesupdate.co.uk/site.aspx?i=ed16412 accessed on 2/04/2015
Courtesy of kusol class of 2015
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