What Is TUPE?
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The Transfer of Undertakings (Protection of Employment) Regulations 2006 protects employees when the business they work for transfers to a new owner. 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 introduces three concepts into UK employment law:
- The automatic transfer principle: when employees transfer to the new employer, that employer inherits all rights, liabilities and obligations regarding them. 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 consult representatives of the affected employees from the previous employer.
TUPE legislation in the UK has been characterised by complexity and uncertainty for employers and employees. This confusion is due to how TUPE Regulations have been drafted and implemented over the years, which have not always been fully compatible with European law.
After 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.
When Does TUPE apply?
TUPE applies to scenarios which fall into one of the two types of ‘relevant transfer:’
A ‘business transfer’ is the transfer of the entirety or part of a business from one company to another. Crucially, the employer’s identity must change in the transfer to qualify. A ‘business transfer’ includes the transfer of an ‘economic entity’ that retains its identity:
- This ‘economic entity’ is an organised grouping of resources that pursues an economic activity. It can be sections of a business and doesn’t necessarily have to be profitable.
- The transfer process is not relevant. It can be multiple transactions.
- To determine whether an economic entity has retained its identity through a transfer, you check if the new owner has pursued identical or similar economic activities. Variations in the entity’s processes do not necessarily change its identity.
Service Provision Change
A ‘service provision change’ commonly affects service industries such as cleaning, transportation and IT. They can occur in three circumstances:
- A client engages a contractor to complete work on its behalf that it had previously done in-house
- A client engages a different contractor to provide the service
- A client brings the work in-house
For a transfer to qualify as a service provision change, legislation states:
- Before the change, an ‘organised group of employees’ must be responsible for carrying out the required activities for the client. A single employee can be an organised group.
- The entity does not need to retain its former identity; one person must cease to provide the activities, and another must pick them back up. Therefore, the incoming service provider can’t avoid TUPE by changing how the services are provided or not taking over the workforce.
- A minor amendment in the 2014 changes states that actions taken following a service provider change must be ‘fundamentally or essentially the same’ as those taken before it.
Service provision changes do not cover:
- Any third-party contractor providing the services for a single event or short-term task
- Goods supplied for the client’s use
A transfer can be both a business transfer and a service provision change.
What does TUPE do?
TUPE transfers employees between businesses in a transfer. If the transferor is insolvent, some of these rules are relaxed. In cases where TUPE applies, the automatic transfer principle means:
- Anyone employed by the transferor immediately before the transfer automatically becomes the transferee’s employee on all their existing employment terms (including their current rate of pay) and without a break in their employment period.
- This automatic transfer includes anyone dismissed before the transfer as a result of the transfer and not an ‘economic, technical or organisational reason entailing changes in the workforce’ (ETO reason).
- All rights, powers, duties and liabilities established in the employment contracts pass to the transferee. In some circumstances, these duties may include trade union recognition.
- Any changes to employees’ contractual terms due to the transfer itself and not an ETO reason will be void. However, if an existing contractual right to vary is present, then changes are permissible. Separate provisions apply regarding changes to terms incorporated by a collective agreement.
- The new employer cannot dismiss employees due to the transfer. Any dismissals on these terms would be ‘automatically unfair’.
- Note, whilst such dismissals are deemed ‘automatically unfair’, employees must meet the qualifying length of service to make an unfair dismissal claim. This period is currently 23 months and 3 weeks.
- If the new employer dismisses employees for an ETO reason, it is necessary to show that the dismissal was procedurally fair.
- These dismissals include any resignations in response to a repudiatory breach of contract or substantial changes in working conditions to the employee’s material detriment.
- Employees may refuse to transfer (objecting) but doing so terminates their employment without any right to compensation in an unfair dismissal case.
In the event of a TUPE transfer, both the transferor and transferee must inform and (if ‘measures’ relating to the employees are proposed) consult representatives of their affected employees concerning the transfer. Failing to do so could result in an employment tribunal awarding up to 13 weeks’ actual pay to each affected employee. Employers with fewer than ten employees can directly inform and consult affected employees in certain circumstances.
Who Is Protected By TUPE?
Under TUPE, an employee is defined in slightly wider terms than is typically used for employment protection purposes. Workers, including casual workers, would likely be included under the TUPE definition. However, agency workers hired by the transferor fall outside the definition of an employee if there is no contract between the transferor and the agency worker, as they are not ‘employed by the transferor’.
Under the automatic transfer principle, employees’ pension rights are protected. However, ‘old age, invalidity and survivors’ benefits are expressly excluded by regulation 10(1) of TUPE so do not transfer. This exclusion is known as the ‘pension exception’. It is important to note that:
- An obligation in an employment contract to pay a percentage of salary into the employee’s pension scheme will not fall within the exception and therefore is covered by the automatic transfer principle.
- The Pensions Act 2004 requires transferees to meet set pension provisions for particular transferring employees.
- The pensions exception only applies to ‘old age, invalidity or survivors’ benefits and no others.
- In Beckmann v Dynamco Whicheloe Macfarlane Ltd and Martin and others v South Bank University, the European Court of Justice ruled that early retirement benefits and benefits intended to improve retirement conditions paid to dismissed employees of a certain age are not ‘old age, invalidity or survivors’ benefits’ under the Acquired Rights Directive. The decision’s broad wording opens it up to include any early retirement benefits, including the right to voluntary early retirement.
TUPE does not apply to a share transfer. Although, it would apply to asset transfer carried out as a precursor to a share sale or a transfer of the entirety or parts of the business to the holding company following a share transfer.
In cross-border transfers, TUPE applies to:
- A business transfer in which the venture is located in the United Kingdom just before the transfer.
- A service provision change, where, prior to the change, there is an organised group of employees located in Great Britain
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 affected by the law of a country or territory outside Great Britain.
- Such a law governs the employment of any affected employees.
- The business transfer (which could be a service provision change) involves employees usually working outside the UK.
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All advice is correct at time of publication.