UK: TUPE Update - January 2012

Last Updated: 25 January 2012
Article by Michael Bradshaw

The Government issues a Call for Evidence

Towards the end of 2011 the Government took the next step in its much talked of review of TUPE, by launching a Call for Evidence. This Call for Evidence was issued on 23 November 2011, and responses are due in by 31 January 2012. If the balance of evidence calls for possible changes to the current regulations, there will be a formal consultation on any proposed changes in 2012. Any changes that the Government ultimately makes will of course be limited by the need to implement the Acquired Rights Directive.

The Call for Evidence document (which is available on the BIS website) identifies various key areas of concern, and asks questions within these areas. The areas are as follows:

  • Clarity and Transparency of 2006 Regulations Overall

Questions in this section focus on whether the 2006 Regulations have succeeded in providing more clarity in contracting-out or analogous situations, and whether they have increased transparency by ensuring that transferor employers and public sector commissioners give new employers proper notification about the employment rights and obligations that are to be transferred.

  • Service Provision Changes

This is perhaps the element of the 2006 Regulations most spoken of in the context of gold-plating the Directive. Service provision change rules were introduced in the 2006 Regulations with a view to increasing certainty and reducing litigation in connection with the application of TUPE to contracting out. Such rules are not specifically required by the Directive. The questions in this area focus on whether these rules have succeeded in increasing certainty and reducing burdens on businesses, whether less litigation has resulted from service transfers, and whether professional services should be included in the definition of service provision (a matter debated at the time of the 2006 Regulations coming into force).

  • Harmonisation of Terms and Conditions

The Directive and the 2006 Regulations prevent a reduction in employee terms and conditions by reason of a transfer. Questions here look at whether changes could be made that reduce the burden on businesses, whilst remaining in line with the Directive. In particular, the Government suggests a provision limiting the future observance of terms and conditions derived from collective agreements. This is expressly permitted under the Directive and is used in other EU countries.

  • Insolvency and Liabilities

The Directive gives a generic description of the different categories of insolvency proceedings, which the 2006 Regulations mirror. This has resulted in tribunals and the EAT having to resolve insolvency issues by interpreting how these EU level terms and concepts apply to the UK system. The Government is inviting opinions on whether more should be done to clarify the application of TUPE in insolvency situations, whether through changing the legislation or providing more guidance. The question is also raised of whether liability for pre-transfer obligations should be transferred entirely to the transferee, as is the case in the 2006 Regulations, or whether both parties should be jointly liable, as permitted by the Directive.

  • Guidance

This section asks whether the provision on Economic, Technical or Organisational ('ETO') reasons entailing changes in the workforce is sufficiently clear. There is no statutory definition of an 'ETO', and additional guidance may be helpful. There is also a question asking whether there are other areas of TUPE that would benefit from additional guidance or clarification.

  • Implementation of TUPE in Member States

The Government is open to learning lessons from abroad and seeks input from those with experience of how other EU Member States have implemented the Acquired Rights Directive, if they have encountered any problems, or, conversely, if there are positive lessons that the UK could learn from the implementation of the Directive.

  • TUPE and other areas of Employment Law

This section focuses on whether there are any problems with the interaction between TUPE and other areas of employment law, and in particular between TUPE and the collective redundancy consultation rules. The issue identified is that a transferee must wait for a transfer to take place before any process of collective redundancy consultation can commence. The question is whether any benefit from this is sustainable in the context of the cost and inconvenience to businesses.

  • Other

Finally, respondents are asked whether there are any other areas of the 2006 Regulations that the Government should be considering, whether any case law since 2006 has resulted in a perceived need for updates to the Regulations, and whether the application of TUPE to different levels of employees within the same organisation causes problems.

Changes to terms and conditions following a TUPE transfer

The last 6 months have seen two new EAT cases and an ECJ case, about changes to terms and conditions following a TUPE transfer. The basic principle that changes to terms and conditions will be void if made by reason of a TUPE transfer goes back to the 1988 ECJ case of Daddy's Dance Hall. The later case Martin v South Bank University then established the principle that a desire to harmonise terms and conditions post transfer, per se, would be by reason of the transfer, and therefore void. TUPE 2006 sought to enshrine these principles in the form of Regulation 4.

Of the recent cases, Smith & ors v Trustees of Brooklands College concerned a change to rates of pay of teaching assistants who had transferred to the college under TUPE. The teaching assistants brought unlawful deduction claims, arguing that the alterations to their terms and conditions were by reason of the transfer and were therefore void under Regulation 4(4) of TUPE.

The EAT held that the question to ask was not but for the transfer would the variations have been made, but what was the reason?. The reason for the variation was held to be a belief that the claimants had been overpaid in error at their last college (the rates were unusual for the sector), and the resulting desire to bring their rates of pay into line with the rest of the sector. This reason was unconnected to the transfer, and harmonisation with the existing employees' salaries was merely a by-product of the variations. The variations to the terms and conditions were therefore not void by virtue of TUPE 4(4).

In Enterprise Managed Services Ltd v Dance & Others the EAT remitted the case back to the employment tribunal for a fresh hearing, having found that the majority of the tribunal made inconsistent factual findings.

EMS and Williams were two companies competing to win a single service contract with MHS. Prior to the expiry of their existing service contract EMS introduced performance-related pay and different hours for its engineers, whilst Williams made no changes. EMS was awarded the contract, and the Williams engineers subsequently transferred to EMS under TUPE. After the transfer, EMS put the Williams engineers on the same pay structures as the EMS engineers. Some of the Williams engineers did not accept the changes and were dismissed. They claimed automatically unfair dismissal for a reason connected with the transfer.

The majority of the tribunal held that the reason for the variation was to harmonise terms and conditions, a consequence of which was to improve productivity; the variations were therefore connected to the transfer. They also made a parallel (and contradictory) finding that harmonisation was driven by the success of the pre-transfer changes to improve productivity. The Employment Judge held the view that the dismissals were not transfer related, and that the reason for the variation in terms was to improve productivity and retain the contract with MHS. Harmonisation was a byproduct of the variation, not the principal reason for it. The EAT were inclined to agree with this view.

These cases are of course consistent with long standing ECJ case law principles, but they do highlight that there are limitations to the restrictions that TUPE and the Directive place on post-transfer changes to terms and conditions. In this context, employers who are considering changes to terms and conditions in a TUPE situation should seek to identify benefits beyond any basic desire to harmonise. If all communications on the matter are then consistent with changes being by reason of such benefits, this would amount to powerful evidence before a tribunal.

The ECJ held that the question is whether there is a substantial change to the employee's detriment, not whether there is any change whatsoever, and that this is determined overall, not term by term.

Finally, on terms and conditions, the case of Scattolon v Ministero dell'Istruzione, dell'Universita e della Ricera has raised an interesting point on collective agreements. This case concerned Article 3(3) of the Directive which is to the effect that collective agreements transfer and must be observed until their termination or expiry or replacement by another collective agreement. The ECJ held that the effect of the Directive is that if a transferee has an existing collective agreement its terms can take the place of the transferor's collective agreement in respect of the employees transferred. However, this must not have the effect of imposing conditions on the worker that are overall less favourable than before the transfer. The ECJ held that the question is whether there is a substantial change to the employee's detriment, not whether there is any change whatsoever, and that this is determined overall, not term by term. In this case, a failure to give credit for length of service in determining pay, led to a significant reduction in salary which was contrary to the Directive.

TUPE 2006 has not transposed Article 3(3), the relevant article of the Directive, and there is no mention of the transferee's collective agreement in TUPE. However, in the light of Scattolon the UK courts may now find it possible to interpret TUPE in order to allow greater post-transfer harmonisation of terms and conditions where the transferee is observing its own collective agreement.

Service provision changes – more case law ...

The cases keep coming on service provision changes and with the Call for Evidence process in mind, we think it is clear that the rules have unfortunately not increased certainty or reduced litigation. The latest case of Enterprise Management Services Ltd v Connect-Up Ltd attempts to provide some helpful guidance on service provision changes. The judgement identified five key principles to apply in considering the matter:

1. Whether the service provision change falls within Regulation 3(1)(b)(ii) will be a case of if activities cease to be carried on by a contractor on a client's behalf and are subsequently carried on instead by another contractor.

2. The Regulations do not define what 'activities' are. Therefore it will be up to the employment tribunal to identify the relevant activities which the first contractor carried out.

3. The tribunal must then consider whether the activities that were carried on by the subsequent contractor are fundamentally the same as those activities that were carried out by the original contractor. This is a question of fact for the tribunal to decide and minor differences may be disregarded.

4. Where fragmentation of an activity occurs, the case may fall out of the service provision change regime.

5. If the above criteria are satisfied, there are still three further questions that the tribunal must consider: (i) is there an organised grouping of employees in Great Britain which has as its principal purpose the carrying out of activities on behalf of the client;

(ii) whether the client intends that the transferee will carry out the activities in connection with a single event of short-term duration (excluded from being a service provision change); and

(iii) whether the activities are not wholly or mainly for the supply of goods (as opposed to services) for the client's use.

If the tribunal believes that the above criteria are satisfied then a service provision change will have occurred. Once a service provision change has been established, the tribunal must then go on to consider whether each individual claimant was assigned to the organised grouping of employees.

This guidance should prove useful in giving an order to the analysis of whether service provision changes have occurred. However, the core questions in many cases will remain whether activities are intended to continue and/or if fragmentation has occurred to a point where TUPE cannot apply, and these are questions of fact and as such, sources of much dispute.

Supply of Goods

As referred to above, one exclusion from a service provision change is where the activities are wholly or mainly for the supply of goods, in accordance with TUPE Regulation 3(3)(b).

The recent case of Pannu v Geo W King Ltd concerned a business providing parts to a vehicle manufacturer, a process which entailed sourcing materials and assembling the same, before selling on the assembled parts. The question was whether the assembly line work gave rise to a service provision change or if the exclusion provided by Regulation 3(3) (b) applied – namely that the contract was for the supply of goods.

The tribunal considered that whilst the assembly line provided a service by checking that the goods to be assembled were safe to use, overall this was incidental to the sale of the assembled goods.

The tribunal considered that whilst the assembly line provided a service by checking that the goods to be assembled were safe to use, overall this was incidental to the sale of the assembled goods. It therefore found that the activity carried out by the alleged transferor was the supply of the finished goods, and not services, and for this reason TUPE did not apply. The EAT emphasised that this was a factual matter for tribunals to determine and upheld the tribunal's decision.

TUPE exemption does not apply to companies in administration

Following the uncertainty stemming from the decisions in OTG Ltd v Barke and others and Oakland v Wellswood (Yorkshire) Ltd the Court of Appeal has provided an authoritative decision in relation to how TUPE applies when a company in administration undergoes a relevant transfer.

Regulation 8(7) of TUPE essentially disapplies TUPE where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner. In Key2Law (Surrey) LLP v De'Antiquis the Court of Appeal confirmed that the EAT's approach to Regulation 8(7) was correct – namely that companies in administration (as opposed to being in liquidation) are not exempted from TUPE. The application of Regulation 8(7) depends on whether the administrator intended to liquidise all the assets of the company.

The application of Regulation 8(7) depends on whether the administrator intended to liquidise all the assets of the company.

On the one hand, if a company is the subject of insolvency proceedings with a view to liquidating all of the company's assets, then Regulations 4 and 7 of TUPE (dealing with the transfer of employees and their dismissal rights respectively) are not applicable. This means that the employment of employees of that business will not transfer to the new employer under TUPE, nor will such employees gain the protection of the automatically unfair dismissal provisions of TUPE.

However, on the other hand, if the company is the subject of insolvency proceedings with any view other than to liquidise the assets of the company (such as an administrator, or insolvency practitioner, being appointed with the objective of selling the business as a going concern), then TUPE will apply to any subsequent sale by the administrator.

This outcome may not be entirely helpful to any rescue culture, but the clarity must be welcomed all the same.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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