TUPE overview and recent changes - key implications for business sales and outsourcing

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) can give rise to various employment related obligations and liabilities for companies involved in business sale transactions and outsourcing scenarios. Our Employment team highlights some key points to watch out for when managing this type of transaction and comments on the implications of recent amendments to TUPE which came into force on 31 January 2014.

The protection of the employment rights of employees where the "undertaking" or business they work in transfers to a new employer was first introduced in 1981 to implement the European Acquired Rights Directive. In 2006 the Government introduced TUPE, which revised and replaced the 1981 legislation and the latest raft of TUPE changes came into effect on 31 January 2014 (TUPE Amendments). Whilst some of the fundamental principles have been left unchanged, business acquirers in particular may be able to benefit from the introduction of new provisions.

Parties negotiating a business sale or outsourcing will need to:

• assess whether TUPE will apply to their transaction, bearing in mind the changes introduced by the TUPE Amendments;
• reduce the risk of valid employee claims by ensuring they comply with the requirements;
• consider the provisions to be included in the transaction documents (for example to allocate employment related liabilities between the parties or to provide for the new ability for acquirers to conduct collective redundancy consultations before the transfer); and
• consider whether they are able to take advantage of the latest changes (which could, in limited circumstances, make it easier for acquirers to make variations to the transferring employees' terms of employment after the transfer).

When TUPE applies and the implications of the TUPE Amendments

In broad terms, TUPE applies to:

• a "transfer of an undertaking" or business (or part of one), situated in the United Kingdom immediately before the transfer, to another person where there is a transfer of an economic entity which retains its identity. A classic example of such a transfer is a sale of a business as a going concern; and
• certain outsourcing scenarios (or "service provision changes"). For these purposes outsourcing includes: (i) "first-generation" outsourcing (where a function such as cleaning or catering is outsourced by an employer to a contractor); (ii) "second-generation" outsourcing (where a customer chooses a new contractor to provide the outsourced services); and (iii) "insourcing" (where an employer brings previously outsourced services back in-house).

As a result of the TUPE Amendments, TUPE now expressly provides that for there to be a "service provision change" the activities carried out by the acquirer must be "fundamentally or essentially the same" as those carried out by the outgoing employer. Whilst this reflects previous case law, uncertainty over the meaning of "fundamentally or essentially the same" means that in most cases a detailed analysis of the facts will be required to determine whether TUPE is likely to apply and we are likely to see case law developments on this question. In practice, we may begin to see parties entering into detailed contractual indemnities to provide, as far as possible, certainty around the costs associated with a potential TUPE transfer.

Key provisions unaffected by the TUPE Amendments

Although the TUPE Amendments have introduced a number of changes, some fundamental principles under TUPE remain unchanged.

• Contracts of employment - Where TUPE applies there will still be an automatic transfer all of the rights and obligations (except certain pension rights) connected with the transferring employees' contracts of employment from the outgoing employer to the acquirer. The employees' continuity of employment is preserved and the acquirer effectively "steps into the shoes" of the outgoing employer. This means that the acquirer is treated as always having been the employees' employer, and any claims that an employee may have had against the outgoing employer arising from the period prior to the transfer will automatically transfer to the acquirer. In some circumstances, the acquirer will remain bound by trade union recognition rights and collectively agreed terms.
  There is a clear distinction between the technical legal position and what can be provided for under the parties' contractual arrangements. Often, for example, the acquirer will agree contractually that it will bear all liabilities arising after the transfer, with the outgoing employer agreeing likewise in relation to liabilities arising prior to the transfer.
• The application of TUPE means employees may enjoy protection against dismissal - A dismissal of any employee (whether before or after the transfer) will be automatically unfair (under statutory unfair dismissal legislation) if the sole or principal reason for the dismissal is the transfer. If the sole or principal reason for the dismissal is an "economic, technical or organisational reason entailing changes in the workforce" (ETO reason) (for example, a genuine redundancy) it will not be automatically unfair, but may still be unfair under normal unfair dismissal principles (for example, where a fair procedure is not followed). Liability for unfair dismissals before the transfer for which there is an ETO reason will remain with the outgoing employer, but liability for automatically unfair dismissals (i.e. where there is no ETO reason) will transfer to the acquirer. As with normal unfair dismissal claims, an employee must have been employed for two years as at the date of the dismissal to bring such a claim.
• Employers must inform and consult in relation to a TUPE transfer - The outgoing employer is obliged to provide information to the appropriate employee representatives (for example, a trade union recognised for collective bargaining purposes and/or elected employee representatives) prior to the transfer. The required information includes the fact the transfer is going to take place, its approximate timing and the reasons for it. In addition, the outgoing employer and/or the acquirer may have to consult with appropriate employee representatives (see above) about any changes connected with the transfer that may impact upon the affected employees. This may include redundancies, changes to terms and conditions of employment or a relocation resulting from the transfer.

Recent amendments to TUPE and practical implications on the transaction parties

• Contract variations - Any variation of transferring employees' contracts of employment is void if the sole or principal reason for the variation is the transfer. The TUPE Amendments have, however, extended the exception to this rule in the case of variations where:
• • the sole or principal reason for the variation is an ETO reason entailing changes in the workforce and the employer and employee agree that variation; or
  • the terms of the contract of employment expressly permit the employer to make such a variation.

Significantly, the TUPE Amendments provide for no ability for post-transfer harmonisation of terms and conditions of employment (with the acquirer's existing employees) even with the transferring employees' agreement.

The extent to which variations to individual contracts of employment are permitted under TUPE remains a tricky area. The Department of Business, Innovation and Skills has issued new guidance (taking into account the TUPE Amendments) which states that if an employer seeks to agree a term giving the employer the power to make variations in the future and the sole or principal reason for agreeing that power is the transfer, this would be caught by the general restriction on variations of contracts and would be void.

• Collective redundancies and pre-transfer consultation - Where the outgoing employer and the acquirer agree, the acquirer may now elect to begin collective redundancy consultation (broadly required where there are 20 or more redundancies in a 90 day period) with the outgoing employer's employees before the proposed transfer takes place. One implication of this change may be the use of contractual provisions in business sale documentation which provide the acquirer with access to employees for, and co-operation of the transferor with, pre-transfer redundancy consultation. It remains to be seen whether, in practice, sellers will contractually agree to such a provision.
• The requirement for the outgoing employer to provide the acquirer with certain information about the employees which the acquirer is to inherit - The deadline by which the outgoing employer must pass on this information has been increased by the TUPE Amendments from no fewer than 14 days to no fewer than 28 days before the transfer. This change will apply only in relation to TUPE transfers taking place after 31 May 2014. Sellers (i.e. outgoing employers) need to be aware of the change and organise their paperwork accordingly.

Insolvent businesses

Although we have not covered insolvency situations in this article, it is important to note that in order to encourage a "rescue culture", TUPE has specific provisions which reduce the protection available to employees and apply in the case of outgoing employers subject to specified insolvency proceedings.

Any information contained in this article is intended as a general review of the subjects featured and detailed specialist advice should always be taken before taking or refraining from taking any action. If you would like to discuss any of the issues raised in this article, please get in touch with your usual Olswang contact. This article was included in our Olswang Corporate Quarterly Spring 2014 publication.