In this blog we hope to demystify what is often considered one of the more complex (and dare we say unpopular!) areas of employment law: TUPE. Whilst many find TUPE intimidating, it can often be helpful, particularly if the issues are engaged with early on.
What is TUPE?
TUPE stands for the Transfer of Undertakings (Protection of Employment) Regulations 2006 and its purpose is to protect employees when the business in which they are employed is transferred to a new owner.
When will TUPE apply?
TUPE applies where there has been either a "Business Transfer" or a "Service Provision Change".
In simple terms, a “Business Transfer” happens when a business or part of a business moves from one employer to another. The full definition is where there is a transfer of an undertaking, business or part of an undertaking situated immediately before the transfer in the United Kingdom to another person where there is a transfer of an economic entity that retains its identity.
The purchase of one business by another company will usually constitute a Business Transfer for the purpose of TUPE. Pure share sales are not covered by TUPE as there will be no change in the identity of the employer, although TUPE issues can still arise (for example if the new owner intends to “hive up” the business into another company after the acquisition, or perhaps wants to achieve cost savings by centralising support functions, like HR and Finance, within the group).
Service Provision Change
TUPE also applies where there has been what is called a Service Provision Change (“SPC”). The classic examples are IT, cleaning or security outsourcing.
There will be an SPC where:
- A particular service is outsourced (eg a service originally provided in-house is awarded to an external contractor),
- There is a change of service provider (for example on retendering a contract), or
- An out-sourced service is brought back in-house.
For there to be a SPC, there must be:
- An organised grouping of employees (or indeed one dedicated employee) based in Great Britain immediately prior to the relevant transfer whose principal purpose is the carrying out of the relevant activities concerned on behalf of the “client”, and
- The “activities” carried out after the transfer must be “fundamentally the same as the activities carried out by the person who has ceased to carry them out”.
There will not be an SPC under TUPE where the business intends only to use the contractor for a single specific event or task that is short-term in duration (for example, to put on a one-off conference) or the service is wholly or mainly the supply of goods for the client’s use (for example, a restaurant changing food suppliers).
What happens when TUPE applies?
Where TUPE applies, the employees assigned to the relevant undertaking or organised grouping immediately before the transfer pass to the new owner / provider, who becomes their new employer.
An employee has the right to object to transferring to another employer. However, if they do object, their employment will come to an end and they will not be treated as having been dismissed by either the transferor or transferee. As a result, the employee will not normally be entitled to claim unfair dismissal or redundancy pay, nor is notice required.
If an employee is dismissed prior to the transfer because of the transfer or for a reason connected to it which does not constitute an economic, technical or organisational reason that necessitates a change in the workforce (otherwise known as an “ETO” reason), they will also be deemed to transfer. For these purposes, a change in the workforce must involve a change in the function or numbers of employees, such as redundancies or a move from a managerial to a non-managerial position. An ETO reason will include essential cost-saving requirements, using new processes or making changes to the structure of an organisation.
What Transfers with the Employees?
The new owner or provider (the “transferee”) steps into the shoes of the previous owner or provider (the “transferor”) and takes on all duties, rights and obligations in relation to the transferring employees’ terms and conditions of employment (although special rules apply in relation to pensions under occupational pension schemes). This means that the transferee also takes on any existing claims that the transferring employees might have against the transferor.
Protection of Existing Terms and Conditions
TUPE protects and maintains the transferring employees’ existing terms and conditions of employment including their continuity of employment.
If a transferee seeks to vary a transferring employee’s terms to the employee’s detriment, that variation will not be valid where the transfer itself is the sole or main reason for the change. However, contractual changes will be permitted if the sole or main reason for the change is an ETO reason and the employee has agreed to the change or the contract permits it.
There are specific rules relating to changing terms incorporated into contracts from collective agreements or where the transfer involves an insolvent business.
Dismissal of an employee where the sole or main reason for the dismissal is a TUPE transfer will be automatically unfair. The only exception to this is where the dismissal is for an ETO reason, when the dismissal can potentially be fair and the usual unfair dismissal rules will apply.
Employees may resign and treat themselves as constructively dismissed where it is clear that the transferee intends to fundamentally breach their terms and conditions of employment or where the transfer will involve a substantial change to their working conditions to their detriment. An example of such a substantial change to working conditions might include a major relocation in relation to the employee’s place of work, even where there is a mobility clause in their contract and the change is therefore not in breach of that contract.
Consultation / Information Obligations
Employers are obliged to provide certain information to “appropriate representatives” (ie recognised trade unions or elected employee representatives, if there is no union) of the employees who are “affected” by the transfer and, if appropriate, consult with them about any measures envisaged in relation to it.
Currently, "micro businesses" (ie those with fewer than 10 employees) may inform and consult with employees directly in certain circumstances. In relation to transfers taking place on or after 1 July 2024, this exemption will apply where either the business employs fewer than 50 employees or fewer than 10 employees will transfer.
An employer that fails to comply with these information and consultation obligations is liable to pay a protective award of up to 13 weeks’ pay per employee.
Employee Liability Information
The transferor must provide certain information about the transferring employees to the transferee at least 28 days before the transfer. However, in reality, in order to effect a smooth transfer information (at least on an anonymised basis) should be provided far sooner.
Failure to comply with the relevant deadline may result in the transferee being awarded compensation of at least £500 per employee.
We regularly advise on TUPE issues arising in a broad range of contexts (including corporate transactions, outsourcing and insourcing, insolvency, charity mergers, property transactions and intra-group restructures).
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, January 2024