UK: TUPE is Dead. Long live TUPE

Last Updated: 27 April 2006
Article by Robert O’Donovan

Originally published April 2006

The Transfer of Undertakings (Protection of Employment) Regulations 1981 must be one of the most controversial pieces of legislation ever passed. They are controversial, not so much because of the intent behind them, but because of the difficulty in dealing with complicated concepts. The regulations, or "TUPE" as they have fondly become to be known, are now being revised and reissued and Robert O’Donovan had a look at some of the details.

Why TUPE?

The intent behind TUPE is to protect employees on a transfer of a business or undertaking.

Why do employees need protection?

The answer lies in the way a business is sold. If a business is sold by way of a share sale, that is to say it is run by a company and the owners of shares in that company sell their shares, then, as far as employees are concerned, there is no fundamental change to their position. Their contracts of employment before the sale were with the company and, after the sale they are still with the company. If the new owner decides to make changes then they have the protection of normal redundancy, unfair dismissal and discrimination legislation.

On the other hand the business could be sold "as a business". This means that the buyer is not buying the shares in the company running the business but rather buys each and every asset separately. There are practical and tax advantages and disadvantages to each method of purchase but an attraction of buying assets separately is that the buyer knows exactly what he is getting. If one buys shares, one gets all the assets and all the liabilities including unwelcome liabilities.

On a sale of shares employees have the protection they have always had. On a sale of business, before TUPE, there was no guarantee of continuing employment on a sale and buyers could cherry-pick staff choosing the ones they wanted and rejecting those they did not want, whether fairly or unfairly. Now staff assigned to the business find their contracts automatically transferred.

Outsourcing

One area of uncertainty had been whether the outsourcing of a function amounted to a transfer of an undertaking and whether the transfer of an outsourced function from one supplier of the service to another was itself a transfer of an undertaking. Take for example office cleaners. The client is dissatisfied with Company A, which supplies his cleaners, and so he appoints another company, B, to supply them. If TUPE applies, then the staff who gave rise to the client’s dissatisfaction in the first place may be transferred to Company B and so continue to clean the office!

Before 6 April, it was almost a matter of chance as to whether TUPE applied to such a transfer. However, as from 6 April, in such a situation TUPE will almost certainly apply. In the above example, that would mean that the original cleaners preserve their job continuity and that the client would have to use other means to improve the quality of service he receives.

Outsourcing from Government

Under TUPE all the liabilities of the old employer pass to the new employer, for example, liability for personal injury claims also pass to the buyer. However, this leads to a practical difficulty. The buyer’s employer’s liability insurer would take the view that the injury predated cover under the insurance and refuse to pay. In such a situation, judges decided the transferee could actually claim under the transferor’s employers liability insurance policy. That is why, today, if you ask us to assist in a business acquisition, we usually ask for details of current and historic employers liability policies from the seller.

There was a problem if one took staff from a Government department as normally employers liability insurance was not provided for. The transferee might have to discharge an old personal injury claim without insurance cover. This gap is now being filled so that, if you take Government employees under TUPE and there is a pre-existing injury, the Government organisation and your entity will be jointly and severally liable.

This still seems unfair. Why joint and several? Why not leave liability entirely with the Government?

Arrangements should be made for the liability to fall on the Government by Agreement although in the writer’s experience, certainly in the past, this has been easier said than done.

Opting-out?

Can you opt out of TUPE? Yes, but you need to plan in advance. If part of a business is being transferred, you can re-assign staff to other parts of your business in advance of the transfer. Aim to do this with the agreement of staff, as depending on circumstances an inappropriate reassignment could give rise to a constructive dismissal.

Harmonising contract terms on transfer

A frequent area of difficulty arises after a transfer when the buyer wishes to harmonise terms of employment between existing staff and the staff arriving as a result of the transfer. Under old TUPE, an agreed variation to the employee’s original terms of employment is void and therefore the employee can revert to the original contract as and when it suits. On the other hand, dismissal and subsequent reengagement on the varied terms does seem to be effective in varying contracts. The end result is the same but the procedure involved determines whether the variation is effective or not.

Presumably the idea is that, if there is a dismissal, at least the employee could, if he wished, take his chances with a constructive dismissal claim.

This arrangement, with its focus on form rather than substance, is not reformed by the new regulations. In fact, if anything it is strengthened in that there is an express regulation that variation of contracts can be agreed only if the sole or principal reason for the variation is economic, technical or organisational, entailing changes in the workforce, or for a reason unconnected with the transfer.

Pensions

To the casual reader occupational pensions simply do not pass under TUPE although, if the transferor operates a personal pension arrangement, the transferee is obliged to set-up an identical arrangement. For practical reasons, new arrangements may or may not be with the same pension provider but this does not seem to cause any difficulty.

In fact, occupational pensions are protected up to a point. The relevant legislation is tucked away in the Pensions Act 2004 and regulations made under it. It is a pity that pensions were not brought into the scope of the new regulations.

Transferees will be relieved to know that there is no obligation on them to replicate final salary or defined benefit type occupational pension schemes which are causing so much difficulty at the moment. All they will have to do is to provide money purchase pension arrangements with a matching contribution from the employer of up to 6% per annum. This is probably a fraction of the true value of a final salary pension and utilising a TUPE transfer remains a possible method of terminating final salary obligations without breach of contract.

Liability information

The transferor is now to be under a duty to provide information about transferring employees to the transferee. To an extent this will duplicate information we would ask for in warranties. However, as there will be a short, three month, limit for claims, we expect most transferees will want warranty protection as well.

Consultation

Consultation remains a strong feature just as before. A quirk of the previous legislation was that if the transferor failed to inform or consult representatives then, whilst it was the transferor who was at fault, the liability to pay compensation to staff would, under TUPE, pass to the transferee. This did not cause any great difficulty where transferor and transferee obtained legal advice as a typical purchase agreement would provide an indemnity from transferor to transferee. On informal transactions, however, there was arguably a considerable degree of unfairness. Now transferor and transferee are jointly liable – a step in the right direction, but still not entirely fair and still requiring an agreement between transferor and transferee to apportion liability.

Where does this get us? Whilst there have been some useful areas of clarification the extension of TUPE to outsource contracts increases the chance of new difficulties. In all probability, the changes do not mean that TUPE will disappear from the Employment Tribunals.

© RadcliffesLeBrasseur

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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