Following a 2-year consultation process, legislation comes into force on 31 January 2014 to amend ‘TUPE’, the Transfer of Undertakings (Protection of Employment) Regulations2006. The 2006 TUPE regulations provide for the protection of certain employee rights in the event of a business transfer or a ‘service provision change’.
Aimed at simplifying the process and reducing some of the red tape involved, the Government believes that the 2014 changes are likely to result in a 50 per cent. reduction in TUPE-related claims, and anticipates that the reduced costs of making, defending and administering employment tribunal claims should benefit employees by £2.3 million and employers by up to £6.6 million each year at 2012 prices1.
Although the 2014 changes are less sweeping in some cases than originally proposed by the legislators, they will undoubtedly have practical implications for employers and employees alike. It remains to be seen, however, whether there will be a sea-change in TUPE’s application or in associated claims given that some of the legislative uncertainty remains.
TUPE or not TUPE?
A TUPE transfer occurs: (i) on the transfer of the whole or part of a business or undertaking where there is a transfer of an economic entity in the United Kingdom that retains its identity; and (ii) in Great Britain2, when there is a change in the provider of a service to a client – either through contracting out, re-tendering a contract, or bringing activities back in-house – that affects an organised grouping of employees (known as a “service provision change” or “SPC”). TUPE does not apply in the context of a share sale.
TUPE’s main tenet is the automatic transfer principle that all employees of a transferring business, or those involved in a service provision change, transfer across by operation of law. TUPE also provides various protections for employees against dismissal and an obligation on the parties to inform and consult with affected employees or their representatives. This means that any application of TUPE is invariably the subject of negotiated contractual indemnification provisions.
Any potential buyer of a business situated in the UK, or considering changing an outsourced or insourced model, should be aware of TUPE and its implications – both legal and practical – and it is hoped that the changes introduced by TUPE 20143 will clarify certain issues and reduce the administrative and cost burden on businesses.
The 2014 Changes
Service Provision Changes
The Government considered removing the application of TUPE entirely on a service provision change due to criticism that the 2006 TUPE regulations exceeded EU law requirements. However, as 67 per cent. of respondents to the consultation were opposed to its removal, TUPE 2014 now merely clarifies that for there to be a SPC the activities carried on after the change in service provision must be “fundamentally or essentially the same” as those carried on before it. This reflects recent case law and is therefore not a change in the law, but it is hoped that such clarification will remove uncertainty as to when TUPE applies and will result in more contracts changing hands.
Varying Terms and Dismissal Protection
On a TUPE transfer, the new employer takes over all rights and obligations arising from transferring employees’ contracts of employment (save for criminal liabilities and certain benefits under occupational pension schemes). Employees have the right to object to the automatic transfer if they wish, but such objection terminates their employment contract and they are: (i) not treated as having been dismissed by either the transferor or the new employer; and (ii) considered to have resigned and therefore not entitled to a redundancy payment.
TUPE 2006 provided that any purported changes (even if favourable) to employees’ terms and conditions were void if the sole or principal reason for the changes was the transfer itself or a “reason connected with the transfer” that was not an economic, technical or organisational reason entailing changes in the workforce (an “ETO reason”). Under the new rules, transfer-connected reasons are removed from the restriction on variation so that only a change in terms made “by reason of the transfer” will be void, unless: (i) there is an ETO reason for the change; or (ii) the contract of employment allows the employer to make the change.
It is not entirely clear what practical difference such changes will make, particularly as to how businesses and the courts will interpret the new test. It is likely, in the short term at least, that the practice on harmonisation of terms will not change markedly, with most businesses waiting 6 to 12 months after the transfer before presenting any changes in terms and conditions as routine updates rather than anything to do with the transfer.
In addition to preserving employees’ terms and conditions, TUPE 2006 provided transferring employees with enhanced protection against dismissal by providing that a dismissal is automatically unfair if the sole or principal reason for the dismissal is the transfer itself or a reason “connected with” the transfer that is not an ETO reason. As with the changes in relation to employment terms and conditions, TUPE 2014 removes transfer-connected reasons from the dismissal test so that only dismissals “by reason of” the transfer itself will be automatically unfair, unless dismissal is for an ETO reason. Again, until case law develops it is unclear to what extent such a change will make a practical difference to businesses. Dismissals for ETO reasons will, under TUPE 2014, remain potentially unfair on grounds of redundancy.
Unlike the changes referred to above, TUPE 2014 does seem poised to make a substantial practical impact on TUPE transfers where transferring employees are required to change their place of work following a transfer. Mirroring the test for the purposes of redundancy within the meaning of the Employment Rights Act 1996, “changes in the workforce” will, for the purposes of TUPE, now include a change of place of work, whereas case law had previously interpreted ETO reasons entailing “changes in the workforce” narrowly as being limited to changes in numbers and functions.
This is a welcome change and is anticipated to go some way to resolving two TUPE issues: (i) a transferee wishing to dismiss as redundant those employees who do not wish to move to a new location following a transfer (as such dismissals will no longer be automatically unfair); and (ii) service providers no longer having to run the previously-accepted risk that employees objecting to a change in location (almost inevitable in SPC scenarios) could bring claims for automatically unfair dismissal.
The Government recognised the legal and practical difficulties that businesses have faced in relation to TUPE-related dismissals and, although employees cannot be forced to move, it is anticipated that this change alone should see a marked reduction in unfair dismissal claims relating to TUPE transfers.
Some of the additional changes brought about by TUPE 2014 that are expected to ease the administrative burden for business include:
- Employee liability information – From 1 May 2014, transferors will be required to provide certain employee liability information 28 days before the transfer (up from 14 days under TUPE 2006), which should help facilitate the commercial planning process for transferees.
- Terms derived from collective agreements – The restrictions on contract variations will not apply to a variation of terms derived from collective agreements as long as: (i) such variation takes place at least 12 months after the transfer; or (ii) the contract, after the change, is overall on no less favourable terms than before the change. TUPE 2014 also provides that transferees will not be bound by post-transfer collectively agreed terms if it is unable to be involved in the negotiating process (known as the ‘static’ approach, and confirming previous European Court of Justice rulings).
- Collective Redundancies – In TUPE-related collective redundancy situations (where there is to be, or is likely to be, a TUPE transfer and a transferee proposes to dismiss as redundant 20 or more employees within a period of 90 days or less), TUPE 2014 – amending TheTrade Union and Labour Relations (Consolidation) Act1992 – provides that a transferee may elect to consult, or at least start the consultation process, with representatives of affected individuals prior to the transfer provided that the transferor agrees.
- Micro-businesses – Businesses with fewer than 10 employees will, from 31 July 2014, be entitled to inform and consult directly with employees where there is no recognised independent union or appropriate representative. Given this change was included in TUPE 2014 in order to ease the administrative burden for small businesses it is unclear why the Government decided to include a 6-month delay for implementation.
As noted above many of the changes enacted by TUPE 2014 are to be welcomed. However, it remains unclear how much will actually change until the amendments are tested in the courts or are implemented regularly in practice.