TUPE update relating to the construction industry

Caroline Humphries looks at recent developments

The uncertainties surrounding the application of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (commonly referred to as TUPE), which have been outlined in previous Construction Law Bulletins in both 1997 and 1998, continued to plague contractors during 1999. TUPE is designed to protect employees when the undertaking for which they work is transferred. If it applies then the employees automatically transfer to the incoming contractor with a raft of employment rights and obligations. If it does not apply then the incoming contractor has much greater freedom but of course the outgoing contractor is stuck with the employees and all the accrued redundancy liabilities . As every incoming contractor usually (eventually!) becomes an outgoing contractor it is very important to know exactly when TUPE will, or will not, apply in order to estimate potential costs. However whether TUPE applies in any given situation seems increasingly hard to predict.

TUPE has never been straightforward, but the correct application of the 1977 Acquired Rights Directive (which was implemented in UK law by TUPE) was put into confusion by the European Court of Justice's ("ECJ") ruling in the case of Suzen v Zehnacker Gebaudereinigung GmbH Krankenhausservice in 1997. This found that the Directive would only apply where the change in contractor involved the transfer of significant assets or the major part of the workforce responsible for providing the service in question. The decision led to bitter debate as to whether TUPE, designed to protect employees , could be circumvented by dismissing all the employees prior to the transfer so that no employees transferred and therefore TUPE did not apply. For contractors requiring unskilled staff it made little commercial sense to take the existing staff with all their attendant liabilities. It was far more attractive to acquire a new workforce.

Although the ECJ has essentially confirmed the Suzen decision in 1999 (see the cases of Francisco Hernandez Vidal SA v Gomez Perez & others and Sanchez Hidalgo and others v Asociacon de Servicios Aser & Sociedad Cooperativa Minerva), both the UK Court of Appeal and the Employment Appeal Tribunal ("EAT") have shown reluctance to do so. The case of ECM (Vehicle Delivery Service) Ltd v Cox suggested that the importance of Suzen had been " overstated" and while stressing consistency with the ECJ's approach, the Court of Appeal upheld a Tribunal's decision that there had been a transfer of an undertaking when a firm lost a contract to deliver cars even though no employees had been taken on by the transferee. Mr Justice Morison, the outgoing President of the EAT confirmed that TUPE applied to a change of cleaning contractor even though there was no transfer of employees or assets (OCS Cleaning Scotland Ltd v Rudden and Olscot Ltd) and that it applied in the case of Kerry Foods Ltd v Creber when all the employees had been dismissed prior to the transfer.

Does TUPE apply?

The test favoured by the Courts currently seems to be a return to a consideration of all the material factors first proposed in the "root authority" 1986 case of Spijkers. The proper question was whether the entity retained its identity; all the circumstances had to be considered but the mere sale of assets did not constitute a transfer. In order to decide whether TUPE applies all factual circumstances must be taken into account, including the type of undertaking, the transfer or otherwise of tangible assets such as building or stocks, the value of intangible assets as at the date of transfer ,whether the majority of staff are taken over by the transfer, the transfer or otherwise of customers, the degree of similarity between activities before and after the transfer and the duration of any interruption in those activities. In particular "a realistic and robust view must be taken".

Although Suzen may still be followed it is hoped that clarification will be shortly available, whether through the ECJ or new TUPE Regulations. In order to collate the European case law and to deal with some of the difficulties of interpretation, a new Acquired Rights Directive was introduced on 29th June 1998. This clarified the concept of transfers so that it now formally applies "where there is a transfer of an economic entity which retains its identity". It also confirms that it applies to public and private undertakings engaged in economic activities whether or not they are operating for gain. The new Directive introduces the option for member states to transfer occupational pension schemes (pensions are one of the few contractual benefits which do not currently automatically transfer). It also provides for tighter information and consultation provisions and some other changes.

The UK has until 17th July 2001 to implement the new Directive. A Public Consultation document is due to be published at any moment (January 2000). Draft Regulations may then be available in the Spring and it is currently anticipated that new Regulations will be in force by the Autumn 2000. The only changes which have already been introduced are the changes to consultation obligations. These were introduced in the Collective Redundancies and Transfers of Undertakings (Protection of Employment) (Amendment) Regulations 1999 which apply to transfers of undertakings completed on or after 1st November 1999. The new law provides that employers must consult representatives of recognised trade unions where they exist. The option of bypassing recognised trade unions in order to talk directly with employee elected representatives is therefore ended. The Regulations also set out specific requirements for the election of employee representatives. Most significantly the maximum compensation which can be awarded in the event of failure to inform and consult on transfers of undertakings has been increased from 4 week's actual pay to 13 week's actual pay. This is a heavy penalty when numerous employees are affected and means that contractors must comply with the new rules or face substantial costs. Incoming contractors should note that the EAT in the Kerry Foods Ltd v Creber case found that a liability for failure to consult falls to the transferee.

Contractors concerned with the spectre of matching generous corporate pension schemes should take some comfort from the current proposals which are to require incoming contractors to provide "broadly comparable" schemes rather than identical schemes. It has been recognised that it would be anti-competitive to require a more onerous obligation, effectively disqualifying smaller organisations from taking over parts of larger businesses with sophisticated pension arrangements.

1999 has seen some significant developments in TUPE. It is likely that 2000 will be even more active - let's hope it brings more answers than questions!

For further information please contact Caroline at [email protected] or on +44 20 7367 3139.