Right to Work checks following corporate transactions – don’t fall foul of your immigration obligations!

In any corporate transaction, Buyers will want to make sure that there are no illegal workers within the workforce they are inheriting. Effective and targeted due diligence will be key to identify any issues before the acquisition takes place. Where risks are identified Buyers will want to obtain contractual protection from the Seller in the form of warranties and (where possible) indemnities against these risks. They will also want to take practical steps to mitigate any problems and address them at an early stage.

Failure to address these issues will leave a Buyer exposed to illegal working penalties. These include a civil penalty fine for any illegal working (of up to £20,000 per illegal worker) or even (in the most serious cases) potential criminal liability (resulting in an unlimited fine or up to five years in prison); not to mention the risks of being “named and shamed” and the associated damage to the organisation’s reputation.

There are also the complicated employment law issues of dealing with illegal workers and the associated risk of potential employment tribunal claims if these issues are not dealt with carefully.

Businesses holding sponsor licences will find that illegal working issues put their sponsor licence at risk of revocation. This could have far reaching consequences for existing sponsored migrants (who will usually be given 60 days to leave the country or find another sponsor) and any future recruitment/expansion plans (as they will no longer be able to sponsor migrant workers).

Right to Work issues following an asset purchase:

An asset purchase is likely to be subject to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). If so, the Buyer will acquire all employees employed in the business/part of the business at the time of the transfer on their existing terms of employment, as well as any rights and liabilities relating to them. The Buyer effectively “steps into the shoes” of the Seller.

This means that any right to work checks carried out by the Seller are deemed to have been carried out by the Buyer. On the plus side, this means that the Buyer will ostensibly have protection from any illegal working allegations by relying on the Seller’s right to work checks. But this only applies so long as the checks were done properly by the Seller and in line with the guidance in force from time to time.

If, however, the Seller did not conduct the original right to work checks correctly, the Buyer does not benefit from this protection, should any illegal working be discovered later.

However, under a special Home Office concession, a Buyer is given a 60 day “grace period” to make right to work checks after a TUPE transfer has taken place. If checks are done within this period, the Buyer will establish its own statutory excuse (or protection) from any illegal working.

With this in mind, we would strongly recommend that a Buyer acquiring employees as a result of a TUPE transfer, should carry out their own right to work checks as soon as possible after the transfer and definitely within the 60 day grace period.

This will give the Buyer the opportunity to put right any deficiencies in the checks made by the Seller as well as allowing them to determine when any follow-up checks should be made for employees with limited leave to remain in the UK.

Right to Work issues following a share purchase:

Where the ownership of a business changes hands as a result of a share sale, the identity of the employing company will not change. This means that the Buyer will continue to be able to rely on the employer’s right to work checks as a defence to any illegal working allegations, as if the change in ownership had not occurred.

In practice, however, a Buyer may very well want to check that all employees in the acquired company have the right to work. Particularly if due diligence before the transaction has been limited, it would be prudent to carry out a full audit of right to work checks on employees. The difference here is that there is no 60 day grace period. This means that, if any problems are discovered, the Buyer will not be able to establish a new statutory excuse.

Dismissals

If post acquisition right to work checks indicate that some employees do not have the right to work, the Buyer will want to act quickly to try and resolve the situation.  This is likely to involve terminating their employment so as to mitigate the risk of illegal working penalties (as referred to above).

However, employers need to be careful not to implement a knee jerk dismissal because illegal working issues appear to have arisen. Importantly, they must not forget their employment law obligations to employees, otherwise, they may face potential tribunal claims. Claims might include:

• Ordinary and automatic unfair dismissal for any employees with 2 years’ continuous employment. Where an employee can show the sole or principal reason for their dismissal is a TUPE transfer, their dismissal will be automatically unfair.
• Discrimination on the grounds of nationality, race or ethnicity.

Instead, employers will usually need to ensure that a fair process is followed before terminating the employment of any employees. This can be tricky to manage in practice and we would recommend organisations take specific advice to support them through these issues.

Practical tips

• Focussed due diligence is vital. Buyers should undertake immigration due diligence before entering into any transactions. This should include an analysis of the right to work checks undertaken by the Seller to establish whether they have complied with their legal obligations to establish all employees have the right to work in the job they are carrying out. Buyers should request details of any employees who require permission to work in the UK and of any past or ongoing breaches of the illegal working requirements, including any Home Office enforcement action. Doing this at an early stage will allow a Buyer to assess and manage the risks with any actual or potential breaches. This is increasingly important post-Brexit, given the end of free movement for EU national employees.
• Obtain protection in the transaction documents. Buyers should seek appropriate warranty and (if appropriate) indemnity protection for any potential non-compliance flagged in their due diligence.
• Audit right to work compliance immediately after a transaction. This is prudent in both share and asset sales, particularly if the Buyer has not been able to undertake a full audit of the right to work checks as part of their due diligence (which is often the case). For TUPE transfers, a Buyer should undertake fresh right to work checks within the 60 day grace period as this allows them to establish a new statutory excuse. It is important to build this into any integration plans post-completion to ensure this is not overlooked.
• Take legal advice early. If you have any concerns or discover any potential issues, it is imperative that you take legal advice as soon as possible, as the risks of getting things wrong, from both an employment and immigration perspective, could be very damaging and costly.

Should you require further advice or support, please contact a member of our specialist Business Immigration Team