TUPE FAQs. for property transactions

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1 TUPE FAQs for property transactions

2 To assist in understanding what TUPE is and its application to property transactions, we have set out below the top ten frequently asked questions we receive from our property clients. TOP TEN FAQs 1. What is TUPE? 2. When does it apply? 3. When might it apply in a property transaction? 4. Can it apply to a change of managing agent/cleaning/ security company? 5. What if the property is closed for re-fitting or opening of a new business? 6. Can I dismiss the employees? 7. Can I change the employees terms of employment? 8. When and what employment information do I have to give to the buyer/the seller/the employees? 9. What is the buyer and seller s financial exposure if TUPE applies? 10. What if the sale contract doesn t mention TUPE? 2

3 1. What is TUPE? TUPE is the usual abbreviation for the Transfer of Undertakings (Protection of Employment) Regulations TUPE protects the employment of individuals when a business changes hands or where there is a service provision change by providing that their employment (including their period of continuous service) and any liabilities in respect of them (save in relation to certain rights and provisions in relation to occupational pension schemes) transfers from the seller to the buyer of a business, undertaking or service. Where it applies, the buyer essentially steps into the seller s shoes in relation to the employees of the business, undertaking or service that is being transferred taking on the rights (e.g. under the employment contracts), responsibilities (e.g. to provide work and pay) and liabilities of the seller (e.g. acts/omissions including unpaid wages, injuries, acts of discrimination). The seller and the buyer also have an obligation to inform (and if appropriate) to consult representatives of affected employees. Important Note: For ease of understanding, in this guide we have referred to transferors as sellers and transferees as buyers. However, where there is a service provision change the transferor and transferee will (depending on the service provision change) be the client and the incoming and outgoing service providers. 2. When does it apply? TUPE applies where there is a relevant transfer which is defined to cover the two following situations:- (i) where a business (or part of a business) changes hands and the business retains its identity (e.g. the business is recognisable after the transfer) known as a standard transfer. (ii) where a client outsources, retenders (e.g. changes a service provider) or insources a service - known as a service provision change (SPC). TUPE specifies that for there to be a SPC, pre and post transfer the services should be fundamentally the same and to the same client. Also the services shouldn t consist wholly or mainly of the supply of goods for the client s use or be for a one-off event or task of short-term duration. There must also be an organised grouping of employees (see question 4). Important Note: Some transfers will be both a standard transfer and a SPC. Even where a SPC isn t caught by TUPE, for example because there is a change of client, there could be a standard transfer and so TUPE may still apply. 3

4 3. When might it apply in a property transaction? TUPE might apply when a business is sold that includes a commercial property which has employees employed in or in relation to it. TUPE could also apply on the sale of a commercial property, the sale of a property subject to a service occupancy, the grant or assignment of a lease to a new tenant, the surrender or forfeiture of a lease, the grant of a sub-lease to a new subtenant, where the landlord assumes activities for the property, and where tenants acquire the right to manage the freehold of a property. Example: A landlord decides to accept a surrender of a lease in which a restaurant is operated. He decides to continue to operate the restaurant himself. TUPE will apply to protect the employees employed in the restaurant and transfer their employment to the landlord. 4. Can it apply to a change of managing agent or cleaning/ security company? Yes, TUPE can also apply to this situation. A key factor in deciding whether TUPE applies is whether there is an organised grouping of employees dedicated to the service provided to the client. The fact that an employee spends all or the majority of their time on the service is not sufficient on its own. There must be an intention by the current provider to have a dedicated team/person assigned to the service. Example: A freeholder of a property has engaged a managing agent to manage the property on its behalf and as part of its contract with the managing agent it has required that there is a dedicated team who provides the service to the property. The freeholder decides that it is not happy with the service provided by the managing agent and decides to engage a new managing agent. TUPE will apply to the change in service provider as it will be a SPC and it may also be a standard TUPE transfer. Example: The freehold of a property is being sold. The seller has engaged a managing agent who is responsible for the property. The buyer intends to employ individuals directly to be responsible for the property. Although the sale will not be a SPC as there is a change of client from seller to buyer TUPE may still apply to the transaction in relation to the employees of the managing agent as the sale could still be a standard transfer. 4

5 5. What if the property is closed for re-fitting or opening as a new business? If there is an economic entity that retains its identity after completion TUPE is still likely to apply even if there is a temporary closure on completion, for example while the new owner completes a fit out of the premises or applies for a premises licence. If, however, the undertaking ceases operating on completion and the new owner in due course opens a different business (for example, if the original business is a restaurant and it reopens as a convenience store), TUPE is unlikely to apply as the original business will not have retained its identity after completion. 6. Can I dismiss the employees? Yes, TUPE cannot prevent employers from dismissing employees but if the sole or principal reason for the dismissal is the transfer itself or a reason connected with the transfer that is not an economic, technical or organisational (ETO) reason which entails changes in the workforce then the dismissal will be an automatically unfair dismissal attracting liability. An employee would need two years service to bring an unfair dismissal claim and the normal limits on awards of compensation would apply. An ETO reason must involve a change in the functions or numbers of employees. Genuine redundancies will usually be ETO reasons and will include redundancies made because of a change of workplace. See question 9 about financial exposure under TUPE. Normal unfair dismissal rules will apply where the dismissal is unconnected with the transfer or where the reason for the dismissal is connected with the transfer but is for an ETO reason. 5

6 7. Can I change the employees terms of employment? No, if the sole or principal reason for the variation is the transfer and it is not for an ETO reason (see question 6). Yes, if: (a) it is for an ETO reason and the employee agrees to the change - which for evidential purposes should be in writing; (b) the contract permits the change to be made without the employee s agreement; (c) the variation is entirely unconnected with the transfer; or (d) the change is entirely positive as far as the employee is concerned. A variation in order to harmonise terms of transferring employees with the terms of the buyer s existing employees is unlikely to be an ETO reason and will therefore be void and unenforceable even if the employees agree to the change. What if the reason is the transfer but the changes are agreed as a package of terms, some of which are favourable and some of which aren t? Then the employees will be able to cherry pick the favourable terms (e.g. a pay increase) and the unfavourable terms will be void and unenforceable against them. What about collective agreements? Collective agreements are effectively frozen at the date of transfer. Buyers can make changes to individual terms derived from a collective agreement one year after the transfer so long as they are no less favourable, when considered together, than the employee s previous terms. Changes which do not satisfy these conditions will be void. 6

7 8. When and what employment information do I have to give to the buyer? What: The seller needs to provide the buyer with employee liability information (ELI) about the employees that will be transferring to them i.e. those employees employed at or in relation to the property. This includes: the identity and age of the employees; the terms that are required to be included in an employee s employment contract in accordance with Section 1 of the Employment Rights Act 1996; details of any grievances or disciplinary action under the ACAS Code in the previous 2 years; details of any court or tribunal case, claim or action in the previous 2 years or that the seller has reasonable grounds to believe an employee may bring; and information about any collective agreement that will have effect after the transfer. When: The above information is required to be given at least 28 days before the transfer and be kept up to date up to the transfer. seller? What: The buyer needs to tell the seller about any measures it plans/envisages (e.g. changing the employees pay day) taking in respect of the transferring employees. When: In sufficient time to enable the seller to inform and consult on the measures with affected employees. employees? What: Both the buyer and the seller need to inform affected employees and, where measures are envisaged, to consult with representatives of the affected employees (or directly with employees if fewer than 10 employees are employed by the business and there are no existing employee representatives). Each employer is responsible for its own employees. If consultation is required on measures, the buyer is not obliged to consult the seller s employees in advance of the transfer. 7

8 Employees should be informed of: the fact of the transfer, the date or proposed date and the reason for the transfer; the legal, economic and social implications of the transfer; any measures that the seller and/or buyer envisages will be taken or that no measures are envisaged; and information relating to the use of agency workers. Who are affected employees? This can include employees of the seller and buyer, including those who do not transfer but are otherwise affected by the transfer or any measures that are intended to be taken. When: Long enough before the transfer to enable meaningful consultation to take place with a view to obtaining the employees agreement on the measures. Who are representatives? Representatives of a recognised trade union or persons elected by affected employees. 8

9 9. Financial exposure of the parties if TUPE applies? Unfair dismissal claims Failure to inform and consult with employees Basic award (calculated in the same way as a statutory redundancy payment) and compensatory award (currently capped at 76,574 or, if lower, the figure of 52 weeks gross pay) which is mostly made up of loss of earnings. 13 weeks gross pay per employee The claim can be brought against the seller and the buyer who can be made jointly and severally liable by a tribunal for any compensation awarded as a result of a seller s failure to inform and consult and any failure by one party to pay compensation awarded. Failure to provide ELI Potential liabilities in relation to employees Usually a minimum of 500 per employee payable to the buyer. Further compensation can be awarded to the buyer to take account of any losses it suffers. Discrimination claims, wages, holiday pay, unpaid tax and national insurance etc. Legal costs For obtaining TUPE advice, defending Employment Tribunal claims in relation to failure to comply with TUPE obligations and potential resulting unfair dismissals and claims in relation to the potential liabilities listed above. 9

10 10. What if the contract doesn t mention TUPE? If TUPE applies it does so by operation of law irrespective of whether it is mentioned in the sale contract. It usually makes sense for specific TUPE provisions to be included in the contract in order to protect both the buyer and seller. For example, it is common for the seller to indemnify the buyer in respect of any of its acts or omissions pre-transfer and for the buyer to give reciprocal indemnities for its actions/omissions pre and post-transfer. IMPORTANT NOTE: TUPE is an evolving area of law. The answers provided above are intended to assist in recognising when TUPE applies particularly in property transactions and its effect. They are not intended to be a substitute for specific TUPE employment advice on a particular property transaction which the Howard Kennedy Employment team can provide. For more information, please contact: Nick Treppass Consultant: Employment T: +44 (0) E: nick.treppass@howardkennedy.com Louise Gibson Associate: Employment T: +44 (0) E: louise.gibson@howardkennedy.com 10

11 Notes 7

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