The law relating to the protection of employment on business transfers is the legal world’s answer to the shape-shifters of science fi ction. Just when it begins to take shape, like the T-1000 terminator in Terminator 2, it suddenly transforms itself into a new shape – making it hard for employers to keep sight of where the current law stands.

The root of the problem lies in the over-arching EU directive1. The original directive was intended to “safeguard employees’ rights in the event of the transfer of an undertaking, business or part of a business” and was aimed primarily at mergers and acquisitions as opposed to outsourcing and/or replacement of service providers.

Whilst the purpose of the original directive was clear, the wording of the directive itself was not as detailed as it might have been.

As a result, the implementation of the directive by member states varied widely. Since 1977 there have been numerous judicial decisions from across Europe, setting out various interpretations of the directive and determining whether or not the facts of the individual case amounted to a TUPE transfer.

To give an example of the differing approach of members states, in Germany failure to follow procedure and/or consult with the affected staff and, more specifi cally, the local works council, can cause the transfer to be delayed or even blocked altogether. Also in Germany, unlike in the UK, staff who refuse to transfer are not deemed to have resigned.

In the UK in 1981, the then Conservative Government didn’t like the new directive at all. It confl icted with their efforts to reduce costs in local government by transferring thousands of public sector workers into the private sector (on private sector terms and conditions) via the programme known as “Compulsory Competitive Tendering”. The Government, however, was obliged under EU law to enact the directive. In an effort to keep the cost-cutting drive on track, they came up with their own idea to reduce the impact of TUPE by including a new exception in the UK regulations. The 1981 TUPE regulations provided that protection of employment on transfer of undertakings would only apply to “commercial ventures”. The directive makes no reference to this limitation and refers throughout to transfers of “undertakings” or “businesses”. The intention of the UK Government was to establish that protection of employment under TUPE did not apply in respect of public sector workers.

The novel UK exception was of course contrary to EU law and eventually held to be unlawful following the cases of Von Colson 1984 and Marleasing 1990, which established that national law had to be interpreted in the light of EU directives.

Although developed and refi ned via case law, it took the UK almost 30 years to fi nally bring UK legislation up-to-date with the directives2. Having tidied up the law, the Labour Government tried to get ahead of other members states by gilding the 2006 TUPE regulations to refl ect the latest case law from the EU. As mentioned above, the original directive was primarily aimed at mergers and acquisitions as opposed to outsourcing and service transfers. It was only through EU case law that the law developed to include a wider range of transfers including transactions where there was no transfer of a business or its assets at all3. The UK 2006 regulations tried to capture this wider defi nition of a transfer by including a new concept of a “service provision change”.

The new regulations provide that employment protection will apply in relation to the service provision change, which is defi ned as follows:

“3. (1) These Regulations apply to—  

(b) a service provision change, that is a situation in which—  

(ii) activities cease to be carried out by a contractor on a client’s behalf (whether or not those activities had previously been carried out by the client on his own behalf) and are carried out instead by another person (“a subsequent contractor”) on the client’s behalf; and in which the conditions set out in paragraph (3) are satisfi ed.  

(3) The conditions referred to in paragraph (1)(b) are that—  

(a) immediately before the service provision change—  

(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;  

(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 specifi c event or task of short-term duration; and  

(b) the activities concerned do not consist wholly or mainly of the supply of goods for the client’s use.”  

The complex wording of Regulation 3 serves as a useful reminder as regards the intricacies of TUPE and, in particular, how one cannot assume that TUPE will apply to all outsourcing or service contracts. For a service provision change to arise the following two elements must be present:  

  1. an organised grouping of employees which has as its principal purposes the carrying out of certain activities;  
  2. such activities ceasing to be carried out by one employer, and then being carried on by another employer, other than in connection with a single specifi c event or task of short-term duration.  

The reference to organised group of employees is intended to exclude staff who do work for a number of clients. This is required, otherwise it would not be possible to identify who is to transfer. Surprisingly perhaps, case law has determined that an organised group can mean one person4.  

The defi nition of a service provision change excludes the situation where a client engages a contractor on a one-off basis without intending to enter into an on-going relationship. The exclusion of one-off services applies if it is intended that the services are to be provided for a “short-term” duration only. The TUPE 2006 regulations do not state where the burden of proof lies for establishing the client’s intent. This gives rise to a potential loophole, whereby clients may break up longer term contracts into a series of short-term contracts in a deliberate attempt to avoid TUPE. It is, however, assumed that the revised TUPE 2006 regulations were not intended to allow this misuse of the exclusion and Employment Tribunals are accustomed to assessing the motivation of parties and applying the regulations on a purposive basis.

As stated above the underlying purpose of the Acquired Rights Directive is to “safeguard employees rights in the event of the transfer of an undertaking”. Looking at Regulation 3, one could ask why does it have to be so complicated? Why refer to “activities” at all? Why not just refer to “services”?

The Department for Business Innovation and Skills Guidance on TUPE 2006 glosses over the lack of clarity in the Regulations stating that “the precise application of the Regulations will be for the tribunal or courts to decide, depending on the facts of each case”. Note that in Tribunal proceedings it is only possible to appeal the Tribunal decision on a question of law. Generally, despite the complexity and nuances of EU case law over 30 years, the Employment Appeal Tribunal will fi nd that the initial Tribunal panel is entitled to determine whether or not on the facts there have been a service provision change or other transfer of an undertaking for the purposes of TUPE 2006.

A number of recent cases including the two referred to in the footnote below5 highlight how much room there is for argument over whether a transfer amounts to a service provision change under TUPE 2006. The various detailed judgments, both at fi rst instance and appeal, contain a confusing array of arguments and reasoning as the parties’ lawyers, Tribunal members and judges wrestle with the overlapping principles set out in TUPE 2006 and try to interpret them based on the facts of the case which are often themselves very complicated.  

In Clearsprings it was held that there was no service provision change due to the fact that the services had been split up and transferred to a number of new service providers, making it diffi cult to identify the transfer date and the actual transfer of activities from one party to another.

In OCS it was held that there was no service provision change due to the fact that the activities performed by the transferor prior to the alleged transfer were materially different to the activities performed by the new service provider.

In relation to outsourcing, uncertainty as to the scope of TUPE 2006 can cause major problems. In certain circumstances it may be impossible to say with certainty whether a TUPE transfer will arise at the end of a contract. Prospective new service providers may fi nd it impossible to price the risk of TUPE not applying on exit. Outgoing employers may fi nd it very diffi cult to consult with its staff with any certainty. In any event, service providers will be best advised to seek a complete indemnity as regards the redundancy costs of employees if, for any reason, the employee does not transfer to the incoming replacement service provider.