Human Resources implications of a TUPE Transfer
Whenever a company looks at different ways of delivering its services, including through
partnership arrangements with other businesses, it is always important not to lose sight
of the HR implications, as these can often be amongst the most problematic and costly
when mistakes are made.
Whenever a company looks to undergo any kind of outsourcing or re-contracting of any
services involving any third party, it is always necessary to consider whether or not the
Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) 1 will
apply, and if they do, understand how to manage the risks that will result without
defeating the commercial aims of the project.
When does TUPE apply?
For there to be a transfer to which TUPE applies, there must either be:

a business or “undertaking” capable of transfer and which does in fact transfer
from one employer to another, retaining its identity; and/or

an outsourcing of services by a client to a contractor, a change in contractor
where services carried out by one service provider cease and are carried out
instead by another, or an in-sourcing of services by a client (“service provision
change”). The services must remain fundamentally the same for TUPE to apply.
As a result, significant break-up of the services amongst several providers has
frequently been found to change the fundamental nature of the activities.
These two definitions are not mutually exclusive. However, as regards, outsourcing the
focus will inevitably be on service provision changes.
In order for TUPE to apply to a
service provision change, there a number of conditions which need to be met. The most
significant of these is that, prior to the change, there must be “an organised grouping of
employees which has as its principal purpose the carrying out of the activities concerned
on behalf of the client”.
The automatic transfer principle
Where TUPE does apply, the basic principle is that the employees who are assigned to
the undertaking will automatically transfer employment to the incoming employer, with
full continuity. This can often defeat the parties intentions, and there have been cases
where employment relationships have continued for several years on the assumption that
TUPE did not apply, only for a Tribunal to determine subsequently that it does, leaving
the parties to try to unpick commercial and employment relationships which had been
misunderstood.
This automatic transfer principle is subject to the right of individual employees to object.
However, with limited exceptions, the effect of an objection is that the employee's
employment is terminated by the transfer so that the employee has no rights in relation
1
As amended in 2014
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to that termination of employment against either of the employers. For example, there is
no right to claim unfair dismissal or redundancy pay.
In addition to the transfer of the contract of employment, most pre-transfer liabilities
relating to the employees will also transfer to the new employer, provided the old
employer is not insolvent. This will include, for example, arrears of wages and statutory
rights and liabilities e.g. claims for equal pay and sex discrimination. In addition, any of
these liabilities which relate to any employee who is dismissed prior to the transfer,
solely or principally because of the transfer will also transfer in the absence of an ETO
reason (see below).
Liabilities which will not transfer are those which relate to the majority of rights arising
under an occupational pension scheme (see below), criminal liability of the old employer
and any liabilities in relation to a former employee whose dismissal was not a result of
the transfer (e.g. for misconduct).
Information and consultation
Both the old and new employers share a duty to inform and potentially to consult with
appropriate representatives of employees affected by a proposed transfer. An exception
is that, from 1st July 2014, organisations employing 10 or fewer staff and which do not
recognise a trade union will be exempt from the requirements to appoint appropriate
employee representatives, where there are none already in place. These small employers
may satisfy consultation requirements by consulting with the employees directly.
Information
regarding
the
transfer
must
be
provided
to
appropriate
employee
representatives (such as a recognised trade union), long enough before transfer to allow
consultation to take place. If "measures" (for example, changes in terms and conditions,
grading or redundancies) are also proposed in relation to affected employees,
consultation must also then take place with the representatives. Consultation must
commence in good time so as to enable it to be carried out prior to the transfer.
TUPE permits a new employer to engage in pre-transfer consultation and for this to count
towards the legal obligations to collectively consult, even though they are not strictly “the
employer”. There are, however, conditions attached: the new employer must give the
old employer written notice that it intends to engage in pre-transfer consultation and the
old employer must agree in writing (and may also withdraw this consent at any time).
If either employer fails to inform and consult, the representatives may present a
complaint to an Employment Tribunal within three months of the completion of the
transfer. Both the new and old employers are jointly and severally liable for this failure so
that a claim may be brought against either or both. If a complaint is upheld, the
Employment Tribunal can order that compensation be paid to affected employees.
If a trade union is recognised, the employer must inform/consult with the union.
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Any agreement to contract out of TUPE is void although there is authority to suggest it is
possible to legitimately compromise an unfair dismissal claim through a settlement
agreement or through ACAS.
Carrying out redundancies as part of a restructure
One of the important protections which TUPE offers to employees, is that any dismissal
which arises solely or principally by reason of the transfer is automatically unfair unless it
is for an economic, technical or organisational reason entailing changes in the workforce.
This is commonly known as the ETO defence.
There is relatively little guidance as to
what ETO exactly means but, broadly speaking, it can be compared with a redundancy or
restructuring situation. For example, following a transfer where there is duplication of
staffing and there consequently needs to be a headcount reduction, that would fall within
the ETO defence.
The most important aspect of the ETO defence and the one that is most commonly
forgotten is the phrase, “entailing changes in the workforce”.
This has been found to
mean specifically that there must either be a reduction in head count or change to the
function or carrying out of a particular job. More recently, the meaning of a change in
the workforce has helpfully been extended to include a change in location, enabling a
transferee to effect redundancies without breaching TUPE.
One further point to note is that the ETO defence will only be available if the dismissals
are carried out by the incoming employer following the transfer, where the dismissal
relates to the future conduct of the business (i.e. following a transfer there will be
duplication of the roles). The intention behind this is to ensure that employees are given
the opportunity to apply for any vacancies in the new organisation, however, in practice
because this is often carried out prior to the transfer, it can often lead to the situation of
de-motivated employees being retained until after the transfer date just to be made
redundant.
Engaging in pre-transfer consultation can help inform the employees and
shorten the period of delay between notional transfer and dismissal. One alternative
option, if the intention is to carry out the redundancies prior to the transfer but to avoid
the risk, is to look to agree settlement agreements with employees who are to leave.
Changing terms and conditions
One of the most difficult areas to manage in practice, following a transfer, is the general
prohibition on varying terms and conditions of employees where the sole or principal
reason for that change is the transfer itself.
Identifying when changes are solely or principally by reason of a transfer will depend on
the circumstances, although this does allow argument that the reason is unconnected.
Harmonisation is prohibited (in the sense of bringing terms of transferring employees in
line with existing employees). Change is therefore problematic but not impossible if it fits
within one of the following:-
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(i)
Reason not connected with the transfer
The first and most obvious basis on which changes can be effected, is where the transfer
is not the sole or principal reason for the change. This might be because the change was
going to happen to the workforce regardless of whether the transfer took place or, more
commonly, something occurs following the transfer which causes the need for change.
For example, it might be the case that due to a changing economic climate, changes in
terms and conditions may need to be made, specifically those relating to pay.
A common misconception is that, if sufficient time is allowed to pass following a transfer,
then a subsequent change will no longer be solely or principally by reason of it. This is
not correct. Whilst the passing of time inevitably increases likelihood of some intervening
event which might justify the change for reasons other than transfer, in theory, a change
which takes place several years after the transfer can still potentially be void if the
reason for it can be linked back directly to the transfer itself. That having been said, in
practice, changes are often made following a transfer several months and years later
without any real difficultly or litigation on the basis that quite simply the employees often
forget about their rights when the transfer becomes a dim and distant memory.
(ii)
Changes for an ETO reason
In addition to the above, it is possible to agree changes to terms and conditions where
the changes are for an ETO reason. For this purpose ETO reason has the same meaning
as in cases of carrying out a dismissal (see above). In essence in order to be able to fall
within an ETO reason you generally need to demonstrate either a change in job function
or head count reduction. Although this exemption is actually fairly narrow and designed
to cover circumstances where a potential redundancy situation arises, in practice it is
often used as a banner under which to harmonise terms and conditions following a
transfer. Whilst such a step may, on the face of it, prove attractive, the danger is that
such a move would be ineffective, and then when the employer comes to enforce a
particular term of the contract some months, or even years, down the line, it finds that
actually that change was void.
(iii)
Reliance upon pre-existing term
Since the underlying principle of TUPE is that the new employer effectively ‘steps into the
shoes’ of the old employer, the new employer similarly inherits any contractual right of
variation retained by the old employer. An example might be a mobility clause,
permitting a change in location but others may well apply, enabling a new employer to
make changes which do not breach the employee’s contract terms.
(iv)
Dismissal and re-engagement
The third and most effective, although generally least popular, route is to terminate the
contracts of the staff upon notice with an offer of re-engagement. This move will prevent
employees seeking to argue that any changes to their terms and conditions are void, as if
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they accept they will be employed under a new contract. However, because notice has
been served to terminate the contract at law, this counts as a dismissal even if the
employee subsequently accepts. Because this is a dismissal which is inevitably by reason
of the transfer, unless there is an ETO defence in place (which generally there will not
be) then this will render any dismissals automatically unfair, with the employee being
entitled to compensation.
In addition, this would also potentially trigger the need to
carry out collective redundancy consultation and issue a form HR1 to the insolvency
service, where there are 20 or more staff affected at a single site. Due to this, unless
the changes are essential in practice e.g. the removal or reduction of core commercial
terms e.g. pay, bonus or benefits, this approach is rarely adopted.
(iv) Terms derived from collective agreement
Restrictions upon contractual changes in a transfer context after one year have been
lifted for terms derived from collective agreements. Revision of such terms may therefore
be agreed but only if what replaces them are no less favourable “when considered
together”. The practical effect of this provision may be limited but it nonetheless opens
opportunity for discussion over changes to terms which would previously have been
prohibited under TUPE.
Pensions
The starting point with pensions under TUPE is that most rights under an occupational
pension scheme do not transfer. The exception to this is that any rights which do not
relate to old age, invalidity of survivors benefits, will transfer.
The most common
example of such a right is any entitlement of an employee under a pension scheme to
payments in the event of redundancy.
Even where accrued rights under an occupational pension scheme are excluded, new
employers need to be aware that they are liable to provide alternative pension provision
post-transfer for those transferring employees who had access to a scheme operated by
the old employer and will need to match certain pension contributions. For example,
employees must be offered post-transfer either:

a final salary (defined benefit) occupational pension scheme which meets specified
statutory requirements and offers benefits of equivalent value to the contributions
made to the scheme (where the transferor’s contribution was at least 6% of
pensionable pay and the transferring employee contributed no more than 6% of
pensionable pay); or

a money purchase (defined contribution) occupational pension scheme or a
stakeholder pension arrangement, in which case the employer has a choice as to
whether to make a matching contribution to that of the transferring employee (of
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up to 6 per cent of actual gross basic pay) or a matching contribution to that of
the old employer.
Are there any alternatives to TUPE?
One of the fundamental aspects of TUPE is that it is not possible to contract out of its
provisions as a matter of law and Employment Tribunals will always scrutinise closely any
structures put in place which attempt to defeat TUPE. However, there are a number of
alternatives options which, if handled correctly, may overcome some of the difficulties
TUPE can create:(i)
Secondment and the Retention of Employment model
In employment law terms, at its most simple, a secondment is a variation of contract
agreed between employer and employee by which changes are made in relation to the
employee’s contract, for example in relation to his/her day to day duties, reporting lines,
place of work. It is usually of a relatively short duration as it is understood that the
longer a secondment continues, particularly if the employer ceases to have effective
control over the employee, the easier it is to argue that the employment relationship
between the secondee and the employer has come to an end.
There is always a risk for the organisation to which the individual is seconded that he/she
may at some point allege and/or be held by a Court or Employment Tribunal to be an
employee of the recipient organisation. Case law shows that an Employment Tribunal is
happy to look behind the labels which the parties have put on a relationship and conclude
that the legal reality is that the employment relationship has shifted from one
organisation to another.
As it has become increasingly common within the public sector in particular to outsource
services to the private sector, there has been an increase in the use of secondments,
often as a means of ensuring that staff can remain in a public sector pension scheme
which private sector providers cannot afford to match, or on occasion as a means of
avoiding the transfer of public sector staff into the private sector which is seen as
politically unacceptable in some quarters.
Secondment has been applied in the most clearly structured way in relation to PFI
schemes in the NHS where the Retention of Employment Model (“REM”) has been
adopted. In such projects REM has to be applied to certain categories of staff - those
engaged in cleaning, catering, laundry, security and portering. Although TUPE applies in
such situations and all staff would be expected to transfer,
REM provides for
management staff transfer to the private sector provider whilst operational staff are
retained in NHS employment and seconded to the private sector provider in order to
undertake the necessary work.
The legal process by which this is effected is for the operational staff to be given the
opportunity to formally object to being transferred (see above) to the private sector
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provider on the basis that they will be retained (rather than regarded as having resigned)
and then seconded as described above.
A variation on the REM theme is the Choices Model where staff are given the option of
transferring to the new provider at the start of the contract, or at any time during the life
of the contract. This has proved of particular interest in Local Authority Strategic
Partnerships in relation to IT services where staff who are initially cautious about the idea
of leaving Local Authority employment, subsequently become more confident about
employment with the private sector provider and see the benefits of greater career
progression/training following a transfer.
Employment lawyers have always urged caution in relation to long term secondments
because of the risk (outlined above) that these may subsequently be regarded as a TUPE
avoidance device and therefore void. A case on point was Celtec v Astley where, after a
referral to the European Court of Justice, the House of Lords held that a “secondment” of
staff from the Department of Education to Training & Enterprise Councils in 1990 had
been void because on an analysis of the law, a TUPE transfer had taken place at that
time. This was so despite the employees and employer believing otherwise. In other
words, an arrangement which the transferor and transferee employers had put in place
and which the employees had accepted, had not been effective.
Similarly, in Capita Health Solutions v BBC and McLean where an employee objected to
the transfer of her employment and then entered into a short term secondment
arrangement to the transferee to perform a handover.
In that case the EAT upheld a
finding that her objection was ineffective, and as a consequence her employment had
transferred to the transferee.
These decisions, call into serious doubt the effectiveness of the REM model. However, in
practice, such arrangements continue to be put in place, on the basis that they are
popular will employers, employees and private sector partners. If this approach is to be
adopted then it will be necessary to ensure that there is full consultation with staff and
their representatives on the issue so that individuals are aware of all the options open to
them and choose freely whether or not to object to a transfer of employment in order to
enable a secondment to take place. Furthermore, careful consideration should be given
to the use of indemnities in relation to any agreement of this type between the public
sector body and the host organisation where long term secondments are in place, to
ensure the risk is shared out as the parties intended.
(ii)
Shattering the contract
A practice which has become increasingly common since the 2006 TUPE regulations
extended the application of TUPE to re-contracting arrangements, is to look to award the
contract to a number of providers, so that ideally no employee can point to a single
provider who has taken over the majority of their responsibilities.
shattering the contract.
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This is known as
Whilst care needs to be taken to ensure that what is not created is simply several TUPE
transfers rather than just one, this approach has been endorsed by the Tribunals in
numerous cases including Thomas-James and others v Cornwall County Council and
others, where the Council was originally one of 17 organisations contracted with the
Legal Services Commission to provide a free legal helpline across the country. Following
a retender 9 organisations were appointed, on a totally different geographic basis, such
that it was not possible for the claimants to identify a single company who had taken
responsibility for their work, and so it was found there was no transfer.
January 2012
Please note this is a very brief overview of a very complicated piece of legislation and not a
complete account of the law.
In addition, there are many aspects of TUPE where the law is
ambiguous and the outcome of tribunal cases is unpredictable.
In consequence the best advice
often has to proceed on the basis that this uncertainty exists and any action should be planned with
that in mind.
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