The right to trade union representation: Kostal UK Ltd v Dunkley & Ors [2021] UKSC 47 – by Stuart Brittenden & Richard Arthur

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1. Introduction

On 27 October 2021 the Supreme Court (“SC”) handed down judgment in Kostal UK Ltd v Dunkley & Ors [2021] UKSC 47. This is the first occasion that the SC has examined collective bargaining and the rights of trade union members. It is profoundly important, acknowledging that the right to be represented by a trade union in the context of collective bargaining is a fundamental component of freedom of association as recognised by Article 11 ECHR.

This is also the first occasion that the appeal courts have considered the reach of the inducement provisions contained within section 145B of the Trade Union & Labour Relations (Consolidation) Act 1992 (“TULRCA 1992”). Section 145B was introduced by section 29 of the Employment Relations Act 2004, principally in response to the ECtHR ruling in Wilson/Palmer v United Kingdom[2002] IRLR 568, which found that the United Kingdom had acted in breach of its positive obligations to ensure the effective enjoyment of rights to freedom of association under Article 11 ECHR. At that time, employers were able to offer sweeteners or a “douceur” to workers to surrender their rights to have their terms negotiated by their union by means of collective bargaining. Those who did not surrender their rights received less favourable terms than those who did.

Section 145B gives trade union members important rights where their trade union is recognised for collective bargaining, or where the union is seeking recognition. The key object of section 145B is to give trade union members the right not to receive an offer which, if accepted, would have the result that one or more terms of their employment will not (or will no longer) be determined by collective bargaining. The legislation describes this as the “prohibited result” (section 145B(2)). Liability will only arise if the employer’s sole or main purpose in making the offer is to achieve the prohibited result: section 145B(1)(b). When considering the employer’s purpose, regard must be had to prescribed factors set out in section 145D(4) which include, for example in the case of a recognised union, when the offers were made, whether the employer had recently changed or sought to change, or did not wish to use, arrangements agreed with the union for collective bargaining (section 145D(4)(a)). Where a claim is upheld, an Employment Tribunal must make a prescribed award (currently £4,341: section 145E).

2. Outline of facts

Proceedings were brought by 57 shop floor employees who were members of Unite the Union (“Unite”). The Company recognised Unite for collective bargaining purposes. The recognition agreement provided for annual collective bargaining negotiations, as well as a prescriptive failure-to-agree process. The final stage included a referral to ACAS. Pending the exhaustion of the process, the agreement expressly provided that the status quo would apply – meaning that no change would be imposed by either party. The recognition agreement was not legally binding, but “binding in honour only”: section 179 TULRCA 1992.

During the collective bargaining negotiations in 2015, the Company tabled an offer to Unite which comprised: a 2% increase in basic pay; an additional 2% increase for those earning less than £20,000 p.a; and a Christmas bonus equating to 2% of basic pay. The quid pro quo was that the Company sought agreement in respect of a reduction to Sunday overtime rates, sick pay for new starters, and a consolidation of breaks. Unite balloted its members. 78.4% rejected the offer.

In the midst of collective bargaining negotiations with Unite, and before the process had concluded, the Company reacted by tabling direct offers to the workforce, informing staff that they would not receive the Christmas bonus if they did not accept by a deadline (this was the “First Offer”). Further collective bargaining meetings took place, and by January 2016 the parties had reached the final stage of the failure to agree process at ACAS. By that stage 91% of the workforce had accepted the direct offers, and the Union’s mandate was, as the ET found, “destroyed”.

On 29 January 2016, the Company made a similar offer to those who had not accepted the First Offer, but this time omitted to include the offer of a Christmas bonus (“the Second Offer”). It warned that if this offer was not accepted, this may lead to the termination of their employment (no mention was made of re-hiring them on the revised terms).

3. Procedural History

The Employment Tribunal (“ET”) sitting in Sheffield upheld the claims under section 145B, finding that the Company had taken the conscious decision to bypass further meaningful negotiations with Unite. It awarded the Claimants the prescribed sum (then £3,800) for each of the First and Second Offers made to them. The total award was £421,800.

The Company’s appeal was rejected by the majority in the Employment Appeal Tribunal (“EAT”), formed of Simler (P) as she then was, sitting with two lay members. The Court of Appeal (“CA”) allowed the Company’s appeal, and set aside the ET decision. The CA accepted the ET’s factual finding that the employer’s purpose in making the Offers had been to circumvent the collective bargaining process. However, it did not follow that this was necessarily a “prohibited result” within section 145B. The Union’s construction, as accepted by the ET and EAT (majority) it said, would give a recognised trade union a “… veto over even the most minor changes in the terms and conditions of employment” (at [38]). Where a trade union was recognised, section 145B was only engaged where the direct offers had the effect of taking terms, or any particular term(s), outside the sphere of collective bargaining on a permanent basis. It did not apply to offers which, if accepted, merely mean that the term was not determined by collective bargaining “on this occasion”. As Professors Bogg and Ewing observed, the CA’s purposive approach to statutory construction appeared to align with “… the maximal preservation of managerial prerogative rather than supporting Article 11 rights, an interpretative approach which is offered without any supporting argument”.

The CA ruling sparked profound consternation within the labour movement, and in particular the sanctity of recognition agreements. Unite appealed to the SC.

4. The Supreme Court

The SC unanimously allowed Unite’s appeal. Lord Leggatt delivered the speech for the majority (with whom Lords Briggs and Kitchin agreed). Lady Arden and Lord Burrows also provided a speech which agreed with the result but differed slightly in analysis. The key points of interest are summarised below.

The SC reached the opposite view to the CA: where a trade union is recognised, for section 145B to be engaged, the direct offer does not have to take the particular term(s) permanently outside the sphere of collective bargaining.

Lord Leggatt determined that, where the union is recognised, offers would have the prohibited result if acceptance of them would mean that one or more terms of employment “will not” or “will no longer” be determined by collective bargaining. He reasoned that “[t]here is no difference in principle between offering an inducement to trade union members to agree not to be represented by their union in collective bargaining indefinitely or for a long period or for a very short period of time…” (at [36]). The prohibited result will still be achieved.

Indeed, this acknowledges the very point made in the example given by Professors Bogg and Ewing where an employer postpones pay negotiations for a year because the union had called for industrial action, and instead makes direct offers to the workforce. Therefore, it is sufficient to trigger section 145B that an offer is made which, if accepted, would in fact “… cause arrangements for collective bargaining which have been agreed with the union to be by-passed (in whole or in part)” (at [36], [53]).

In the minority, concurring as to the result, Lady Arden and Lord Burrows agreed that this was “obviously correct” (at [118], [126]). Echoing the reasoning of Simler (P) (as she then was in the EAT), they reasoned that were it otherwise, section 145B would be rendered a “dead letter” [120]:

“… If we were to dismiss this appeal, employers would be advised that, provided they do not expressly mention in individual offers that the workers must give up or surrender rights to have terms fixed by collective bargaining, and provided they continue to show commitment to collective bargaining by little more than what the ET described as ‘window dressing’…”

Of particular significance is the fact that the reasoning of the majority was firmly buttressed by reference to ECtHR jurisprudence on freedom of association under Article 11 ECHR, and criticisms made of the UK law as it stood by the International Labour Organisation’s Committee on Freedom of Association (at [59]). Lord Leggatt unhesitatingly observed that it was: “… incompatible with Article 11 to allow an employer simply to by-pass a trade union which has been recognised for the purpose of collective bargaining and enter into direct individual negotiation with its employees…” ([58] – [65]). The language used here is highly important, the majority acknowledged that under Article 11, workers possessed a “right” to be represented by their trade union in collective bargaining. Where an employer refuses or fails to engage in any discussions or negotiations with a recognised union before making direct offers to workers, such conduct “denies the union its seat at the table and does not allow the union’s voice to be heard” (at [58]). Indeed, the majority acknowledged that if the right to be represented by the union in negotiations and for the union’s voice to be heard is to have any “substance” at all and is not to be “entirely empty or illusory”, permitting such conduct must be contrary to Article 11 (at [57]).

It is necessary to reflect upon the ramifications of this: workers have a right to have their interests represented by their trade union (such a right does not exist in contract but is derived from Article 11); and that right must have some meaningful content. This places a fetter on the exercise of the managerial prerogative, and is the polar opposite of the CA’s analysis.

The interesting question is where the line is to be drawn? How much discussion or negotiation with the union does the employer need to engage in to satisfy the rights of union members to be represented by their trade union in collective bargaining? The majority decided the parameters should be defined by reference to whatever bargaining procedure has been agreed between the employer and the union, or otherwise imposed in cases of compulsory recognition under the procedures contained in Schedule A1 TULRCA 1992 (at [60]) and set out within the Trade Union Recognition (Method of Collective Bargaining) Order 2000, SI 2000/1300. What this means is that an employer cannot make direct offers to its workforce in respect of any terms which fall within the scope of collective bargaining unless it “… has first followed, and exhausted, the agreed collective bargaining procedure…” (at [67]).

Drawing these points together, the SC concluded that the United Kingdom was subject to a positive obligation to secure the right under Article 11 for members to be represented by a recognised trade union (and the corollary of this was the right of the union to be heard). This demands that an employer follows a specified bargaining procedure which it has either voluntarily entered into or which has been imposed by the Central Arbitration Committee. An employer: “… cannot be permitted with impunity to ignore or by-pass the agreed procedure, either by refusing to follow the agreed process at all or (quoting from the ET) by being free to “drop in and out of the collective process as and when that suits its purpose” (at [61]). 

On the current facts as found by the ET, in making the direct offers, the Company had “dishonoured” the recognition agreement because the direct offers were made before the procedure had been exhausted (at [70]). Additionally, the Company had treated less favourably employees who were not prepared to relinquish their right to have the bargaining procedure followed, in that they would be deprived of the Christmas bonus. In language resonant of that used by the ECtHR in Wilson/Palmer(at [47]), the majority was clear that the Company’s behaviour: “… can fairly be characterised as a disincentive or restraint on the use by the claimants of union representation to protect their interests”.

5. Causation

Applying those principles to the facts, the majority considered that the question of when the prohibited result arises is one of causation. It is necessary to consider what would “… inevitably have occurred anyway, irrespective of whether the offers were made and accepted” (at [65]).To achieve the prohibited result, there must be at least a “real possibility” that, if the offers were not made and accepted, the workers’ relevant terms of employment would have been determined by a new collective agreement reached for the period in question. If there is no such possibility, then, according to the majority, it cannot be said that making the individual offers has produced such a result. In other words, it is implicit in the definition of the prohibited result that the workers’ terms of employment, or any of those terms, will not (or will no longer) be determined by collective agreement negotiated by or on behalf of the union “…when they otherwise might well have been determined in that way” [emphasis in original text].

This formulation was unheralded in oral argument. Section 145B contains no obvious clue that section 145B was intended to be applied in this way or subject to an additional filter (none appears in the text). There is no clue that this was ever countenanced in the Government’s Response to the Public Consultation reviewing the Employment Relations Act 1999 (published on 2 December 2003). At para. 3.12 it explained that section 145B was to address the mischief in Wilson, but:  

“… In addition, offers should be made unlawful whose main purpose is to induce a group of workers, who belong to a recognised union, to accept that their terms of employment should be determined outside collectively agreed procedures. The result is that it would be unlawful for an employer to offer an inducement to the union members in such a group to have their terms of employment determined outside the framework set by any existing collective bargaining arrangements…”

The majority’s approach to causation is difficult to reconcile with the language of section 145B and may be unworkable. The reason why the Employment Relations Bill 1999 was amended to include offers made to members of union “seeking to be recognised” was that the European Court of Human Rights in Wilson ”…had made it clear that the rights under article 11 apply whether or not the union is recognised” (at [46])(see Explanatory Notes at [193]). For the majority, applying a test of causation resolved a perceived difficulty in relation to cases where the union is not yet recognised (at [66]).  It may be difficult to countenance how it could be said that at the time the offer was made, there was a “real possibility” that the terms “might” have been determined by collective bargaining in circumstances where the employer is under no obligation at all to negotiate with a union which it has not so far recognised.  However, the minority saw no difficulty in the pre-condition for the prohibited result being an existing “or envisaged” collective agreement in circumstances where the union was not yet recognised (at [127]).  It may be that the majority had in mind that, where the union is not yet recognised, the prohibited result only arises in a limited species of direct offers where the worker opts out of changes to their terms being negotiated to the bargaining unit in the future (see [35]). That does seem artificial.

In the minority, Lady Arden and Lord Burrows, found that the offers made by Kostal did amount to contracting-out of collective bargaining anyway (at [119]).  However, they disagreed that causation lay at the centrepiece of section 145B, instead adopting an approach similar to the EAT majority, they identified two questions for consideration as to whether or not the prohibited result is made out (at [126]):

1. is the employer, in form or in substance, making an offer for the workers to contract out of collective bargaining whether in the future or on this occasion?
2. is the employer seeking to bypass the agreed (or, if the union is seeking recognition, the contemplated) collective bargaining procedures or does the employer have a genuine business purpose in making the individual offers?

6. “Real possibility”

Regardless, of the divergence in reasoning, it is unlikely that the majority’s “real possibility” test places any real obstacle to a claim succeeding under section 145B. By definition, the ET cannot realistically second guess what would have happened had the direct offers not been made. The direct offer has or is likely to have altered the substance of any future bargaining because the employer evidently intends for staff to accept the direct offers, and this is sure to inform its stance in any further negotiations. The practical issue however is that ETs cannot be expected to embark on a sea of speculation and examine the world that never was. In any event, even the majority acknowledged that the “real possibility” element sets a low bar. In relation to determining whether there was a real possibility that the terms in question would have been determined by collective agreement, “… that must ordinarily be assumed to be the case where there is an agreed procedure for collective bargaining in place which has not been complied with” (at [71]). The default position is that an ET can assume that there existed such a real possibility where the procedure has not been exhausted.

7. Consequences

The import of Kostal cannot be understated, as seen by the very significant difference in principle between the company’s case and the judgments delivered by the SC.

The Company maintained that the offer must be expressly presented to the worker as a ‘contracting out’ offer in order to achieve the prohibited result.  This was to be contrasted with an offer, which if accepted, would mean that one or more terms would no longer be determined by collective bargaining – which, by itself, according to the Company would not be sufficient to achieve the prohibited result. Even then, prior to the SC hearing, it maintained that it was only offers to contract-out of collective bargaining on a permanent basis which were capable of being prohibited.  

At the SC hearing, the Company conceded that an offer to contract-out of collective bargaining in the current pay round only (with collective bargaining being resumed subsequently) was also capable of giving rise to the prohibited result. Its position was, therefore, that it was only offers to contract-out of collective bargaining which were capable of giving rise to the prohibited result, although this applied to both contracting-out of collective bargaining on a permanent basis, or in the particular pay round only.

This was rejected by Lord Leggatt, who did “… not, however, accept the [further] submission that those rights [under article 11] and section 145B are only capable of being infringed by an offer which, if accepted would require the worker to contract out of collective bargaining (for any length of time and in relation to one or more terms of employment” (at [53]). According to Lord Leggatt and the majority, it was sufficient for the offer, if accepted, ”to cause arrangements for collective bargaining to be by-passed”. 

Assume that a trade union is recognised for collective bargaining in respect of terms and conditions of employment. Whenever an employer makes a direct offer which has the effect of removing, or modifying even a solitary term, then unless it has “exhausted” the collective bargaining process, it is inevitable that this will achieve the prohibited result for the purposes of section 145B(2). It is immaterial whether the change is temporary or permanent. It must also be “ordinarily … assumed” that there was a real possibility that the term in question would have been determined by collective bargaining.

All of this was however intentional – the legislation was designed to have a deterrent effect. The rationale was expressly spelled out by Gerry Sutcliffe (Parliamentary Under-Secretary (Trade and Industry)) during the passage of the Bill through Parliament where he explained:

“…the tribunal must make a set award of £2,500. In effect, that is a fine… We believe that the fine would act as a significant deterrent to employers, especially in circumstances where many workers are offered inducements and could potentially make a claim. We also provide that any unlawful inducements received by the complainant do not need to be returned. Therefore, the total cost to the employer of his unlawful behaviour could mount up, which again adds to the deterrent effect of the system of remedies… We think that £2,500 is a reasonable deterrent; that is why we set that figure. It gives a clear signal in the law that such abuses are unacceptable. A variable award would send entirely the wrong message. Indeed, if an award were set simply at a level to compensate pecuniary loss, it might be very small indeed. The deterrent effect on employer behaviour would be minimal.”

Employment Relations Bill Deb, 5 February 2004, c109.

8. A duty to bargain in good faith?

The decision also sees the emergence of an employer’s duty to conduct collective bargaining in good faith, at least until the bargaining procedure has run its course. It is material that the SC described the Company as having “dishonoured” the recognition agreement. The majority considered that an employer could make direct offers once it had exhausted the process. However, even that was subject to an important qualification, in that the employer must “genuinely” believe this to be the case (at [68]). The minority view was that it does not necessarily follow that the employer escapes liability just because the collective bargaining process for this round has been exhausted: “… For example, an employer who has been determined to thwart the bargaining process does not have a genuine business purpose …” (at [129]). However, after some reflection, it is perhaps possible to reconcile the views of the majority and minority. Both recognised and acknowledged (in different ways) that the position may be different where there is evidence that the employer has acted in bad faith or in a way designed to undermine the trade union.

9. Conclusion

There is doubtless much ink to be spilt about the implications of Kostal. However, at the heart of the Supreme Court ruling is an acknowledgment of fair dealing in the industrial relations arena – the expectation that employers should observe the ground rules that they have signed up to (or have been imposed by the Central Arbitration Committee); coupled with employers not taking steps to undermine or frustrate the Article 11 ECHR rights of trade union members to have their interests represented by their trade union in collective bargaining negotiations.

What is now clear is that regardless of whether or not a voluntary recognition agreement is presumed not to be legally binding for the purposes of section 179 TULRCA 1992, the use of the descriptor that such agreements as being “binding in honour only”, perhaps calls for reconsideration, or at least qualification. It also remains to be seen how section 145B modifies an employer’s ability to fire and re-hire workers, bearing in mind that for section 145B to apply, the inducement need not result in an improvement to terms.

(Suggested citation: S Brittenden and R Arthur, ‘The right to trade union representation: Kostal UK Ltd v Dunkley & Ors’, UK Labour Law Blog, 14 December 2021, available at https://uklabourlawblog.com)