The EAT has held that when considering the identity of the "client" for the purposes of a TUPE service provision change, a subcontractor's client will not necessarily be the contractor from whom the subcontract is held. Rather, it could be the ultimate beneficiary of the service, despite the absence of a direct legal relationship. Where this is the case, relevant employees of the subcontractor may transfer to the ultimate beneficiary on the insourcing of the service (Jinks v London Borough of Havering).
TUPE covers two types of transfer mechanisms: (1) the traditional "transfer of an undertaking" and (2) the "service provision change". A service provision change can occur in the following ways:
- Outsourcing: where a client ceases to carry out activities on it own behalf and assigns them to a contractor to carry out on its behalf.
- Second generation outsourcing: where the activities cease to be carried out by a contractor on the client's behalf and are reassigned to a subsequent contractor to carry out on the client's behalf.
- Insourcing: where the activities cease to be carried out by a contractor or a subsequent contractor (a subcontractor) on a client's behalf and are instead carried out by the client on its own behalf.
The statutory concept of a service provision change was first introduced by TUPE 2006 and is not derived from the European Acquired Rights Directive (ARD). This aspect of TUPE is said to represent a "gold plating" of the rights enshrined in the ARD and, as such, the EAT has previously decided that it is not required to apply a purposive construction of this section of TUPE. Instead, there should be a straightforward and common sense application of the relevant statutory words to the individual circumstances. This has led the Courts and Tribunals to decide that the term "client" requires the identity of the client to be the same both before and after the purported transfer in order for a service provision change to have occurred (see our report on the Court of Appeal's decision in McCarrick v Hunter here).
However, this principle presents difficulties where the client, A, outsources the activities to a contractor, B, and B, in turn, subcontracts the service to another contractor, C. If A terminates the contract with B and elects to bring the activities back in house, what happens to the employees of C who have been performing the relevant activities? Do they transfer to A under TUPE? Although TUPE expressly applies to subcontractors, we also know that a service provision change can only take place where the "client" remains the same pre and post transfer. Therefore, it would need to shown that prior to the transfer C's "client" for the purposes of TUPE was A, instead of, or as well as, B. The recent case of Horizon Security Services Ltd v Ndeze (Horizon) involved the insourcing of activities previously carried out by a subcontractor. In that case, the EAT held that there was no service provision change, partly because the identity of the client had changed.
This issue has recently come before the EAT again. Here, the EAT had to consider whether an Employment Tribunal (ET) was right to strike out a claim where a client took back in house the management of car park from a subcontractor.
The London Borough of Havering (LBH) outsourced the management of the Romford ice rink and an associated car park site to Saturn Leisure Ltd (Saturn). Saturn subcontracted the management of the car park to Regal Car Parks Ltd (Regal). In April 2013 the ice-rink closed and Saturn gave up occupation of the site. LBH converted the site to a public car park and took management of the car park back in house.
The Claimant was employed by Regal (having initially been employed by Saturn) and his job role concerned the management of the car park. He argued that his employment transferred to LBH when they insourced the management of the carpark. LBH refused to accept him and he brought an unfair dismissal claim.
The ET struck out the claim on the basis that it was clear that Regal's client was Saturn and not LBH, noting that there was never a "direct contractual link" between Regal and LBH, whether before or after LBH took possession of the car park management. This meant that the identity of the client had changed and there was no service provision change. The Claimant appealed the strike out decision to the EAT.
The EAT said that the key question to be answered was on whose behalf was Regal operating the car park before the insourcing of the activities? Could it be said that their "real" client was LBH? In the EAT's view, the ET had taken "an impermissibly narrow approach" when deciding that a subcontractor's client was necessarily, and could only be, the contractor to which it was contractually bound to provide the service. The EAT also confirmed that Horizon did not establish a general rule that the absence of a direct legal relationship between a subcontractor and the ultimate beneficiary is determinative. Rather, the outcome of that case turned on its particular facts.
So how do you determine the client of a subcontractor? The EAT held that three important principles had been established in the Horizon case:
- The question of who is the client for TUPE purposes is one of fact, not law.
- There can be more than one client.
- The insourcing provision in TUPE should be read together with the provision expressly covering subcontractors.
Together, these principles show that a subcontractor's client will not necessarily be the contractor from whom the subcontract is held. In other words, it could be the ultimate client – in this case, LBH. The EAT upheld the appeal, overturning the strike out decision. The application was remitted to the ET who will decide who Regal's client was for TUPE purposes.
This is an important decision for transferors involved in the outsourcing or insourcing of services. Whilst the "same client" principle remains good law, it should not be assumed that the "client" of the subcontractor will always be the contractor with whom they have the direct legal relationship. The "client" could be the ultimate beneficiary of the service. Where this is the case, then the subcontractor's employees could transfer to the ultimate beneficiary (on an insourcing) or to a new contractor or subcontractor (a second generation outsourcing). Accordingly, when entering into outsourcing agreements, transferors should consider obtaining appropriate indemnities from the contractor to cover liabilities relating to a subcontractor's employees.