'In January 2013, the government issued a consultation paper on proposed changes to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI/2006/246) to address concerns that the regulations are overly bureaucratic and ineffective. The consultation ends on 11 April 2013 and a number of key legal changes to remove gold plating of the Acquired Rights Directive (2001/23/EC) (ARD) are expected to take effect in October 2013.

Removal of service provision changes

Currently, regulation 3(1)(b) TUPE 2006 provides that TUPE applies where there is a ‘service provision change’ (SPC) encompassing an initial (or first generation) outsourcing, a subsequent (or second generation) outsourcing or an in-sourcing (contracting in) by a client or customer. The effect of regulation 3(1)(b) is that most commercial outsourcing deals automatically came within the scope of TUPE unless it is for a short term duration or single specific event. The SPC provision enabled suppliers and customers to have commercial certainty about how employees dedicated to the provision of services should be managed and to assign or apportion those legal risks by way of indemnities in the commercial agreement. It also ended any exposure to fluctuating case law based on the old TUPE regulations and created a more level playing field in the tendering process and reduced costs.

The government is proposing to exempt SPC from TUPE 2006 altogether in order to make procurement more attractive and more consistent with the definition of transfer under the ARD. In its view, the SPC provision goes further than the provisions of the ARD and is considered gold plating. Due to the impact this change would have on existing contracts and the fact that the outsourcing process, from planning for a tender until eventual transfer, and more complex services could take a year or longer, the government plans to have a long lead-in period before these provisions are amended or repealed. The lead-in period could be less than a year, one to two years, three to five years, or five years or more.

In the meantime, it would be prudent to review the terms of any existing contracts and develop an action plan if these contracts are due for renewal to assign or apportion the risks of any back end employment-related costs accordingly as the law is in a state of flux. Customers will want to ensure that employees remain with the outgoing contractor on termination regardless of whether or not TUPE applies at that time, whereas the latter will probably want to negotiate sharing of employment exit costs if TUPE does not apply.

Outsourcing deals not completely exempt

When the SPC provision is repealed, it is still possible for TUPE to apply to commercial outsourcing deals if there is a transfer of an economic entity that retains its identity under reg 3(1)(a) TUPE 2006. For example, TUPE may apply if there is an organised grouping of staff assigned to a common task that is to be carried out by another employer and there is either a transfer of significant tangible or intangible assets or where there is a transfer of a major part of the workforce in terms of numbers and/or skills (Spijkers v Gebroeders Benedik Abbatoir CV [1986]; Ayse Süzen v Zehnacker Gebaüdereinigung GmbH Krankenhausservice [1997]).

A transfer of the assets will be the material factor where the function being outsourced may be said to be ‘asset-reliant’ (Oy Liikenne Ab v Orskojärvi and Juntunen), and the transfer of employees will be the material factor when the function can be characterised as ‘labour-intensive’ (eg cleaning and security). There is a legal transfer of an economic entity if there is a similarity of activity before and after the transfer. In Abler v Sodexho MM Catering Gesellschaft [2004] IRLR 168, the European Court of Justice (ECJ) held that, in deciding if there was a transfer of an undertaking, it was first necessary to characterise the undertaking as labour-intensive or asset-reliant and that, in asset-reliant cases, there can be no transfer if the assets are not transferred. However, in The Scottish Coal Company Ltd v McCormack and others and (2) Crouch Mining Ltd (in administration) 2005, the Scottish Court of Sessions did not read the Abler case as requiring businesses to be characterised as ‘asset-reliant’ or ‘labour-intensive’ as if they were mutually exclusive and noted that there are an infinite range of intermediate possibilities.

Therefore, whether TUPE will apply to a commercial outsourcing deal, in the future, will depend on the nature of the services that is being outsourced and be decided on a case-by-case basis. The tribunal will need to return to the Spijkers and Süzen tests to determine the issue, which will likely result in more legal and commercial uncertainty, and litigation.

Alternatives to repealing the SPC

The government has considered alternatives to removing the SPC provisions altogether. Suggestions that have been put forward in the call for evidence include restricting the scope of SPC to types of work considered to be more ‘vulnerable’ (eg cleaning and security) where the need for protection may be greater and recasting reg 3(1)(b) so that it only covers first generation outsourcing situations. The argument for the latter is that there is a stronger reason for enhanced employee protection and TUPE applying to first generation outsourcing, but in second generation outsourcing and insourcings. such automatic protection is more likely to conflict with commercial objectives (eg a desire to change the staff on the contract). However, second generation SPC might still be caught by the usual test for a transfer under reg 3(1)(a). The government considers that it would be simpler to return to the position prior to 2006 rather than to introduce a variation. There was also divided opinion on whether professional services (eg accountants, IT providers and advertisers) should be exempt from TUPE. The government does not see any merit in producing arbitrary results between different employees, not least because such contracts may still be caught under the normal transfer test under reg3(1)(a).

A return to contractual due diligence?

Currently, there is a duty on the outsourcer or exiting contractor to provide Employee Liability Information under regulation 11(2) TUPE 2006 in relation to employees who are dedicated to the provision of the services. This is to enable the incoming contractor (or client if the service is being insourced) to be aware of the number of employees that are transferring over and any actual or potential legal claims associated with the transferring staff. Breach of reg 11(2) attracts a penalty of at least £500 per transferring employee and such liability can only be enforced in the employment tribunal.

The government is proposing to abolish statutory due diligence under reg 11(2). As of October 2013, the exchange of information will be left to the contracting parties. Going forward, contracting parties will need to ensure that contractual due diligence of staffing issues is included in the commercial agreement, but the scope of such disclosure will be a matter of contractual negotiation.

New flexibility with TUPE and redundancy consultation

Currently, any redundancy consultation in relation to any proposed redundancies taking place after the start of a contract cannot start prior to the transfer. It has been acknowledged that the current commercial practice of allowing the transferee to start the redundancy consultation process with the transferor’s employees (as part of the transferor’s TUPE consultation) is risky and untested in the courts.

The government is proposing to change the law to expressly allow the transferee to consult with the transferring employees prior to the transfer about proposed collective redundancies. This is a positive development. However, there is no statutory requirement to do this as it may not always be appropriate for commercial reasons. In relation to TUPE consultation, this must currently be done via:

  1. the transferring employees’ trade union representatives,
  2. employee representatives, or
  3. the transferring employees in that particular order.

The commercial reality is that it is not often practical to appoint employee representatives (if there is no trade union recognition), particularly where the number of transferring employees is low. The government is proposing to allow employers who qualify as ‘micro-businesses’ to inform and consult with affected employees directly. It is currently unclear if this means ten or less employees, or less than ten employees. Furthermore, there does not appear to be any exemption for service provision changes affecting a small number of employees of a large organisation.

Harmonising contractual terms of transferring employees

One of the practical problems generated by reg 4(4) TUPE 2006, which prohibits post-transfer harmonisation of terms, is that the transferee ends up with a two-tier workforce following a transfer. The government’s proposal is to allow employers to change contractual terms post-transfer if it was mutually agreed and this would have taken place had there not been a transfer or the reason for the change was for an economic, technical or organisation reason (ETO) entailing changes in the workforce. It is questionable if the first proposal will be legally possible in light of Foreningen af Arbejdsledere i Danmark v Daddy's Dance Hall A/S [1988] where the ECJ held that a variation to the employment contract is ineffective if the transfer itself is the reason for the variation, even if the employee agrees to the change and the less favourable terms are offset by other benefits so that the contract as a whole is no less favourable. The new employer will have to demonstrate that the contractual changes to achieve harmonisation had nothing to do with the transfer itself.

Are collective agreements static or dynamic?

The impact of collective agreements on a TUPE transfer is unclear pending the ECJ’s decision in Parkwood Leisure Ltd v Alemo-Herron [2011]. Parkwood will establish whether the ARD allows or requires member states to provide that employees are entitled to the benefit of future collective agreements relating to their original employer (a ”dynamic” approach), or whether employees can only be entitled to the terms of collective agreements applicable at the time of the transfer (a ”static” approach). The Advocate General has recently held that the ARD does not preclude UK courts from giving a "dynamic" as opposed to a "static" interpretation to TUPE. However, this “dynamic” approach would breach the transferee’s rights under Article 16 of the Charter of Fundamental Rights of the European Union (freedom to conduct a business) if their obligation to accept future collectively agreed terms is "unconditional and irreversible". The government considers that a static approach should apply so it remains to be seen if the ECJ agrees with the Advocate General’s opinion. The ECJ’s decision is expected to significantly affect public sector outsourcing as it will determine whether private sector contractors need to honour national collective bargaining pay rates and increases agreed after the transfer.

Whatever is the outcome, the ARD allows the UK to limit the period for which collective agreements would be binding on the transferee. The government’s proposal is to limit the applicability of a collective agreement to one year post transfer.

Flexibility in dismissals

Dismissing employees before or after a service provision charge is notoriously risky for contracting parties as dismissals connected to a transfer are automatically unfair. The government plans to increase the freedom on employers to effect dismissals on a TUPE transfer. Only dismissal as that are ‘by reason of the transfer’ (reflecting ECJ case law) will be automatically unfair as opposed to merely ‘connected’ to a transfer (eg prompted by a knock-on effect of the transfer). This means that dismissals will only be automatically unfair if they were made by the transferee because of the transfer or if the ground for dismissal was the transfer itself.

Furthermore, under current case law, ETO dismissals, which are legally permissible, do not include a change of location. This is particularly pivotal to commercial outsourcing deals which may involve the provision of services by the new contractor from a different geographical area (eg call centre contracts). The government’s proposal is to ensure that a change of location of the workforce will fall within the meaning of entailing changes in the workforce thereby falling within the legal definition of redundancy. This would, in turn, allow a transferee to effect a fair dismissal.

At present, commercial flexibility is also hampered as a transferor can only rely on its own ETO reason for dismissal, not the future conduct of the transferee’s business. The government acknowledges that this is unduly restrictive, puts off buyers and raises the contract price because of the legal risks of claims. As the current case law is based on UK court decisions rather than ARD jurisprudence, the government proposes to remove the moratorium on pre-transfer redundancies. This development will benefit an incoming contractor involved in competitive tendering as so often the price of the contract is also driven by whether employees will transfer over, particularly with contracted-out services that are labour-intensive. Those involved in offshoring will also benefit from this change, particularly incoming contractors based abroad where it is not always practical to relocate UK based employees or for such contractors to make those employees redundant immediately after taking over a contract.

An employee who claims constructive dismissal against the transferor under reg 4(9) due to substantial contractual changes to their detriment cannot currently claim notice pay against the transferor under reg 4(10). The proposal is to repeal these provisions as they go beyond the ARD. Whilst this legal change is sensible, contractors will end up picking up the tab when faced with a constructive unfair dismissal claim.

Source: March edition of Procurement and Outsourcing Journal