The Legal 500

On 6 April 2006 the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE 2006') will finally come into effect after a four-and-a-half year gestation period.This will replace the existing, and somewhat long-in-the-tooth, regime, which is governed by TUPE 1981. Although TUPE 2006 rests on the foundations of TUPE 1981, it introduces a number of new obligations and clarifying provisions (see box, right), which this briefing will outline.

The DTI has also issued a guidance document on the new regulations at  www.dti.gov.uk/er/individual/tupeguide2006regs.pdf.

Implications for outsourcing

Under TUPE 1981 one of the major areas of uncertainty is whether or not TUPE applies in the event of a service provision change (ie first and subsequent generation outsourcing and bringing services back in-house, etc). Whether there is a business transfer is dictated by a number of factors, including the nature of arrangements before, and after, the service provision change; whether or not it is an asset-dependant or labour-intensive activity; and the manner in which the incoming provider proposes to perform the services in question.

TUPE 2006 seeks to create certainty. Broadly speaking, TUPE applies to two types of relevant transfer:

1) the ‘orthodox transfer', where there is a transfer of an economic entity that retains its identity; and

2) a service provision change (‘service provision transfer').

In many cases transfers will qualify as both an ‘orthodox transfer' and a ‘service provision transfer'. Outsourcing a service will, in many cases, meet both definitions.

There will be a relevant ‘service provision' transfer to which TUPE applies if:

1) there is an organised grouping of employees (this includes a single employee) situated in Great Britain which has as its principal purpose the carrying out of activities concerned on behalf of the client,

2) the client intends that the activities will, following the service provision change, be carried out other than in connection with a single specific event or task of short-term duration by another person; and

3) the activities do not consist wholly or mainly of the supply of goods for the client's use.

In the event of a service provision transfer, the incoming service provider will inherit the employees assigned to the organised grouping, together with all the rights, obligations and liabilities arising in relation to their contracts of employment (excluding occupational pensions). This will be the case regardless of the way in which the incoming service provider organises its own workforce in relation to the provision of services, ie there is no need for the economic entity to retain its identity.

Where the incoming service provider has its own workforce capable of performing the services, it may have to embark upon a redundancy exercise in relation to incoming staff. Of course, where the incoming service provider is unable to redeploy the incoming employees elsewhere within its own business, or use them in relation to the services it will provide, it will need to factor potential contractual and statutory redundancy costs, possibly a protective award (if collective redundancy consultation applies but cannot be complied with), and certainly the notice period of the employees, into any costings in relation to the provision of the services in question .

Although TUPE 2006 is now clearer, areas of uncertainty still remain. At this stage it is not known what short-term duration means - days, weeks or months? No doubt this will be the subject of litigation. In addition, if a service provision change does not meet the threefold test outlined above, it will still be necessary to examine whether there is a transfer of an undertaking that retains its identity, thereby satisfying the definition of an ‘orthodox transfer'.

Which employees transfer?

TUPE 2006 will apply to employees who are assigned (other than on a temporary basis) to the organised grouping of resources or employees (in the case of a service provision change). There continues to be scope for uncertainty as to whether a particular employee is so ‘assigned' if they do not work exclusively in the business. Whether or not an employee is assigned is a question of fact for the employment tribunal, which will look at factors such as job description, proportion of time spent working in the relevant undertaking, and how the costs of employment are transferred.

An end to the harmonisation problem?

Under the current TUPE regime, transferees who wish to amend the terms and conditions of employment of incoming employees in order to harmonise them with those of any existing workforce face some difficulty as any changes, if the reason for them is the transfer itself, are void. This is the case even if the harmonisation takes place some time after the transfer. TUPE 2006 permits changes to terms and conditions made in connection with the transfer that are for an economic, technical or organisational (ETO) reason and entail changes in the workforce. Changes that are made in connection with the transfer that do not satisfy this two-limb test will be void, as will be any changes made by reason of the transfer itself.

Although this change is intended to provide greater flexibility for transferees, it does not solve the harmonisation problem. The DTI guidance on TUPE 2006 states that the desire to achieve harmonisation is by reason of the transfer itself, and therefore cannot be an ETO reason connected with the transfer.

At present, it is not uncommon for senior employees to conclude tripartite compromise agreements immediately before a transfer, terminating their employment with the transferor and entering into a new employment contract with the transferee containing different terms and conditions. This is often done to ensure that the executive continues to be subject to enforceable restrictive covenants. The validity of such compromise agreements has not, to date, been fully tested before the courts, and there is a risk that they can be challenged on the grounds that they are seeking to contract out of TUPE and are therefore void.

Will the TUPE 2006 regime enable executive service agreements to be amended without the need for compromise agreements that can delay proceedings? Unfortunately, it seems not, because in reality even if the change is for an ETO reason it will not entail a change to the workforce. However, where the nature of the executive's duties change, a variation is more likely to be permitted.

Cost of failing to inform and consult

Failure to inform and consult trade unions or employee representatives in relation to the transfer of an undertaking can give rise to an award of not less than 13 weeks' pay per affected employee. TUPE 2006 introduces the concept of joint and several liability in relation to any such failure. An employee can bring a claim against transferor, transferee or both, but inevitably will be influenced by the depth of either entity's pocket.

If an employee elects to pursue the transferor, it will be able to join the transferee in the proceedings for such a failure or, alternatively, will be able to pursue the transferee for a pro-rata contribution to any damages awarded by the courts and vice-versa. It is therefore advisable for transferors and transferees to enter into a commercial agreement as to who will bear such financial liability.

The government has, however, decided not to establish joint and several liability for any failure to conduct a collective redundancy consultation should such an exercise be carried out in the context of a TUPE transfer.

New employee liability information obligations

TUPE 2006 requires the transferor to notify the transferee of specified information in relation to the transferring employees, known as ‘employee liability information' (see box, left). This effectively introduces a statutory obligation to provide comprehensive due diligence. This obligation cannot be contracted out of. At present, in contracting-out situations the incoming service provider is frequently not in a direct contractual relationship with the outgoing service provider. The provision of employee liability information will therefore enable the incoming contractor to assess more accurately the type of liabilities it is assuming and factor this into costings if appropriate.

The obligation to provide details of disciplinary action and grievances raised over a two-year period is potentially quite onerous, and employers may need to revisit how such information is collated so that it is readily accessible for an employee liability information exercise.

Although the scope of employee liability information is broad, key information that a transferee will generally wish to know is not covered, for example details of bonus schemes, option plans and enhanced redundancy schemes. The provision of this information will therefore continue to have to be addressed in the commercial agreement between transferor and transferee.

What is the cost of failing to provide employee liability information?

If a transferor fails to provide this employee liability information, or it is inaccurate, a complaint can be brought before the employment tribunal. The tribunal may award such compensation as it considers just and equitable having regard to: (i) any loss attributable to the failure to provide the information; and (ii) any contract under which the transferor may be liable to indemnify the transferee in respect of a failure to notify employee liability information. A default minimum level of compensation is set at £500 per employee in relation to whom no/defective information was supplied, although a lower amount can be awarded if considered just and equitable; for example where the transferee fails to mitigate its loss.

It remains to be seen whether commercial parties are going to seek to avoid providing indemnities or warranties on the grounds that an adequate remedy is available via the employment tribunal in any event.

Insolvent transferors

In the context of insolvent transferors, TUPE 2006 provides that, depending on the type of insolvency proceedings involved, liability for statutory insolvency payments and statutory redundancy payments will not pass to the transferee. In addition, if the insolvency falls into one of the specified categories (which includes administration, voluntary arrangements, and a creditor's voluntary winding up, but not administrative receivership) the transferor or transferee can agree variations to terms and conditions of employment with the appropriate representatives of the transferring employees, subject to certain specified terms and conditions being satisfied.

Key dates

TUPE 2006 will apply to business transfers and service provision changes that take place on or after 6 April 2006.

There will be no requirement to comply with the new employee liability information obligations as long as the transfer occurs on or before 19 April 2006. In many cases agreements will already be in place in relation to business transfers or service provision changes that will occur on or after 20 April 2006; the transferor must take steps to ensure that it is in a position to provide the employee liability information regardless of what the terms of any relevant commercial agreement provides.

Where a service provision change is not also a transfer of an undertaking or business occurring on or before

4 May 2006 there will be no obligation to inform and consult or elect employee representatives.