On 31 January 2014, new regulations came into force updating the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE"), which implement the European Acquired Rights Directive in the UK. Changes to the regime go some way towards eliminating the "gold plating" of the European Directive that has made the rules such hard work for employers. This briefing set outs the key changes.

HR action items

The new changes allow amendments to employment terms where the employment contract would allow such amendments regardless of a transfer. Whilst the Government's guidance expressly rules out the inclusion of a generic clause in a contract to legally validate any changes specifically on a TUPE transfer, it would be advisable to ensure that contracts contain a generic clause allowing changes to terms in the normal course of business and that other terms, for example, dealing with place of work and job title provide flexibility for changes.

What is TUPE?

TUPE applies to all UK companies when a business is sold or there is a "service provision change" (an outsourcing, insourcing or re-tendering process – see further below). It protects employees' rights when the business they work for transfers to a new employer or service provider. If TUPE applies, employees transfer automatically to the incoming employer, their terms and conditions of employment and continuity of service are maintained and there are protections against changing terms and conditions and dismissals.

Key Changes

  1. Contracts of employment

It will continue to be the case that changes to employees' terms and conditions will not be valid if the "sole or principal reason" for the change is the transfer. Previously, changes for a reason "connected to the transfer" were also invalid, but this has now been removed. The following changes may now be permitted:

  • When the reason for the change is not connected to the transfer;
  • When the sole or principal reason for the change is an economic, technical or organisational, entailing changes in the workforce (an "ETO reason") and the employer and employee agree. From 31 January 2014, new wording has been introduced to bring a change in place of work within the scope of an ETO reason;
  • If the terms of the contract allow the employer to make the change regardless of the transfer (e.g. a mobility clause); or
  • When the contract incorporates terms and conditions from a collective agreement, the renegotiation of terms contained in the collective agreements will be allowed, provided that the variation takes effect more than one year after the transfer (even where the reason for the change is the transfer) and the overall change is no less favourable to the employee.
  1. Dismissals

It will continue to be automatically unfair to dismiss an employee where the "sole or principal reason" for the dismissal is the transfer. Previously, dismissals were also automatically unfair where they were for a reason "connected with the transfer", but this wording has now been removed. Dismissals in the following circumstances may now be permitted:

  • When the reason for the dismissal is not connected to the transfer (e.g. for poor performance); or
  • When the sole or principal reason for the dismissal is an ETO reason (e.g. a genuine redundancy, providing the employer follows a fair dismissal procedure). As noted above, for there to be an ETO reason there must be a "change in the workforce", which now expressly includes a change in place of work. Therefore, relocation can now be an ETO reason, meaning that redundancy dismissals as a result of a change in location will not be automatically unfair. Further, a dismissal for refusing to accept a new workplace location (or an employee resigning and claiming constructive dismissal) in these circumstances will not be automatically unfair.
  1. Redundancy Consultation

Where the incoming employer wants to dismiss at least 20 employees within 90 days (collective redundancies), it can now choose to undertake the obligation to consult with representatives of affected transferring employees about the proposed dismissals before the transfer, provided that the incoming employer notifies the outgoing employer in writing and the outgoing employer agrees. The new regulations allow for collective redundancy consultations to begin before the transfer and continue afterwards.

Both outgoing and incoming employers were, and still are, required to consult with employee representatives about TUPE before and after the transfer. This change means that both TUPE consultation and collective redundancy consultation can now run concurrently.

This is a helpful provision. Redundancies are a common occurrence after a TUPE transfer and the incoming employer will not have to wait until after the transfer has occurred to start the 30 or 45 day collective consultation process.

  1. Information and Consultation

TUPE requires incoming and outgoing employers to inform and consult with elected representatives of the affected workforce before the transfer. If there is no recognised trade union or group of appropriate representatives, the employers must arrange for the election of employee representatives in order to provide information and consult about anything to do with the transfer that would affect the employees. Previously this requirement applied regardless of the size of the workforce. However, the new regulations allow "micro-businesses" (employers with fewer than 10 employees) to inform and consult with employees directly where there is no recognised union or any existing appropriate representatives. The change will only apply to transfers taking place on or after 31 July 2014.

  1. Service provision changes

As noted above, TUPE applies to services provision changes. Broadly speaking, a service provision change occurs when a client outsources activities to a contractor, re-tenders for such activities or brings them back in-house. In order for TUPE to apply there must be an organised grouping of employees situated in the UK whose principal purpose is the carrying out of the activities concerned on behalf of the client.

The new changes are not as far reaching as originally envisaged. In particular, the Government's earlier proposals to abolish the current rules in relation to service provision changes have not been implemented. Instead, the legislation has been amended to clarify that a service provision change will only occur if the activities carried on after the transfer are "fundamentally or essentially the same" as those carried on before it. This reflects recent case law and is therefore not a change in the law, but it is hoped that such clarification will help to remove uncertainty as to when TUPE is intended to apply.

It will therefore be for the courts to determine whether this test has been satisfied. Recent case law has highlighted that there is still doubt as to whether or not a particular transaction satisfies the definition of a service provision change. The courts have significantly narrowed the circumstances in which TUPE applies, causing uncertainty and potentially unforeseen financial consequences for the parties involved. The following key points have arisen from recent cases:

  • There must be a deliberate "organised grouping of employees" for the purpose of carrying out the activities required by the particular client, working together as a team for that client. As such, TUPE will not apply if a contractor provides services to a particular client using different employees, rather than an identifiable team.
  • Only employees who are "assigned" to the organised group will transfer. It is not sufficient for employees to spend most/all of their time working for the client; they must be part of the organised group carrying out the activities. Accordingly, it is unlikely that administrators (HR, finance, IT etc.) or managers will transfer under TUPE, unless their administration and managerial functions are a pertinent part of the activities rather than ancillary to them.
  • The carrying out of the relevant activities must be the "principal purpose" of the organised group. Employees must be organised by reference to the requirements of the particular client; they must be dedicated to the services that are to transfer. Thus, employees organised according to their shifts and not according to the requirements of the client have been held not to be an organised grouping for the purposes of TUPE.

After considering the points made in response to a consultation, the Government accepted that abolishing the service provision rules would create more uncertainty about which transfers are within the scope of TUPE, making such commercial transactions time-consuming and costly. It has also acknowledged that a repeal may increase contract prices and result in providers requiring indemnities against possible redundancy costs. Therefore, the Government concluded in this case that the existing provisions are "necessary" gold plating of the EU Directions and not burdensome for business.

  1. Other amendments
  • The deadline for notification of employee liability information by the outgoing employer to the incoming employer has been extended from 14 days before the transfer to 28 days before the transfer, which should help facilitate the commercial planning process for incoming employers. This change will apply to transfers on or after 1 May 2014.
  • In some circumstances contractual changes arising from new collective agreements agreed by the outgoing employer are not required to be incorporated after the transfer where the incoming employer is not a party to the process. This confirms a previous European Court ruling.

Many of the new changes are to be welcomed by employers. However, it remains unclear how much will actually change until the amendments are tested in the courts or are implemented regularly in practice.