TUPE: Not for the Faint Hearted

As their name suggests, the Transfer of Undertakings (Protection of Employment) Regulations 2006, commonly referred to as "TUPE", have as their core aim the protection and preservation of employment and contractual rights of employees who are the subject of transfers between employers.

At the heart of TUPE lies the "automatic transfer" principle that ensures that the relevant employees of an existing employer (the "transferor") automatically transfer to the new employer (the "transferee") on the same terms and with the same rights as they enjoyed prior to the transfer.

When does TUPE apply?

TUPE transfers can arise in two circumstances:

Business transfers: these occur where a business, or part of a business, situated in the UK prior to the transfer, transfers to another party. Business transfers most commonly arise where one organisation buys the business or part of the business of another – this tends to involve the transfer of assets (which can include goodwill and employees) but the legislation cannot be defeated by the parties simply denying that employees should transfer. It is, however, key that the transferring business can be said to retain its identity post transfer. 

Service provision changes: these occur in three situations. Firstly, where a service which is currently being performed in-house is contracted out (outsourcing), secondly, where there is a change in the external service provider (second-generation outsourcing) or thirdly, where a contracted-out service is brought back in-house (insourcing).

It must be the case that, immediately before the transfer, there can be said to be an organised grouping of employees (but that can in fact be satisfied by just one employee), based in the UK, whose principal purpose is the carrying out of the relevant service on behalf of the ultimate client.

Service provision change transfers cover the typical outsourcing scenarios that have become common in the UK in the past decade, for example, cleaning contracts that a contractor performs for a period of time, at the end of which, the work is either transferred back in-house or transferred to a new external provider. The key issue is usually assessing whether or not there is an organised grouping of employees for whom the main purpose of their role is carrying out the service on behalf of the client.

Specific exceptions where TUPE will not apply to a service provision change

The regulations state that there will not be a service provision change where the business intends only to use the contractor for a single specific event or task of short-term duration. At present, there is no case-based guidance as to how this exception is likely to be applied by the tribunal. However, the Department of Business, Enterprise and Regulatory Reform suggests that there would not be a service provision change transfer where a client engages a contractor to provide a one-off conference on its behalf, even though an organised grouping of staff was likely to be dedicated to the conference for its duration.

The second exception is where the service is wholly or mainly for the supply of goods for the client's use. For example, where a client engages a contractor to supply drinks and sandwiches to its canteen everyday for the client to then sell on to its employees, this would not be caught by TUPE.

Which employees are eligible to transfer?

Where there is a transfer of an entire business, it is likely that all the employees of the transferor will be eligible to transfer to the transferee under TUPE. A situation that commonly gives rise to conflict between transferors and transferees is where only part of an undertaking makes the transfer. In such cases, questions almost inevitably arise as to which individuals fall into the category of employees that will transfer to the transferee under TUPE and which employees will remain with the transferor?

The key consideration in such cases is whether or not an employee is sufficiently assigned to the transferring undertaking. One factor commonly applied to assess this issue is the amount of time an employee spends working on the transferring undertaking. 

In the case of Skillbase Services vs King (a Scottish Court of Session case), it was found that the percentage of time spent by an employee on the relevant contract or service, although useful, is not determinative of whether or not they are assigned to the relevant undertaking. This case involved two employees who both spent 80% of their time on a particular project and it was found that, despite this, only one of them was entitled to transfer under TUPE.

Notwithstanding the outcome of this case, the issue of the amount of time an employee spends working on the relevant undertaking still tends to be the predominant one in the debate between transferor and transferee. The Skillbase case and others do however make the point that time spent on the part of the business in question should not be the only consideration and it is, of course, likely to be fluid anyway. It is certainly important to consider staff contracts of employment and job descriptions that should specify what each individual is employed to do as well as considering what the employee does in practice, as this may differ from their job description.

What transfers?

On a TUPE transfer, the transferee steps into the shoes of the transferor and takes on all duties, rights and obligations in relation to the transferring employees' terms and conditions of employment. This means that the transferee also takes on any existing claims that the transferring employees may have against the transferor. 

Occupational pension schemes do not transfer under TUPE, however, there are two important caveats to this. Firstly, the Pensions Act 2004 introduced a right for transferring employees to an on-going pension provision if immediately before the transfer they belonged to or were eligible for membership to an occupational pension scheme sponsored by the transferor, which was either a defined benefit scheme or a defined contribution scheme to which both the employer and the member contributed. 

The other important caveat relating to occupational pension schemes is contractual early retirement benefits and stems from the cases of Beckman vs Dynamco and Martin vs South Bank University.

These cases held that the provisions of occupational pension schemes that do not relate to old age, invalidity and/or survivors' benefits (i.e. pure pension entitlements) do transfer under TUPE to the transferee. Many final salary pension schemes provide a contractual benefit whereby employees above a certain age, for example 50, who are made redundant, are entitled to early retirement benefit equivalent to the pension they would otherwise have been entitled to at the normal retirement age (commonly 65).

If such individuals are made redundant, the transferee will have a liability to replicate the enhancement to pension that their original terms provided for, which could be huge (for long-serving employees, these are often six-figure sums). This is just one of the reasons why it is very important that potential transferees conduct a thorough due diligence process prior to a TUPE transfer so as to establish what types of liability they may be inheriting as well as considering if any warranties or indemnities are required from the transferor.

As well as having to maintain employees' terms and conditions, any termination of employment for a reason related to the transfer will be unfair except if there are economic, technical and organisational reasons that crucially must necessitate a reduction in the workforce.

Practical obligations and requirements

It is worth noting that as well as fixing the position on employees' rights, the transferor and transferee share detailed obligations to inform and consult employees on the implications of a transfer and risk a tribunal award of 13 weeks full pay for each employee if they fail to meet them. Transferors are also obliged to provide detailed information to transferees at least 14 days in advance of a transfer and risk a penalty of a minimum of £500 an employee is they fail to do so.  

Conclusions

There is no doubt that TUPE places onerous obligations on employers. However, at its core, the principle is a simple one – employees should not simply lose their jobs or face less-favourable terms and conditions because the work they are engaged in doing is transferring between two different organisations. Frustrating and treacherous as it can be for the unwary, it does at least provide a level playing field and reward good management.