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Business Transfers

What is TUPE?

The original Transfer of Undertakings (Protection of Employment) Regulations 1981 (“TUPE”) were introduced to reflect EU rules on the protection of employee rights when the business they worked in was sold as a going concern by a seller (transferor) to a buyer (transferee).

Those regulations have now been replaced and expanded by the 2006 regulations. They apply to business transfers by way of a sale of assets, as well as to contracts to tender, re-tender and insource the supply of services (such contracts are known as ‘service provision changes’).

What is the purpose of TUPE?

The purpose of TUPE is to provide for (1) the automatic transfer of contracts of employment of those employed in the business (or part of the business) sold, (2) the transfer of rights and liabilities relating to those contracts, (3) a remedy so that transfer-related dismissals became automatically unfair, (4) obligations to provide information to, and consult with, employees or their representatives before the transfer and (5) information about the transferring employees to be provided by the transferor to the transferee.

Which employees are protected by TUPE?

All affected employees transfer automatically and are protected by TUPE regardless of length of service. The definition of “employees” within TUPE can include anyone who works for the business other than independent contractors or purely temporary staff.

What transfers under TUPE?

Any employment contract that would otherwise have been terminated by the transfer has effect after the transfer as if it was originally made between the employee and the transferee (buyer). All the transferor’s (seller’s) rights, powers, duties and liabilities under or in connection with that contract transfer and anything done before the transfer by or in relation to the transferor (seller) in respect of that contract or employee (including breaches of contract) are deemed to have been done by the transferee (buyer).

Liabilities that can transfer include unexpired notice periods, benefits in kind, unpaid pay and bonuses, restrictive covenants, employee claims and contractual collective agreement rights. If a transferee cannot replicate pre-existing contractual entitlements, then the transferee may be obliged to establish “substantially equivalent” benefits.

When does a relevant transfer take place?

The TUPE regulations apply to “a transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in the UK to another person where there is a transfer of an economic entity which retains its identity”. Which is to say, that the same or similar economic activity takes place before and after a sale.

In order to determine this an Employment Tribunal will consider the type of undertaking, the assets that transferred (tangible and intangible), any customers and goodwill transferred, the similarity of activity before and after transfer as well as any interruption in economic activity. If a buyer acquires a business as a going concern by purchasing the assets and goodwill in the usual way then TUPE would normally apply.

In most business acquisitions there is a contractual relationship between the seller and the buyer. If the parties proceed on the basis that TUPE applies they will negotiate the terms of their contract accordingly. The price paid usually reflects financial risks the parties take and the liabilities that may be inherited.

Does TUPE apply to all business transfers?

No. The TUPE regulations do not apply to the acquisition of a business by share sale (because the identity of the employer does not change), or a pure asset sale (because there is no sale of the business as a going concern, although an Employment Tribunal will look at the substance of the transaction and not just the contractual terms).

When does TUPE apply to a service provision change?

TUPE applies where a client intends that activities carried out on its behalf by an identifiable team of UK employees as their principal activity should then be carried out by a transferee following a service provision change.

The activities before and after transfer do not have to be identical, but they must be fundamentally or essentially the same, and employees will only transfer if they were assigned to the activity before the change.

TUPE does not however apply to a single event or a short-term task, nor to activities that consist wholly or mainly of the supply of goods for the client’s use.

What if there is a dismissal before the transfer?

To fall within TUPE the relevant employee must be employed in the undertaking “immediately before” the transfer (Regulation 4(3)).

That regulation must be read in conjunction with Regulation 7(1) which provides that a dismissal connected to a TUPE transfer is automatically unfair.

If therefore a pre-transfer dismissal occurs in breach of Regulation 7(1), then (subject to an ETO defence) all liabilities under that employment contract and relationship will pass to the transferee, although the termination will still be effective as a matter of law.

A pre-transfer dismissal for a reason unconnected to the transfer (eg, poor performance) will not fall within this principle and liability for the dismissal will not transfer.

When can employees object to a transfer?

Employees have the right to object to a transfer under Regulation 4(8). If an employee objects then the transfer is treated as terminating the contract of employment. The employee is not treated as having been dismissed by the transferor and has no claim for pay in lieu of notice, redundancy or unfair dismissal.

Under Regulation 4(7) and (8) an employee may treat their contract of employment as having been terminated – if the transfer would involve a substantial and detrimental change in working conditions (Regulation 4(9)), ie. constructive dismissal.

Which employees will transfer?

The TUPE Regulations apply to any person employed immediately before the transfer in an organised collection of resources or employees transferred (an economic entity).

A further consideration applies if only part of a business is transferred and employees carry out some duties for that part, as well as elsewhere in the business. The question is whether an employee has been “assigned” to the transferring part.

The answer depends on a number of factors, including the amount of time spent in that part of the business, the terms of the employee’s contract, the value given to each part of the business by the employee and the allocation of cost.

What are the consequences of dismissal?

If an employee is dismissed either before or after a transfer, this will be automatically unfair if the transfer (or a reason connected with it) is the reason or principal reason for his dismissal (Regulation 7(1)).

What is the ‘ETO’ defence to automatic unfair dismissal?

Where there is an “economic, technical or organisational reason entailing changes in the workforce” of either the seller or the buyer before or after the transfer, then it will not be an automatically unfair dismissal. The dismissal will be treated as for “some other substantial reason” and considered fair or otherwise under normal unfair dismissal principles. If there is a pre-transfer dismissal for an ETO reason, then potential liability for that dismissal will not transfer.

In practice this is similar to the test applied to redundancy. Reducing numbers in order to continue to remain solvent, or achieve profit may well be within ETO reasons if not related to a possible transfer. In contrast, a dismissal in concert with a proposed purchaser simply to make the transaction more attractive is unlikely to be a genuine ETO because an ETO dismissal must relate to the continuing business.

Does the timing of a dismissal have any effect?

In theory a point in time will be reached when, following a transfer, a dismissal will not be connected to the transfer. In practice it can be difficult to say when that connection is broken. There is certainly no fixed time period a passage of years may not break the connection, although it can depend on intervening events and the particular facts of each dismissal.

Does TUPE apply to the subsequent harmonising of terms and conditions?

This depends on the reason for harmonisation. If an employer simply seeks contractual consistency then this will not amount to an ETO defence. Any harmonisation must be related to a change in the number of employees or their functions for an ETO defence to succeed, for example a redundancy process or a reorganisation. (See also contracting out of TUPE below)

Is it possible for employees to contract out of TUPE?

Any agreement or contract (including contracts of employment) seeking to exclude the operation of TUPE is void and unenforceable (Regulation 4). This applies even if an employee initially agrees to the change; the agreement can still be challenged a number of years later. This even applies if an employer ‘compensates’ the employee for agreeing to the variation, although employers can use settlement agreements as a way to avoid claims.

A valid variation of contract can only be agreed if it is for an ETO reason connected to the (Regulations 4(4) and (5)).

What effect do collective and recognition agreements have?

A collective agreement made by the seller with a recognised trade union in respect of any employee whose contract of employment transfers is deemed to transfer, although in practice collective agreements are not legally enforceable unless their terms become incorporated into the contracts of employment of transferring employees.

Similarly a trade union recognition agreement is deemed to transfer, even on the sale of part of a business provided that the transferring business maintains a distinct identity from the remainder of the business. However the buyer can simply rescind the agreement without consequences.

What is the effect of TUPE on pensions?

Ostensibly occupational pension schemes are excluded from the scope of TUPE (Regulation 10) and any rights or liabilities associated with such a scheme will not transfer. However the additional benefits of an occupational pension scheme that are not related to old age, invalidity or survivorship will transfer, for example a pension scheme allowing early retirement on the grounds of redundancy falls inside TUPE (Regulation 10(2)).

Furthermore, the Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005 now oblige a buyer to offer an occupational or a stakeholder pension and current workplace pension scheme requirements coming into force between now and 2017 mean the initial exclusion is becoming increasingly less relevant.

Who is affected by the TUPE consultation obligations?

The 2006 Regulations set out the duties of both the transferor and the transferee to inform and consult “affected employees” (at Regulations 13,14,15 and 16).

An affected employee is a person employed by either transferor or transferee who may be affected by the changes caused by the transfer, whether or not they are employed by the part of the business that will transfer.

It can include employees who transfer, employees in the business to which they transfer and employees who remain behind.

When must an employer consult?

There is no time limit for providing information. It must be done “long enough before” the transfer to enable any necessary consultations to take place.

What are the consultation obligations?

Each employer must provide specified information about the transfer to the “appropriate representatives” of that employer’s affected employees. There should be representatives regardless of the number of employees transferring.

What information must an employer provide?

Both the transferor and the transferee have a duty to provide the following information to the appropriate representatives of their own affected staff:

  • The fact of the transfer, when it is to take place and the reasons for it;
  • The “legal, economic and social implications” of the transfer for the affected employees; and
  • Any measures the employer envisages taking in connection with the transfer (or if there are no measures envisaged).

In addition the transferee must disclose to the appropriate representatives any measures it envisages taking in relation to the transferring staff (or if there are no measures envisaged).

In practice both transferor and transferee should cooperate to ensure this takes place.

What is meant by ‘measures’?

This includes any form of a definite plan or proposal that the employer intends to take in relation to the employees in connection with the transfer. It does not include speculative or contingency plans.

What are employee representatives?

Each employer must consider whether there are “appropriate representatives” within its organisation. These can include representatives of a recognised trade union, representatives elected for that specific purposes or representatives elected for some other purpose, but who have authority from the affected employees to receive information and be consulted on their behalf.

What election arrangements should be made?

If employee representatives are required for TUPE purposes, then an election must be carried out in accordance with Regulation 14. The employer must make reasonable and practical arrangements to hold a fair and secret election, ensuring that no affected employees are excluded from standing for election, or from voting. All the candidates for election must be affected employees and the employer must decide on a representative number to be elected. If employee representatives come forward then consultation information should be provided direct.

What are the consultation obligations?

The employer of any affected employees must then consult with the appropriate representatives of affected employees if it intends to take measures in connection with the transfer in relation to its employees. Unless the transferor has measures related to retained employees, the transferor does not have a duty to consult.

Consultation should be with a view to seeking agreement to the measures to be taken, although there is no obligation on either side to reach agreement. During the consultation the employer must consider the representations made by the representatives and to reply to those representations, setting out any reasons for rejections in writing.

What are the penalties for failure to comply?

Complaints can be made to a Tribunal that (1) the employer has failed to comply with the statutory requirements relating to the election of employee representatives by any of the affected employees, or (2) in the case of any other failure relating to employee representatives, by the appropriate representatives themselves.

If the complaint is that the transferor failed to supply particulars of the measures envisaged by the transferee, the transferor can argue that it was not reasonably practical to provide that information because the transferee did not provide it.

If successful a Tribunal can order compensation to be paid to all the affected employees not simply the person who complained. A complaint must be made within 3 months of the date of transfer and the compensation can be up to 13 weeks’ uncapped pay for each affected employee, depending on the seriousness of the failure to comply.

Liability for a breach of these duties is joint and several between the transferor and transferee, unless the complaint is that the transferee did not comply with its obligation to supply information, in which case the transferee will be liable.

Can ‘special circumstances’ apply?

If it is not possible to comply (e.g. because of a lack of time), then a Tribunal may accept that there are “special circumstances” which excuse the failure to comply – provided the employer has done what it reasonably could in the circumstances.

What information obligations does a transferor have to the transferee?

Regulations 11 and 12 impose a requirement for the transferor to notify the transferee at least 14 days before the transfer of details of the rights and obligations in relation to the transferring staff. The notification can be provided either in writing, or by making the information available to the transferee in a readily accessible form.

The information must be accurate and up to date, consisting of (1) employee age and identity, (2) details of all contractual terms, (3) disciplinary action and grievances, (4) details of any legal action brought in the last 2 years and (5) any collective agreements. Any changes in the information once provided must also be notified.

If in special circumstances the transferor cannot comply, there is still a duty to supply the information as soon as reasonable practicable thereafter, even if this is after the transfer date itself.

What is the remedy for non-compliance?

The transferee has the right to complain to a Tribunal that the transferor has failed to comply with the notification requirements. It has the power to award compensation against the transferor depending on any loss attributable to that failure, which must be at least £500 per affected employee unless it considers it is not just and equitable to do so.

How is TUPE affected by insolvency?

The 2006 regulations seek to encourage the transfer of insolvent businesses as going concerns to protect employees as opposed to asset sales in which the employees may be discarded.

The provisions of Regulations 8 provide for two different approaches depending on whether the transferor is subject to either bankruptcy “or any analogous insolvency proceedings” (ie, liquidation), or to “relevant insolvency proceedings” which are “opened not with a view to liquidation of assets” (ie, administration).

In the case of the former TUPE does not apply (since it is analogous to an asset sale rather than a sale as a going concern).

In the case of the latter, TUPE does apply to the disposal of a business in administration and employees will transfer from transferor to transferee. However liability for certain sums payable to transferring employees (or employees whose contract would have transferred but for an automatically unfair dismissal) will not transfer if they are part of a “relevant statutory scheme”.

The “relevant statutory schemes” include statutory redundancy payments, arrears of pay up to eight weeks, any outstanding notice pay for the relevant statutory period only, outstanding holiday pay up to six weeks in total and any basic award of compensation for unfair dismissal.

These sums will be paid from a fund operated by the Secretary of State and liability will not fall on the transferee.

Can an administrator rely on an ETO reason?

The ETO defence remains available to an administrator. If once appointed an administrator dismisses employees in order to save costs and maintain the continued existence of the business then this can be an ETO. If the reason is to facilitate a sale of the business then this dismissal is connected with the transfer and the ETO defence is not available.

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