Transfer of undertakings

Amendments to the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) came into force on 31 January 2014.

TUPE applies when there is a transfer of an economic entity that retains its identity or a service provision change. A transfer of an undertaking generally occurs where all or part of the business of a sole trader, partnership or company is sold or otherwise transferred and a ‘grouping of employees’ – which can mean a single employee – is affected. It also occurs during an ‘outsourcing’ of a function to a third party contractor, a change of contractor or bringing services that had been performed by a contractor in-house. The 2014 changes specify that in outsourcing cases TUPE only applies if the work is ‘fundamentally the same’. TUPE can apply to transfers to another country, even if it is outside the EU. Employers should check whether the type of transfer they may be involved in comes under the TUPE regulations.

TUPE means that when employees are transferred to the new employer or service provider, their contract of employment automatically transfers and therefore they generally keep their previous terms and conditions. The regulations also provide for the right of recognised trade unions or elected representatives of the employees to be informed and consulted about the transfer, although the 2014 changes specify that micro businesses (those employing fewer than ten people) can inform and consult directly with employees for transfers taking place on or after 31 July 2014, meaning there is no need for them to hold elections if a union is not recognised. Although some changes are inevitable as a result of transfer, in practice something as apparently minor as changing the date employees are paid on (which may have consequent, albeit minor, tax implications) can trigger the duty to inform and consult as employees will be concerned about changes to their payment arrangements.

Liable to tribunal action

If both the original and the new employer fail in their duty to inform and consult trade unions or employee representatives during the transfer, both are liable in any subsequent tribunal action. The new employer’s duty to consult about measures they envisage taking ends on the date of transfer – but this only applies to their duties under TUPE and not to duties under other legislation (e.g. if 20 or more redundancies are proposed). The former employer’s duty only extends to what it genuinely believes to be the legal, social and economic implications of the transfer – in other words, it won’t automatically be in breach of TUPE if it fails to inform employees of the correct legal position (but that doesn’t mean it can ignore the issue). The former employer must inform unions or employee representatives long enough in advance to allow consultation to take place, even if none of the measures under consideration would trigger the statutory duty to consult. After the transfer has taken place, any claims which an employee may have had against their original employer, e.g. unfair dismissal, can be brought against the new employer.

The existing employer has a duty to provide the new employer with ‘employee liability information’ at least 28 days before the transfer date.

Employee liability information includes information about:

• the identity and age of employees

• their statement of terms and conditions of employment

• any disciplinary proceedings or grievances listed within the previous two years

• any court or tribunal cases brought by employees in the previous two years – or any the company has reason to think might be brought – and any collective agreement that might affect the transfer.

Failure to provide this information means the new company can bring a tribunal case against the original company for damages. The amount of damages is set at a minimum of £500 per employee, except in cases where the tribunal thinks it would be unjust.

Contractual changes

A TUPE transfer does not break an employee’s service or continuous employment. The date the continuous employment started with the old employer is the one on which statutory employment rights are based.

In cases where the previous employer agreed changes to employees’ contracts that come into force after the transfer has taken place and the new employer was not party to the negotiations, the new employer is not necessarily bound by them. Until January 2014 it was automatically unfair to dismiss employees as a result of the transfer or for a reason ‘connected to the transfer’. The 2014 amendments still provide that it is automatically unfair to dismiss employees as a result of the transfer but they do allow redundancies for economic, technical and operational reasons entailing changes in the workplace, e.g. a change in location. If redundancies in these circumstances are likely the 2014 amendments allow the new employer to begin redundancy consultation before the transfer takes place. (See more on redundancy).

Harmonisation agreements

One issue that is occurring more frequently, particularly among larger companies where several TUPE transfers may have taken place (meaning there are numerous employee contracts in force), is harmonisation agreements – establishing one set of terms and conditions for all employees. Currently EU law considers virtually all harmonisation agreements to be the result of a transfer or a reason connected to the transfer that is not an economic, technical or organisational reason. This has the effect of making all harmonisation agreements void – even if agreed by employees. If the harmonisation agreement includes dismissals then the affected employees would be able to claim unfair dismissal. It is possible that harmonising upwards and gaining the agreement of union and employee representatives might leave you less open to challenge but it is no guarantee.

Leaving a period of time before introducing a harmonisation agreement has been considered as one way of avoiding a breach of TUPE but in the Sackur case two years was not considered a long enough period of time. There have been two cases where the harmonisation has been held to be for another reason. In the Enterprise Managed Services case, changes to a performance-related pay system were considered to be related to productivity improvements. Meanwhile, in Smith and others v the Trustees of Brooklands College, changes to pay were allowed because the employer genuinely believed them to be a mistake and not consistent with industry standards. The 2014 amendments now allow collective agreements to be renegotiated after one year, provided “the overall terms and conditions are no less favourable”. However, in February 2015 in the HCL case the EAT ruled that changing terms and conditions to the employees’ detriment could be a proportionate means of achieving a legitimate aim – e.g. reducing costs to stay in business. In this case the company kept the basic salary for all staff but removed some of the extra entitlements that some long-serving members of staff were entitled to. The judge found its comprehensive and careful consultation particularly noteworthy and was also impressed by the decision to keep basic salaries the same. The position where the agreements are not collective appears to be that harmonisation agreements should only be attempted with legal advice. You can download the Acas guidance for the amendments from its website.

TUPE regulations only apply for contracts of service (contracts of employment). Those engaged under genuine contracts for services are not covered, although employers may prefer to treat them in the same way as other employees, particularly if the relationship may already imply an employment contract. The difference between contracts for services and contracts of service may not always be clear, so it is worth seeking specialist advice.

TUPE also contains insolvency provisions – the question of how these operate in relation to companies in administration and whether a buyer of a business in administration can avoid the automatic transfer of employees was considered by the Employment Appeal Tribunal (EAT) in 2011. The EAT held the intention of the administrator is irrelevant, the slightly relaxed TUPE provisions for insolvency will only apply if there is a realistic chance of saving the business. As the decision was made by the EAT, it can be appealed and it is not a binding decision – so it’s important to seek legal advice if this is an issue you face.