Guide to TUPE

What is TUPE?

TUPE means the Transfer of Undertakings (Protection of Employment) Regulations 2006, which replaces the Transfer of Undertakings (Protection of Employment) Regulations 1981 and introduced to give effect to European Directives: the Acquired Rights Directive (77/187/EC), the Acquired Rights Directive (98/50/EC) and the Acquired Rights Amendment Directive (2001/23/EC).

The purpose of TUPE is to protect the rights of employees when the whole or part of the business for which they work is taken over by another business. If TUPE does apply, the incoming business (referred to as the ‘transferee’) takes on all the rights and liabilities associated with the employees who were employed by the out-going business (referred to as the ‘transferor’) immediately before the transfer took place.

When will TUPE apply?

TUPE will apply if there is a ‘relevant transfer’. This is where an undertaking that is situated in whole or in part in the United Kingdom is transferred from one person to another. A ‘person’ can be a company, a firm or an individual.

Often it will be difficult to determine whether there is a ‘relevant transfer’. The test is whether the undertaking is engaged in an identifiable economic activity that is doing essentially the same thing after the transfer as it was before the transfer.

The two broad categories of a relevant transfer are ‘business transfers’ and ‘service provisions changes’. Some transfers will be both a business transfer and a service provision change.

Business transfers

In determining whether the is a relevant transfer, this can be broken into two parts:

1 Is there an identifiable economic entity that is capable of being transferred?

2 Will the economic entity retain its identity after the transfer in question?

There is a wealth of case law on the subject of ‘what is a relevant transfer’ and essentially it will depend on the specific facts of each case. However, the following guidelines derive from the case law, in the context of the contracting out of services.

In relation to what constitutes an identifiable economic entity:

• there needs to be a “stable economic entity”, being an organised grouping of persons and assets enabling or facilitating the exercise of an economic activity which pursues a specific objective;
• the undertaking must be “sufficiently structured and autonomous” but not necessarily have significant tangible or intangible assets;
• in labour intensive sectors, the assets are often reduced to their most basic and the activity based on manpower alone;
• an organised grouping of wage earners who are specifically and permanently assigned to a common task may, in the absence of other factors, amount to an economic entity; and
• an activity in itself is not an entity. The identity of an entity emerges from other factors such as its workforce, management of staff, the way in which its work is organised, its operating methods and, where appropriate, the operational resources available to it.

As to whether the entity has transferred, the classic test is: Is there an identifiable economic entity that is doing essentially the same thing after the transfer as it was before the transfer? The following factors are indicators of whether there has been a relevant transfer:

• the nature of the undertaking or business;
• whether or not its tangible assets, such as buildings and moveable property, are transferred;
• the value of its intangible assets at the time of the transfer;
• whether or not the majority of its workforce are taken over by the new employer;
• whether or not its customers are transferred;
• the degree of similarity between the activities before and after the transaction; and
• the duration, if any, of any interruption in its activities.

Note: that for TUPE to apply, it is not necessary for the undertaking to be a commercial venture.

Service provision changes

A ‘service provision change’ occurs when a company engages a contractor to do work on its behalf and either:

• reassigns such a contract (whether by contracting out, outsourcing or re-tendering); or
• brings the work ‘in-house’ (where a contract ends with the service being performed in-house by the company itself).

Where a company awards a contract to a contractor for the first time this is known as “first generation contracting out” and where a company ends a contract with one contractor and awards it to another contractor this is known as “second generation contracting out”.

It will not be a service provision change if:

• the contract is wholly or mainly for the supply of goods for the client’s use; or
• the activities are carried out in connection with a single specific event or a task of short-term duration.

In determining whether there is a relevant transfer when there is a ‘service provision change’ what needs to be established immediately before the change is:

• an organised grouping of employees which had as its principal purpose the carrying out of the activities in question;
• the company intends that those activities will be carried out by the transferee; and
• the activities cease to be carried out by the transferor and are carried out instead by the transferee.

The courts must make a factual appraisal in order to determine whether the undertaking has continued and retained its identity before and after the transfer and the work carried out by the employees of the transferee is substantially the same as that done by the employees of the transferor.

Inter-group transfers

Where an activity is transferred between subsidiaries of a group, TUPE will apply if there is a transfer of an economic entity, which would be within TUPE were the undertakings involved entirely separate from each other. Therefore, where subsidiaries are separate legal entities employers cannot hide behind the group to avoid their TUPE obligations.

In what situations does TUPE apply?

By way of broad guidance TUPE has been found to apply to:

• mergers
• sales of a businesses by sale of assets
• a change of licensee or franchisee
• the gift of a business through the execution of a will
• contracting out of services
• changing contractors
• where all or part of a sole trader’s business or partnership is sold or otherwise transferred

When will TUPE not apply?

TUPE will not apply in the following circumstances:

• transfers by share takeover;
• transfers of assets only (for example, the sale of equipment alone would not be covered, but the sale of a going concern including equipment would be covered;
• transfers of a contract to provide goods or services where this does not involve the transfer of a business or part of a business;
• the supply of goods for the client’s use, for example, supplying food to a client to sell in its staff canteen, rather than a situation where the contractor runs the canteen for the client; and
• transfers of undertakings situated outside the United Kingdom (although these may be covered by the regulations of other member states).

The law on relevant transfers in the case of contracting out and changes of contractors for labour intensive activities, such as security, catering, refuse collection and cleaning, has given rise to confusion in the past. Many of these difficulties have been resolved by TUPE. However, TUPE will apply in many situations where one business takes over a client from another eg following a tender process a law firm may be under an obligation to also take on the staff who were working on the client account for the previous firm.

Automatic transfer

Where there is a relevant transfer the effect of TUPE is that the transfer does not terminate the employee’s contract of employment but automatically transfers it to the transferee. TUPE deems the contract to have been made originally between the employee and the transferee. The transfer will not affect the employee’s continuity of employment.

The rights that transfer are:

• all existing terms and conditions of employment;
• enhanced redundancy payments;
• some occupation pensions (although there are special provisions for public sector employees)
• money purchase and stakeholder schemes with a cap on pension contributions of 6%;
• early retirement benefits under an occupational pension scheme;
• share options (which will be lost) should at least be compensated by an equivalent provision or payment, unless (which is unlikely) the share options are genuinely separate from the employment contract;
• comparable private medical insurance and/or permanent health insurance; and
• an indemnity under employer’s liability insurance.

The transferee also takes over all existing liabilities relating to those transferred employees in tort (eg for personal injury) and anything done by the transferor which might result in a dismissal or discrimination based claim.

Criminal liability and vicarious liability to third parties in tort will not automatically transfer.

Which employees are affected?

TUPE applies to any employees who were employed immediately before the transfer whose contract would otherwise terminate on the transfer.

Employees whose contracts would have been terminated by the transfer will be those who were actually employed by the business or part of the business which is being transferred or who spent all or the majority of their time working for the transferred business.

Transferors cannot avoid the effects of TUPE by dismissing employees prior to completion of the transfer. The courts have extended the concept of employment immediately before the transfer to include those employees who would have been employed immediately before the transfer if they had not already been unfairly dismissed for a reason connected with the transfer.

What must employers do prior to the transfer?

Before the transfer takes effect, both the transferor and the transferee have an obligation to inform and consult with all employees who may be affected by the transfer.

Employee Liability Information

The transferor must provide the transferee at least 28 days before the transfer or as soon as reasonably practicable written information about the employees who are to transfer by virtue of TUPE. This information includes the identity and age of each employee, terms and conditions of employment, disciplinary and grievances, details of any claim or action brought against the transferor and any collective agreements. Failure to comply with this obligation may result in the employment tribunal ordering the transferor to pay a minimum of £500 per employee in compensation to the transferee.

Consultation

The transferor must consult fully and meaningfully with employees likely to be affected by the transfer as soon as possible. Failure to comply with this obligation may result in an employment tribunal ordering compensation of up to 13 weeks’ pay (uncapped) for which both the transferor and transferee may be jointly or severably liable.

What if the employee does not want to transfer?

Employees have the right to object to the transfer of their contract of employment to the transferee. Where an employee makes a clear objection concerning this, the contract of employment is terminated on the transfer. If the only objection to the transfer is the change in identity of the employer then no dismissal occurs and, consequently, no claims can be brought by the employee in respect of the termination of the contract of employment. If the objection relates to a repudiatory breach of contract, ie the employee can show that the change is both significant and to his detriment, an employee may resign and claim that s/he has been constructively unfairly dismissed.

Transfer related dismissals – what are the employee’s rights?

If an employee of the transferor or the transferee is dismissed before or after a relevant transfer for a reason connected with it, the dismissal will be automatically unfair, although the employee must still have one year’s continuous service to make a claim for unfair dismissal to an employment tribunal.

An employee dismissed prior to the transfer will be unfairly dismissed if, at the time of the dismissal, a transferee had been found and the dismissal was connected to the transfer under negotiation. There is some inconsistency in the case law concerning what will constitute a transfer-related dismissal, but the present view appears to be that the dismissal can be in connection with ‘a’ transfer, not necessarily the particular transfer which is within the contemplation of the transferor.

Is there any defence available?

The only defence available to either transferor and/or a transferee against a claim of unfair dismissal where the employee has been dismissed for a reason connected with a relevant transfer is where the either transferor and/or a transferee can show that the dismissal was for an economic, technical or organisational (ETO) reason entailing a change in the workforce. This is known as the ETO defence.

To be an ETO defence, the reason must entail a change in the workforce and relate to the conduct of the business (as opposed to being designed to effect a sale or enhance the value of the business). This means that there has to be a change in the composition of the workforce or possibly a substantial change in job descriptions. In most cases this will apply only to genuine redundancy situations or where there is significant restructuring. However, an ETO defence was established when a dismissal occurred in order to achieve a cost reduction as part of a successful tender bid, as the transfer was the occasion rather than the cause or reason for the dismissal. The ETO reason must also have been the actual reason for dismissal.

Where an ETO defence can be demonstrated, the employee will be treated as having been dismissed for ‘some other substantial reason’, which is a potentially fair reason for dismissal. However, the transferor and/or a transferee must still demonstrate to an employment tribunal that it has acted fairly and reasonably.

Who should any claim be brought against?

If the dismissal of a transferor’s employee takes place pre-transfer for a transfer-related reason, liability will pass to the transferee, unless there is an ETO defence, in which case liability remains with the transferor.

Liability for the dismissal of a transferor’s employee on or post-transfer will pass to the transferee.

The transferee will be liable for any dismissals of its existing employees, whether pre- or post- transfer.

Variation of the contract of employment

TUPE has the effect of transferring an employee’s contract of employment from the transferor to the transferee in its original form. After the transfer has taken place the pre-existing contract is treated as having been made between the employee and the transferee.

An actual or constructive dismissal relating to refusal to accept changes in the terms and conditions of employment is potentially fair where the employer is able to show an ETO defence. A mere harmonisation of terms and conditions does not entail a change in the workforce. Where the employer is not able to show an ETO defence, the dismissal will be automatically unfair.

If an employee is dismissed and then re-engaged on new, less favourable terms, the dismissal will take effect, but the employee will still be able to claim for compensation for unfair dismissal (whereupon it will be necessary for the transferee to establish an ETO defence).

A variation of terms is possible if the employee consents to it and the employer can demonstrate that the variation is:

• unconnected with the transfer;
• there is an ETO defence; or
• in a case of insolvency.

However, a consensual variation will not be valid if the reason for it is connected with the transfer and the employer cannot show an ETO defence. In such a situation the change is legally ineffective, even if it is on more favourable terms or is accompanied by some other benefit to the employee.

Any attempt to change terms and conditions after a relevant transfer should be approached with extreme caution.

Conclusion

Where an undertaking is to be transferred, it is essential that both the transferor and the transferee have regard to the rights of all employees of that undertaking. The law in this area is constantly evolving, the scope of situations that are covered by TUPE is increasing and the protection for employees is far-reaching.

Provided that a dismissed employee can show that they have been dismissed and that this dismissal was connected with a relevant transfer there will be a claim for compensation for unfair dismissal. An employee will not need to show that the employer behaved unreasonably, the dismissal will be automatically unfair.

With the maximum compensation for unfair dismissal now £66,200 (in addition to a basic award of up to £10,500) and increased awards available where the consultation requirements are not complied with, there are serious implications for employers who get it wrong.

Don’t take chances

Getting it wrong with TUPE can be extremely expensive. Our Legal 500 and Chambers & Partners ranked solicitors are an excellent and safe choice for advice on this issue.

If you would like to discuss your employment situation or would like a review of your employment contract then call us today in confidence on 03456 381381, or email your details to employment@ibblaw.co.uk.