One of the key issues on any outsourcing is what happens to the employees involved in the service.  The answer will be determined largely by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).  Government plans to reform TUPE were announced in early September 2013 and, although not as significant for outsourcing as originally envisaged, make material improvements for contractors.  New regulations are expected to be laid before Parliament in December 2013 and in force from January 2014 subject to transitional provisions.

TUPE: the current position

The commercial viability of outsourcing will depend in part on whether employee costs have been properly taken into account.  It is therefore critical to know whether employees have to be taken on by the incoming contractor and on what terms.  The position cannot simply be agreed between the parties, not least because of TUPE. 

TUPE implements a European Directive aimed at protecting employment rights on business transfers and outsourcings and, where it applies, it transfers employees automatically on their existing terms and conditions of employment.   This saves the transferor potential redundancy costs, but reduces flexibility for the transferee, a factor which may then be costed into the contract price.

If TUPE applies, both transferor and transferee may have a duty to inform and consult their affected employees; the transferor has to provide the transferee with certain employee data ('employee liability information'); and there are restrictions on changing employment terms and dismissing employees by reason of the transfer.

Originally TUPE applied where there was the transfer of an economic entity which retained its identity post-transfer;  this involved a consideration of what assets and staff were taken on by the transferee (among other factors).  Complex, fact-specific case law developed as to how this applied to outsourcings, leading to considerable uncertainty as to whether TUPE applied to any particular scenario.

Various provisions were added to TUPE in 2006, including the concept of a service provision change (SPC).  The SPC provisions expressly apply TUPE to outsourcings, second generation outsourcings and insourcings where there is an organised grouping of employees in Britain with the principal purpose of carrying out the relevant activities.  With a couple of minor exceptions, TUPE will apply if the activities are for the same client and remain fundamentally or essentially the same after the transfer; it is irrelevant whether the incoming service provider takes on staff or assets.  This provided much greater certainty to those involved in outsourcings as to when TUPE would apply, giving contractors a level playing field, less legal argument and more cost certainty. 

ReformThe Coalition government took the view that provisions which go further than is required by the European Directive should be removed from TUPE; the SPC provisions were the main example cited of this so-called "gold-plating" and the Government trailed their possible removal.  This would have had a significant impact on outsourcings; whilst it might potentially be easier to avoid the application of TUPE, the considerable uncertainty as to the application of the original 'business transfer' test to outsourcing situations would increase costly legal debate and be difficult to price into contracts. 

The Government initiated a consultation process in early 2013 and on 5 September published its response.  The biggest surprise was a change of heart on SPCs: the SPC provisions will remain.  This was in response to 67% of consultation responses being against their repeal, for the sake of certainty.  

Nevertheless, there will still be material changes to TUPE which will assist those involved in outsourcing arrangements.  The main changes are:

  • Employee liability Information: The requirement to provide certain employee information to the transferee will remain, but the transferor will have to provide this 28 days before the transfer, not 14 days.  The Government initially proposed repealing this obligation, so its retention is particularly welcome for second generation outsourcing where a contractual obligation to provide employee information may not have been negotiated.  However, arguably the timescale is still too short as the re-tendering stage of an outsourcing may take place earlier.
  • Change of location redundancies:  Where a SPC involves a relocation, currently dismissals of those employees unwilling to relocate are automatically unfair by virtue of TUPE, even though they might otherwise be fair redundancies.  This is because dismissal by reason of a transfer is unfair unless for an economic, technical or organisational reason involving a change in the number or function of employees (ETO reason).  The reforms will ensure that relocation redundancies qualify as ETO reasons, and so can be made without risk of an unfair dismissal claim (assuming a fair process is followed).  This will potentially reduce the cost of service provision changes involving relocation.
  • Harmonising terms and conditions:  Changing terms and conditions of employment to bring transferring employees into line with existing employees is currently prohibited by EU law. However, the Government plans to engage with Europe to flag the potential benefits of allowing harmonisation of terms and conditions post-transfer.  This would be very beneficial for contractors, if it can be achieved (and it is a big 'if'!).  TUPE will be amended to make clear that TUPE does not prevent an employer operating a contractual provision allowing changes (e.g. relocating employees using a mobility clause in their contract).
  • Interaction between TUPE and collective redundancy consultation:  An incoming service provider who will be making redundancies among the transferring employees post-transfer will be able to start collective redundancy consultation with employee representatives prior to the transfer, provided it is meaningful consultation and the transferor and transferee agree. Redundancies could therefore be made more quickly post-transfer. We will need to see how "meaningful" will be interpreted.
  • Collective agreements:  The reforms will allow renegotiation with unions of terms derived from collective agreements one year after the transfer, provided the overall changes are no less favourable to the employee. Also, the terms derived from collective agreements that applied at the time of the transfer will apply, not any new terms subsequently negotiated between the transferor and union.

A link to the consultation response is available here.