1 BUSINESS TRANSFERS Barry Hough
2 Employment Law Free Advice Clinic Martine Eneas
3 This lecture Commercial background Does TUPE apply? Consultation with workforce by vendor Due diligence by purchaser What transfers? Who transfers? Changes to terms and conditions Summary of TUPE problems
4 Introduction - The Transfer of Undertakings (Protection of Employment) Regulations Governs relevant transfers and apply to employees in all firms-there is no small business exception. - TUPE and Employment law liability is only part of the commercial context.
5 Does TUPE apply? The definition of a relevant transfer under TUPE 2006 contains two categories: a transfer of an undertaking and a service provision change.
6 Types of transaction The purchase of a controlling interest in the shares of a business (a share transfer) The purchase of the assets of a business to continue to run it as business in its own right or as part of a larger business (a business transfer) The purchase of some of the physical assets of a business for use in a quite separate business enterprise (asset transfer) Surrender of a licence with a transfer to another person
7 Transfer of undertaking Three criteria need to be satisfied: there needs to be an identifiable transfer, a transfer of an economic entity which needs to have retained its identity posttransfer.
8 Identifiable transfer there must be a change in an employer, not merely ownership, which means that a share sale will not constitute a relevant transfer. In share sale the employer remains the same: there is no transfer between employers Business does not need to be solvent
9 Economic entity Reg 3 (2) defines an economic entity as an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary.
10 The going concern test Spijkers v Gebroeders  ECR The test for deciding whether an undertaking has been transferred (as opposed to an asset sale) is whether there has been the transfer of a going concern Q: is there a stable economic entity which is carried on in different hands after the transfer?-rygaard v Dansk etc  IRLR 51
11 Question of fact (i) consider all the factual circumstances; (ii) what is the type of asset transferred? (iii) are tangible assets transferred, such as buildings and movable property? (iv) the value of intangible assets at the time of the transfer (v) whether the majority of its employees are taken over by the transferee (but can exist otherwise);
12 Cont d (vi) are customers /goodwill transferred? (vii) degree of similarity activities carried out before and after the transfer and whether these activities are suspended for any period and, if so, how long? (viii) transfer of stock? Contracts? (ix) transfer of name? (x) change of the natural or legal person running the business who enters into contractual relations as an employer.
13 Examples Hotel operated as family hotel sold. Purchaser ceased family hotel and ran sports and educational facility on the site. Clause in sale: existing hotel bookings would be honoured. Business transfer? Asset sale? Pub licensee surrenders lease to brewery which puts in own manager? Transfer?
14 Service Provision changes Activities cease to be carried out by a person ( a client ) on his own behalf and are carried out instead by another person...( a contractor )- thus where client outsources work to a contractor Where contract ends and goes to subsequent contractor Where the client takes the entity back in house- PROVIDED THAT
15 Service Provision changes there is an organised/identifiable group of employees whose principal purpose [in the client s business] is to carry out the contracted services (Reg 3 (3)) Buying short term one-off services excluded- eg contractor organises one celebratory dinner
16 Examples Delta, a small company [contractor] employing two employees, loses its major cleaning contract. No replacement work. Both employees are mainly engaged in work for that contract- so relevant transfer Gamma, a security firm providing security services that has many security contracts employs A. A happens to be working at Zeta s premises when Gamma loses the Zeta contract to a rival. In these cases, A has always been redeployed to other contracts- hence no transfer (principal purpose test)
17 Consultation Joint and several liability of purchaser and vendor if consultation rules breached. Brief summary of reg 13.
18 Due Diligence and Disclosure The purchaser is bound by caveat emptor, so if he or she had a duty to do due diligence to find out exactly what their liability is. Eg is they are inheriting a host of equal pay claims they will be unable to complain Reg 11 requires employer liability information to be given to transferee
19 Sale agreements Business transfer agreement usually includes a warranty clause requiring disclosure of all material facts relating to transferring employees including but not limited to age, length of service and the statutory matters below). Astute transferors will negotiate a clause limiting liability to what they were aware or reasonably aware
20 Documents Contracts of employment and staff handbooks since these are also a likely source of further contractual obligations. Union recognition agreements? Collective agreements? Incorporated?
21 Disclosure Letters-not less than 14 days Identity of employees; age; sex and job description; leave arrangements and leave taken; remuneration; salary structure and progression; job evaluation and grading schemes in operation; staff handbooks, details of bonus schemes or other employee benefits, such as car leasing, car allowances; mobile phones, IT health insurance, gym membership; employees who are away on sick leave, maternity or paternity leave; details of any outstanding claims for work-related injury
22 Disclosure Letters-not less than 14 days sick leave and sick pay schemes; details of recognised trade unions and facilities and arrangements; any disciplinary procedure taken against an employee; any grievance procedure taken by an employee within previous 2 years; Details of any court of tribunal claims brought by an employee within the previous 2 years
23 Breach of Reg 11 disclosure Reg 12. A complaint may be made to the ET by the transferee within 3 months of the transfer (subject to usual escape clause) and it has power to award a declaration and compensation. But this will only cover the statutory matters
24 What transfers The contract of employment has effect after the transfer as if originally made between the person so employed and the transferee (except occupational pension rights-reg 10). transfer does not terminate the contract of the employee of the transferor.
25 What transfers Transferee inherits all outstanding liability of the transferor for breach of contract or employment rights associated with the contract even if these occurred before the date of the transfer: Reg 4(2) collective agreements have effect as if made by purchaser (but are unenforceable)-reg 5
26 What transfers recognition of trade union transfer BUT ONLY if the assigned entity is separate from the new employer s business. Statutory recognition under Employment Act 1999
27 What transfers Criminal liability and occupational pension scheme rights do not transfer If transferred employees have a right to contribute to an occupational pension scheme- transferee matches e ee contribs up to max 6% of salary into stakeholder pension : Pensions Act 2004
28 Problems with collective agreements Issue where collective agreement incorporated and terms such as pay rises negotiated by union and transferor from time to time The terms applicable at date of transfer transfer across. But what happens thereafter? Alemo-Herron v Parkwood Leisure  ICR 920 Cf inflation-linked pay rise clauses
29 Who transfers? Reg 4 (1) the transfer affects any employee assigned to the organized grouping of resources or employees assigned to activity other than on a temporary basis- Temporary -1 year can be temporary: Securiplan v Bademosi (EAT/1128/02) In substance all employees and new employer cannot pick and choose
30 Who transfers-part transfers an employment relationship is essentially characterised by the link between the employee and the part of the undertaking or business to which [they are] assigned to carry out [their] duties: Botzen test - 2 CMLR 50 Sunley Turriff Holdings Ltd v Thomson  IRLR 184
31 Who transfers-dismissals Transferor dismisses employees before transferdismissals are VALID (ie no transfer) but employees are automatically unfairly dismissed: Wilson v St Helens Borough Council  IRLR 706 Commercial decision? Beware possible re-instatement/re-engagement awards
32 IF ETO applies- employer can dismiss fairly if acts reasonably-eg selects fairly Dismissal Dismissal connected with transfer are automatically unfair unless there is an ETO reason entailing changes in the workforce (below) Eg sudden and expected loss of key order. Redundancy is normally ETO
33 Who transfers-objectors Employees who object under Reg 4 (7) are not in law dismissed by transferor and have no rights against transferee as contracts do not transfer. Exception (Reg 4(9))-if transfer involves substantial changes in working conditions to material detriment, employee is constructively dismissed. Justification if reasonable and fair.
34 Who transfers-practical Issues Dumping in part transfers (purchaser beware) Vendor retains valued staff by transferring out before transfer-(purchaser beware) But vendor beware breach of contract claims. Mobility clauses? Job flexibility clauses?
35 Changes to contracts post transfer Employees are normally not permitted to agree to change contractual terms where the reason is the transfer or is connected to the transfer unless ETO applies-reg 7 Even if they agree the changes are void unless more advantageous-reg 4 (4). Unfair constructive dismissal (unless ETO applies)- Reg 7
36 Changes to contracts the only variations of contract that can be agreed between the employees and their new employer are those carried out for (i) a reason unconnected with the transfer, or (ii) those done for a reason connected with the transfer that is an economic, technical or organisational reason entailing changes in the workforce ( an ETO reason ).
37 Wilson v St Helens BC If new terms unconnected with transfer employees can be invited to agree new terms- but imposing terms without agreement must be carried out within normal unfair dismissal rules. Changes for ETO reasons still need to be implemented fairly or there can be an unfair constructive dismissal: Nationwide v Benn  IRLR 922 Connection : looks at employer s reasons for change
38 ETO An ETO reason relates to the functions or numbers of the workforce: London Metropolitan University v Sackur  unreported EAT; Crawford v Swinton Insurance Brokers  ICR 85 Standardisation of terms not enough for ETO (but risks of not doing so): Berriman v Delabole Slate Ltd  ICR 546 But if ETO applies must still act reasonably and fairly
39 Changes unconnected with transfer Time lag Changes applicable to whole workforce- eg Job evaluation scheme; new non-competition clause?
40 Problems with TUPE 2006 Wilson v. St Helen s problem of causation unaddressed Dumping staff into contracts The 14 day rule in Reg 11.[Due diligence] makes tendering difficult-what price?