Supreme Court Rules on Employee Rights in Corporate Restructuring

The SCOK reaffirmed the doctrine of separate juristic personality, a foundational principle underpinning modern business structures, which maintains the distinct legal identities of parent and subsidiary companies. The SCOK held that, in the absence of fraud or bad faith, the separation between these entities should be upheld. Consequently, any new employment relationship arising from the transfer of employees from one company to another will be recognised and respected, including changes in employment terms. This decision emphasises that if corporate actions are conducted in good faith and without fraud, the distinct legal separateness of each company will be preserved, allowing them to independently manage their employment relationships and contractual obligations.

Symon Wairobi Gatuma was originally employed by Kenya Breweries Limited (KBL) in its malting unit in 1986. In 2003, KBL informed certain employees including Symon that it had separated its malting unit from its beer business, resulting in the declaration of redundancy for employees in the malting unit and that they will be paid redundancy dues. Two days after leaving KBL, Symon accepted an offer of employment from Kenya Malting Limited (KML), a subsidiary of KBL, at a reduced salary, and he continued to work under these new terms until 2009, when he was again declared redundant and received a redundancy package from KML.

Following his termination, Symon filed a suit at the Employment and Labour Relations Court (ELRC), alleging unfair labour practices and contending that the separation of the malting business from KBL to KML was merely a façade, and that his true employer had not changed. He argued that his work environment, including his shift schedules, production tasks, and machinery, remained identical. He further asserted that communications and actions concerning his National Social Security Fund and retirement benefit contributions were managed by KBL, and he continued to receive benefits such as medical cover, food rations, and uniforms from KBL. Additionally, upon leaving employment in 2009, he received a Certificate of Service from KBL, which stated that he had been employed by KBL from 1986 to 2009.

The ELRC initially took the view that in regulating labour, courts should be willing to disregard the corporate separation between parent and subsidiary entities and allocate responsibility to the ultimate decision maker. The ELRC reasoned that KML functioned as a division of KBL, a view further supported by the fact that KBL ultimately issued the certificate of service for the entire period he worked for KBL and KML. Accordingly, the ELRC held that Symon had demonstrated that he was denied his employment rights through manipulations by KBL, which involved creating façade companies to exploit labour and avoid providing fair and adequate compensation. Symon was accordingly awarded damages.

KBL appealed this decision to the Court of Appeal (COA). The COA allowed the appeal, stating that KBL and KML were separate legal entities, each with its own rights and liabilities. The COA also held that since the redundancy notice issued by KBL was valid, and Symon had accepted the new terms of employment at KML and worked under those terms for six years, there was no violation of fair labour practices. Dissatisfied with the COA’s decision, Symon filed a further appeal to the Supreme Court of Kenya (SCOK).

The SCOK examined whether the changes in Symon’s employment terms constituted unfair labour practices. Noting the deficiency in the Employment Act in providing a legislative framework for solvent business transfers and takeovers, the Court reviewed laws from the UK and South Africa, which protect employees’ rights during such transitions.

The Supreme Court relied on the principle established in Salomon v. Salomon[1896] UKHL 1, [1987] Ac 22 (1896), affirming that each member company in a corporate group is a separate legal entity. It held that a corporate group could structure itself so that liability falls on a particular member only, and the corporate veil can only be pierced or lifted in exceptional circumstances. Such circumstances include when a statute, contract, or other document requires the veil to be lifted, when it is shown that a company is used as a façade or sham to perpetrate fraud, avoid legal obligations, or achieve an improper purpose, and when it is established that the company acts as an authorised agent of its controllers or members. The SCOK found that while Symon remained in the same station, performed the same work, and was under the same medical scheme, the roles and operations of KBL and KML were distinct. The SCOK also found no evidence of fraud or ill motive by KBL or KML in the delinking, which was driven by economic reasons. The SCOK noted that due process was followed: Symon was paid severance upon leaving KBL, accepted a new contract under KML, which was a distinct entity, and was involved, along with his trade union, in the redundancy process.

Agreeing with the COA, the SCOK dismissed the appeal, finding that Symon’s rights were not infringed. It upheld that the redundancy notice was valid and procedurally compliant and that the subsequent employment terms offered by KML were based on a new contract, which Symon willingly agreed to and under which he remained employed for six years.

This decision by the highest court in Kenya provides guidance on the distinct legal relationship between parent and subsidiary companies, particularly in relation to employee rights. The decision upholds the principle that companies, including parent and subsidiary companies, are separate legal entities, even within a group structure. As long as due process is followed and the transfer of business is carried out for legitimate economic reasons, an employee transferred to a subsidiary or a different entity within the group, even at reduced pay, cannot claim to have been employed by the same company.

Should you have any questions regarding the information in this legal alert, please do not hesitate to contact Sonal Tejpar or Faith Macharia. 

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Contributors
1. Edel Ouma – Senior Associate
2. Leah Muhia – Associate
3. Brian Kibet – Trainee Lawyer