Service provision changes

The 2006 revision of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) introduced the new concept of 'service provision change' (SPC) transfers. This essentially widened the scope of the regulations to make it clearer that TUPE does cover cases where services are outsourced, insourced or assigned to a new contractor. However, contracts for the supply of goods and one-off buying-in of services are exempt. For there to be a service provision change, there must be an organised grouping of employees before the change that has as its principal purpose the carrying out of the relevant activities on behalf of the client.

Six years on, the tribunals and courts are awash with cases testing the scope of this 'new' statutory concept much derided by the current Government as the 'gold-plating' poster child. So, what lessons has 2012 brought:

Similarity of pre and post-transfer activities?

Unlike the test for traditional TUPE transfers, there is no express requirement that the relevant activities must retain their identity after the transfer. However, it is implicit that the post-transfer activities must be identifiable as the pre-transfer activities for a service provision change to occur, although those activities may be carried out in a different way. The test is whether the activities are 'fundamentally or essentially the same as those carried out by the alleged transferor' (Churchill Dulwich). This is a question of fact and degree in each case. This year we have learned that:

  • A 15 percent reduction in the scope of services provided and a 40 percent reduction in the number of schools to be serviced, meant there was no SPC as the activities were held to be no longer fundamentally the same (Enterprise Management Services v Connect-Up).
  • A particular 'activity' may constitute more than the sum of its individual tasks - for example, by virtue of being centralised. Identifying an activity involves a holistic assessment by the tribunal and small differences quantitatively can be critical. Accordingly, the EAT confirmed that a tribunal was entitled to hold that there had been no SPC where a centralised taxi booking administration service was taken back in-house. It no longer operated as a centralised service. Instead, each individual was responsible for their own bookings. Features of the previous centralised system, for example maintenance of a database, no longer existed after the change. The service as operated after the change was held to be essentially a different activity (Johnson Controls Ltd v Campbell).
  • On the other hand, the poor performance of activities on an insourcing, due to lack of resourcing, does not mean there will not be a service provision change (London Borough of Islington v Bannon).

Is there an organised grouping and who is assigned?

For there to be an 'organised grouping', the employees must be organised by reference to the provision of services to a particular client. There must be some "deliberate planning or intent" in the way the employees are organised (Seawell v Ceva Freight). It is not enough that by mere chance of circumstances and shift patterns that some groups of employees end up carrying out work for the same client (Eddie Stobart v Moreman).

Even if an organisation effectively exists entirely for the benefit of one client, it does not follow that all the employees are assigned to the provision of services to that client. An employee may not be assigned to the organised grouping, if their role is strategic and principally directed to the survival and maintenance of the outgoing contractor as an entity (Edinburgh Home-Link Partnership v The City of Edinburgh Council).

What if there is a change of client on a transfer?

The client before and after transfer must be the same for a service provision change transfer under TUPE to occur. So, there will not be a service provision change transfer - even if the employee who claims to have transferred still carries out the same services - if the client simultaneously changes so he now carries them out for a different client (Hunter v McCarrick and Taurus Group v Crofts).

What is the scope of the supply of goods exemption?

The question is not what activities those employees are carrying out for their own employer, but what activities the employer is carrying out on behalf of the client. So while assembly line workers provided a 'service' in carrying out a quality control function, the service to the client was the supply of the assembled goods (Pannu v Geo W King).

What is the scope of a single specific event or task of short duration exemption?

A one year contract for the transport of school children, required in light of a sudden need to rebuild a school, was short-term in nature. The fact that activities carried out in connection with an event may last some time does not make the event itself long-term (Liddell's Coaches v Cook).

ETOs

Under TUPE changes to affected employees', terms and conditions made in connection with the transfer will only be valid if the principal reason is for an "economic, technical or organisational reason entailing changes in the workforce" (ETO reasons).

In Meter U Ltd v Ackroyd & Hardy, the EAT confirmed that it can be fair for a transferee service provider who operated a franchisee business model to dismiss transferred employees and replace them with limited company franchisees. The change amounted to a reason entailing changes in the workforce, meaning that the dismissals were not automatically unfair.

This case turned on the EAT holding that the term 'workforce' did not include limited companies. So, the use of corporate franchisees rather than the transferee's employees to carry out the services entailed changes in the workforce. Intriguingly, the EAT went on to say that changes in numbers of employees or their duties are not the only changes which may constitute changes in the workforce, but unfortunately did not elaborate. No doubt, issues will arise in future for businesses taking up and operating on an employee shareholder model next year, although the 'limited company argument' will not be available.