Matrix Employment Law Seminar
TUPE in Twenty Twelve: An Expert Review of the Law on Transfers
Other points on the application of the Regulations
Recent cases on transfers of public administrative activities and
standard transfers
Mathew Purchase
Introduction
1. Article 1 of the Acquired Rights Directive 2001/23/EC (‘the Directive’) states:
‘(a) This Directive shall apply to any transfer of an undertaking, business, or
part of an undertaking or business to another employee as a result of a legal
transfer or merger.
(b) Subject to paragraph (a) and the following provisions of this Article, there
is a transfer within the meaning of this Directive where there is a transfer of
an economic entity which retains its identity, meaning an organised grouping
of resources which has the objective of pursuing an economic activity,
whether or not that activity is central or ancillary…’
2. Regulation 3(1)(a) of the Transfer of Undertakings (Protection of Employees)
Regulations 2006 (SI 2006/246) (‘TUPE’) adopts a similar definition. It provides
that:
‘These Regulations apply to
(a) a transfer of an undertaking, business or part of a undertaking or
business situated immediately before the transfer in the United
Kingdom to another person where there is a transfer of an economic
entity which retains its identity…’
An ‘economic entity’ is defined as ‘an organised grouping of resources, which has
the objective of pursuing an economic activity, whether or not that activity is
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central or ancillary’. In this paper, transfers within the meaning of regulation
3(1)(a) are referred to as ‘standard transfers’.
3. By virtue of regulation 3(1)(b), TUPE also applies to ‘service provision changes’,
thus extending the applicability of the domestic legislation beyond the scope
required by the Directive. This paper does not address the concept of ‘service
provision changes’, which are addressed elsewhere in this seminar.
4. Regulation 3(5) of TUPE provides:
‘An administrative reorganisation of public administrative authorities or the
transfer of administrative functions between public administrative
authorities is not a relevant transfer.’
This applies to both standard transfers and service provision changes.
5. This paper sets out a short summary of the law on standard transfers, before
considering three recent ECJ cases concerning standard transfers and the
reorganisation of public administrative authorities.
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General principles
6. The law on the meaning of a standard transfer is now well-settled. The seminal
case remains Spijkers [1986] ECR 1119. The ECJ held that ‘the decisive criterion
for establishing whether there is a transfer for the purposes of the Directive is
whether the business in question retains its identity’. The business must be
transferred as a going concern, which might be indicated by the fact that ‘its
operation was actually continued or resumed by the new employer, with the
same or similar activities’. All the facts characterising the transaction should be
taken into account, none being considered in isolation, including:

the type of undertaking or business

whether or not tangible assets are transferred

the value of its intangible assets

whether or not the majority of its employees are taken on

the degree of similarity between the activities carried on before and after
the transfer

the period of time, if any, during which those activities were suspended.
7. Thus, the three components of a standard transfer are: an undertaking, a
transfer, and the retention of identity after the transfer.
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The definition of an ‘undertaking’
8. The definition of an undertaking in Article 1(2) of the Directive and Regulation 3
of the TUPE Regulations derives from a number of ECJ judgments. In Allen v
Amalgamated Construction [2000] IRLR 119, the ECJ summarised the position as
follows:
‘the transfer must relate to a stable economic entity whose activity is not
limited to performing one specific works contract. The term ‘entity’ thus
refers to an organised grouping of persons and assets facilitating the exercise
of an economic activity which pursues a specific objective.’
9. Several principles can be derived from this. First, the entity which is transferred
must have an ‘economic objective’. However, ‘economic’ does not mean
‘commercial’ or ‘operating with a view to profit’: Renato Collino v Telecom Italia
[2000] ECR I-6659. Further, the fact that a body operates in the public interest
will not be sufficient to exclude it from the scope of the Directive, so most
charities will be caught: Dr Sophie Redmond Stichting v Bartol [1992] IRLR 366.
10. Nevertheless, transfers between public administrative authorities may in some
cases be excluded from the scope of TUPE. In Henke v Gemeinde Schierke [1996]
IRLR 701, a secretary in the mayor’s office in the municipality of Schierke in
Germany claimed that her contract of employment was transferred when the
municipality joined with several others to form a new administrative authority.
The ECJ disagreed:
‘the reorganisation of structures of the public administration or the transfer
of administrative functions between public administrative authorities does
not constitute a “transfer of an undertaking”… in the circumstances…, the
transfer carried out between the municipality and the administrative
collectivity related only to activities involving the exercise of public authority.
Even if it is assumed that those activities had aspects of an economic nature,
they could only be ancillary.’
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This judicial exclusion of reorganisations of public administrative authorities has
since been adopted in Article 1(3) of the Directive and 3(5) of TUPE. It has,
however, been interpreted strictly. In Didier Mayer v APIM [2000] ECR I-7755, the
ECJ confirmed that ‘only the reorganisation of structures of the public
administration or the transfer of administrative functions between public
administrative authorities are excluded by the judgment in Henke’ (emphasis
added). In the recent case of Scattolon v Ministero Dell’Istruzione, Dell’Universita
e Della Ricera [2011] IRLR 1020, considered in more detail below, the ECJ held
that this exception applied only to entities which were engaged in the exercise of
public powers.
11. In any event, the UK cabinet office issued in 2001 a statement of practice entitled
Staff Transfers in the Public Sector. The statement emphasises the government’s
intention that, other than in exceptional circumstances, it expects employees
transferring within or from the public sector to be protected by the TUPE
principles, even if TUPE does not strictly apply. If necessary, this would be
achieved by legislation relating to the specific transfer. However, absent such
legislation, it is debatable how much legal force this cabinet office statement has,
even as a matter of public law.
12. A second principle is that there must be some organisational framework which
makes the entity identifiable: Wynnwith v Bennett [2002] IRLR 170; Wain v
Guernsey Ship Management [2007] ICR 1350. However, a sufficient
organisational framework does not necessarily require more than one employee:
Dudley Bower v Lowe [2003] IRLR 260.
13. A third principle is that the economic entity must be stable: Perth & Kinross
Council v Donaldson [2004] IRLR 121. Furthermore, the ECJ has consistently held
that a contract to complete one specific works contract does not create an
economic entity: Rygaard v Stro Molle Akustik [1996] IRLR 51; Sanchez Hidalgo v
ASA [1999] IRLR 136. However, a single contract in respect of an ongoing or
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multi-faceted operation could give rise to a stable economic entity: Argyll
Training v Sinclair [2000] IRLR 630.
14. Fourth, TUPE may apply to the transfer of part of an undertaking, even if that
part itself becomes an identifiable economic entity only upon transfer: in
Fairhurst Ward Abbotts v Botes Building [2004] IRLR 304, the Court of Appeal
held that:
‘it is sufficient if a part of the larger stable economic entity becomes
identified for the first time as a separate economic entity on the occasion of
the transfer.’
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The transfer itself: when and how
15. The Directive states that the economic entity in question must be transferred by
means of a ‘legal transfer or merger’, but judicial interpretation has for some
time entirely neutralised this requirement. In the words of May LJ in ADI v Willer
[2001] IRLR 542:
‘the requirement for a “legal transfer or merger”… has been emasculated out
of existence by purposive judicial interpretation… Speaking generally, [a]
transfer may arise where an undertaking or business carried out by one or
more employees ceases to be carried out by one employer and starts to be
carried out by another employer.’
16. TUPE formalises this position in regulation 3(4):
‘these Regulations apply to… a transfer or service provision change
howsoever effected...’
24. A number of principles follow from this. There is:
(a) no need for a change in ownership of the undertaking (Schmidt v Spar
[1994] IRLR 302, paragraph 12), and
(b) no need for a direct contractual relationship between the transferor
and the transferee, though this is a factor to take into account
(Merckx v Ford Motors [1996] IRLR 467).
What matters is that ‘there is a change in the natural or legal person who is
responsible for carrying on the business and who incurs the obligations of an
employer towards employees of the undertaking’: Merckx, paragraph 28.
17. Thus, TUPE can apply to a transfer between subsidiary companies within a single
group: Allen v Amalgamated Construction [2000] IRLR 119. However, TUPE will
not apply to a transfer of staff within one legal entity or to share transfers
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(though see Millam v Print Factory (London) 1991 Ltd [2007] IRLR 526, which
demonstrates the need to examine closely the factual reality).
18. Leasing and outsourcing may also give rise to a standard transfer, even in the
absence of a direct contractual relationship between the businesses in question:
Daddy’s Dance Hall [1988] IRLR 315; Temco v Imzilyen [2002] ECR I-969.
However, many such cases will now fall more easily within the scope of ‘service
provision changes’ under TUPE.
19. In the recent case of Albron Catering v FNV Bondgenoten [2011] IRLR 76,
considered in more detail below, the ECJ held that there may be a relevant
transfer of an undertaking from one body to another when there is a transfer of
the responsibility of running the business and of the day-to-day management of
employees between those bodies, even if the strict contractual rights and
obligations owed to the employees in question originally rested with a third
party.
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After the transfer: has the undertaking retained its identity
20. Much of the confusion in interpreting TUPE and the Directive has arisen over the
question of whether or not the relevant economic entity has in fact moved from
the transferor to the transferee. In order for a relevant transfer to exist, the
economic entity must ‘retain its identity’. The principles laid down in Spijkers (see
paragraph 6 above) remain the guiding authority.
21. In Schmidt [1994] IRLR 302, the ECJ appeared on one analysis to suggest that
there could be a standard transfer of an economic entity comprising a single
cleaning lady, based solely or principally on the fact of ‘the similarity in the
cleaning work performed before and after the transfer’. However, in Suzen v
Zehnacker [1997] IRLR 255, the ECJ made clear that:
‘an entity cannot be reduced to the activity entrusted to it. Its identity also
emerges from other factors, such as its workforce, its management staff, the
way in which its work is organised, its operating methods or indeed, where
appropriate, the operational resources available to it… The mere loss of a
service contract to a competitor cannot therefore by itself indicate the
existence of a transfer…’
‘the degree of importance to be attached to each criterion for determining
whether or not there has been a transfer within the meaning of the Directive
will necessarily vary according to the activity carried on… Where in particular
an economic entity is able, in certain sectors, to function without any
significant tangible assets, the maintenance of its identity following the
transaction affecting it cannot, logically, depend on the transfer of such
assets.’
‘since in certain labour-intensive sectors a group of workers engaged in a
joint activity on a permanent basis may constitute an economic entity, it
must be recognised that such an activity is capable of maintaining its identity
after it has been transferred where the new employer does not merely
pursue the activity in question but also takes over a major part, in terms of
their numbers and skills, of the employees specially assigned by his
predecessor to that task.’
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22. In essence, then, the weight to be given to the fact that certain aspects of an
economic entity transfer and others do not will depend on the importance of
those aspects to the business in question. So, a transfer of employees is of great
importance for businesses highly dependent on manpower. Similarly, for assetbased undertakings, a transfer of materials might be necessary. See, for example,
Oy Liikenne v Liskojarvi [2001] IRLR 171; Abler v Sodexho [2004] IRLR 168. In the
recent case of Crece v Valor [2011] IRLR 251, considered in more detail below,
the ECJ reiterated this principle in holding that there was no standard transfer of
a contracted-out cleaning business when none of the staff were taken on by the
new operator.
23. This kind of result caused concern in the English courts, because of the risk that
employers could avoid TUPE in labour-intensive undertakings merely by refusing
to take on staff. As result of, the Court of Appeal developed the ‘ECM factor’, an
English phenomenon as yet not considered by the ECJ. This requires an
employment tribunal to have regard to the reason why employees were not
taken on: ECM v Cox [1999] IRLR 559; ADI v Willer [2001] IRLR 542; RCO v Unison
[2002] IRLR 401. In Astle v Omnisure [2005] IRLR 12, the EAT held that the correct
approach to this issue was:
(i) a desire to avoid the application of TUPE should only be taken into
account if it was the reason or principal reason for not taking on the
workforce and
(j) if so, then it is just one factor to be taken into account along with the
other relevant circumstances.
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Recent cases
Scattolon v Ministero Dell’Istruzione, Dell’Universita e Della Ricera [2011] IRLR
1020, ECJ
Facts
24. This case concerned the provision of auxiliary services – such as cleaning,
caretaking and administrative support – to Italian state schools. Until 1999, these
services had been provided by two groups of employees, one employed by local
authorities, the other by the state. In 1999, Italy passed legislation providing for
the transfer of local authority employees, such as the claimant in this case, to the
state. The principal issue was whether the state was required to count the
claimant’s full length of service as a local authority employee towards the
assessment of his salary as a state employee.
Judgment
25. The judgment of the ECJ restates most of the general legal principles governing
standard transfers without significant development. However, the judgment is
important in clarifying – or, some might say, reducing – the scope of the public
administrative exception derived from Henke v Gemeinde Schierke [1996] IRLR
701.
26. Henke concerned the reorganisation of local government boundaries. As a result,
the functions of the secretary to the mayor of the former municipality were
transferred to a newly-formed administrative region. The ECJ held that this
reorganisation of responsibilities was not a standard transfer. The way that ECJ
expressed its decision was as follows:
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‘the reorganisation of structures of the public administration or the transfer
of administrative functions between public administrative authorities does
not constitute a “transfer of an undertaking”…’
This language was then adopted directly into TUPE.
27. As noted above, subsequent cases tended to give the so-called Henke exception
a restricted application. This continued in Scattolon. At paragraph 54, the ECJ
confirmed that:
‘Whilst it is true that… the Court has excluded from the scope of [the
Directive] the “reorganisation of structure of the public administration” and
the “transfer of administrative functions between public administrative
authorities” and that exclusion has subsequently been confirmed in Article
1(1) of the Directive… the fact remains, as the Court had already pointed
out… the scope of those expressions is limited to cases where the transfer
concerns activities which fall within the exercise of public powers.’
(paragraph 54).
Since the identifiable economic entity in the Scattalon case centred on a group of
staff providing auxiliary services to schools, it could not be said to be an entity
carrying out activities involving the exercise of public powers. Accordingly, it did
not fall within the exception.
28. This interpretation can be reconciled comfortably enough with Henke. First, it
seems clear that in Henke the ECJ was using the terms ‘administration’ and
‘administrative’ in the public law or governmental sense. Its concern was with
governmental or Executive activities, and the transfers of those activities. Indeed,
in the Henke case, the ECJ expressly referred to the fact that the activity in
question was concerned with the exercise of ‘public authority’. Secondly, it
appears clear that the focus in deciding whether the Henke exception applies
must remain on the activities carried out by the entity in question and not
necessarily on the activity carried out by the particular employee who is making a
claim. Thus, although Mrs Henke was a secretary – who did not appear to be
herself exercising public powers – the entity which transferred in her case was
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the wider municipal office; this clearly was, as a whole, endowed with and
exercising public powers. By contrast, in Scattolon the organised grouping of
resources in question was dedicated purely to auxiliary tasks. This issue might
well mean that, in cases involving public authorities, the way in which the entity
is defined becomes increasingly important.
Albron Catering v FNV Bondgenoten [2011] IRLR 76, ECJ
Facts
29. This case concerned the transfer of catering activities from a group company
within the Heineken group to an outside company. Like all of Heineken’s
employees, the claimant was employed by one subsidiary company within the
group (‘Heineken A’), but was assigned to a different subsidiary company
(‘Heineken B’). Accordingly, Heineken A had the contractual employment
obligations towards the claimant, but it was Heineken B which was actually
responsible for the catering activities in question and which managed him on a
day-to-day basis.
30. The catering activities were subsequently outsourced to Albron and the claimant
entered into their employment. In effect, Albron was argued that there was no
transfer of an undertaking and/or that the claimant was not transferred as part
of it, because the legal entity from which the relevant economic activity was
transferred had no contractual obligations to the claimant as an employee.
Judgment
31. The ECJ held that there was a standard transfer. While, as set out above, a key
issue in a transfer is that the transferee takes over the employment obligations
of the transferee, it is not necessary for the transferor actually to have
contractual employment obligations. As the ECJ pointed out, Article 3(1) of the
Directive provides that:
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‘The transferor’s rights and obligations arising from a contract of
employment or from an employment relationship existing on the date of
transfer shall, by reason of such transfer, be transferred to the transferee.’
(emphasis added.)
32. Accordingly, the ECJ held at paragraphs 28 and 29 that:
‘28. …the the transfer of an undertaking, within the meaning of [the
Directive], presupposes, in particular, a change in the legal or natural
person who is responsible for the economic activity of the entity
transferred and who, in that capacity, establishes working relations as
employer with the staff of that entity, in some cases despite the absence
of contractual relations with those employees.
‘29. It follows that the position of a contractual employer, who is not
responsible for the economic activity of the economic entity transferred,
cannot systematically take precedence, for the purposes of determining
the identity of the transferor, over the position of a non-contractual
employer who is responsible for that activity.
‘30. That analysis is supported by recital (3) of [the Directive], which
emphasises the need to protect employees in the event of a change of
'employer'. That concept may, in a context such as that in the main
proceedings, designate the non-contractual employer, responsible for the
running of the business transferred.
‘31. In those circumstances, if, within a group of companies, there are two
employers, one having contractual relations with the employees of that
group and the other non-contractual relations with them, it is also
possible to regard as a 'transferor', within the meaning of [the Directive],
the employer responsible for the economic activity of the entity
transferred which, in that capacity, establishes working relations with the
staff of that entity, despite the absence of contractual relations with those
staff.’
33. The decision is not without its difficulties: although the ECJ sidestepped
confronting this head on, the result appears to be that the employee in question
was entitled on his transfer from Heineken B (which was deemed to be the
transferor) to Albron (the transferee) to the continuation of the contractual
rights and obligations he had with Heineken A (a third party) as against Albron.
Nevertheless, the general merits of this judgment are clear enough in light of the
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policy behind the legislation. It will mean that groups of companies cannot avoid
the application of TUPE by splitting contractual and managerial employment
responsibilities between different companies; it may arguably also have an
impact on employees on secondment to a different legal entity if the economic
activity there carried out is transferred during the course of the secondment.
Clece v Valor [2011] IRLR 251, ECJ
Facts
34. Clece was another case of the Schmidt/Suzen-type. A local authority contracted
out, and then took back in house, the activity of cleaning its schools. No
specialised equipment was required to do the cleaning. Nor were any of the
contractor’s staff taken on by the local authority.
Judgment
35. The ECJ in effect reconfirmed the application of Spijkers and Suzen, holding that:
(1) If an entity can function without significant tangible or intangible assets, then
the question as to whether there has been a standard transfer cannot
depend on the transfer of such assets (paragraph 35).
(2) An entity cannot be reduced to the activity entrusted to it (paragraph 41).
(3) An entity which is essentially based on manpower cannot transfer unless the
majority of its employees are taken on by the alleged transferee (paragraph
41).
(4) The mere taking over of the cleaning work in this case did not amount to a
transfer (paragraphs 42-43).
36. Accordingly, this decision tends to validate the general sense that the judgment
in Schmidt was something of an aberration. However, it should be borne in mind
that the alleged transferee of the cleaning business in Schmidt did offer to take
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on Mrs Schmidt albeit on less favourable terms and conditions. Presumably, Mrs
Schmidt would have transferred had she accepted those new terms. This is a
factor which distinguishes that case from Suzen and from Clece and is arguably
reflective of or similar to the ECM factor developed by the English courts. The ECJ
was not asked in Clece to consider these kinds of issues and there were,
accordingly, no findings about the reasons for the refusal to take on any of the
previous cleaning staff or their relevance.
Mathew Purchase
11 March 2012.
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