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If it ain’t broke…

Following the Employment Law Review in 2011, the Government issued a call for evidence on the effectiveness of the Transfer of Undertakings (Protection of Employment) Regulations 2006. Makbool Javaid, Partner at Simons, Muirhead & Burton, explores.

There are concerns that some employers believe the Regulations have been ‘gold plated’, going further than the EU Directive, their source, requires, and are overly bureaucratic. But are these concerns justified or just a vehicle for further reducing employee protection and making it easier for mergers, takeovers or contracting out under the banner of cutting ‘red tape’?

Is there a valid argument for revising a set of Regulations, which in many instances have brought a greater clarity to what was previously regarded as a complex area of the law? In November 2011, the Government issued a call for evidence on the effectiveness of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and how they might be improved. The TUPE regulations are designed to safeguard employees’ rights where a business changes hands. They also clarify transfer terms, including exchanges of information, employment liabilities and consultation rights. So let’s look at two of the key issues causing concern and test whether this can fairly be described as ‘gold plating, complexity and bureaucracy gone too far.

The Call for Evidence asks for views on whether TUPE provides greater clarity and transparency on when TUPE will apply and in particular, by providing greater certainty about the application of TUPE in outsourcing situations (which are referred to as a ‘Service Provision Change’ (SPC) in the Regulations). TUPE preserves the continuity of employment and terms and conditions of employees who are transferred to a new employer where a ‘relevant transfer’ takes place. A ‘relevant transfer’ can take place in one of two situations: (i) where there is a ‘business transfer’; or (ii) where there is a SPC, and applies to public and private undertakings engaged in economic activities whether or not they are operating for profit. A ‘business transfer’ occurs where a business, or part of a business, situated immediately before the transfer in the UK, is transferred from one employer to another employer an ‘economic entity’ (pursuing an economic activity which is a central or secondary part of the business) which retains its ‘identity’. Here the guidance from the European Court of Justice (ECJ) has long been regarded as assisting with interpretation.

In Foreningen af Arbejdsledere i Danmark v Daddy’s Dance Hall [1988] IRLR 315, the ECJ held that ‘economic entity’ means the business continues to run without any interruption with the same staff. In Spijkers v Gebroeders Benedik Abbatoir C-24/85 [1986] ECR 1119 ECJ, the ECJ ruled that ‘identity’ was effectively a ‘going concern’ test requiring all the factors of the transferring business to be looked at and setting out five specific elements such as looking at the activities pre and post-transfer and whether goodwill and the previous customers also transferred. Subject to three conditions, a SPC can arise where: (i) activities previously undertaken by an organisation (‘the client’) are carried by someone else, e.g. a contractor; (ii) activities carried out by a contractor on a client’s behalf are carried out by a new contractor (second generation contracting-out) or (iii) activities ceased to be carried out by a contractor and are taken back ‘in-house’ by the client.

The three conditions for a SPC to apply are that: (i) immediately before the service provision change, the transferor has an organised grouping of employees situated in Great Britain whose principal purpose is to carry out the activities concerned on behalf of the client; (ii) the transferring activities do not consist of a single specific event or task or are of a short-term duration; and (iii) that the activities concerned do not consist wholly or mainly of the supply of goods for the client’s use. Before TUPE was amended in 2006, contracting out situations had always been problematical. So the inclusion of a SPC definition has been widely welcomed and even greater certainty as to when a SPC applies has been brought by three recent decisions in the EAT1, which combine to provide the approach to be adopted. An SPC arises where ‘activities’ cease to be carried out by one party and are carried on instead by another party, i.e. a contractor, a subsequent contractor , or taken back in-house.

The expression ‘activities’ is not defined in the Regulations, so the first task is to identify the relevant activities carried out by the transferor. The critical question is whether the activities carried on after the transfer are fundamentally or essentially the same as those carried on before – minor differences can be disregarded. In considering what ‘activities’ means, you have to look at what was required of the transferor, rather than simply characterising the activities. What exactly was the service for? The evaluation of ‘activities’ is not simply to be decided by listing tasks and seeing whether the majority are the same before and after the transfer.

A, ‘activity’ may also involve a central and co-ordinated service, e.g. a central point for dealing with administration to ensure delivery of that service (as well as service to others), which does not transfer. Assuming that the activities remain essentially the same before and after the transfer a SPC will only take place if there is an organised grouping of employees in Great Britain which has as its principal purpose the carrying out of the activities concerned on behalf of the client. ‘An organised grouping of employees’ means fewer employees than the transferor’s entire workforce, deliberately organised for the purpose of carrying out the particular activities required. ‘Situated in Great Britain’ means just that, albeit that part of the organised grouping may work outside Great Britain. ‘Principal purpose’ should bear its ordinary meaning, i.e. main function; it need not be the ‘sole purpose’. The reality is that TUPE 2006 has provided much greater certainty as to when TUPE will apply and in particular when it comes to contracting out situations. The clarity of the Regulations and the interpretation by the courts to put even more ‘flesh on the bones’ of the provisions have been of great benefit to organisations contracting out and to contractors as there is much more certainty as to when TUPE applies, reducing the scope for disagreements and making the whole process much smoother.

The Call for Evidence asks: is lack of provision for post-transfer harmonisation a significant burden, would it be helpful to agree with employees a renegotiation of their contract provided that overall the resulting contract was no less favourable than at the point of transfer and how might the Regulations be adjusted to enable this whilst remaining in line with the Directive? Under TUPE, any variation of the contract will be void if the sole or principal reason for the variation is the transfer itself, or a reason connected with the transfer that is not an economic, technical or organisation reason (ETO) ‘entailing changes in the workforce.’ This, however, does not prevent the employer and the employee, from agreeing a variation to the contract if the sole or principal reason for the variation is: (i) a reason connected with the transfer that is an economic, technical or organisational reason ‘entailing changes in the workforce.’

The provisions do not allow employers to alter terms and conditions to produce harmonisation across the workforce, as this will not amount to an ETO reason, even if variations are agreed with the employees concerned. This is because of the Court of Appeal’s ruling in Berriman v Delabole Slate Ltd 1985 ICR 546 that ‘entailing changes to the workforce’, means that changes can only relate to the numbers of people employed or changes in the functions employees perform, but not to their terms and conditions of employment, such as pay and benefits. There is no doubt that this does present a lack of flexibility for the new employer, even though they would know of the contractual liabilities they inherited through the due diligence exercise via an exchange of information pre-transfer.

The difficulty for the suggestions made by the Government is that the Directive prohibits variations by agreement “by reason of the transfer” on the basis that employees should transfer with their contractual rights safeguarded against any changes imposed because of the transfer itself and to move away from this right would mean that employees could transfer without their rights being preserved. As to the ‘overall package no less favourable’ suggestion, this flies in the face of the ruling in Langeland v Norske Fabricon A/S [1997] 2 CMLR 966 that employees cannot agree to waive their rights even if new benefits compensate for some contractual rights being withdrawn.

It is arguable that TUPE 2006 goes further than the Directive requires variations by agreement not just by reason of the transfer, but also because of a reason ‘connected with the transfer’ are prevented. This means that agreed contractual variation, even a year after the transfer will be void, if the reason is ‘connected to the transfer. A workable alternative is to allow variations, say a year after the transfer, as long as they were not because of the transfer. Case law shows that the courts are having little trouble interpreting TUPE 2006 and there have been no UK referrals to the European Court of Justice in recent years about any potential conflicts with the Acquired Rights Directive. So do employers have a justifiable case for concern? Or is it the case that against a background of reducing employment rights, cutting ‘red tape’ and supposedly generating more opportunities for business success and job creation, the Government are using the review as a vehicle for further reducing employee protection and make it easier for mergers, takeovers or contracting out, without the ‘baggage’ of employment rights acting as a hindrance?

Any alterations are likely to weaken the protection the Directive is designed to provide. The balance between fostering business prosperity and protecting employee rights is a fine one. Yes we want successful businesses, but this can only be achieved by having an engaged workforce who are treated fairly and reasonably. But this will not be happen if we have a set of rules designed to ‘dodge’ TUPE applying or to weaken contractual rights. We don’t subscribe to the adage, “if it ain’t broke, don’t fix it”, that ignores the fact there may be a way of doing it better. But in this case there appears to be no better way. 1 Enterprise Management Services Ltd v Connect-Up Ltd [2012] IRLR 190, Coastal Services Ltd v Stirling & others UKEATS/0012/11/BI, Johnson Controls Ltd v Campbell and another UKEAT/0041/42/12/JOJ

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