Employment Contracts

by Kate Russell

Transfer of a business or undertaking (TUPE)

TUPE applies to the transfer of an undertaking, or part of an undertaking, to a new employer, for example, because all or part of a business has been sold. The definition of a service provision change was introduced in 2006 and was intended to bring most service provision changes within the scope of TUPE – in other words situations where work is outsourced or there is otherwise a ‘service provision change’ involving
(a) an initial outsourcing of a service (such as where services transfer from the customer to an external contractor), or
(b) a subsequent transfer (such as where services transfer from the first external contractor to a different external contractor, or
(c) bringing the service back in-house (for example where services transfer from an external contractor back to the customer).

The protection conferred by TUPE means that employees who were employed by the former employer at the time of the transfer automatically become the employees of the new employer as if their contracts of employment were originally made with the new employer. The new employer takes over all the employment liabilities of the old employer (except criminal liabilities and occupational pension rights relating to retirement). Sometimes this duty can extend over several years.

In January 2014, new TUPE regulations came into force replacing or amending the TUPE 2006 regulations.

Service provision changes

TUPE continues to apply to service provision changes provided that the post-transfer activities are ‘activities which are fundamentally the same as the activities carried out by the person who has ceased to carry them out’.

The definition of a service provision change refers to “an organised grouping of employees ... which has as its principal purpose the carrying out of activities on behalf of the client.”

It is essential to identify whether there is an organised grouping of employees and secondly whether an employee is assigned to the organised grouping of resources or employees that is subject to the relevant transfer.

This issue of what amounts to an organised grouping of employees was considered in the case of Eddie Stobart Limited (ES) v. Moreman [2012]. This case concerned the loss of a logistics contract by ES. The contract had been serviced at one of ES’s depots. That depot had looked after just two customers. The day shift employees principally carried out work for one customer and the night shift employees for the other customer. ES lost one of the customers (the one serviced by the day shift) and said that there had clearly been a service provision change and that the day shift employees were assigned to the service transferring.

On appeal, the EAT did not agree. It noted the requirement, first and foremost, for an organised grouping of employees and that the fact that the vast majority of the work carried out by the day shift was for that particular customer, did not of itself give rise to them being an organised grouping of employees.

Regulation 3(3)(a)(i) of TUPE does not say merely that the employees should in their day-to-day work in fact (principally) carry out the activities in question: it says that carrying out those activities should be the (principal) purpose of an organised grouping to which they belong. The EAT concluded that that meant that the employees be organised in some sense by reference to the requirements of the client in question. There will be an organised grouping where employees are organised as ‘the Client A team’.

This is an important test to consider, not only at the point of contract review/procurement, but throughout the life of the contract. Is there an expectation, if a contract is lost, that the employees will transfer to a new contractor? If so, how is the workforce organised? Is there a ‘Client A team’ as identified above? If not, is the identification of employees who might be considered as the ‘organised grouping’ more sophisticated than a simple percentage of time spent basis? If not, then it is very unlikely that the definition of a service provision change will be met.

Who is assigned?

The Eddie Stobart case highlighted the need to identify the relevant transfer before then considering the issue of which employees are assigned to the undertaking/service which is transferring.

The requirement for an employee to be assigned, goes back to the European Acquired Rights Directive from which TUPE originates. A 1985 European court decision (Botzen v. Rotterdamsche Droogdok Maatschappij BV) is still referred to in decisions on this issue. This case decided that only employees who are actually assigned to the department (or service or undertaking) transferring should transfer. It noted that it is not a question of looking at which employees spent all or most of their time but rather deciding to which part of their employing organisation, they are assigned. The applicability of this test was noted in the Employment Appeal Tribunal decision of London Borough of Hillingdon v. Gormanley [2014]

The test is a useful reminder to those who look at which employees should/should not transfer by applying a percentage amount to the work that employees carry out within a transferring service. The application of a percentage is commonplace and has been for a number of years. More recently it has not been uncommon to see parties apply a 50 or 55% threshold. The percentage test is useful but other elements need to be explored. This will include considering the amount of value given by the employee to different parts of the business, together with internal charging mechanisms. The description of an employee’s duties in the contract of employment may influence the analysis, taking into account that the employee’s duties may differ in practice.

The test of assignment has to be met. Whilst, in general terms, the greater the percentage of time an employee spends working on the service/undertaking which is transferring, the more likely it is that the test will be met, it must be remembered that it is possible for an employee not to be assigned to a service even though they spend the majority (even the vast majority) of their time working in the service and visa versa.

Assigned employees will include those on fixed term contracts, but not agency workers.

Information and consultation

TUPE places a duty on the transferor and transferee to inform and consult via representatives. If you are contemplating the sale or transfer (including outsourcing) of the whole (or any part) of the business or undertaking, you must inform employee representatives of these plans and consult with them on the likely effect that the transfer will have on their future with the intended transferee. Consider any representations made by the representatives and give reasons for the rejection of any of those representations.

If there is no trade union representation or not enough representatives to represent the interests of all affected employees, give those affected by the prospective transfer an opportunity to elect one or more of their number to represent their interests Make sure that there are appropriate facilities available for the conduct of such elections, and ensure that the ballot is conducted in secret and that votes are accurately counted.

Consultation is particularly important when there are likely to be changes taking place after the transfer which impact significantly upon the transferring employees’ contracts. The 2014 regulations expressly permit pre-transfer consultation where there is a relevant transfer and the transferee is proposing to dismiss at least 20 employees within 90 days. The transferee can decide to consult with representatives of affected transferring individuals about the proposed dismissals before the transfer – provided that the transferee notifies the transferor in writing and the transferor agrees. The transferor may provide information or assistance to the transferee but is not obliged to do so (and any failure to do so will not be a ‘special circumstance’ to relieve the transferee from its consultation obligations). The transferee may choose to cancel an election to carry out pre-transfer consultation (for example if it considers that the transferor is not co-operating or that the consultation is not meaningful).

The 2014 regulations allow micro-businesses (defined as those with ten or fewer employees) the transferee will be allowed to inform and consult directly with affected employees where there is no recognised trade union, nor existing appropriate representatives. This change will only apply to transfers taking place on or after 31 July 2014.

Ensure that employees understand that they may object to being employed by the new owner of the business (or part of that business). However, if they do object, they will be treated as having resigned.

Employee liability information

The transferor is required to provide employee liability information to the transferee 28 days before the transfer. The information to be provided includes the written employment particulars required to be given to the employee under s.1 of the Employment Rights Act 1996. While this change recognises that 14 days is not an adequate period of time to assess employee information and goes some way to addressing it, the Government has not resolved complaints about the inadequacy of the scope of the information to be provided (details of each employee’s age and identity, their section 1 written statement, any disciplinary action or grievances within the previous two years, collective agreements; and any previous (in the past two years) or potential legal action).

TUPE Employee Liability Information does not need to include detail as to whether employees’ entitlements are contractual. Born London Ltd v Spire Production Services Ltd [2017] concerned a Christmas bonus that Spire had described as ‘non-contractual’ when providing its ELI. After the transfer, a number of employees claimed that the bonus was actually a contractual entitlement (this was eventually confirmed by an employment tribunal). Born argued that Spire had failed to comply with its duty to provide ELI by inaccurately describing the bonus as ‘non-contractual’.

The Employment Appeal Tribunal found that, by simply disclosing the details of the Christmas bonus, Spire had complied with its duty; Spire was not obliged to articulate the contractual or non-contractual nature of the bonus. Perhaps more usefully, though, this case serves as a useful reminder that full remuneration details should be disclosed as part of the ELI process – not only contractual entitlements.

ELI form.

Changes to terms of employment

Employees are transferred with all their contractual rights intact, and the transferee will have to take on all associated rights and liabilities (except for criminal liabilities and some liabilities in respect of occupational pension schemes).

Changes to a transferring employee’s contract (whether consensual or otherwise) will be void if the sole or principal reason for the variation is the transfer itself, or a reason connected with it that is not an economic, technical or organisational (ETO) reason entailing changes in the workforce. However, changes in the location of the workforce following a transfer can now fall within the scope of the ETO defence. As a result, redundancies due to a change in location following a TUPE transfer will not be automatically unfair.

Subject to the general rules on making effective changes, a variation to a contract of employment will be permitted:

  • when the reason for the variation is unconnected to the transfer (for example a sudden unexpected loss of an order)
  • when the sole or principal reason for the variation is an economic, technical or organisational, entailing changes in the workforce (ETO reason)
  • ‘changes in the workforce’ can include a change of place of work
  • if the terms of the contract permit the employer to make such a variation (such as a mobility clause).

Collective agreements

Collective agreement terms can be renegotiated one year after the transfer (even where the reason for the change is the transfer), but only if overall the change is no less favourable to the employee. Tribunals will adopt a ‘static approach’ to terms derived from collective agreements, where the transferee is not a party to the collective agreement or bargaining process. This means that only those terms in collective agreements in existence at the date of the transfer will be binding on the transferee, not subsequent changes negotiated by the original parties to the collective agreement. This is consistent with the European Court of Justice decision in the case of Alemo-Herron v Parkwood Leisure Ltd [2013].

What transfers?

Following a TUPE transfer, all of the outgoing employer’s rights, powers, duties and liabilities connected with a transferring employee’s employment contract will transfer to the incoming employer.

In Baker v (1) British Gas Services (Commercial) Ltd (2) J&L Electrics Lye Ltd, Mr Baker was employed as an electrician by the outgoing employer (Connaught Compliance Electrical Services), which was responsible for carrying out periodic inspections of the wiring at a premises. His employment subsequently transferred to British Gas under TUPE.

While employed by British Gas, Baker received an electric shock and suffered a brain injury from a resulting fall. This accident happened because J&L Electrics (the second defendant) incorrectly wired a light fitting when it was installed. This was then not picked up by Connaught’s subsequent inspections.

Baker sought personal injury compensation from British Gas. British Gas argued that it should not be liable, as the accident arose from Connaught’s breach before the transfer. The High Court was clear that liability for personal injury will transfer under TUPE, regardless of whether that liability had fully accrued or was contingent.

Dismissal

The dismissal of a transferring employee will be automatically unfair if it is for a reason in any way connected with the relevant transfer. Such a dismissal may be justified for an ETO reason entailing changes in the workforce, but not otherwise.

Don’t dismiss employees immediately before the transfer or after the transfer, since such dismissals are automatically unfair, unless you can demonstrate that they are unconnected with the transfer or are for an ETO reason requiring a change in the workforce. If the new employer offers new terms that represent a fundamental breach of contract the employee can refuse to transfer and the outgoing employer will be liable for any breach of contract or unfair dismissal claim.

Where the transfer involves, or would involve, a substantial change in the employee’s working conditions to his substantial detriment, he can treat the contract as being terminated, without the need to show actual breach of contract.

Xerox Business Services Philippines v Zeb [2017] concerned an overseas transfer of an employerÂ’s accounting team from the UK to the Philippines.

As part of the TUPE consultation, employees were given the choice of: a) formally opting out of the transfer (and receiving enhanced termination packages); or b) transferring to Xerox Philippines and subsequently being made redundant on statutory terms.

Mr Zeb was employed in the business function that was being transferred overseas. His contractual place of work was ‘Leeds or Wakefield’. He elected not to opt out and asked to be relocated to the Philippines on his existing UK terms.

Xerox Philippines was only willing to allow Zeb to work in the Philippines under a local remuneration package, otherwise the purpose of the overseas outsourcing (cost saving) would be defeated. Zeb was eventually made redundant and received a statutory redundancy payment. He claimed unfair dismissal.

The EAT confirmed that the dismissal was potentially fair, if the reason for the dismissal was a place of work redundancy. While the case was ultimately remitted back to the employment tribunal for a final decision, the case indicates that employees will rarely be entitled to relocate on their UK terms as part of an overseas outsourcing – particularly where the reason for the outsourcing is to save costs.

As already mentioned ‘changes in the workforce’ for the purposes of the ETO defence now expressly includes a change of place of work. Providing that relocation can be an ETO reason is a welcome amendment for employers, meaning that redundancy dismissals as a result of a change in location will not be automatically unfair.

Under the 2006 regulation dismissals were automatically unfair where they were by reason of the transfer, or for a reason connected with the transfer that was not an ETO reason entailing changes in the workforce. The 2014 Regulations changed this to provide that the dismissal will be automatically unfair where the sole or principal reason for the dismissal is the transfer itself, unless there is an ETO reason entailing changes in the workforce. A dismissal which takes place for an ETO reason will be potentially fair on grounds of redundancy or some other substantial reason.

The distinction between dismissals that are by reason of a transfer and those which are for a transfer-connected reason is not a straightforward one. The Government has not provided any examples in its guidance and has acknowledged that there might be ‘some short term uncertainty’ adjusting to this change.

Transfers by non-contractual employers

Employees assigned to the business being sold by a group company, but employed by a separate service company, will also transfer to the buyer.

Example

The Heineken Group employs its employees in the Netherlands through a service company, HNB. Staff are seconded by HNB to the Heineken Group’s operating companies in the Netherlands. Some 70 HNB employees, including R, worked in the catering department seconded to Heineken Nederland BV. On 1 March 2005, the catering function was outsourced to Albron Catering (AC) and on that date R became an employee of AC.

R claimed that his employment had transferred automatically under Dutch laws implementing the Acquired Rights Directive. If so, R would have continuous service and be entitled to the same terms and conditions of employment, except for occupational pension rights, as he enjoyed with HNB. AC argued that as HNB was not the transferor of the catering business, the ARD did not apply and R’s continuous service was broken by the sale.

The ECJ decided that group companies can be ‘non-contractual employers’ of employees who are assigned to a particular business under the ARD. So employees employed by a service company who are assigned to a business operated by a ‘non-contractual employer’ within the group will have rights to transfer employment, and will retain their continuous service and their employment terms and conditions.

It is likely that UK tribunals will follow this decision and interpret TUPE as applying in the case of non-contractual as well as contractual employment relationships, so that group employment structures, set up for administrative and management convenience, will not negate the protections granted by TUPE. Organisations involved in the sale and purchase of businesses whose employees are employed by another group company should note this potential risk and take service company employees into account.

Transferors should

  • Inform or consult employee representatives of the affected employees (including service company employees assigned to the business being sold)
  • Disclose employment information about the transferring employees and
  • Consider reassigning any key employees to other functions or otherwise agreeing with them that they do not transfer to the acquirer of the business.

Transferors checklist

Transferees should

  • Provide information about proposed changes or other measures regarding all transferring employees (including service company employees who are assigned to the business)
  • Consider obtaining a list of all transferring employees and indemnity protection against any non-disclosed employees who claim to transfer and
  • Consider a price adjustment or severance cost contribution if severance costs are increased as a result of more employees transferring on close.

Transferees’ Checklist

See also the topic on Redundancy.