Bordering on a fine


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There are few issues in the United Kingdom that create more political debate and press comment than immigration. Over recent years, immigration legislation has been heavily amended and, most recently, caps have been placed on the total number of non-EU workers that can be employed in any year.

One of the inevitable consequences of the attention which immigration issues has received is that it is easier than ever for employers to fall foul of the legislation. The key piece of immigration legislation in the UK is the Immigration, Asylum and Nationality Act 2006, and the most publicised repercussion for employing an illegal worker is the imposition of a £10,000 fine, which is unlikely to be disastrous for most businesses. What can be disastrous is the potential for damage to reputation (the UK Border Agency (UKBA) publishes a list of offenders) and the possible revocation of a sponsor licence (which could prevent the employer from employing any non-EU workers).

The risk of unintentionally employing a worker who does not have the right to work in the UK is increased when acquiring a new business, either by way of an asset or a share purchase. As with any acquisition, it is advisable to carry out appropriate due diligence before the event and we look at how to carry out such due diligence.

In the case of a share purchase, liability may fall on the target company but, as we explain below, it is likely that the acquiring company will hold the necessary UKBA sponsor licence and therefore has to ensure compliance with immigration legislation. With an asset purchase, the target’s employees are likely to be deemed transferred under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and will become the direct responsibility of the purchaser.

Before the acquisition

The key tool available to a buyer pre-purchase is due diligence, which is particularly important given that warranty and indemnity claims cannot fully compensate for damage to the purchaser’s reputation and relationship with the UKBA.

The final decision as to the extent of immigration due diligence will depend on the type of business operated by the target and how the acquirer intends to operate the business.

The minimum investigation necessary is to determine which employees, if any, do not have EU citizenship and therefore require permission to work in the United Kingdom. Further enquiries are recommended if the target business is deemed high risk (e.g. restaurants, care homes, lower skilled manual work) or if the preliminary investigations highlight any potential issues.

In an ideal world, with sufficient time and resources, a buyer would carry out the enhanced checks described below against all employees before the acquisition takes place. If not, then these checks should at least be carried out in respect of employees in key management roles because replacing them is likely to be harder and more time consuming.

When deciding if enhanced checks should be carried out, the acquirer should bear in mind that on a TUPE transfer the acquirer has a 28 day period following completion to check employee details fully, but no such grace period exists for share purchases.

Essential checks to be carried out during the due diligence process include:

  • names of all employees;
  • nationalities;
  • each employee’s place of work;
  • working hours (especially to check compliance with any student visas);
  • current remuneration;
  • copy of permission to work in the case of non-EU employees (UKBA letters, visa vignette and biometric ID card); and
  • details of the target business’s UKBA sponsor licence including its authorised users.

Details of all consultants should also be sought, in case any are determined to be employees.

If the acquirer determines that any enhanced checks are required, they should ask for copies of the documents that the acquiring entity inspected at the time they recruited the worker, together with a confirmation that the originals of such documents were seen prior to the employment starting. Exactly which documents are required depends on an employee’s status but will, at the very least, include a passport (front cover and bio page). If in doubt, advice should always be sought as to exactly which documentation is required.

While paper-based due diligence is most likely to be the primary source of information, the value of a site visit should not be disregarded. Any decisions to undertake enhanced checks should be based merely on the facts presented and should not be based on an individual employee’s name or apparent ethnic background.

The other essential tool used to protect a buyer is carefully drafted warranties and indemnities. The extent of the warranties will depend on the type of business being acquired and how much of that business’s value is in the workforce. At the very least, there should be confirmation that the target business has complied with relevant immigration legislation at all times, has never employed workers other than in accordance with their relevant permission to work and has not done anything that may compromise their “A rating” with the UKBA sponsor licensing unit.

As with any warranties, their primary purpose is to try to elicit information from the seller before the transaction completes.

The benefit of using indemnities to deal with immigration issues is somewhat limited. As mentioned, the reputational damage and effect on the target’s or buyer’s sponsorship licence tend to be of greater concern than the civil penalties and are harder to quantify. As many issues as possible should be resolved before entering into the sale contract, with indemnities used as a means of shielding the buyer from historical but unquantifiable liabilities (including liabilities arising out of any dismissal requested of the seller as a consequence of the buyer’s due diligence).

Between exchange and completion

If there is a period of time between exchange and completion it may be an appropriate moment for the buyer to consider registering with the UKBA as a sponsor. While this can be undertaken just after completion, doing it early may relieve some of the pressure likely to be experienced by the buyer in the weeks immediately following completion.

Immediately following completion

The weeks following completion are usually a frenzy of activity, while the acquirer integrates systems and staff. Unfortunately, the buyer of a business by way of an asset purchase may also have quite a lot of work to do from an immigration perspective.

In order to be able to use the “statutory excuse” (as provided for in the Act) for employing a worker without permission, the acquirer would have to make all of the checks that would usually be carried out, as if the transferring employees had just joined the buyer’s business. Further advice should be sought to determine exactly which documents are required, but they are likely to include the originals of the documents described above. The buyer should keep copies of all original documents it has been provided with and keep such copies in the relevant employees’ personnel files.

There is no such “grace period” in the case of share purchases, but it would be wise to carry out exactly the same checks so that any problematic employees can be dealt with as soon as possible.

In the case of either a share purchase or an asset purchase, the buyer must also register with the UKBA for a sponsor licence within 28 days of completion, if it is not already registered. The target business will also have to notify the UKBA that the transaction has occurred – in theory, this notification can be made using the UKBA’s Sponsor Management System (SMS) but, given that transaction details are rarely straightforward, an e‑mail notification is the UKBA’s preferred method of communication.

The buyer should also consider whether the individuals registered on the SMS as users remain appropriate, given the structure of the business following completion.

If the target business is employing an illegal worker

If any illegal workers are identified during the due diligence process, a buyer should ensure they are dismissed by the seller (applying an appropriate and fair process) before the transaction takes place.

If an illegal worker is identified after completion, the buyer should take employment advice to ensure that dismissal is made correctly; however, illegality can be a fair reason for dismissal. Hopefully any costs of going through such a process can be picked up by way of a warranty claim.

The one course of action which must not be taken is doing nothing. As well as the civil penalties and reputational consequences of employing an illegal worker, the Act provides that knowingly to do so could be a criminal offence by directors or managers, with a risk of imprisonment for up to two years.

For further information, please contact Taj Rehal (trehal@fladgate.com) or Michael McCartney (mmccartney@fladgate.com).

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