The People Bulletin

If you are outsourcing a function or acquiring another organisation, your employees will be affected by the transfer of undertakings rules. Deborah Nathan explains the practicalities.

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When dealing with outsourcing, retendering, or a potential sale, the first question is whether The Transfer of Undertakings Regulations (TUPE) apply¹. TUPE covers any transfer of a ‘stable economic entity’ and applies automatically, regardless of the parties’ intentions².

Employers need to assess individual situations objectively and consider whether an organised grouping of employees and assets working on a specific activity is going to transfer. If a specific function is being transferred and there are a group of employees dedicated to that task, this is likely to amount to a transfer. In addition, a ‘service provision change’ where there is a transfer of an activity, is expressly covered. Where the services provided after a transfer are wholly different, TUPE may not apply (OCS Group UK Ltd v Jones and another UKEAT/0038/09) When TUPE applies, employees’ continuous employment will continue unbroken and their terms and conditions (with some limited exceptions) will transfer to the new employer automatically. Any variation to contracts is void unless it is due to an economic, technical or organisational (“ETO”) reason entailing changes to the workforce. Any dismissal that is connected to transfer will be automatically unfair unless it is due to an ETO reason.

Who is assigned to the undertaking?

Only employees permanently assigned to the undertaking or service contract will transfer. Employers need to assess who is assigned to the relevant undertaking. If employees are sent to the organisation that won a contract and they are turned away, they are likely to have claims for unfair dismissal. Generally the percentage of time their staff spend working for the undertaking or service contract in question will identify the staff who are assigned to the transfer. However, this is not always definitive and organisations should also consider the terms of individual employment contracts, roles and functions within the undertaking and how the employee’s position is funded.

Information and consultation

Employers must provide details of the transfer and the legal, economic and social implications for any affected employees. Those affected will include employees who have applications pending for posts in the part of the undertaking that is transferring and should be included in consultation. Employees should be told of any ‘measures’ it is envisaged will be taken by the transferee organisation or they should be informed if no such measures will be taken. Occupational pensions are an exception to the general prohibition on varying contracts (see below) but any proposed changes in relation to such a scheme should be included. All information must be provided long enough in advance to enable genuine consultation to take place. The penalties for a failure to consult are severe; the Tribunal can order an award of 13 weeks’ pay for each affected employee.

Employers must consult with ‘appropriate representatives’. If there is a recognised trade union in the workplace, this will be the trade union representatives. In other cases, existing employee representatives, elected by staff and authorised by employees to receive information and represent them in TUPE consultations can be used. If no appropriate representatives are in place, staff should be given the opportunity to elect representatives. It is the employer’s duty to arrange elections and ensure that there are sufficient representatives, having regard to the number of employees and their role or grade. If employees do not want to elect representatives, information should be provided directly. Consultation should be carried out for all affected employees.

The duty to provide employee liability information

The transferor is required to provide employee liability information to the transferee no less than 14 days before the transfer. The information required includes copies of particulars of employment and records of any disciplinary or grievance matters relating to each employee. Practically, parties may seek disclosure of this information and other details at an earlier stage. Whilst an employer may want to move negotiations forward, they should ensure that they comply with the Data Protection Act 1998 when disclosing information before they are legally compelled to do so. If the transferor fails to provide this information, the transferee can pursue a claim in the Tribunal and recover a minimum of £500 compensation per employee.

Dismissals and variations of contract following a transfer and ETO reasons

Any dismissal by reason of the transfer or a reason connected with the transfer is automatically unfair unless there is an ETO reason. Variations to contracts are also void unless an ETO reason can be established. Harmonisation of terms and conditions, even if this will result in economic or efficiency savings for an employer, will not generally amount to an ETO reason because there has been no change to the workforce as a whole. An employer may be able to establish an ETO reason where there is a redundancy situation and the overall number of staff needs to be reduced or where there is a significant change in the functions of the workforce. The transferor cannot rely on the transferee’s future plans for the business to establish an ETO reason if dismissals or variations are proposed prior to the transfer.  However, the Court of Appeal recently confirmed  in the case of Alemo-Herron v Parkwood Leisure Ltd [2010] EWCA Civ 24 that where a collective agreement is incorporated into the contracts of transferring employees, the new employer is not bound by future collective agreements negotiated by the old employer.

The pensions exception

Old age, invalidity or survivor benefits under an occupational pension scheme are not protected on transfer. Where such benefits are in place, the new employer is not required to maintain them but is obliged to comply with the Pensions Act 2004 and should offer an equivalent final salary scheme or a stakeholder pension scheme with the employer matching the employee’s contribution rate up to 6%. However, an obligation to contribute to a personal pension scheme (which would not be an occupational pension scheme) may be contractual and would transfer. The exception is also limited to specific benefits. In some cases early retirement benefits will transfer and it is therefore important that these are considered carefully. When a local authority is outsourcing, they must have regard to the terms of the 2007 Direction (issued by the Secretary of State for Communities and Local Government) which sets out additional protection. This can present significant costs for employers. In particular, employers entering the Local Government Pension Scheme should be aware of the risk of future increases to the level of contributions they may be required to make.

Summary of key points

• Consider all employees who may be assigned to the undertaking. This may include casual staff who in fact have employee status and staff who may be working elsewhere temporarily. Transferees should also be aware of contractual rights that may have arisen through custom and practice, which will also be protected on transfer.
• Avoid making redundancies due to changes that may be introduced by the transferee following the transfer. The transferor cannot rely on the transferee’s future plans to establish an ETO reason.
• Consider the right group of employees for consultation, which may include employees who are not transferring over but who will be affected by the transfer.
• In consultation, cover all changes that may be introduced as a result of the transfer, including pensions and changes to non-contractual policies and practices.
• Consider any existing pension provision. While occupational pension schemes are excluded from the normal operation of TUPE, obligations to contribute to personal pension schemes will transfer to the new employer. Employers should also ensure that they meet the minimum requirements for pension provision under the Pension Act 2004.
• Where dismissals or variations to contracts are proposed following a transfer, employers must present a clear business case, demonstrating a redundancy situation or a radical change in the way in which the work will be carried out in order to establish an ETO reason.

[1] The Transfer of Undertakings (Protection of Employment) Regulations 2006. (2006) SI 2006/246. London: HMSO. Available here

This entry was posted on Wednesday, February 3rd, 2010 at 3:07 pm and is filed under Employment Law. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.