Businesses can be subject to significant employment related liabilities and obligations as a result of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE, for short). In the construction industry this is most likely to occur when services are outsourced or insourced, or when business operations are transferred from one provider to another. Obvious examples include where a service provider is changed in a long term O&M arrangement or a long term framework agreement is re-let.
Under TUPE, certain employees will automatically transfer from one company (normally the customer, incumbent service provider or seller) to another (normally the new service provider or buyer).
Key aspects of TUPE include:
- The new employer will inherit all of the rights, obligations and liabilities of the old employer in relation to the transferring employees;
- Obligations are imposed on both employers to inform and consult with affected employees. Notably, liability for failure to inform and consult can be up to 13 weeks’ uncapped pay per employee, so can be very substantial;
- Restrictions are also placed on whether the new employer can dismiss the transferring employees;
- Employers can become bound by trade union recognition and/or collective agreements which it was not party to and which might conflict with existing employee relations;
- Requirements for the new employer to ensure it has or obtains an appropriate sponsor’s licence for all incoming employees within specified time limits (with fines of up to £20,000 per employee for failing to do so); and
- The new employer can, in certain circumstances, become lumbered with onerous and expensive obligations in relation to pension liabilities.
All of these factors can, in one way or another, influence the bottom line. In a best case scenario, getting TUPE wrong could erode profit margins. In a worst case scenario, it could destroy those margins altogether. There could be unexpected redundancy costs or claims for unfair dismissal.
Not only that, TUPE can have a major effect on a business by undermining business plans or service delivery. For example, if a service delivery plan relies on being able to change employees’ working patterns, the restrictions on changing employees’ terms and conditions under TUPE might prevent this from being a viable option. TUPE litigation tends to be complex too, meaning it can absorb significant amounts of management time and legal budgets.
TUPE doesn’t have to be burdensome. While you cannot contract out of TUPE (a common mistake is to think you can), it is something that can be effectively managed by considering it early and factoring it into business plans. It is also sensible to address TUPE in your commercial contracts, so that if necessary, any risks can be appropriately allocated.
There are many options for managing and allocating risks associated with TUPE. These range from:
- structuring the workforce or transaction in such a way as to influence the likelihood of TUPE applying;
- factoring TUPE costs into pricing assumptions or utilising price adjustment mechanisms;
- allocating risk by way of warranties and indemnities;
- managing the employee relations environment through careful planning and consultation.
The earlier TUPE issues are identified, the greater the range of tools available.