This article was first published in the Procurement and Outsourcing Journal, March/April 2012.
In this article, I shall be considering whether recent cases on the application of the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE Regulations") are limiting the application of the legislation in an outsourcing scenario.
Before 2006, the application of the 1981 TUPE Regulations to situations in which services were outsourced focused on a number of evolving and often opaque legal tests that were based on questions such as whether the services were labour-intensive, whether assets or employees were taken on by the transferee and whether the same assets were used in the services before and after the transfer. The inclusion in the 2006 TUPE Regulations of a definition of service provision change was designed to clear away the obscurity and to a large extent it has done so. However, the language of the definition has made employment tribunals look at the application of the TUPE Regulations from a different perspective, sometimes with surprising results.
Activities not services
Under regulation 3(1)(b) of the TUPE Regulations, a service provision change is a situation where (in summary):
- activities cease to be carried out by a client on its own behalf and are carried on by a contractor on the client's behalf; or
- activities cease to be carried out by a contractor and are carried out by a new contractor; or
- activities cease to be carried out by a contractor and are carried out by the client.
Other conditions apply (notably that there be an organised grouping of employees in Great Britain whose principal purpose is to carry out the activities) but much of the significant recent litigation has centred on the issue of "activities". What has emerged is that the emphasis on "activities" requires analysis of factual situations at a more granular level than is required when considering "services", the consequence of which is judicial decisions that may have been different had the same facts arisen under pre-2006 law.
Activities must be fundamentally and essentially the same
There is no express requirement in the TUPE Regulations that the activities before and after the transfer must be identical, although logic suggests that the Regulations ought not to apply where they are significantly different and indeed that approach is consistent with the requirement that a transfer of an undertaking under regulation 3(1)(a) will occur only when the undertaking retains its identity after the transfer.
The EAT first stated the "same before and after" requirement in the case of Metropolitan Resources Limited v Churchill Dulwich (in liquidation) and Cambridge and others (2008). It advocated a straightforward and common sense approach to the interpretation of the service provision change definition, rather the purposive approach that had been a feature of pre-2006 cases.
It held that if, on analysing the facts, a tribunal found that the activities before and after were not "fundamentally or essentially the same", it would be entitled to find that no service provision change had occurred. However, subsequent cases seem to have accepted that a much lesser degree of change will suffice as a basis for finding that the facts do not fit the definition of service provision change.
In Enterprise Management Services Limited v Connect-Up Limited and others (2010), Enterprise lost a contract with Leeds City Council to provide IT services to schools. In its place, new contracts were awarded to Connect-Up and to five other service providers. The EAT found that the activities under Connect-Up's contract were different to the activities under Enterprise's former contract because:
- curriculum services (which accounted for about 15% of the Enterprise contract) were excluded; and
- activities had also been outsourced to other service providers.
Therefore it found that there had been no service provision change.
In this case, the difference in the nature of the activities was relatively small but the EAT found that it was justifiable to conclude that they were not fundamentally or essentially the same after the transfer and therefore there had been no service provision change.
In Nottinghamshire Healthcare NHS Trust v Hamshaw and others (2011), the Trust operated a residential home for vulnerable adults on behalf of a local PCT. Residents at the home were cared for on a 24-hour basis by Trust employees who were also provided with accommodation at the home. Upon closure of the home, Nottinghamshire County Council became directly responsible for their care in place of the PCT. It re-housed residents in homes of their own and engaged two private sector companies to provide care. The new carers did not work night shifts but were on call to provide night care as they slept in the same accommodation as the adults they were assigned to.
The EAT held that the activities before and after the transfer were fundamentally different and therefore there had been no service provision change. It took into account the "change of ethos" from residential care provision to support in the recipient's own home. It also said that it was right for the employment tribunal to have focused on the differences in care arrangements before and after the transfer, rather than similarities.
Furthermore, it suggested that because the client had also changed when the county council took over responsibility from the PCT, the TUPE Regulations were not even engaged because there had been a change of client simultaneously with the change of service provider. This suggestion was analysed in the case of Hunter v McCarrick which is considered below.
Similarly, in OCS Group v Jones (2009), the EAT found that the activities had not continued in the same form after the transfer. The outgoing contractor had provided catering services at a central canteen and four "satellite" outlets at BMW's car factory in Oxford. Its services involved a great deal of time spent on the preparation of hot meals, as well as the sale of other food. It was replaced by a new contractor which also provided catering services to the entire factory. However, the new contractor was not required to provide hot meals and sold mainly pre-prepared sandwiches and salads instead. The EAT found that the activities before and after the transfer were very different and that no service provision change had occurred.
Arguably the case may have been decided differently if it had been heard pre-2006, as the focus would have been on the fact that both old and new suppliers provided catering services to the factory, rather than on the detail of the activities that comprised the services.
Finally, in Ward Hadaway Solicitors v Love (2009), the EAT held that where a client appointed a new law firm to its panel to replace the previous supplier of conveyancing services, there was no service provision change because:
- the new services were slightly narrower in scope than the old services; and
- there was no transfer of ongoing work from the old firm to the new firm, so it could not be said that the activities previously carried on by the old firm were now carried on by the new firm.
Again, whilst it might be said that at the level of services there was no change, the changes in the detail of the activities excluded the transfer from the TUPE Regulations.
It is doubtful that this was the intention when the TUPE Regulations were amended in 2006. However, the tribunals are only following the express scheme in the Regulations which obliges them to look at whether the activities are being carried on by a new contractor.
Fragmentation
It is commonly the case that services are contracted out to a number of contractors, particularly in the public sector. However, the application of the service provision change definition to scenarios involving multiple contractors has presented challenges for employment tribunals.
The initial approach was seen in the case of Kimberley Housing Group Limited v (1) Hambley (2) Leena Homes and (3) Angel Services UK Limited (2007). Services were contracted out to two contractors, Kimberley Housing and Angel Services. The employment tribunal found that Kimberley Housing had taken on by far the majority of the services and that there had been a service provision change. It went on to apportion liability for the employees' claims between Kimberley Housing and Angel Services pro rata to the proportion of the services that they had taken on. The EAT held that this was incorrect. It approached the case by looking at which services the employees were assigned to, applying the test of "assignment" established in Botzen v Rotterdamsche Droogdok Maatshcappij (1983). It found that they were assigned to the Kimberley Housing services and therefore that liability in respect of the employees' claims had transferred to Kimberley alone.
This has a logical consistency, but is a commercially unattractive outcome for any new contractor that is taking over the majority of services in a multiple outsourcing. However, in subsequent cases the tribunals have been more reluctant to find that a service provision change has taken place and the results have been quite different.
In Thomas-James v Cornwall County Council (2008), a panel of 17 service providers was reduced to nine and the Council was one of those that lost out. A number of its employees argued that they had transferred to one of the new service providers. However, the tribunal found that it was not possible to identify which of the new service providers had taken over the services previously provided by the Council. Therefore, it was not possible to say that the Council employees had transferred pursuant to a service provision change.
In Clearsprings Management Limited v Ankers and Angel Services UK Limited (2008), the services provided by one contractor were re-contracted to three new contractors. It was not possible to identify to which new contractor particular services had transferred, largely because during a transitional period services had been randomly distributed between them. The EAT found that no service provision change had occurred.
Avoidance and flexibility
None of the above cases appeared to involve deliberate attempts to avoid the application of the TUPE Regulations. However, in some of them, relatively small or detailed differences in the activities pre and post-transfer resulted in there being no service provision change.
The consequence is to place many typical outsourcing exercises outside the scope of the TUPE Regulations. Moreover, it could almost be said to encourage clients and contractors to construct their invitations to tender and responses so that the activities involved will no longer be fundamentally or essentially the same and/or to fragment the services in a way that will cause the transaction to fall outside the definition of service provision change.
The advantages for contractors in being able to operate outside TUPE are obvious. But there can also be advantages for clients: if contractors can be reasonably confident that they will not have to make a provision for having to take on employees under the TUPE Regulations (or having to make them redundant), they may have greater scope for delivering genuine cost savings. That assumes that the client will remain responsible for any redundancies or redeployment, but if the new activities are different or fragmented such that the TUPE Regulations do not apply, the client cannot argue that such costs would pass to the contractor in any event.
No service provision change where there is also a change in client
The statutory definition of service provision refers to services carried out by or for "a" client being transferred to a contractor on behalf of "the" client. In Nottinghamshire v Hamshaw the suggestion was made that this must have the effect of excluding a situation in which the client changes simultaneously with the service provider. In Hunter v McCarrick (2010), the EAT confirmed that this was correct.
In that case, Mr McCarrick was employed to manage a property portfolio. In 2009, Mr Hunter ceded control of the portfolio to Law of Property Act receivers appointed by the mortgagee of the properties. More or less simultaneously, the receivers appointed new managers. Mr McCarrick argued that a service provision change had occurred and that he had transferred to the new managers appointed by the receivers. The EAT disagreed and held that the definition of a service provision only applies where the same client is involved and cannot be read to include situations where the client changes.
So, by analogy, if the statutory responsibility for providing a service transfers from A to B and B simultaneously appoints a new contractor to provide the services, the employees of the old contractor cannot argue that they have transferred to the new contractor as a result of a service provision change, although they may still seek to argue that a transfer of an undertaking had occurred under regulation 3(1)(a).
The decision in Hunter v McCarrick seems to produce an interesting consequence, particularly in the context of property transactions. Consider a situation in which the freehold owner of a building sells its interest to a buyer. The seller has managing agents who employ staff to work at the building (receptionist and security guards):
- if the seller's contract with managing agents for the building is assigned to the buyer as part of the sale, there will be no service provision change because there is no change of contractor;
- but, if the contract is not assigned and the buyer appoints new managing agents, there will arguably be no service provision change because there has been a change of client.
In both cases employees can argue in the alternative that they have transferred under the TUPE Regulations if they can establish a transfer under regulation 3(1)(a), an argument that was rejected by the EAT on the facts of both Hunter and Nottinghamshire v Hamshaw.
The two types of transfer under regulations 3(1)(a) and (b) are not mutually exclusive, according to the EAT. Each case turns on its facts, but it will usually be the case that, if there has not been a service provision change because the activities have not remained fundamentally or essentially the same, there is unlikely to have been a transfer of an undertaking because the undertaking will not have retained its identity. Moreover, in outsourcing situations there will rarely be the transfer of an economic entity necessary to establish a transfer under regulation 3(1)(a).
Government review
In November 2011, the government called for evidence on the effectiveness of the TUPE Regulations, including the service provision change definition. A formal consultation process will be the next step if the evidence received supports consideration of changes to the law.
Conclusions
- applying the TUPE Regulations to outsourcing situations requires detailed comparison of the activities before and after the event;
- it seems that relatively small or trivial differences in activities can defeat a service provision change argument;
- multiple contracting out exercises may fall outside TUPE entirely if it is not possible to trace which services go to which contractors;
- a change of client at the same time as a change of contractor will also cause the outsourcing exercise to fall outside the service provision change definition.
Metropolitan Resources Limited v Churchill Dulwich (in liquidation) and Cambridge and others (UKEAT/0286/08).
Enterprise Management Services Limited v Connect-Up Limited and others (UKEAT/0462/10)
Nottinghamshire Healthcare NHS Trust v Hamshaw and others
(UKEAT/0037/11),
OCS Group v Jones (UKEAT/0038/09)
Ward Hadaway Solicitors v Love (UKEAT/047/09)
Kimberley Housing Group Limited v (1) Hambley (2) Leena Homes and (3) Angel Services UK Limited UKEAT/0489/07
Botzen v Rotterdamsche Droogdok Maatshcappij (BV C-186/83).
Thomas-James v Cornwall County Council (ET/1701021-22)
Clearsprings Management Limited v Ankers and Angel Services UK Limited (UKEAT/0054/08)
Hunter v McCarrick (EAT/0617/10
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.
