Donald MacKinnon: Does ‘pre-pack’ deal protect House of Fraser’s staff?

Donald MacKinnon

Donald MacKinnon looks at how the rights of House of Fraser’s 17,500 employees may be affected following the deal with Mike Ashley’s Sports Direct.

Does ‘pre-pack’ deal protect House of Fraser’s staff?

It has been the worst year for retail since the last financial crisis. The news of House of Fraser going into administration back in February came as no surprise and through the last few weeks its existence hung in the balance. Now it seems the department store has won a reprieve, as Sports Direct Group purchased the company for £90 million as part of a ‘pre-pack’ administration deal, meaning it was negotiated prior to the formal appointment of administrators. But what does this mean for House of Fraser’s anxious employees in Glasgow, Edinburgh and Dumbarton?

The Company Voluntary Arrangement which had been previously approved in a bid to save part of the business would have resulted in 31 store closures and the loss of around 6,000 jobs. Mike Ashley, the founder of Sports Direct, has now vowed to keep open the majority of stores, with the intention of making House of Fraser the ‘Harrods of the High Street’. According to EY, the appointed administrators, Sports Direct tabled the only viable offer to save the business.

Packing their bags?

As the dust settles, employees will now be asking what impact the ‘pre-pack’ has on their status and the contracts they had in place with the former employers. One of the important questions is whether the Transfer of Undertakings (Protection of Employment) (TUPE) Regulations, aimed at protecting employees’ terms and conditions under a new employer, will now apply. The TUPE regulations apply to ‘relevant’ insolvency proceedings which are aimed as rescuing the business as a going concern. Where proceedings are ‘terminal’ and aimed solely at the liquidation of company assets, TUPE does not apply. The European Court of Justice confirmed last year that TUPE rights would apply to pre-pack administration as relevant insolvency proceedings.

As with all TUPE transfers, the employees who transfer will be protected against transfer-connected dismissal, however not all protections under TUPE apply in the same way in administration scenarios. For example, the new employer does not take on liability for all sums due to the transferring employees, as outstanding wages and holiday pay will be paid out of the National Insurance Fund instead.

There is also greater flexibility for the new employer to vary terms and conditions were the reason for the variation is to boost the chance of business survival, although any such changes must be agreed with the employees or their representatives.

So while their jobs should, in theory, be safe for now, their roles could look different.

The 11,500-concession staff

Mike Ashley has stated he intends to keep 80 per cent of the stores open, but this means there may still be job losses. Any dismissals made where the reason is the transfer itself and not for an economic, technical or organisational (ETO) reason will be deemed automatically unfair. However, the 11,500-concession staff may not be afforded such protection.

Staff employed directly by brands would not be transferred and Ashley has made it clear he intends to change the brands available in store, which could result in redundancies for brands affected by a reshuffle.

Whilst Mike Ashley and the Sports Direct Group aim to save as many jobs as possible, the retail sector is suffering from a raft of underlining issues and faces a battle for survival. Concerns over how stores stack up against online channels coupled with uncertainty surrounding Brexit could see pre-package administration deals grow in popularity as companies struggle to stay afloat.

Retailers would be wise to stay live to how TUPE applies to them.

Donald MacKinnon is group legal director of Law At Work (LAW)