The Legal 500

In March this year, almost four years after its initial consultation exercise, the government issued for consultation draft regulations that amend the current Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE 1981). The consultation closed in June. It was originally intended that these amending regulations, the Transfer of Undertakings (Protection of Employment) Regulations 2005 (TUPE 2005), would come into effect on 1 October 2005. However, the DTI has recently announced that TUPE 2005 will now come into effect in April 2006.

Changes to service providers will be caught
At present, under the TUPE 1981 regime, one of the major areas of uncertainty is whether or not there is a transfer of undertaking caught by the regulations in the event of a service provision change. Much will be dictated by the nature of arrangements before and after the service provision change, whether or not it is an asset-dependent (eg catering) or labour-intensive (eg cleaning) activity, and the manner in which the incoming provider proposes to perform the services in question.

TUPE 2005 provides that where there is a group of people dedicated to providing a specific service (other than on a one-off basis) immediately before the service provision change, then there will be a deemed transfer of undertaking and the incoming service provider will inherit the employees assigned to the undertaking 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 the services. This may mean, in certain cases, that the incoming service provider will then have to embark upon a redundancy exercise in relation to transferring staff when its own workforce is capable of performing the services.

The intention is that TUPE 2005 will protect jobs, as the new service provider may be able to redeploy the incoming employees elsewhere within its own business or, indeed, use them in relation to the services it will provide. Of course, an incoming service provider will need to factor potential contractual and statutory redundancy costs, possibly a protective award and certainly the notice period of the employees, into any costings in relation to the provision of the services in question.

There are currently two proposed exceptions:

1) TUPE 2005 will not apply to a service provision change where the contractor was engaged for a single specific event or task, for example organising a conference. In most cases it will be clear when a single task is involved. However, it is likely to be problematic in the context of long-term projects. For example, if a consultant is commissioned to undertake some research and write a report in three months' time, that would not be caught under TUPE 2005. But if that project were to span several years the position is less clear. It will therefore be paramount for parties to identify their intentions clearly in the contract.

2) The second exception relates to the procurement of professional services, such as legal and accounting services. However, the draft regulations have not identified the professional service providers that are to be excluded from the scope of TUPE 2005 and there is some speculation that because of the difficulties in defining 'professional services' this exception will be dropped from the final version of TUPE 2005.

Changing terms and conditions of employment
Under the TUPE 1981 regime, transferees who wish to amend the transferring employees' terms and conditions of employment, to harmonise them with those of any existing workforce, face some difficulty. Any such changes, if they are made in connection with the transfer, are void, and a harmonisation programme will almost certainly be in connection with the transfer. This is the case even if the harmonisation takes place some time (possibly even years) after the transfer.

TUPE 2005 provides that changes to terms and conditions made in connection with the transfer will be valid if:

• they are for an economic, technical or organisational (ETO) reason; and
• they entail changes in the workforce.

Changes made in connection with the transfer that do not satisfy this two-limb test will be void. Although this change is intended to provide greater flexibility for transferees, in many cases a harmonisation programme is unlikely to entail a change in the workforce, ie the workforce will not be reduced, or job functions will not change. Accordingly, any such changes will be void unless the transferee can demonstrate that the changes were unconnected 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 following the transfer. The validity of such compromise agreements has not, to date, been fully tested before the courts. Under the new TUPE 2005 regime, given the express clarification in relation to when changes to terms and conditions may be made, there must be a risk that such tripartite compromise agreements will be more vulnerable to challenge on the grounds that they are seeking to contract out of TUPE and are therefore void.

New joint and several liability
TUPE 2005 also introduces the concept of joint and several liability in relation to any failure to inform and consult trade unions or employee representatives in relation to the transfer. A transferor will be able to join a 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. Commercial agreement as to who will bear such financial liability therefore continues to be advisable.

The consultation paper also asks for views on whether joint and several liability should be imposed on transferor and transferee in respect of protective awards payable as a consequence of a failure to inform and consult in a collective redundancy situation connected to a TUPE transfer. It seems likely that this proposal will appear in the final version of TUPE 2005.

New information obligations
TUPE 2005 also introduces the new obligation on a transferor to notify the transferee of the identities of all transferring employees and to provide details of all the rights, liabilities, powers and duties that arise under or in connection with the transferring contracts of employment; essentially an extremely wide statutory obligation to provide comprehensive due diligence. One helpful side effect is that, as there is now a legal obligation to identify transferring employees, a transferor cannot now rely on the Data Protection Act 1998 to resist providing the names of employees. This employee information must be provided in good time, and in any event, before the transfer completes. If there is a breach, a complaint can be lodged at court (not the employment tribunal) and a penalty of up to £75,000 may be awarded. The size of the penalty will be determined by the court having regard to several factors, including any indemnity provisions contained in any commercial agreement between the parties.

Although this provision is new, in reality the parties to a transaction involving the transfer of an undertaking will insist on the provision of information about transferring employees, and in modern contracting-out scenarios the outgoing contractor will usually be contractually obliged to provide specified categories of employee information to the client and/or the incoming service provider. In practice, as the information that has to be supplied under the new employee information provision is potentially extremely wide, it is likely that the parties to a transaction may agree to limit the information that has to be provided.

New rules for insolvent transferors
In the context of insolvent transferors, TUPE 2005 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 include 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.

E-mail: tania.stevenson@cliffordchance.com;
Tel: 020 7006 8938.