TUPE- a practical guide
In this practical guide to TUPE, Dr John McMullen, Director of Employment Law at Wrigleys Solicitors LLP, explains the key issues that employers must consider.
The Transfer of Undertakings (Protection of Employment) (TUPE) Regulations 2006 are disliked by business because of their potential uncertainty, transaction cost and lack of flexibility. Perhaps as a result, the subject is probably near the top of the Coalition government’s agenda to cut red tape. On 23 February 2011, The Times newspaper ran a leader under the banner: “The TUPE regulations are a barrier to open services that needs to be removed”, and criticised what it felt was the “gold- plating” of TUPE. This was followed by a BIS announcement on 11 May 2011, which reported a speech by employment relations minister Edward Davey at the Institute of Economic Affairs when he announced a review of what he called “employment red tape”.
But as the TUPE Regulations are based on the European Acquired Rights Directive, there is little scope for manoeuvre to change TUPE without infringing European law. So, in the main, business will have to live with the provisions of TUPE, and to work with or around them.
When does TUPE apply?
TUPE applies when there is a “relevant transfer” from one employer to another. This can include a business sale or a merger, and this can be in the public or the private sector. (Because TUPE requires a change of employer for the regulations to apply, however, the acquisition of another company by way of purchase of its share capital is not a TUPE transfer; in that case there is simply a change in the ownership of the company’s share capital, whilst the company’s identity remains unchanged.) TUPE will also apply to outsourcing. It can apply on first generation outsourcing (client to contractor), second generation outsourcing (contractor to contractor) or on the taking back of the service in-house.
For a business transfer or merger there has to be a transfer of an economic entity which retains its identity. So, for example, if a grocery business is up for sale and the purchaser wishes to carry out a different trade, such as a newspaper shop, there will be no transfer of an economic entity which has retained its identity and TUPE will not apply. In outsourcing cases, a different regime applies. Outsourcing engages the service provision change rules in TUPE, introduced for the first time in 2006. Here it is very difficult to argue that TUPE does not apply. When service activities cease to be carried out by one person and are taken up by another person, there will be a TUPE transfer as long as, prior to the handover, there was an organised grouping of employees, the principal purpose of which was to service the contract.
What is an organised grouping of employees is a question of fact in each case will involve an analysis of how much working time an employee spends in the activity concerned, his contract of employment, and the value of the employee’s contribution to the function changing hands, amongst other considerations. There is often much debate about which employees are on the transfer list. The service provision change rules are peculiar to the UK. In effect, they make it virtually impossible to re-let a contract without TUPE applying (see illustration). Often the reason for a client changing a service provider is because the first service provider’s staff are unsatisfactory. But if TUPE applies, the new service provider has to take on the staff previously employed by the outgoing service provider.
Elsewhere in Europe, a more flexible approach applies and there will, in contrast to the UK position, only be a transfer of an undertaking on a service provision change if there is a transfer of assets and/or a taking over of a major part of the workforce. The European approach allows a client to collaborate with a new contractor not to take on the previous contractor’s staff. The more generous approach in the UK is now subject to scrutiny by the Coalition government who are intent on looking at any instance where a European obligation has been gold plated in the UK legislation implementing it. But there will not be a service provision change attracting TUPE if the activities carried on after the handover, compared with before, are radically different.
The EAT recently illustrated when the service provision rules will not apply. In Nottinghamshire NHS Trust v Hamshaw and others it was decided that there cannot be a relevant transfer under TUPE, either by way of a transfer of an undertaking, or a service provision change where the services provided to a client are not fundamentally or essentially the same as they were before the change of provider. In this case Nottinghamshire Healthcare NHS Trust ran a care home. This was then closed and residents re-housed into homes of their own. Their care was transferred to two new independent providers. A number of care workers in the former home were offered jobs with the new providers. The Trust considered TUPE applied, the providers said it did not.
The EAT (upholding the employment tribunal decision) held there was no TUPE transfer. There was neither a transfer of an economic entity retaining its identity nor a service provision change. Under the new arrangements residents were to live in their own flat. The care provided was different. The individual care user was to be helped autonomously to undertake domestic tasks and all the paraphernalia of a fully staffed care home was not available. The economic entity had lost its identity. And even the seemingly wider definition of a relevant transfer by way of service provision change could not apply where the activity carried on by the new provider was not “fundamentally” or “essentially” the same as the service provided before the change.
Public sector transfers
TUPE applies to transfers within the public sector and from the public sector to the private sector. But when tendering for services from the public sector, any contractor has had hitherto to bear in mind public sector codes of practice which build on TUPE. The most significant code of practice is the Cabinet Office Statement of Practice on Staff Transfers in the Public Sector (COSOP) with its appendix, A Fair Deal for Staff Pensions. COSOP provides that TUPE should be applicable to almost all tendering exercises even in borderline cases. A Fair Deal for Staff Pensions obliges a new contractor to put in comparable pension provision to that which prevails in the public sector. Hitherto that has simply put people off tendering.
But the Government is examining the future of the Fair Deal policy and it seems quite likely it will be amended so that contractors do not have to offer equivalent pension provision. That, in theory, should open up the market. And, to help, the Government has already abolished two Codes of Practice dealing with the two tier work force. These codes provided that not only did TUPE have to be applied to transferring staff but the TUPE terms had to be offered to any new joiners to the contract (as opposed to the market rate). But the Code of Practice on Workforce Matters in Local Government Contracts was abolished in April 2011 and the Code of Practice on Public Sector Service Contracts was abolished earlier, in December 2010. These initiatives may contribute to opening up the tender process to a wider range of contractors than previously has been the case.
The transfer of employment rights
At the core of TUPE Regulations is the phenomenon, under Regulation 4 of TUPE, that there is a transfer of the entire employment contract and rights and obligations arising under it from transferor to transferee. This takes place automatically, irrespective of the wishes of the parties. On any due diligence exercise, before taking on a transfer, the transferee must ascertain the full range of contractual rights that might transfer even if they are not contained in the written contract of employment itself. Thus working practices may have become contractual by custom and practice. Individual promises may have been made to employees, and staff handbooks and collective agreements must also be assessed as to whether they contain terms of a contractual nature. Even terms which are not suitable for transfer such as a disciplinary or grievance procedure, bonus or commission scheme geared to the identity of the transferor, that cannot be replicated, word for word, by a transferee, must be implemented by giving employees substantially equivalent rights.
“Theoretically, non-contractual rights do not transfer. But TUPE allows an employee who is deprived of non-contractual rights (such as a discretionary bonus) to resign and claim constructive dismissal”
A prudent transferee will undertake thorough due diligence, obtain warranties to the effect that the information supplied by the transferor is correct and seek an indemnity in case it is not. This is sometimes difficult where there is no contract between transferor and transferee, such as in the case of second generation contracting (see illustration) but Regulation 11 of TUPE, requiring any transferor to supply certain specific employee liability information to a transferee not less than 14 days before the transfer, fills the gap to an extent. Theoretically, non-contractual rights do not transfer. But TUPE allows an employee who is deprived of non-contractual rights (such as a discretionary bonus) to resign and claim constructive dismissal if there is a substantial change in working conditions to his material detriment. This can apply to alteration of non-contractual conditions. Complaints of this nature commonly arise when a new employer tries to change the terms of a discretionary bonus scheme (or to withdraw it) or tries to change the work location of the employee, particularly in outsourcing cases.
A collective agreement will also transfer to a transferee. The question has arisen how long for? If an employee’s terms and conditions (including pay) are settled by a third party body in the sector (such as a National Joint Council) a contractor / service provider will be bound by the pay deal currently in force at the time of the transfer. But European law states that a contractor will not be bound by future collective agreements setting pay and conditions in a case where the provider is not a party to the negotiating machinery concerned. A line of previously decided British cases conflicted with this, suggesting that a new provider may be liable for subsequently collectively bargained terms. The issue is so complex that the Supreme Court (in Parkwood Leisure Ltd v Alemo-Herron and others (2011) has referred the matter to the European Court. But it is always possible that the Government may anticipate events by legislating to confirm the European legal position that a provider is not liable for future pay awards made under collective bargaining processes applicable, say, to the public sector that do not operate in the private or third sector.
Harmonisation of employment terms and transfer connected dismissals
Employees are strongly protected against having their employment terms changed in connection with the transfer and against dismissals on account of the transfer. As far as changing terms and conditions is concerned, Regulation 4 of TUPE provides that any variation of an employment contract where the sole or principal reason is the transfer itself is void. The European Court has expressed the view that harmonisation of terms and conditions of employment of transferring employees transferring with those of the transferee’s existing staff, is always by reason of a transfer. So it would seem that harmonisation of terms and conditions, following a transfer is, at least on paper, legally ineffective.
Such employment changes can take place if there is an economic, technical or organisational reason entailing changes to the workforce. But the problem is that whilst many harmonisation exercises are for economic, technical or organisational reasons generally, they will not entail a change in the workforce, which is interpreted as meaning a change in the actual numbers or composition of the workforce. Mostly, a new employer wants the same number of employees but wants them to work on a single, common contract of employment. In practice, many employees willingly agree to reasonable harmonisation proposals. But employers should be aware that employees may be able to resist change if they are so disposed. As far as dismissals are concerned, a dismissal where the sole principal reason is the transfer is automatically unfair. But if the employer can also demonstrate an economic, technical or organisational (ETO) reason entailing changes in the workforce the dismissal will not be automatically unfair. This means that TUPE need not stand in the way of redundancies.
For a change in the workforce is inevitably entailed. Commonly, transferee, when acquiring a business, unwittingly asks the transferor to effect the redundancies it perceives are necessary. This idea, at first glance, saves the transferee the job of having to do it and also takes advantage of the transferor’s knowledge of the workforce, and its relationship with employee representatives or trade union representatives. But there is a catch here. It has been held that to have an economic technical or organisational reason entailing changes in the workforce, that reason must relate to the future conduct of the business. An employer who is selling his business cannot be making a decision as to the future conduct of the business by him and therefore will not be able to dismiss for an ETO reason. He is not able to borrow the ETO reason of the transferee. The pre- transfer dismissal will be automatically unfair. And this liability will pass to the transferee under TUPE.
In such a case, the safest course of action is for the transferee to take the business, over-staffed as it is, and then to affect the redundancies itself, perhaps taking an indemnity from the transferor against the cost of the redundancy payments. One difficulty for employers is that it is received wisdom that when selecting employees for redundancy, it is unfair to concentrate just on the transferring employees. The pool for selection should really be a combined pool of transferring employees and the transferee’s prior workforce. It may be unfair to discriminate against the transferring employees who, after all, are now deemed to be the transferees’ own employees.
Information and consultation
Finally, employers should not forget the information and consultation required under TUPE. For many years these obligations were largely overlooked by employers. But employers now ignore them at their peril. The information and consultation obligations apply however few employees are involved in the transfer (in contrast to information and consultation on multiple redundancies, where the obligations are not engaged unless 20 or more employees are proposed to be dismissed at any one establishment within 90 days). The information and consultation obligations apply whether or not there is a recognised trade union. If there is no recognised trade union, the employer’s obligation is to invite the election of employee representatives to receive the information and take part in the consultation if required. Information as specified in TUPE Regulations has to be supplied in every TUPE transfer. Consultation has to take place if the employer is envisaging measures in relation to the employees. “Measure” is given a very wide interpretation. On the one hand a “measure” could include a change in pension rights, but could include even a minor adjustment, such as a change of salary payment date.
The penalty for failing to inform and consult is potentially severe. It is a maximum of 13 weeks’ pay, per affected individual. It is important to note that there is no cap on the amount of a week’s pay (applicable in the case of some other employment protection rights). A breach of the information and consultation obligations can therefore be very expensive. The key to handling TUPE is preparation before a TUPE transfer and expert advice throughout the process. Due diligence is critical and whenever possible the parties should agree warranties and indemnities in sale and purchase agreements that may more fairly allocate risk.
Dr John McMullen, Director of Employment Law
Wrigleys Solicitors LLP