The Transfer of Undertakings (Protection of Employment) Regulations 2006 introduced a new type of TUPE transfer: service provision change. Anthony Korn summarises the current state of play as to when these provisions will apply.

Background

Regulation 3 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) defines when there will be a relevant transfer for the purpose of TUPE. Regulations 3(1)(a) represented a statutory codification of the pre-existing ECJ (as it then was) jurisprudence on this topic. Regulation 3(1)(b) represented an extension of the TUPE provisions to cover a service provision change (SPC) in one of three situations: first when the service was “contracted out” by a client under a first generation contract, secondly where, as a result of a re-tendering process, the service was awarded to a new provider (a second generation contract) and thirdly where the service reverted back “in house” to the client. (Earlier this year it was established by the EAT in Hunter v McCarrick [2012] IRLR 274 that these provision only apply where the client remains the same)

However the SPC provisions only apply where the conditions where the conditions set out in Regulation 33) are met namely that immediately before the SPC (i) there is an organised grouping of employees situated in Great Britain which has as its principal purpose the carrying out of the activities concerned on behalf of the client and (ii) the client intends that the activities will, following the service provision change be carried out by the transferee other than in connection with a single specific event or task of a short term duration. In addition the SPC provisions do not apply where the activities concerned do not consist wholly or mainly of the supply of good for the client’s use.

The rationale behind this provision, as explained by the Government at the time, was “to reduce such uncertainty [leading to unnecessary disputes and litigation]...by establishing a position in which the UK service provision changes will, subject to certain specified exemptions, be comprehensively covered by the legislation. Businesses and employees will thus be clearer where they stand”.

Defining activities

A common thread running through these provisions is that the focus is on the activities which constitute the service rather than the retention of identity of the service. In Ward v Hadaway (Solicitors) v Love, Scott and Capsticks [2010] All ER (D) 250 (May), the Appellant was a member of a Panel which provides legal services to the Nursing and Midwifery Council (NMC). There was no obligation on the NMC to refer cases to any particular member of the Panel and there was no obligation on any member of the Panel to accept the work. The contract came to an end and the NMC decided (after a process of competitive tendering) to award future work to Capsticks on a slightly different basis in that some of the preparatory work would be done “in house”. The Employment Tribunal concluded that there was no service provision change as the activities-essentially the work in progress- did not transfer to the new provider. The ET also concluded that the future likelihood of the request for the provision of legal services in the event of future instructions “could not be regarded as ‘activities carried out by Ward Hadaway’” and therefore there was not SPC. The absence of any mutuality of obligation in the provision of work appears to have played a significant part in the conclusions reached by the ET whose ruling was upheld in the EAT. The position may be different if the work of a particular client transfers from one firm to another. In those circumstances, it is likely that there is a SPC (Royden and ors v Barnetts Solicitors (2009) ET No 2102451/07).

Fragmentation of the activity

It is well established that the TUPE Regulations apply not only to the transfer of an undertaking but also to the transfer of part of an undertaking. In principle the same applies to an SPC (Kimberley Group Housing Ltd v Hambley [2008] ICR 1030). However it is now well established that the activity which transfers must be identifiable in whole or in part as transferring for it to transfer from the transferor to the transferee. In Thomas-James v Cornwall County Council (Case No 1701022), an ET ruled that there was no SPC where it was not possible to identify the entity to which transfers. The case involved 17 different companies who held contract with the Legal Services Commission to provide legal advice services over the telephone. When the contract came up for renewal it was decided to limit the number of service providers to 9. The Employment held that there was no SPC because it was not possible to identify those to whom the relevant hours were allocated before and after the transfer. The judge said that there must be some nexus between the activities carried out before the transfer and those carried out by the incoming contractor or contractors after the transfer. This approach was approved and adopted by the EAT in what is currently the leading case on this point (Clearsprings Management Ltd v Ankers and ors (EAT/0054/08). Further references to the ‘fragmentation’ of the service point is made by the EAT in Enterprise Management Services Ltd v Connect-Up Ltd [2012] IRLR 190. What is less clear from the developing case law is when the activity will be regarded as so fragmented that it will cease to transfer under the SPC provisions?

Fundamental changes to the service

Despite the fact that the retention of identity is not a requirement of an SPC, there is a growing body of authority to the effect that there will be no service provision change where there is a fundamental change in the service to be provided. In Metropolitan Resources Ltd v Churchill Dulwich Ltd [2009] IRLR 700, the EAT ruled that the “multifactorial” approach in ordinary transfers does not apply in deciding whether or not there is an SPC but the EAT did acknowledge that there may be no SPC where there was a fundamental change in the service (which excluded minor changes). This was applied in OCS Group UK Ltd v Jones (EAT/0038/09) where the EAT upheld a Tribunal’s ruling that there was no SPC where the catering service provided by the new caterer was fundamentally different from the provided by the old caterer in that the new caterer simply offered a dry goods kiosk whereas the old caterer offered a full canteen service. Similarly in Healthcare NHS Trust v Hamshaw (EAT 0037/11), the EAT ruled that a care service carried out by two private providers which involved looking after adults with learning disabilities in their private homes was fundamentally different from the previous service which involved residential care and therefore there was no SPC. Similarly in Johnson Controls Ltd v (1) Campbell and (2) UKAEA (EAT/0041/12), the EAT upheld a Tribunal conclusion that there had been no SPC where a centralised taxi bookings service had been taken back ‘in house’ by the client of the service as thee service was no longer operated as a centralised service. The EAT summarising the caselaw opined that the critical question is whether the activities carried on by the subsequent contractor are fundamentally or essentially the same as those carried on by the original contractor, although minor difference should be ignored. What is a minor difference? In Enterprise Management Service Ltd v Connect-Up [2012] IRLR 190 the EAT upheld a Tribunal’s ruling that a variation to the original IT support service which amounted to 15% of the work done by the organised grouping of employees was sufficiently ‘fundamental’ to amount to a change in service even though 85% of the contact involved administrative work which was included in the new contract. In time honoured fashion, the answer is probably that it is all a question of fact and degree.

Regulation 3(3) conditions

There have also been some recent developments on the Regulation 3(3) conditions summarised above. In Eddie Stobbart Ltd v Moreman [2012] IRLR 356 the EAT ruled that the fact that a group of employees in practice (without deliberate planning or intent) spend most of their time working for a particular client (on the facts a group of night shift workers) does not mean that they are a organised grouping of employees for the purpose Regulation 3(3)(a). It remains to be seen how this decision is applied in practice as it is questionable that this provision imposes the kind of formal arrangement envisaged by the EAT. The exclusion in Regulation 3(3)(b) was applied to a group of assembly workers who were involved in assembling axles on commercial vehicles in Pannu v Geo W King Ltd [2012] IRLR Ltd 193, which was reported in greater detail in our Spring Newsletter.

Conclusion

As stated above, when the SPC provisions were introduced, it was hoped that that they would bring clarity and certain. At the time if clients had asked “do these provision apply where activities are taken over by a new contractor?”, he answer would have been “normally yes” but in the light of the developments referred to above, the answer now is that it will all depend on the particular circumstances and the SPC provisions will only apply with any certainty to straightforward changes in service providers.