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Employment Outsourcing and Pension Deficits – Court of Appeal Rules

Many large companies do not directly employ their staff, instead relying on outsourcing. However, an Appeal Court ruling has shown that that does not necessarily relieve them of legal liabilities that may arise from the now ubiquitous deficits in employee pension schemes.

Companies A and B were in the same ownership. The former provided services to the latter by acting as employer of its staff. Company A went into administration and an issue arose as to where responsibility lay for a deficit of about £7 million in a staff pension scheme. A judge found that company B was obliged by Section 75 of the Pensions Act 1995 to indemnify company A in respect of the deficit.

In dismissing company B’s challenge to that ruling, the Court noted that its directors had clearly understood that it would bear legal responsibility for the employment costs of staff that were seconded to it, including pension costs. An implied contract existed between the companies to that effect and company B was thus liable to make good the pension deficit.