TUPE 2006 Detailed Analysis

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1 that activity is central or ancillary. Under existing case law this can include an organised group of one person! TUPE 2006 Detailed Analysis The TUPE 2006 Regulations completely replace the 1981 Regulations from 6 April The key changes under the TUPE 2006 Regulations were highlighted in our Article last month TUPE 2006 and Pensions A Day. TUPE is a complex area of employment law that can, when not managed properly, present problems on the sale or purchase of a business. Whilst TUPE 2006 Regulations go some way to clarifying some areas this is primarily only where there was clear case law authority on an issue. Unfortunately there remains a considerable amount of ambiguity which will undoubtedly result in further litigation in the not too distant future. 1. When does TUPE apply? Identifying a transfer for the purposes of TUPE has proved problematic in the past and has generated a huge amount of case law. A clearly stated aim of the TUPE 2006 was to clarify areas of uncertainty so that employers can plan effectively in a climate of fair competition but also protect affected employees. TUPE will continue to apply where there is a transfer of an economic entity which retains its identity (Regulation 3(1)(a)). An economic entity has been defined as an organised grouping of resources which has the objective of pursuing an economic activity, whether or not TUPE has been extended to cover service provision changes even if there is not a transfer of an economic entity (Regulation 3(1)(b)). Therefore TUPE 2006 will apply to contracting out, a change of contractor or contracting back in where, immediately prior to the change there is an organised grouping of employees situated in Great Britain whose principle purpose is to perform a service for a client. There will need to be an identifiable team of employees or a single employee essentially dedicated to providing the service although they may do other work too. an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary There are two exceptions: (i) where the client intends the services to be carried out in connection with a single specific event or task of short duration and (ii) where the service is wholly or mainly the supply of goods for the client s use (e.g. supply of food to a client to sell in its staff canteen). A failure of the new contractor to take on employees or assets will not prevent TUPE applying; neither will a change in the way in which the service is provided. The new contractor may have to make redundancies if it has existing staff with capacity to carry out the service or if the transferring employees do not have the necessary skills/cannot be retrained to adopt any new working methods. The parties may seek to apportion contractually who makes any redundancies and who bears the costs of any such dismissals. It will only be if the

2 activities themselves are changed that TUPE will not apply. 2. Who is covered by TUPE? It can be difficult for employers to work out who actually transfers under TUPE! Under both the existing and the new regulations, those who transfer are simply those that are assigned to the transferring entity/organised grouping. But how do we work out who is actually assigned to an undertaking? Recent case law tells us that the answer is not just to look at the proportion of time which the employee spends on the business of that undertaking. You also have to take into account a range of other factors. These include the value provided to each part of the overall business by the employee; the terms of the employee s contract showing what he could be required to do; and the allocation of the cost of the employee s time to different parts of the overall business. In a recent case, the employer, Skillbase Services Limited, had been providing housing maintenance services to Falkirk Council. The Council decided to bring the maintenance function back in-house. Skillbase and the Council could not agree on whether certain employees transferred to the Council under TUPE. Two of these employees spent 80% of their time working on the maintenance contract. Sadly, new TUPE 2006 does not provide much further clarification on the question of how to identify whether an employee is assigned to an undertaking However, the Tribunal decided that only one of these transferred. The court compared the responsibilities held by the two individuals and distinguished between the two. One employee s responsibilities were related to the performance of the contract and so he transferred, whereas the other s responsibilities related to the management of the branch as a whole, so he would not be assigned to the undertaking and would not transfer as he did not have any particular responsibilities for the housing maintenance contract other than general responsibilities which arose as a result of his role as branch manager. Sadly, new TUPE 2006 does not provide much further clarification on the question of how to identify whether an employee is assigned to an undertaking. But they do require the transferor to provide the transferee with information about all assigned employees, including their identities. This should provide a greater element of certainty as to who should be covered. The certainty is needed particularly where the transferor otherwise has no incentive to provide the information, for example, where one contractor loses a contract to another or a function is brought back in house. The parties would still be well advised to address, through an appropriate indemnity, any uncertainty which may arise as to whether a particular employee transfers 3. What transfers? Except where an employee objects to the transfer, the transferring employees transfer to the transferee on the same terms and conditions of employment as they enjoyed with the transferor including continuity (Regulation 4(1)). There is one exception to this in respect of certain pension rights. Rights in relation to occupational pension schemes, whether contained in a contract of employment or collective agreement, do not transfer (Regulation 10 (1)). This exemption only applies to benefits for old age, invalidity and survivors. Any other

3 benefit, such as enhanced redundancy terms, which is contained within an occupational pension scheme, would transfer with the contract of employment. All the transferor s rights, powers, duties and liabilities under or in connection with the contract of employment transfer to the transferee including any act or omission of the transferor before the transfer. This means that, subject to any indemnities, the transferee becomes liable for any acts of omissions of the transferor prior to the transfer. However, criminal liability does not transfer. 4. Disclosure of Employee Liability Information Under the 1981 Regulations there was no obligation on the transferor (the seller) to give the transferee employer (the buyer) any information about the rights and liabilities relating to the transferring employees. Albeit, in practice that this was often provided as part of a due diligence exercise. TUPE 2006 imposes a new obligation on a transferor to provide a transferee with specified employee liability information about the employees who will transfer and any employees who have been automatically unfairly dismissed in connection with the transfer (possibly where liability for claims transfers to the transferee) (Regulation 11). A transferring employee is not entitled to bring a claim against the transferor for breach of contract or constructive unfair dismissal arising out of the loss or reduction in his rights under an occupational pension scheme in consequences of the transfer except where the alleged breach occurred prior to 6 April 2006 (Regulation 10(3)). The information must normally be provided Transferees should also remember that, since April 2005, transferred employees with an occupational pension entitlement prior to the transfer are entitled to a minimum standard of occupational pension entitlement or contribution to a stakeholder pension after the transfer. This obligation is contained in separate legislation which is not referred to in TUPE For further information on this please refer to our article Pension Rights on a TUPE Transfer of May at least two weeks before completion of the transfer. It can be given in writing or in other forms which are readily accessible to the transferee (e.g. in electronic form or through access to a data room, by providing copies of sample contracts etc). The transferee must be given written notice of any changes to the information provided. The information can be given in instalments or through a third party (such as a client in a change of contractor situation). The parties would be well advised to continue to address, through an appropriate indemnity, apportionment of liability for acts and omissions prior and post completion Employee Liability Information includes: the identities of the transferring employees their ages their statement of employment particulars which an employer is obliged to give under Section 1 of the Employment Rights Act 1996

4 any collective agreements which will apply in relation to the employee post-transfer any disciplinary action or grievances to which they have been subject or have raised in the preceding 2 years (where the statutory resolution procedures apply) any actual or potential legal actions against the transferor in the preceding two years The provisions will have most impact in relation to second generation contractors who do not have a contractual relationship with the original contractor (and who may not have the benefit of a similar contractual obligation indirectly through the client). It should enable new contractors to better assess the liabilities they will assume. However, the new obligations will not be of much benefit at the bidding stage, the obligation only applies once there is an identified transferee and not where there are still a number of bidders. The required information does not cover everything a transferee would normally wish to ascertain through due diligence. Where there is a contract between the client and the transferor (in a service provider scenario), parties may well continue to impose additional requirements. The new obligation should assist in meeting data protection concerns over providing personalised employee data as there is a specific exemption where it is required to be provided by law. It is not possible to contract out of the obligation. The penalty for breach of this obligation (and presumably for providing erroneous information or failure to comply in time) is such an award of compensation as a tribunal considers just and equitable having regard to any losses suffered by the transferee because of the breach (subject to the duty to mitigate loss) and the terms of any contract between the transferor and transferee. There is, however, a normal minimum award of 500 per employee whose information has not been provided. A transferee normally has to bring a claim within three months of the transfer (Regulation 12). s All potential transferors (and contractors in particular) may need to review their policies for retention of employee data to ensure that they keep and can easily retrieve the required information All employers should review their contracts of employment to ensue that they meet the requirements of Section 1 of the Employment Rights Act 1996 An important point to remember is that the obligation in relation to disciplinary and grievances only relates to such matters which are covered by the statutory dispute resolution procedures. Therefore it does not necessarily apply to warnings. However, it does apply to other sanctions, short of dismissal, such as the cessation of company sick pay, suspension without pay and demotion Transferors should also consider imposing confidentiality obligations and a requirement to return the information if the transaction falls through as TUPE 2006 contains no such requirement

5 5. Duty to inform and consult Where a transfer is pending under TUPE, both the transferor and the transferee share a duty to inform and potentially consult with elected representatives of affected employees. This duty extends beyond the employees actually transferring, to cover everyone affected by the transfer (Regulation 13). On the face of it, there is relatively little change to the substance of this obligation under TUPE The duty remains on the transferor to inform representatives, long enough before the relevant transfer about: the transfer any measure the transferor envisages it will take any relevant legal, economic or social implications of the transfer; and any measures which the transferee envisages taking. The transferee is obliged to give the transferor the necessary information in sufficient time to allow the transferor to meet the above obligations such as any measures anticipated on its part or likely implications of the transfer. If any measures are envisaged then the obligation to consult with the representatives is activated and consultation must be undertaken, with a view to seeking the agreement of the employee representatives. the transferor and transferee will now be jointly and severally liable for any award of compensation made by a tribunal To avoid attempts by either side to pass the buck in relation to information and consultation with employee representatives on TUPE issues, the transferor and transferee will now be jointly and severally liable for any award of compensation made by a tribunal, allowing an aggrieved party to bring a claim against either or both (Regulation 15). An elected representative may, within three months of the date of transfer, bring a claim on behalf of the employees, alleging failure or inadequate performance of these obligations. Where there is no such representation however an individual employee may bring a claim. This will enable employees to recover compensation where the transferor is insolvent. The penalty for failure to inform and consult has not been changed and remains at up to 13 weeks pay per affected employee (which is not subject to any cap on weekly pay). There are also minor drafting changes to the obligation to inform and consult which it is hoped will have no practical effect. Parties may wish to address and reapportion financial liability for failure to inform and consult through contractual indemnities 6. Changes to terms and conditions Changes to terms and conditions of employment where the sole or principal reason is the transfer itself, or a reason connected with the transfer that is not an ETO reason will be void and ineffective (Regulation 4(4)). However, TUPE 2006 confirms that a change for a transfer connected ETO reason can be validly made (subject to the usual requirement of employee consent) (Regulation 4(5)).

6 An ETO reason is an economic, technical or organisational reason entailing changes in the workforce. A reason is transfer connected where it is related to or could be said to be a knock-on effect of the transfer, e.g. the need to re-qualify staff to use different machinery, relocation etc. Unfortunately this will not allow changes made simply to harmonise terms with those of the transferee s existing workforce. Such changes are by reason of the transfer and void unless there is also an ETO reason. Simply harmonising terms will rarely of itself fall within the definition of an ETO reason if there are no additional changes to the numbers, or job functions of the employees as well. Thus, dismissal, compromise agreements to waive claims and then re-engagement on new terms remain an option to achieve a harmonisation in certain cases, albeit not a course that should be undertaken lightly. A transferee would be wise to ensure that any changes to terms and conditions are coupled with major changes to the work force to ensure the ETO exemption applies 7. Dismissals TUPE 2006 confirms that where the sole or principal reason for the dismissal is the transfer itself or a non-eto transfer connected reason the dismissal will be automatically unfair Regulation 7) However, where there are ETO reasons the dismissals will be potentially fair, subject to the normal test of reasonableness and the dismissal will be treated as being on grounds of either (i) redundancy (in which case the employee will be entitled to a statutory redundancy payment) or (ii) some other substantial reason. 8. Objections and constructive dismissal Employees who do not wish to transfer have a number of options. If the transferor still has work for them, it can reassign them to new duties prior to the transfer so they are not assigned to the part of the business transferring and thus not covered by TUPE. Employees can also object to the transfer, but lose rights to claim compensation unless they have a constructive unfair dismissal claim in the traditional sense (i.e. of a fundamental breach of contract) (Regulation 4(7)). TUPE 2006 introduces another option. An employee can resign and treat himself as dismissed where the transfer involves or would involve a substantial change in working conditions to his material detriment (Regulation 4(9). The DTI Guidance suggests that examples could be a major relocation of the workplace which makes it difficult or much more expensive for an employee to transfer, or the withdrawal of a right to a tenured post. There is no need to show a breach of contract, let alone a fundamental breach. The employee cannot claim damages in respect of any period of notice not worked and the dismissal is not deemed automatically unfair but the employee may be able to claim ordinary unfair dismissal (subject, probably, to complying with the statutory grievance procedure (i.e. in respect of the substantial change and material detriment complained of)). There are a number of grey areas in relation to this new statutory constructive dismissal right just waiting to be litigated! There is no definition of material detriment and this particular phrase does not appear in other forms of employment legislation (there are, however, references to detriment or material and substantial detriment in discrimination legislation. There is also no guidance on whether the

7 test is objective or subjective. In our view it will be a combination of the two as a tribunal is likely to look at the business case for the change and balance this with the employee s individual circumstances. The timing of when this new right applies is a substantial problem. It is not clear when the right actually arises whilst there is an argument that it may be limited in time to around the date of completion, there is also an argument that it could be open ended. Until the tribunal determines otherwise it would be wise to assume that the right applies both pre and post transfer. Transferors should consider seeking an indemnity from the transferee to protect against liability for unfair dismissal where the employee resigns prior to completion as a result of a substantial change in working conditions proposed by the transferee 9. Insolvent transfers In order to promote a rescue culture TUPE 2006 introduces two changes where a transferor is in relevant insolvency proceedings (i.e. proceedings not with a view to liquidation of the assets and which are supervised by an insolvency practitioner). Certain employee debts will not pass to the transferee and will instead be paid by the National Insurance Fund as if the employees had been dismissed on an insolvency (these are a maximum of 8 week s pay arrears, holiday pay for up to 6 weeks, statutory notice entitlement, statutory redundancy pay and unfair dismissal basic awards with pay for these purposes currently capped at 290 per week). Debts to employees in excess of these limits or in a different category still transfer to the transferee (Regulation 8). It will also be easier to vary terms of employment in this situation. It will be possible to change terms by reason of the transfer without having to establish an ETO reason if the changes are (i) designed to safeguard employment opportunities by ensuring the survival of the undertaking; (ii) agreed with appropriate representatives of the employees (union representatives or, if none, elected representatives) and (iii) do not contravene UK law (e.g. national minimum wage). Certain employee debts will not pass to the transferee and will instead be paid by the National Insurance Fund as if the employees had been dismissed on an insolvency There is no requirement for the employees individually themselves to agree the changes. However, where the employees are represented by non-union representatives, the agreement must be in writing and signed by each representative and, prior to signature, a written copy plus guidance on the changes must have been given to each affected employee (Regulation 9). ETO changes normally permitted by TUPE or non TUPE related changes would not be subject to this regime and so would still need the consent of individual employees. 10. Personal Injury Insurance Where a transferor is not required to carry employee personal injury insurance (e.g. certain public sector employers) the transferor and transferee will have joint and several liability for personal injury claims relating to the employee s employment with the transferor (Regulation 17).

8 11. Transitional provisions Transfer Completion Date Pre 6 April April April May 2006 Applicable Regime 5 May 2006 TUPE What to do now 1981 Regulations. (If service provision contract not covered by 1981 Regulations, TUPE does not apply) TUPE 2006 (but no obligation to provide employee liability information. If service provision contract would not have been covered under 1981 Regulations, no obligation to inform and consult) TUPE (If service provision contract would not have been covered under 1981 Regulations, no obligation to inform and consult) For any on-going transactions, review all agreements not yet completed in light of the transitional and new provisions. Where possible, delay any transfer until 6 April 2006 or later so as to make available the opportunity to change terms and conditions where there are ETO reasons. Employee Liability Information as well as the duty to inform and consult. For transactions which are due to complete within a short timescale for whatever reason, be careful to comply as far as possible to the Employee Liability Information obligation. Ensure HR processes are in place to enable required employee information to be retained and retrieved. 13. Further Information The DTI Guidance on the New TUPE Regulations can be found at: 6regs.pdf The Regulations can be found at: If you have any queries or concerns about anything in this article, please contact the author or another member of the Outset Legal Team. 30 March 2006 Lorraine Williams Senior Employment Law Consultant (non-practising solicitor) Outset (UK) Ltd Remember to factor into any deal timetable the requirement to provide

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