347: Can an employer make a pay offer directly to employees to bypass collective bargaining?

Employers need to tread very carefully where a union agreement could be in place for pay discussions, even when they think one might no longer exist. Doing the wrong thing can be very expensive.

The Supreme Court has confirmed that an employer can make a direct offer to workers in relation to terms falling within a collective agreement, but only when the agreed collective bargaining procedure has been exhausted. While this may sound straightforward, many collective agreements do not specify precisely when the negotiation process is finished. Employers should therefore be careful to document the process throughout, and to clarify in writing the reasons why collective bargaining has stalled in order to avoid falling into the trap of making a direct offer too early.

In the final stage of the long-running case of Kostal UK Ltd v Dunkley, the Supreme Court has ruled that a one-off direct pay offer to employees, which bypassed stalled collective bargaining, was an unlawful inducement under section 145B of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA). This provision prohibits employers from approaching union members directly with an offer which, if accepted, would mean that any term of employment is no longer determined by collective bargaining. The Kostal case is significant because it is the first time the Supreme Court has decided an unlawful inducement claim.

The recognition agreement between Unite and Kostal UK Ltd included provisions for annual pay negotiations and for any proposed changes to terms and conditions to be negotiated with Unite through a four-stage procedure. The final stage was referral to Acas by joint agreement, failing which the procedure would be exhausted.

In 2015, Kostal’s formal pay offer included a 2% pay increase, Christmas bonus, reduction in Sunday overtime rate, and consolidation of breaks into one thirty-minute break. Unite did not recommend the changes and a subsequent ballot resulted in 78.4% of members rejecting the offer. Although the process of Acas conciliation had not been completed, on 10 December 2015, Kostal wrote directly to employees setting out the pay offer and explaining that if it was not accepted by 18 December 2015, they would not receive a Christmas bonus. In January 2016, Kostal sent a further letter to employees who had not yet accepted the offer. Fifty seven employees brought claims in the Employment Tribunal alleging that the two letters infringed their rights under section 145B of TULRCA by seeking to bypass the union.

The Employment Tribunal and the EAT ruled in the employees’ favour. However, the Court of Appeal then allowed a further appeal by Kostal, ruling that a one-off direct offer to employees, to bypass collective bargaining which had stalled, did not amount to an unlawful inducement. In the Court of Appeal’s view, section 145B only prohibited cases where the employer’s main purpose in making a direct offer was to ensure that terms of employment would no longer be determined through collective bargaining arrangements on a permanent basis, which was not Kostal’s intention here.

The Supreme Court has now restored the decision of the Employment Tribunal. Since Acas conciliation had not been completed, Kostal’s letters to employees had been sent before the negotiation process agreed with the union had been exhausted. The letters were therefore a restraint or disincentive to use the collective bargaining process, amounting to unlawful inducements under section 145B. The Supreme Court also held that since the legislation does not specify a length of time, there is no difference in principle between offering an inducement to union members to bypass collective bargaining on a temporary or permanent basis.  Kostal’s employees were awarded total compensation of £421,800.

The Supreme Court also confirmed that where a union is seeking recognition but is not yet recognised, an employer is free to make direct offers to workers since in these circumstances there is no possibility of agreeing terms through collective bargaining.

The Supreme Court’s judgement provides clarification in an area that can be particularly costly for employers both in terms of labour relations and reputational damage, but also financially with compensation currently being fixed at £4,341 per breach with no scope for a reduction. Employers may now want to consider revisiting their collective bargaining arrangements to ensure that they are clear when the process has been exhausted and also document their reasons when this stage has been reached.