TUPE - does it apply to facilities management contracts and, if so, does it matter?

Henry Cort considers this issue

The increasing sophistication of facilities management contracts

Facilities management contracts have, historically, not been the subject of intensive legal examination. This is because services were often provided to procurers such as local authorities or large institutional investors in-house, without the need for extensive formal documentation beyond detailed specifications.

Developments in the commercial sphere have focused legal attention upon the legal framework under which facilities management services are delivered. For instance, the increasing use by government bodies and larger institutions of competitive tendering to obtain the best price for their facilities management needs, and in particular the use of long-term facilities management contracts under the UK Private Finance Initiative.

Under more recent documentation facilities management services are often procured under term agreements for several years, and in the case of UK Private Finance Initiative agreements of 10 years or more are common.

The use of contracting-out and longer term agreements has led to an increased emphasis upon the allocation of attendant risk, including that arising from the impact of employee protection legislation.

The development of TUPE

The Transfer of Undertakings (Protection of Employment) Regulations 1981, as amended by subsequent legislation (and commonly referred to as TUPE) represent the implementation into UK law of a European Directive concerned with safeguarding employees' rights in the event of transfers of businesses or parts of businesses (the "Acquired Rights Directive" (Directive, No 77/187/EEC)).

The scope of TUPE, and the Directive underlying it, have been expanded significantly by the European Court of Justice taking a wide and purposeful approach to interpreting their intended scope. In addition, the Directive's scope is to be slightly widened by Directive 98/50/EEC, which must be brought into force in the UK by national law before 1 July 2001.

The effect of TUPE

Where TUPE applies then a statutory transfer of employees and employment rights and obligations including redundancy and personal injury claims and obligations occurs from the outgoing employer to the new employer. Some rights, such as pension provision, are not transferred but the greater part are.

Pre-transfer dismissals which are connected to the transfer may, under TUPE, give rise to claims against the new employer. Obligations to inform and consult workforce representatives in "good time" before the transfer also arise.

Whether the new contractor or employer may negotiate changes to the terms and conditions of transferred employees' employment without breaching TUPE is soon to be the subject of a decision of the House of Lords. The Court of Appeal has stated that they may not.

How TUPE can apply to facilities management contracts

For TUPE to apply there must be a transfer of an "undertaking". However, the European Court of Justice view of this concept includes some scenarios where:

1. services are contracted out to external providers;
2. services are brought back in-house following contracting-out; and
3. where one external service provider is replaced by another.

It is not possible to avoid the effect of the Regulations by agreement and whether a transfer has occurred is a question of fact in each case.

There is a large amount of (sometimes conflicting) caselaw examining the boundaries of TUPE. One case of particular importance is a 1997 decision of the European Court of Justice, Suzen -v- Zehnacker Gebaudereinigung Gmbh Krankenhausservice. This concerned the transfer of a term cleaning contract from one contractor to another and lays down guidelines which suggest that many facilities management arrangements may come within the scope of the Directive underlying TUPE, including:

• that assets are not transferred is not of itself determinative of whether a transfer has occurred;
• where the new employer takes over a significant part of the old workforce in terms of numbers or skills a transfer is quite likely to be deemed to have occurred; and
• the majority of employees do not need to be taken over by the new employer for a transfer to occur.

English caselaw has clarified that it is not possible to avoid TUPE by refusing to accept a transfer of any of the outgoing contractor's staff.

Relevance to procurers of facilities management services

TUPE difficulties can have a disruptive effect amongst staff and generate negative publicity for the service procurer. Possible examples of such difficulties are:

• Where contracting out for the first time, a statutory transfer of employees to the contractor may occur under TUPE which leads to upset amongst transferred staff. There may also be claims by the contractor against the procurer where the contractor wishes to change terms and conditions of employment of transferred staff after the transfer but may have not been made fully aware of them before the transfer. Such disputes can have a detrimental effect upon the morale of retained staff and relations with trades unions. The procurer may be brought into the action, at least for the purposes of giving evidence.
• Where changing contractor, a dispute may arise concerning the conduct of the outgoing contractor towards the transferred employees. This may generate unwelcome publicity and the procurer may be brought into the action.
• Where bringing services back in-house the procurer will be transferee and may therefore be liable to TUPE claims arising out of, for instance, unfair dismissal, alterations to terms and conditions, personal injury claims and other transferred matters.

Managing the risk

Many procurers of facilities management services seek to protect themselves against claims and potential involvement in claims. Protection sought often includes the use in facilities management contracts of pre-emptive measures restricting the ability of a facilities management contractor from dismissing or materially altering the terms and conditions of relevant employees' employment contracts during the period prior to the expiry or termination of a facilities management contract. This may be backed up by indemnity protection against contractor behaviour which is or may be contrary to TUPE.

A protocol has recently been agreed for dealing with MoD external procurement, and revised guidance has also been issued to local authorities and government departments. Potential contractors should be aware that, notwithstanding the exclusion of pension rights from the transfer under TUPE, contractors will be expected to provide comparable pension arrangements.

This area of the law is developing quickly and provisions are often widely drawn. How widely they should be drawn is a difficult question which is affected by the state of the law at the date of the contract.