In this webinar, our employment experts will help you focus on successfully managing service provision changes (SPC) and how to solve TUPE related risks.
Siobhan Bishop: Hello and welcome to this Gowling WLG TUPE Club Webinar on how to successfully manage a service provision change.
I'm Siobhan Bishop from the Employment, Labour and Equalities team and I am joined today by Jane Fielding, a Partner in the team and Louise Clifford, a Director in the team, both of whom have extensive experience of advising on all the issues we are looking at today.
The presentation will last for about 50 minutes with some time for questions at the end. Now, just before we get started; a few housekeeping points. The webinar has a few simple controls; the most important are the volume adjuster and the full screen option which are in the bottom of the right hand corner of your player. There are also some tabs along the top which you can click on to access details of today's speakers, some slides and some downloads. You can ask a question at any time, to do that just click on the question tab and type in your question and click submit. We will try and answer as many as we can in the time available. There is also a poll tab. Don't worry about that too much at the moment. At a couple of points during the webinar we will flash up a poll automatically on your screen and we would really encourage you to participate in those and we will share the results live on air. Now if for any reason you can't see your current slide, you just need to click on the side tab to get back to it.
So today we're covering how to manage a service provision change. We will start with Jane Fielding looking at scoping the transfer and then move onto a middle section looking at mitigating employee risks. Firstly on information and consultation and secondly on contractual protection which Louise Clifford will cover. Finally, there's a common challenges on exit section, where we will look at dealing with termination problems.
So, if I can handover to you Jane.
So scoping a transfer, why is it important? Well, before you embark on any of the sort of TUPE related activities, if you think you've got a TUPE transfer, you need to understand the scope of the transfer so you can manage the employee relations risk and also the legal risks in terms of TUPE liabilities and employment liabilities and you need to work out how you are going to approach that from a contractual perspective which Louise will look at later.
But before we look at the sort of employee relations aspect of managing this, I just wanted to remind everyone of the effects of TUPE in basic terms.
So, it's quite draconian left to its own devices. Employees transfer automatically on their same terms and conditions as they had with the outgoing employer. The new employer also inherits claims against the previous employer, any grievances, for example. There are obligations on the transferor in respect of employee liability information and potentially obligations on both parties to consult with employee representatives, as well as inform employee representatives and we are going to look at both ELI and information consultation in more detail as part of managing a transfer successfully.
Just finishing up on the effects of TUPE though first. If you're the transferee, in particular, you need to be concerned or at least aware of the fact that changing terms of employment becomes more difficult. Peopled affected by the TUPE transfer have increased protections against unfair dismissal and if you are in an unionised environment, collective agreements with unions and trade union recognition itself may also transfer. So, we don't have time to cover that today but those are the things to be aware of if you are in a TUPE scenario. If you're the customer or the transferee in an outsourcing situation, then you need to be thinking not only about the contractual provisions and the effect of TUPE when you enter into the agreement but also what the future will look like. What will look like on exit if you're the transferee or transferring to a new provider or bringing it back in house, if you're the customer, and Louise is going to talk in a little bit more detail about that later.
So, the key really is to be prepared and to bear in mind that an outsourcing situation is not the same as a TUPE scenario in an M&A deal, for example, where you've got one transaction to think about. You've got to think about entryies, the life of the arrangement and exits. Also in terms of differences with M&A, normally in an M&A scenario you'll have a deal room and due diligence will be a structured process, you will get access to, hopefully, to quite a lot of information. But in an outsourcing situation, where TUPE is going to transfer the employment liabilities in the same way, you may not have access to that level information. So, you are going to inherit all the employment liabilities as the transferee with some exceptions around occupational pensions and criminal liabilities. But generally you are going to be wanting to carry out a risk assessment, as best you can, of what you are likely to inherit. That will enable you to make decisions about the nasty issues, as we have called them, which are up on the screen there. I'm not going to go through the whole list but those are some of the things we particularly see coming up and needing to be investigated and perhaps dealt with in the contract and, as the incoming transferee, you are going to be reliant on the customer really, to be able to provide you with information, so that you can do your risk assessment. And that's because, under TUPE, the only thing that you're entitled to as a matter of law, is the employee liability information, which is limited. So, this is information that goes from the transferor to the transferee. It can go indirectly through a third party; it could be through the customer. But it is limited both in scope, but also in time, so you only get it 28 days before the transfer and it only has to be accurate 14 days before it is given. So really, in many outsourcing situations, that is quite late, particularly to scope for a bid, but even if you are scoping for bidders to actually then get your house in order before taking the staff on. It has to be given in writing or a readily accessible format and it has to be kept updated once given if it changes, right up to the point of the transfer. In terms of what it is, it is very specific information and it relates to assigned employees, so those employees who are in the scope to transfer to the transferee, but also the second category of staff that we've mentioned on the slide there, which is quite often forgotten in reality, but it is also people who would have been employed and assigned if they had not been dismissed under Regulation 7 which is the bit that says if people are dismissed where the sole or principal reason is the transfer. So it's both those sets of people.
In terms of the information itself, there's a list there on the screen which is also available as a download and you can see from that that it is fairly limited. The starting point is the particulars under section 1 and then there's some other information around disciplinaries, grievances, claims etc.
In terms of complying with Regulation 11, the duty is not limited to purely contractual terms. So, as the starting point of Section 1 of the ERA (Employment Rights Act 1996), that isn't limited to contractual terms, it can be non-contractual, discretionary terms. We've had a recent appeal decision that said because of that the transferor, when giving this information, is not required to label the entitlement as contractual or otherwise. That's additional information which isn't needed and the case in question said that if you do voluntarily give that information, but you don't have to, it is not necessarily a breach of Regulation 11, attracting a penalty. I think, in practice, we would still recommend being wary of giving of any information you don't actually have to give, because that is not necessarily going to save you in every circumstance, that decision may be quite limited to its facts.
So, in terms of ELI, as I've said it's very limited, it does not include everything you would want to see. In particular, it doesn't include information about redundancy and severance arrangements. It doesn't include the full range of administrative information you might want to have around, you know, which provider provides benefits that you may need to replicate to operate the payroll and it is not going to give useful pension information. So, it really does provide a minimum protection for the transferee, particularly in a second generation outsourcing where it also provides the ability to go directly against the transferor rather than have to perhaps go against the customer under any contractual obligation that the customer has entered into, but it really is a minimum protection.
In terms of compensation, or financial penalties, this is again specified in TUPE as a minimum of £500 (per employee) payable by the transferor to the transferee for any breach unless it is just and equitable to award less. There is, as there often is in employment law, a special circumstances defence, but that is very narrow and I really wouldn't recommend trying to rely on that, it's there just for completeness but not to be relied on.
So, moving onto assignment. When we're scoping a transfer one of the key things is to understand who exactly is in the scope to move across to the transferee and this is important both for the transferor and the transferee and any customer in the middle for all the reasons set out on the slide there. It is going to be important for both parties to understand workforce planning, particularly if people have got duties split across different activities, some of which may transfer, some of which may not. Where there is a lot of skills or knowledge on the transferor's part, they are going to have to understand how they are going to deal with that. They may need to reallocate people, if possible, so that they don't lose those skills and it may be both the transferor and the transferee need to be considering whether they are going to have to make redundancies. So, it really is essential for both parties to understand how the workforce assignment works. So when you are looking at assignment, the first question when you're looking at a service provision change, is there an organised grouping of employees, and Louise is going to come on to look at that in a little bit more detail at the end, and the organised grouping is something that has to be put in place with a deliberate intent, it's not just happenstance, that's the first question. If you do have an organised grouping of employees the second question is who is assigned. Now, unhelpfully, as is often the case with TUPE, there is a very limited definition of what assigned is and all it says is assigned others and on a temporary basis. What you're looking at is principally the activities carried out immediately before the transfer and who is assigned to those. Ultimately it is going to be a question of facts for tribunals and it is one of the most common issues that comes up in a TUPE transfer and where there is often dispute which we have to advise on.
So, it's a question of facts, and all of those factors on the screen have to be looked at and considered. So the first one time. I just wanted to flag we often get asked what's the minimum amount of time somebody has to spend on activities to be in scope for transfer? Well, there is no minimum, it's a factor along with everything else but it is not determinative. Often people use the rule of thumb of 50%, just to kind of get a rough feel for who's in scope. But it will not be the end of the story or determinative as I say, and in fact what you probably need to be focussing on more is the grey areas, where people are not necessarily devoting all of their time or have sole responsibility for those activities. They may have responsibilities and they may have value to the business spread across different projects, for example. They may be an area manager and a particular activity falls within their area but their responsibilities are wider. And grey areas can also come up with shared services and central support functions. You can exclude people who are genuinely temporarily with you, like secondees from other employers and you mustn't forget conversely about people who are not present at the time. Perhaps because they are on sick leave or maternity leave but are nonetheless assigned for TUPE purposes.
So, in practice, you need to be considering all aspects of the test where there is scope for dispute, applying those factors and it is necessary to point out that the relevance and weightings of the factors will vary from case to case. So, for example, if you've got junior employees and they don't have responsibilities if you like, they work on a fairly vanilla basis, they're probably going to be fairly straightforward to deal with. But where you've got managerial people, some of the other factors such as value for the business, responsibilities at a managerial level, are going to need looking at and perhaps weigh more heavily in the mix.
Siobhan: Thank you Jane. We're just now going to go to our first poll which you should be able to see on your screen now. And this is a question, in your experience, as a transferee, (so that's as the incoming employer) which employment related issue is the most contentious on commencement?
- Who is assigned?
- Redundancy costs?
- Information and consultation?
- Pre-existing liabilities or claims? or
- Something else?
So if you can press your responses and we will see what comes out of that result and they are coming in now so just a few more seconds. A quick reminder as well, the downloads that Jane has mentioned are available under the downloads tab.
Right, I think we're nearly ready to go, so there are the results. So, that shows that who is assigned is the most contentious issue, well nearly 50% are suggesting that that is the one that they find is the most difficult one to deal with and that probably reflects what we see in practice, would you say so Jane?
Jane: Definitely yes. As I said it is one of the most common things that comes up, particularly if you've got a provider who have lost the contract and perhaps they don't have other work to redeploy people onto. You know if we're advising the transferee we are often being asked to kind of come up with ideas for pushing back on the number of people that are in scope to transfer because the transferee is thinking well of those people can't have been doing the activity, or if they were perhaps that's why the outgoing transferee couldn't price it properly because they've had too many people on it. So, sometimes, you have to come up with very practical solutions for challenging that and perhaps get somebody from within the business, rather than legal and HR, who can sit down with their counterparts and actually sort of run through why do you say this person is assigned, what do they actually do and try and thrash through it that way. But that does involve a degree of co-operation by the outgoing transferor as well.
Siobhan: Okay great, thank you. We're going to move onto the second section now which is looking at mitigating some employee risks and Jane will be covering the first issue we're going to concentrate on, which is information and consultation.
Jane: Thanks Siobhan.
So TUPE has an information and consultation regime set out within the regulations and one of the best ways to mitigate a risk, if you are not going to otherwise have indemnity protection, is to actually conduct the information and consultation process properly and timing is going to be very key in that so we are going to look at that in a bit more detail.
The next slide just sets out what information has to be given to the representatives by the transferor and the transferee to their respective affected staff and that is available as a download is well. Obviously, if you're the transferor, you can only pass on information about the transferee's measures if you have received that information from the transferee and typically the transferor will write to the transferee asking for that information fairly early on in the process.
I also just want to flag on here the information about use of agency workers. It is the same obligation that appears in collective redundancy consultation as well, where it is a bit more logical to have that, but it also applies here in the TUPE context. It's giving information about how many agency workers the business has, the transferor has, where they are and what they do and it's anywhere in the transferor's or transferee's business respectively, depending on which party you are, not just in the part of the activities, the part of the services, that are going to be transferring. So it's quite onerous and easily overlooked.
In terms of the information duty, it is a distinct duty, from the duty to consult and it is going to apply in every TUPE transfer. There is a qualified exemption if you are a micro business with fewer than ten staff. It is only qualified mildly though really because you still have to give the information, it's just that you can give it to the staff directly, rather than to representatives, and only if you haven't actually invited them to elect a rep, but it's quite a limited exemption there.
In terms of when you give it, again TUPE is not particularly helpful, it says long enough before the transfer to allow the employer to consult the rep of the affected employees. And just note there, this information and in turn the consultation obligations are relating to affected employees, not just those in scope. So, if someone at the transferor is going to lose part of their job, but they are not sufficiently in scope to transfer then they are still affected and they should be part of this process. Now the timing is going to vary, depending on the number of staff involved and the extent of any measures that need to be consulted about. But even if you've got the most basic, no measures, for a small group of staff really you are still looking at sort of 14-21 days as an absolute minimum.
So, in terms of the separate duty to consult, this is triggered, as a mandatory consultation, if an employer of affected employees envisages measures in relation to those employees and again it is with the appropriate representatives. So often, when we talk about consultation and we help with consultation processes, what we are actually helping with is the transferor not having any measures of its own for its staff that are in the scope to transfer, but it is actually facilitating the transferee coming in to talk to the staff about things it plans to do once it is the employer. So, neither has an obligation to consult but the parties work to co-operate for a smooth transfer.
In terms of appropriate representatives then, this is that the primary obligation is to consult with them. If you are in a unionised environment and there is a recognised trade union in place, then they have the primary right to be consulted with by the employer. If there's no union or the union recognition doesn't cover all the staff who are affected, then for the residual group, who are not under union recognition, then the employer has a choice. It can either invite the staff to specifically elect reps for this TUPE exercise or, if there's a pre-existing body elected for another purpose which has the remit to be consulted about TUPE, then the employer can chose to consult with them. Now, in our experience, there are pitfalls of going with a pre-elected body because sometimes the requisite authority might not be there or it might be overlooked. So often employers will go with a fresh election, but we have just flagged some pitfalls there to check depending on whether you're unionised and if you do have a pre-existing body you want to look into.
In terms of why it is important to get this right, there is a penalty regime rather than a compensatory regime. So, if you do nothing in relation to the information and consultation, the tribunal, their starting point will be to award a maximum of 13 weeks' gross pay per affected employee. So if you have a Finance Director or someone in the business who is resisting doing this, a good shorthand is to say well the potential penalty is a quarter of the annual wage bill for all the affected staff, that quite quickly mounts up. If you do do something, then you can obviously argue down from 13 weeks' and the tribunal makes the award on a just and equitable basis. Again there is a special circumstances defence but it is very special and even in insolvency situations almost never applies. So again, I wouldn't get too excited about that.
Just finally to flag, there is now an opportunity, if you're the transferee and you know you are going to be in a collective redundancy situation, so 20 or more people in scope to be made redundant shortly after the transfer, you can with the transferor's consent do pre-transfer collective consultation for redundancy, or at least start it. But you still need to be the employer to actually do the dismissal, so you still can't dismiss until the transfer has actually happened.
So, just a few practical tips to end on, in terms of information and consultation. When you are planning the process you need to factor in time for elections, if you are going to invite employees to elect representatives. All we would say is that takes a minimum, unless you've got literally a handful people, any sizeable group is going to take about a week but it could take longer if you've got people on shift patterns for example or a shutdown. You need to factor in sufficient opportunity in the timetable for voluntary consultation. So even if there is no mandatory consultation because no measures are envisaged, then case law says you've still got allow an opportunity for reps to ask questions on behalf of their constituents. So again, if you've got to shutdown that won't be a good time, you need to extend the timetable with that in mind or take a risk that you will be shortcutting the process.
You have to consult with a view to reaching agreement, so that's helpful in the sense of the reps don't have a right to veto the transfer, but you do need to show that you have entered into it in good faith and we would recommend having a document trail that shows the extent of the information and consultation exercise. So you will want to have minutes of meetings, perhaps on a larger scale outsourcing you will want to have frequently asked questions, running documents to capture the ebb and flow of the questions and the answers that have been given. If you can keep something back in terms of showing some movement during the consultation process then all the better.
So, I think there's a download in your pack which shows the basic summary of information and consultation. But I am now going to move on and handover to Louise who is going to deal with the contractual ways to mitigate risk.
Well, as Jane said, another key part of mitigating risk is what you actually put in your contracts. Now before we look specially at the type of provisions you might expect to see, I just wanted to reflect briefly on the actual structure of an outsourcing transaction and how that might impact on the drafting and negotiation of contracts.
Now set out on the slide is a diagram showing the basic structure you would expect to see in second or subsequent generation outsourcing situation. And what you can see from that slide is that in the most basic situation you going to have technically three parties in the picture. It might be many more if you've got multiple providers and subcontractors as well. You are also going to have typically at least two contracts which are potentially relevant to the same transfer. But you can also see from the slide is that TUPE itself operates independently of any contract. So the transfer is actually between the outgoing service provider and the incoming service provider, it is indicated on the slide by the dotted line. Now, in the vast majority of circumstances, there won't be a contract in place between those key parties, so both the transferor and transferee are likely to be relying on their contract with the customer to obtain the necessary protection.
Now, a number of important points flow from that. The first is that to a certain extent parties will be operating potentially within the constraints of the existing contract and what that says about TUPE. So, for example, if you're a customer and you've already agreed to provide certain indemnities in relation to staff who transfer on exit, then that is going to dictate what you may need to back off in your new contract. Conversely, what protections you get from the incumbent service provider in your contract will potentially dictate what you're prepared to flow down to the new provider.
The other point that that diagram flags is that it's typical to have regard at the outset to what your exit plans are. So the time for getting necessary indemnities and warranties and so on in relation to exit is at the start of the contract because you're not likely to get another bite of the cherry.
So moving on then to the specifics of what you would expect to see in the contract. Well, Jane has already spoken about the kind of draconian effect of TUPE particularly with regard to the automatic transfer of liabilities from one provider to the next. In broad terms, what the parties to a provision change will be looking to do in their contracts is to redress those draconian effects of TUPE by making sure that the parties are only going to be liable for that period of time when they actually employ the staff. So, the first area that you would expect to be covered by indemnities are employee emoluments and outgoings, that's things like TAX, NI, salaries, benefits and so on and also claims that arise from acts or omissions of the other parties to the transfer. So that can be unfair dismissal, discrimination claims, breach of contract and so on. The way apportionment would physically work is that the transferor will pick up all liabilities relating to the pre-transfer period and the new provider will take on responsibility for employee liabilities going forward, in the respect of the period going forward. You do need to watch out for certain liabilities that may not have crystallised by the time of the transfer. So, holiday pay is a good example. So, what you have with holiday pay is employees accruing rights to leave in respect of the period up to the transfer and they may have taken more or less than they are actually entitled. Now the actual cost of that holiday entitlement is not necessarily crystallised until some point later. So often you'll get a provision for a balancing payment to be made either to or by the transferee depending on whether the employee who has transferred has taken more or less holiday than they've actually accrued by the point of the transfer.
Bonus information is another area where you might see specific apportionment provisions particularly, if, for example, you've got a new provider taking over staff part way through a bonus year and in those circumstances there is likely to be some kind of provision whereby they can become a part of that payment from the transferor or via the customer.
The next area where you might to expect to see specific provisions is in relation to specific claims that aren't necessarily covered by the pre-transfer acts and omissions indemnity. Now these are the exception of the rule. You don't always see this type of provision. But a good example of where you might need one of these provisions is where there is, for example, a known equal pay liability. In that situation, you could have a transferee inheriting an existing claim but also accruing further liability in relation to that equal pay issue from the start of the new contract. In that situation, you may want a broader indemnity than is provided by the pre-transfer acts and omissions indemnity.
The third area you would expect to see covered is in relation to information and consultation, which again we talked about, and here it is usual to have fairly straightforward reciprocal indemnities between the parties in relation to each of the failures, if any, under the obligations under TUPE. You might also see more general provisions whereby the parties effectively agree to co-operate in terms of the information consultation obligations.
Now those three areas you would expect to see covered in very similar ways both on commencement and on exit from the contract. What you also need to consider, both as a service provider and a customer, is what extra protection you need in relation to the lifespan of the contract. First of all, if you're the service provider, you need to think about whether there could be additional TUPE transfers after the initial transfer of staff on day one. And that could arise, for example, where the customer retains the ability to add in extra services during the life of the contract. Now if there's a chance that those additional services can trigger another service provision change then the service provider will want to ensure that they are protected against inheriting further employee liabilities. Looking at it from the customer's point of view, the customer is likely to want robust exit provisions relating to employee information. The ELI provisions that Jane talked about, which kick in 28 days before the transfer, should be very much seen as a basic back stop if you like. In most cases the customer will need access to more information and at an earlier point in the process. Particularly if there is going to be some kind of formal re-tendering process on exit, the customer is likely to need an employee information several months before the end of the contract in order to be able to share that with future potential providers and bidders.
The other thing the customer is going to want to be covered are what is referred to as workforce 'status quo' provisions. You may have seen these, these are kind of standard restrictions that you see kicking in, once notice has been served or a certain number of months before exit. What we mean by this is that there are restrictions that stop the service provider making key changes to the body of employees who may ultimately transfer across. So it's things like restrictions on changes to terms and conditions, adding in extra staff that haven't previously been on the contract, removing key staff that might be fundamental to the services so far. The reason for having these factors in is effectively two-fold. First of all, they're to avoid the new provider inheriting some poisoned pill and lots of additional costs from changes having been made at the last minute. It is also to help ensure that there is not a watering down of the skills and knowledge that they are going to be needed by the new provider in order to be able deliver the services following exit.
So, just a couple of general points on the contract. The first is that you need to remember that what you put in the contract, particularly around TUPE, will also have a direct impact on what is happening on the ground. So, it's not a case of doing the contract and then outing it away in a drawer. There needs to be clearly co-operation between the leading commercial team and the HR team and you will need to refer back to the contract at later points, particularly on exit to see what obligations you might have agreed to. Just to give a simple example. If you are a commercial party and you are negotiating provisions about employee information and when that is going to be provided, there is no point arranging to do that within seven days if your HR is going to need 21 days to collate and deliver that information. So there needs to be a dialogue with the relevant people who are going to be operating the contract from the start.
The other point about outsourcing agreements, and particularly the TUPE clauses, is that, unusually, you are actually looking to extend the protection to cover third parties in a lot of cases. So, if you are the service provider, you will be looking to ensure that if you are planning to flow down a section to subcontractors then they are covered. Similarly, if you are a customer, you want to make sure that when you come to retender the services in future, any new providers are protected in relation to the same TUPE issues. Now the simplest way to achieve this in fact is often just to make sure that the indemnities are expressly made in favour of all the parties who need to benefit from them. But what you must remember, if you do do that, is to make sure that third party rights, the rights that enforce those indemnities directly aren't excluded in some of the part of the contracts.
Just some practical tips on mitigating risks before we leave this section. First of all, make sure you understand the structure at the start, understand what contracts are in play and also understand what events may trigger a TUPE transfer. Remember to discuss that existing contract and work out what existing commitments may already cover the service provision change in question and going forwards make sure you have robust, practical protection to protect you both at the start and end of the contract and during the life.
Finally, start early, Jane talked a lot planning, TUPE itself is quite light in terms of specific deadlines but certainly the earlier you start the planning process the smoother the ultimate process is going to be and the better the outcome for all parties.
Siobhan: Thank you Louise and as Louise mentioned we are now moving to the last section of the day which is looking at some of the common challenges faced on exit and we are looking at the risks and solutions there. So, back to Louise.
Louise: Thank you Siobhan.
Yes, so the focus of today has been predominantly on what you do when you've got a service provision change when it is known and understood that the staff will be transferring on commencement. But what happens if things aren't so straightforward when you get to the exit? In particular, when might you encounter the specific arguments that TUPE doesn't apply.
Again, before we look at the specifics, there are just a few general points we want to start with. First of all, you always need to consider the potential application of TUPE on exit even if you don't think it will apply. In my experience, where TUPE applies at the start, the parties will naturally be thinking about how it is going to impact on exit. Where it is sometimes missed, however, is where the parties might be entering into a contract for a brand new service where staff aren't transferring to the service provider on day one and parties may not anticipate how the services can evolve over the life of the contract and how a dedicated workforce can build up. So, always consider it even if you think the application of TUPE is a minor thing. And actually go one step beyond that. It is safest in all cases to assume that TUPE will apply, it will apply in the vast majority of outsourcing situations where you've got a dedicated body of staff. Even if it doesn't apply by making the assumption that it will, you can make sure that you've got the appropriate protections in your contract to make sure that all parties are protected at the end of the contract.
Finally, do of course watch out for some of the more complex situations which we are going to come on to talk about.
I should just say before we move onto the challenges themselves, all of these challenges relate specifically to the service provision change test. As Jane has already mentioned, there are two tests where TUPE can apply, the other being the kind of classic business transfer test that you encounter in M&A transactions. So what you need to remember is if any of these arguments succeed and the SPC test does not apply you still need to remember to go back and check whether the transfer could actually amount to a business transfer.
So, the first common challenge I am going to look at is where activities change, or where they allegedly change. Now for the SPC test to apply, the services provided by the transferor have to be fundamentally the same as those provided by the transferee. As you'd expect with TUPE, there is no clear test or guidance to set out how exactly we work out whether services are fundamentally the same. But there are some kind of pointers that we can take from the case law.
The first is that you need to apply some ordinary common sense approach to the meaning of 'fundamentally the same'. So you should disregard any minor differences in the way services are delivered or in what the services entail. What we also know is that there can actually be more than one transferee, it's not necessary that all of the activities provided by the original provider are then replicated by a single new provider. Ultimately though, it is going to be a question of fact and degrees as to whether the services have changed fundamentally or not and that is going to require a detailed analysis based on the specific facts.
Some practical tips though, if you are faced with this situation. As a starting point, you need to look the complete factual description of activities in both the old and the new contract and that might give you some kind of flavour as to what the nature of any changes are. But the analysis shouldn't stop there. What we also know from the case law is that you have to focus on what was actually being done before and after the transfer on the ground. So, for example, TUPE has been held to apply in a situation where both the transferor and transferee are operating under a framework agreement that gives them neither a guarantee of any work nor indeed any obligations to perform any activities. And TUPE was held to apply based on the analysis of what was happening on the ground, the activities that were being carried out were held to be fundamentally the same. You should also look out for the fact that you can have a split along functional lines, we had this confirmed recently by case law, and essentially it is now clear that in the same way as you would have a transfer of part of the business in an M&A transaction you can have a transfer of part of the activities.
The second potential area for challenge is fragmentation which is actually closely related to the first point and what we mean by fragmentation is essentially where activities are split between multiple providers. Now, as we've already seen from the previous slide, it is not every case of fragmentation which will defeat the application of TUPE. We've already seen that you can have a service provision change where the services are split along functional lines. Equally, where services are split along quantitative lines, for example, where one service provider is replaced by two new service providers and one of those takes over the greater part of the activities then again TUPE can still apply. So, the key question you have to ask yourself is whether there's what the cases refer to as a discernible pattern of relocation post transfer. And what that essentially that means is, is there any way of actually tracking through where particular activities have ended up? If there isn't, then the SPC test might not be met.
The third area of challenge, and you might think one of the most common issues we face in practice, is whether or not there is an organised grouping of employees. Now, for the test to be met the organised grouping must have as its principal purpose providing the relevant activities on behalf of the client. So although a grouping can refer to a single employee, if that single employee or grouping delivers services to a number of different clients and with different needs for priority, you can say that it would be difficult to make out the argument that the activities of one client forms the principal purpose of that grouping. But another difficulty that has been brought about by the case law and that is a fact that an accidental grouping of employees isn't enough. You have demonstrate that there has been some deliberate planning or intent in putting together a group of employees for the purposes of the activities. So what you are really looking for is some evidence that the employees have been organised by reference to a specific contract or client.
The next point I want to look at is where you've got a change of client. Now this issue first arose actually in a property management context where there was a change of property manager in relation to the sale of property at the same time as a sale of the building that was being managed and what the Court said in that particular case was that for the service provision change to be met you had to have the same client both before and after the transfer. It is not often going to crop up, but it has been suggested that the same kind of principle could apply in relation to subcontractors. So, the suggestion is that if you have a change of subcontractor at the same time as a change of prime contractor, then you might not be able to point to a common client. Now, in reality, I don't think that's going to occur in many cases, because in most situations it will be relatively clear, or at least in my experience that subcontractors are providing activities on behalf of the ultimate customer. But depending on the nature of the relationship between the subcontractor and the prime contractor, that is potentially an argument that is open to the parties.
The final potential planning difficulty, I just wanted to mention very briefly the exceptions under these, these are set out in the Regulations themselves. I am not going to cover these in great detail because they don't crop up very often. TUPE specifically doesn't apply where the contract is solely for the supply of goods for the client's use and neither does it apply in connection with a single specific event or task of short term duration. Now, there is quite a body of paper which we don't have time to go through today in relation to both of those points, but if you do think either of those potentially applies then you should take further advice on that.
Just to summarise where we've got to in terms of managing challenges. First of all consider the impact of how these challenges should impact on the way you actually manage your workforce. So, for example, if you're the provider and you want TUPE to apply at the end of your contract, make sure, for example, that you have a clear organised grouping of employees delivering services. Also consider future proofing. So think about the ways in which a customer might look to retender in the future. Is there are a chance, for example, that services might be subdivided into smaller lots, is that likely to be along a quantitative or qualitative line? Think then about how that might impact on how you manage the workforce in the meantime.
Finally, if you're concerned about the potential for TUPE not to apply on exit, then you ought to have the option to seek a redundancy costs indemnity. Of course, whether or not that can be obtained will depend on the particular commercial realities of the transaction in question.
Siobhan: Thank you very much Louise.
That brings us onto the final poll, after which there will be a chance for questions. So there is still time for you to submit a question under the questions tab. But in the meantime we have the poll, so please participate in that and we are asking in your experience as a transferor - so that's as the outgoing employer - which of these is the biggest problem on termination:
- Whether TUPE applies?
- Workforce planning and who is assigned?
- Information and consultation process?
- Risk of claims?
- Something else?
I will just give you a few moments to go to the tab there to vote for your experience and let us know how you find this works on the ground.
On the questions, we've had a few coming in, particularly relating to assignment which reflects the answer to the first poll which said that assignment was one of the most common issues for difficulties on commencement. So it would be interesting so see how we fare in relation to assignment on exit as well.
Okay, just a couple more seconds and we're ready to push those poll results out now. So, on termination the biggest issue is whether TUPE applies, which again reflects what we see particularly in the case law which has challenged almost every aspect of the definition of the service provision change in minute detail.
Louise: Yeah. I'm not surprised by that outcome and I think when service provision change assessment was originally introduced the idea was that it would provide some certainty to parties, because prior to its introduction the parties were trying to shoehorn outsourcing situations into a business transfer text. So, whilst it did provide an initial element of certainty, the actual growing body of case law over recent years has I think led to more potential challenges than we ever thought possible. The fact that we don't give a purposive interpretation to the wording of the service provision change, because it is not based on EU law, I think also it impacts on the level of certainty because I think under the old rule you could always guarantee that once you applied the kind of purposive interpretation you know what might be a kind of 50:50 case would dissolve into being a TUPE transfer, but we don't have that now, so that doesn't surprise me.
Siobhan: So just to confirm that was 32% of you saying that whether TUPE applies was the biggest problem on termination. But it was quite closely followed by who is assigned at 28%.
So we will turn now to some of the questions that have come in and as I mentioned there have been quite a few on assignment. So the first one, Jane, we will go to you to ask you - relating to staff on long term sick leave how do you decide if they are assigned?
Jane: Okay, well, just because someone is on long term sick leave doesn't rule them automatically out of being assigned or in. It is part of the factual scenario which, as I mentioned earlier, you have to look at all the relevant facts. There has been case law, fairly recently, although the litigation did settle before we got a further appeal decision in it, about a person who was on PHI. But even the fact that someone is on PHI insurance cover and getting the benefit of that doesn't automatically rule them in or out. In that case it was quite specific to its facts. The individual had been on PHI for some time and the managers in the transferor had actually reached an internal decision, which the tribunal had evidence of, that in fact this individual was not going to come back to the business and they had sort of functionally taken him out of the area of the business that subsequently transferred. So, on those facts, that individual was not assigned because, you know, his current employer had effectively de-linked him from the part of the business that then transferred. That is not going to be the case with everyone who is on long term sick leave or PHI. Some people do actually come back from PHI and it is genuinely rehabilitative. So, its part of the factual scenario, but you still need to look more closely at, you know, how ill the person is, what the prognosis is, how have they been treated by the transferor internally and if they are still being treated as part of that area then they may well be in the scope to transfer.
Okay, there is another question on assignment as well - what about when someone is actually employed in another group company but spends all of their time in the company that provides the services?
Well, if they're not being provided under some sort of structured secondment arrangement, whereby they could be pulled back by their original employer, there is European case law which was exactly the sort of intra-group provision of employees by perhaps by one group company which then sort of provides services out to other group companies. An individual there was dragged along with a TUPE transfer from his employer with the business that actually sat in a different group company. So again, it's not the end of the story and it's not determinative, so you are going to have to look at the specific facts to see whether somebody can be dragged along from a different group company.
Siobhan: Okay, we'll move onto another topic now which is, there has been a question about employee liability information. So how common is it to have additional requirements over and above ELI in an outsourcing scenario?
Jane: It's fairly common, obviously when you first go out to tender on something then, as the customer you are going to have all the information when you first contract out.
But when you're looking at second generation outsourcing, if the customer has properly catered for exit, as Louise talked about, then they are likely to have built in more onerous obligations on the outgoing provider, well the incumbent, I should say because they may obviously be reappointed, to provide information for a tender process. You know six months out, sometimes longer, and sometimes the customer, well quite often the customer, will build into the contract the ability to ask for information for legitimate business reasons at any point along the way, but perhaps limited in terms of the frequency with which they can ask until they get to that kind of pre-termination period.
Siobhan: So ELI is really just a fall-back position and you are really looking for something more, ideally?
Jane: That's right yeah. Ideally, as the customer you would build that in and if you're the incumbent then you need to be mindful of those obligations when you are coming up to the end of the contract and make sure you've got your ducks in row to comply with the contractual obligations you've signed up to.
Siobhan: Okay, another question, looking at information and consultation - so this is setting out - if there are series of transfers, because services are moving across in waves, can you do all the information and consultation at the beginning or do you need to do it on each occasion separately?
Jane: Okay, well that does quite often happen with phased transfers. The way to approach this is that you do as much as you can upfront at the start, which would necessarily involve telling the reps that is going to be phased transfers and giving them the best idea of the timetable for that and how the phases are going to operate. But what we wouldn't recommend is doing the first phase and then closing that information and consultation exercise because it may be that things change along the way. So we would generally advise keeping it open and doing as much as you can at the start and then sort of topping up, if you like, as you go along. So what you don't have to do is do a wholesale new exercise for each phase of the transfer and just in terms of planning ahead, which has been one of the main themes of this webinar, if you have got phased transfers then obviously you need to keep an eye on who the reps are because what you don't want to do is have somebody elected who then moves out on phase 1 potentially, or at least you need to make sure you have got a quorate body until the last one of your phased transfers has happened.
Siobhan: Okay the planning is key as always.
Siobhan: Thank you. Louise there's a few questions here I think that you might be best placed to answer - there are some about redundancy. So, the first one is what is essentially included in a redundancy indemnity?
Louise: Well, essentially you can draft it as narrowly or as broadly as appropriate to the circumstances or what is commercially acceptable. So it could include, for example, simply notice pay and statutory redundancy. It could go on to cover contractually enhanced redundancy payments. It might even, in some cases, be drafted so broadly that it might cover the costs of claims arising from the redundancy process, or if the process has been carried out incorrectly to cover unfair dismissal costs. Of course if you're the party giving that indemnity, that kind of thing you would want to resist quite strongly because you're not in control of that initial process. But it basically is as broad or as narrow as is appropriate for the particular situation.
Siobhan: Okay. Another question deals with a specific scenario which is who would pay the cost of redundancy of staff if there is no contract in place and the likelihood is that the new supplier will be based in a different location?
Louise: Well, legally the position is that the transfer of staff to the new supplier will be triggered as soon as responsibility for the services has transferred. At that point, the transferee takes on all responsibilities for the employee in terms of their future contract, subject to any indemnities that it might obtain, but we were talking about a situation where there is no contract. So, the decision to move the work to another location would be treated as a business reason of the transferee and whilst that would give you a potential fair reason for the dismissal, namely redundancy, there are other responsibilities that arise from that and those would fall to the transferee, so it would certainly be a case of the transferee's responsibility unless they can actually negotiate with the customer who hopefully may be covering an element of those costs.
Siobhan: Okay, so looking at the contract as well, again if you are the client and you realise that your current contract is not ideal in terms of the protection that they give on termination, what can you actually do about that?
Louise: Well, you've got a number of options, I mean you could introduce a flow down of whatever protection you've got, regardless of how narrow. Or you might choose to give no protection at all to the new provider. Of course that would make it be difficult for the provider because they've been asked to give an estimate of the price for the contract because they are dealing with a series of unknowns effectively, they don't know what potential liabilities they might inherit and that in turn can potentially push up the price of the contract. So the customer has to take a view as to whether they want to take on some risks themselves at that point and offer their indemnities, notwithstanding the fact that they may not be backed off properly or to only provide limited protection and bear in mind that can impact on the price for contracts. In principle, there could be an attempt to try to renegotiate with the current provider but that is likely to be commercially very difficult at that point. I mentioned during this talk that actually you really only get one bite of the cherry, generally speaking, that's at the start of the contract and that's the point at which you try to set out what protection will apply on exit.
Siobhan: Thank you very much Louise and thank you to the audience for sending in your questions and for participating in the polls. I am afraid that's all we have time for today, so thank you for joining us. Please don't forget that the slides are available on the slide tab and the downloads that we mentioned as well and if you have chance please do give us any feedback and if of course there is any question that you have that have arisen out of today's webinar, please do feel free to contact either Louise or Jane. Thank you.