As part of our "TUPE takeaways" series, we consider some recent cases on whether vicarious liability transfers under TUPE and the implications for employers.
The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") are designed to safeguard the rights of employees when the business in which they work changes hands or there is a change in service provider.
When TUPE applies, affected employees in scope to transfer will move across from their original employer (the transferor) to the new company (the transferee) on their existing contract of employment, with their continuity of employment preserved.
The transferor's "rights, powers, duties and liabilities under or in connection with any such contract" transfer to the transferee. Any act or omission by the transferor before the transfer is deemed to be an act of omission by the transferee (although commercial contracts will often vary this basic position). Broadly, this means that the transferee "steps into the shoes" of the transferor.
For example, if an employer has historically underpaid a transferring employee, under TUPE this liability would transfer. The transferee would be on the hook for any breach of contract or unlawful deductions from wages claim.
The position is less clear when it comes to vicarious liability. This is where an employer is held responsible for the wrongful acts of its employees, provided that those acts are committed in the course of employment. It is a form of secondary liability. The employer itself hasn't done anything wrong but can still be held liable.
Vicarious liability could arise in, say, a negligence claim. If a delivery driver employed by a courier company causes a car accident whilst making deliveries, the employer could be vicariously liable for any negligence.
For the first time, the High Court has considered if vicarious liability would transfer under TUPE.
What happened?
Huntercombe owned and operated a hospital in Maidenhead. The claimant, ABC, alleged that two Huntercombe employees had committed wrongful acts whilst she was an in-patient at that hospital. ABC brought a personal injury claim seeking damages for the harm suffered. ABC alleged that Huntercombe was vicariously liable.
Huntercombe later sold its business to Active Young People Ltd. TUPE applied and its employees (including the two alleged wrong-doers) transferred.
Did vicarious liability transfer?
The High Court held that vicarious liability for acts done by a transferring employee to a third party does not transfer under TUPE. So Huntercombe remained liable.
The High Court reminded itself that the purpose of TUPE was to safeguard employee rights. It found that liabilities "in connection with" a contract of employment could capture a wide spectrum of liabilities. But for a liability to transfer, the connection with the contract must be direct. This meant a liability the transferor has to the employee which is connected to the "fundamental" parts of the employer/employee relationship.
Here, Huntercombe's liability was not owed to its transferring employee, but to the third party, ABC. The connection was therefore too remote.
What does this mean for employers?
This case provides some additional reassurance for transferees that they will not inherit vicarious liabilities for harm caused by transferring employees to third parties. But transferees could still be liable for other acts carried out by employees pre-transfer.
Last year, the Employment Appeal Tribunal considered a case in the context of employment claims (Sean Pong Tyres Ltd v Moore) and reached a similar outcome to the High Court. In that case, a claimant, Mr Moore, employed by Sean Pong Tyres won claims of constructive unfair dismissal, direct age and race discrimination and harassment. The claims pinned on the conduct of a colleague, Mr Owusu, who had since transferred to another employer, Credential. Sean Pong Tyres argued their liability transferred to Credential.
The EAT disagreed. Unfair dismissal liability did not transfer because Mr Moore's employment had ended before the transfer (for unconnected reasons). His only employer had been Sean Pong Tyres Ltd and so any liability for unfair dismissal lay with them.
Discrimination and harassment liability also did not transfer because, although liability arose because of Mr Owasu's actions, Sean Pong Tyres actually had primary liabilities towards their employees under the Equality Act for direct discrimination and harassment. Any liability was owed to Mr Moore and was in connection with his employment contract (not Mr Owusu's).
Transferees could therefore still inherit liability for discrimination alleged by an employee who is transferring under TUPE. For example, if Mr Moore had been a transferring employee, Credential could then have been deemed liable because the liabilities were connected to his contract of employment.
TUPE takeaways
These cases serve as a useful reminder for transferees:
- Do your homework: It is crucial to do thorough
due diligence of who is transferring and what liabilities may be
lurking. Although liability for third party claims may not
transfer, there are lots of liabilities owed by the transferor to
their employees which will transfer. It is important to understand
what previous complaints or grievances have been raised (in, say,
the previous two years) to understand if claims could later come
out of the woodwork.
- Warranties and indemnities: Transferees should
negotiate appropriate warranties and indemnities for any
pre-transfer liabilities. As mentioned above, any business purchase
agreement or outsourcing agreement will usually contain indemnities
so that the transferor picks up the cost of claims arising from
acts or omissions before the transfer, and the transferee picks up
the cost of claims for acts or omissions after the transfer. Those
indemnities should cover damages due for successful claims, but
also the legal fees and other costs in defending a claim (even if
it does not succeed).
- Insurance cover: Previous case law has suggested that the benefit of any employer's liability insurance cover relating to liabilities in connection with an employee's contract of employment (such as a personal injury claim) would also transfer. The High Court indicated that they agreed with this position. Transferees may therefore want to assess whether any such insurance policy applies as part of their due diligence.
ABC v (1) Huntercombe (No. 12) Limited, (2) Active Young People Limited, (3) Dr. Veerraju Banisetti, (4) Dr. Mark Tattersall – download the full judgment here.
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.
