14th November 2017
The Transfer of Undertakings (Protection of Employment) Regulations 2006 protects employees when the business they work for transfers to a new employer. The original employer, or seller, is known as the ‘transferor’ and the new employer, or buyer, is known as the ‘transferee’.
TUPE implements the European Acquired Rights Directive and introduced three concepts into UK employment law:-
- The automatic transfer principle. This means employees transfer to the new business who inherits all rights, liabilities and obligations in relation to them. In other words the buyer, or transferee, ‘steps into the shoes’ of the seller, or transferor.
- Protection for employees against dismissal in connection with a TUPE transfer.
- The obligation to inform and consult with representatives of the affected employees.
It would be fair to say that TUPE legislation in the UK has been characterised by complexity and uncertainty for both employers and employees. This is because the way TUPE Regulations have been drafted and implemented over the years have not always been fully compatible with European law. After an extensive consultation the Government introduced the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014. One of the objectives of the 2014 Regulations was to provide greater flexibility for employers and align the Regulations more closely to the Directive. Whether this will be achieved is yet to be seen.
When does TUPE apply?
TUPE applies where there is one of two types of "relevant transfer":
- A "business transfer": the transfer of a business, undertaking or part of a business or undertaking where there is a transfer of an economic entity that retains its identity.
- An economic entity is "an organised grouping of resources that has the objective of pursuing an economic activity". This can include part of a business and doesn't have to be profitable.
- How the transfer takes place is not relevant. Indeed, it can result from a series of transactions.
- In deciding if the economic entity has retained its identity, the test is whether the economic entity is still in existence after the transfer. This should be apparent from the fact that the operation is being continued, or has been taken over, by the new owner carrying on with the same or similar economic activities. A mere change in the way it is carried out does not necessarily change its identity.
- A “service provision change”: This can occur in three circumstances and commonly affects those in the service industries such as cleaning, transportation and IT:
- A client engages a contractor to do work on its behalf that it had previously done in-house.
- A client engages a different contractor to provide the service.
- The client brings the work in house.
The following conditions apply to service provision changes:
- There must be an organised group of employees before the change whose principal purpose is to carry out the relevant activities on behalf of the client. A single employee can be an organised grouping.
- It does not cover a contractor providing the services for a single specific event or a task of short-term duration.
- It does not cover the supply of goods for the client's use.
- There is no need for the entity to retain its identity; it is merely necessary for one person to cease to provide the activities and for another to take them over. This means that it is not possible for the incoming service provider to avoid TUPE by performing the services in a different way or by not taking over the workforce.
- The 2014 changes included a minor amendment making it clear that the activities carried on after a change in service provider must be "fundamentally or essentially the same" as those carried on before it.
It is possible for a transfer to be both a business transfer and a service provision change.
What does TUPE do?
If TUPE applies then:
- Anyone employed by the transferor in the "organised grouping of resources or employees" immediately before the transfer automatically becomes the transferee's employee on all their existing terms of employment (including their existing rate of pay) and without a break in their period of employment.
- The automatic transfer of employees to the transferee will also catch any employees who are dismissed before the transfer, but by reason of the transfer and not for an "economic, technical or organisational reason entailing changes in the workforce" (commonly known as an ETO reason).
- All rights, powers, duties and liabilities under the employment contracts pass to the transferee. This could even include trade union recognition in some circumstances.
- Any changes to employees' terms will be void if the sole or principal reason for the change is the transfer itself and is not an ETO reason. However, changes are permissible if there is an existing contractual right to vary. Separate provisions apply with regard to changes to terms incorporated by a collective agreement.
- Any dismissal will be automatically unfair where the sole or principal reason for the dismissal is the transfer itself and is not an ETO reason. It will also be necessary to show that the dismissal was procedurally fair. This will include any resignations in response to a repudiatory breach of contract or to substantial changes in working conditions to the employee's material detriment.
- (Note, whilst such dismissals will be deemed “automatically unfair” employees will still need the qualifying continuous length of service to bring an unfair dismissal claim. This is currently two years less one week.
- Employees may refuse to transfer (known as objecting), but the effect is to terminate their employment without any right to compensation.
- Both the transferor and transferee must inform and (if it is proposed to take any "measures" in relation to the employees) consult representatives of their own affected employees in relation to the transfer. If they fail to do so, an employment tribunal can award up to 13 weeks' actual pay for each affected employee. Employers with fewer than 10 employees will be able to inform and consult affected employees directly in certain circumstances.
- Some of the above rules are relaxed if the transferor is insolvent.
Who is protected by TUPE?
Under TUPE, an employee is defined in slightly wider terms than is normally used for employment protection purposes and it is likely that workers, including casual workers, would be included. However, agency workers hired by the transferor will fall outside the definition of employee under TUPE provided there is not a contract between the transferor and the agency worker. This is because they are not "employed by the transferor".
The major exceptions to the principle of automatic transfer are old age, invalidity and survivors' benefits under occupational pension schemes (the "pensions exception"). These do not transfer under TUPE because they are expressly excluded by regulation 10(1) of TUPE. However:
- An obligation in an employment contract to pay a percentage of salary into the employee's personal pension scheme will not fall within the exception and therefore will be covered by the automatic transfer principle.
- The Pensions Act 2004 requires transferees to meet specified levels of pension provision for certain transferring employees.
- The pensions exception does not apply to other benefits under an occupational pension scheme which are not old age, invalidity or survivors' benefits.
- In Beckmann v Dynamco Whicheloe Macfarlane Ltd and Martin and others v South Bank University the ECJ held that early retirement benefits and benefits intended to enhance the conditions of such retirement paid in the event of dismissal to employees who have reached a certain age are not "old age, invalidity or survivors' benefits" within the meaning of the Acquired Rights Directive. The wording of the decision is wide enough to include any early retirement benefits, including the right to retire early voluntarily.
TUPE does not apply to a transfer of shares but it would apply to asset transfer carried out as a precursor to a share sale or a transfer of the business or part of the business to the holding company following a share transfer.
TUPE applies to:
- A business transfer, where the undertaking is situated in the UK immediately before the transfer.
- A service provision change, where there is an organised grouping of employees situated in Great Britain immediately before the service provision change.
It applies even if:
- The transfer is governed or affected by the law of a country or territory outside the UK.
- The service provision change is governed or effected by the law of a country or territory outside Great Britain.
- The affected employees' employment is governed by any such law.
- The transfer of a business (which may also be a service provision change) involves employees who ordinarily work outside the UK.
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