The Transfer of Undertakings (Protection of Employment) Regulations 2006, more commonly known as ‘TUPE’, is often seen as a complex area of employment law. In this guide, we provide a practical and accessible overview of all of the basics of TUPE, focussing on the key essentials of how TUPE could apply to your business.
Jump to:
- What is TUPE?
- Why is awareness of TUPE important?
- When will TUPE apply?
- Who transfers under TUPE?
- Which employees (or category of employee) will TUPE apply to?
- What if an employee does not want to transfer?
- What responsibilities and obligations do employers have under TUPE?
- Which rights and liabilities are automatically transferred under TUPE?
- Which rights and liabilities do not automatically transfer under TUPE?
- How can you protect against the effects of TUPE?
- Contracts affected by TUPE - Changing terms of employment
- Employee protection against dismissal under TUPE
- Employee Liability Information
- How does TUPE apply when the employer is insolvent?
What is TUPE?
At its core, TUPE can be understood as a package of employment laws that are designed to protect employees in a business sale or outsourcing context. TUPE won’t generally apply to share sales. Without TUPE, employment contracts would remain with the original employer, leaving employees at risk of redundancy. TUPE therefore steps in to protect employment in this context by deeming those contracts of employment as automatically transferring to a buyer of a business or new outsourcing provider in order to maintain an individual’s employment. maintain an individual’s employment.
The three main concepts introduced by TUPE are:
- The automatic transfer principle: the employment of affected employees will automatically transfer from their current employer (ie the business being acquired or the business currently providing the service) to a new employer (ie the buyer of the business or the new service provider). In other words, the identity of the employees’ employer will change and the new employer will inherit the employees on their same terms and with almost all potential rights and liabilities.
- Protection against dismissal: employees will be protected against dismissal if the sole or main reason they are dismissed is the TUPE transfer. This means that if you dismiss employees because of the TUPE transfer (e.g. you are buying a business and dismiss employees because you don’t want them to transfer to you), employees would be able to bring claims for automatic unfair dismissal against you.
- Obligation to inform and consult: employees have a legal right to be informed about a TUPE transfer that is planned and to be consulted if there are any measures planned as a result of it.
There are different scenarios when the above will be relevant and TUPE applies. So, if you think that TUPE might apply to you it is better to seek legal advice sooner rather than later to give your business maximum time to prepare and comply properly with TUPE, as it can be costly not to.
Why is awareness of TUPE important?
Getting familiar with TUPE is important for a number of reasons:
- TUPE applies in many contexts: TUPE can come up in many different situations (eg business sales, outsourcing, insourcing). It’s not always obvious that TUPE applies and so it’s important to plan ahead (see When will TUPE apply?).
- TUPE impacts both parties to the transfer. TUPE impacts both the employer who is making the transfer (the ‘transferor’) and the new employer taking over the business or taking over provision of a service (the ‘transferee’). That means you could be impacted by TUPE whether you are selling your business or buying a business, or whether you are outsourcing a service to someone else or you are taking on a service from someone else.
- You will need time for staff planning: If TUPE applies, the employment of affected employees transfers to a new employer. It’s usually understood who will be transferring well in advance of the transfer, but you’ll want to do some planning ahead of time. If you’re the seller or the one outsourcing the service, you’ll want to be clear about who exactly is expected to transfer out of your business. If you’re the buyer or the new service provider for a client, you’ll want to understand how many staff you’re inheriting and the likely costs and liabilities. See Who transfers under TUPE?
- There may be unexpected cost and risk: If TUPE applies, employees will transfer to the new employer on their same terms and conditions and the new employer will take on all obligations and liabilities in respect of the employees, with a few exceptions. This could result in unexpected costs and legal exposure. It’s therefore common for the parties to try to negotiate TUPE terms and conditions for the sale or outsourcing agreement to fairly apportion these risks before the transfer takes place.
- You may need to inform and consult: There are usually legal requirements under TUPE to inform and consult affected employees before the transfer takes place, with a few exceptions. There can be penalties for failing to do so. See What responsibilities and obligations do employers have under TUPE?
When will TUPE apply?
TUPE applies on a ‘relevant transfer’, which can either be:
- A business transfer: transferring a business, undertaking or part of a business or undertaking and the economic entity being transferred retains its identity. For example, if you are buying part of another company’s business by purchasing the assets of that business it is important to consider what exactly is being taken over. To decide whether the economic entity is still in existence after the transfer you should consider which assets are being bought and which are not, and whether the same or similar economic activities are being continued, or have been taken over, by the new owner, even if the way a business is being run will change. You need to consider whether the economic entity retains its identity or whether it is purely just a collection of assets; or
- A service provision change: this might be outsourcing work for the first time to a service provider when it was previously performed in-house (eg specialist IT services that cannot be performed in-house), switching from an existing service provider to a new service provider (eg to get a better deal after putting the contract out for tender)[1], or bringing work in-house that was previously outsourced to a service provider (eg to regain control over specific services). To be protected under TUPE, an organised group of employees (which can be one employee) whose principal purpose is to carry out the activities in question on behalf of the client and are essentially dedicated to doing so must be in place immediately before the change. This does not include services performed for a specific event or specific short term and cannot just be for a supply of goods to a business.
Who transfers under TUPE?
TUPE will only apply to employees if they are:
- ‘employed by the transferor’: this will cover employees and apprentices whether they are on paid or unpaid leave at the time of the transfer, it may also include directors if they are employees and part of the organised grouping being transferred. Self-employed consultants working under a contract for services are generally not covered by TUPE, but whether an individual is operating under a contract for services or a contract of employment will require careful analysis and is only ultimately decided by an employment tribunal. If staff are technically employed by another organisation (such as a service company or a holding company and not the transferor), but permanently work in the business being sold they will not generally be covered by TUPE. However, an employee may be assigned to a particular undertaking or part of the transferor undertaking if most of their time and effort is spent working in it, even if legally-speaking their employer is a different company; and
- ‘assigned to the organised grouping of resources or employees’: this is not specifically defined, but whether an employee is ‘assigned’ to the organised grouping means looking at the facts. For example, how much time is spent by an employee on the parts of the business being transferred, if it is the majority of their time, they are more likely to be assigned to the organised grouping. However, there is no specific percentage or number of hours of time spent which qualifies an employee as being assigned, it will depend on the individual facts in each case. Employees who are only temporarily assigned to an organised grouping (a short assignment and where a date of return or re-assignment to another company has been set) will not transfer under TUPE.
- ‘subject to the relevant transfer, and would otherwise be terminated by the transfer’: This means the employee must be part of the organised grouping immediately before the transfer. It will depend on the facts of the case whether those who are on long-term sick leave immediately before the time of the transfer are assigned to the organised grouping and employed immediately before the transfer. If an employee appeals a decision to dismiss them before a transfer and the decision is overturned on appeal, it is as if the employee was not dismissed and they will continue to be part of the organised grouping and will transfer under TUPE. Employees who are not automatically unfairly dismissed, for example if they are dismissed for an economic technical or organisational (ETO) reason relating to the transfer, will not be included as employed immediately before the transfer and will be the liability of the transferor and not the transferee. Establishing an ETO as the transferor can often be very difficult as the transferor cannot rely on the transferee’s ETO reason.
Parties to a TUPE transfer can often spend considerable time discussing whether an employee satisfies the above requirements. For example, an outgoing service provider that has just lost a contract with its client is likely to argue that anyone working on that contract forms part of the ‘organised grouping’ to avoid the risk of being left with employees it doesn’t need and would have to make redundant. The new provider may challenge this by asking questions about how the employees have been assigned to the contract and where they spend their time. For these reasons, it’s important to try to start discussions about a potential TUPE transfer as early as possible.
Which employees (or category of employee) will TUPE apply to?
TUPE will only apply to employees if they are:
- ‘employed by the transferor’: this will cover employees and apprentices whether they are on paid or unpaid leave at the time of the transfer, it may also include directors if they are employees and part of the organised grouping being transferred. Self-employed consultants working under a contract for services are generally not covered by TUPE, but whether an individual is operating under a contract for services or a contract of employment will be a matter for the tribunal. If staff are technically employed by another organisation (such as a service company or a holding company and not the transferor), but permanently work in the business being sold they will not generally be covered by TUPE. However, an employee may be assigned to a particular undertaking or part of the transferor undertaking if most of their time and effort is spent working in it, even if legally-speaking their employer is a different company; and
- ‘assigned to the organised grouping of resources or employees’: this is not specifically defined, but whether an employee is ‘assigned’ to the organised grouping means looking at the facts. For example, how much time is spent by an employee on the parts of the business being transferred, if it is the majority of their time, they are more likely to be assigned to the organised grouping. However, there is no specific percentage or number of hours of time spent which qualifies an employee as being assigned, it will depend on the individual facts in each case. Employees who are only temporarily assigned to an organised grouping (a short assignment and where a date of return or re-assignment to another company has been set) will not transfer under TUPE.
- ‘subject to the relevant transfer, and would otherwise be terminated by the transfer’: This means the employee must be part of the organised grouping immediately before the transfer. It will depend on the facts of the case whether those who are on sick leave or who are suspended immediately before the time of the transfer, are assigned to the organised grouping and employed immediately before the transfer. If an employee appeals a decision to dismiss before a transfer and the decision is overturned on appeal, it is as if the employee was not dismissed. So, if they were part of the organised grouping they should have been part of this immediately before the transfer and so would transfer under TUPE. Employees who are not automatically unfairly dismissed, for example if they are dismissed for an economic technical or organisational (ETO) reason relating to the transfer, will not be included as employed immediately before the transfer and will be the liability of the transferor and not the transferee.
What if an employee does not want to transfer?
Whilst employees will generally be happy to transfer their employment, in some situations they may have reasons for not wanting to automatically transfer to a new company. If they do not wish to transfer, they may object to the transfer in writing to the transferor or transferee. The legal effect of this is that the contract of employment, rights, powers, duties and liabilities relating to that employee will not transfer to the transferee as their employment will automatically end on the date of the transfer. The employee will not have any rights to statutory or contractual compensation unless they object and resign because of their employer’s repudiatory breach or if their terms have been substantially changed to their material detriment. Employees are unlikely to object without following up with some form of claim.
There is no legal obligation for an employer to inform an employee of their right to object to the transfer and the consequences of objection, but it is best practice to do so, though commercially this should be given consideration.
Transferees should be wary where an employee exercises their right to object from the perspective of enforcing restrictive covenants. As there is no contract between the transferee and objecting employee, the transferee will not be able to enforce the restrictive covenants in the objecting employee’s contract: this can be dealt with by an asset purchase agreement stating that certain key employees will not object to the transfer or by way of assignment by the transferor to the transferee of the benefit of the restrictive covenants, but this is a more risky and untested method and also depends on the wording of the restrictive covenants.
What responsibilities and obligations do employers have under TUPE?
Both the transferor and the transferee must inform, and are in some circumstances required to consult with, recognised trade unions or elected employee representatives in relation to their employees who may be affected by the transfer or any measures taken in connection with it.
There is always a requirement to inform about a TUPE transfer, but the requirement to consult only arises where ‘measures’ are envisaged by in connection with the transfer. ‘Measures’ are given a wide interpretation and so it’s good practice to try to consult on anything that may be changing in connection with the transfer. Examples include post-transfer potential redundancies, changes to team structures or individual working hours.
If there is no trade union and no elected representatives, employers will be required to fairly elect representatives so that information relating to the transfer can be passed to elected employee representatives. There is an exception to this for small businesses with ten or fewer employees that allows them to simply inform and consult directly with the affected employees, without the need for employee representatives. For TUPE transfers taking place on or after 1 July 2024, this exception is being extended and will allow employers to inform and consult affected employees directly where:
- the business has fewer than 50 employees; or
- fewer than ten employees will transfer under TUPE, regardless of the overall number of employees within the business.
The information must be given in writing to the elected representatives and should include:
- The fact that the transfer is going to take place, why and give an indication as to when.
- Social, legal or economic implications (such as a change in location).
- Any measures that the transferor and transferee expect to take (such as redundancies) in respect of their own employees. If there are none, this should be stated.
- The number of agency workers employed, the work they are performing and in which departments.
- The transferor must provide information about any measures which the transferee is considering taking in respect of affected employees. If there are none, this should be stated.
This information must be provided to the representatives long enough before the transfer to enable the transferor to consult meaningfully with the affected employees. A failure to comply with information and consultation obligations exposes the parties liable to pay compensation equivalent to up to 13 weeks’ uncapped pay per affected employee. If there is a potential redundancy situation due to a transfer, employers must consult with a recognised trade union where they exist. If there is no recognised union then employers must consult with elected employee representatives and directly with affected employees when the transferee is making (or plans to make) 20 or more redundancies within 90 days. Where there are fewer than 20 employees being made redundant within 90 days, employers must still consult with employees individually, but there are no prescribed time limits. Since the 2014 amendments to TUPE, with the transferor’s agreement the transferee can now elect to consult representatives of affected employees regarding the proposed redundancies, including those transferring, before the transfer.
Which rights and liabilities are automatically transferred under TUPE?
TUPE specifically states that all the transferor’s 'rights, powers, duties and liabilities under or in connection with' the transferring employees’ contracts pass to the transferee. In other words, it’s as if the transferee steps into the transferor’s shoes in respect of the affected employees. Therefore, if your business is a transferee (eg a buyer of a business or an incoming service provider in an outsourcing context), thorough and timely due diligence is essential to ensure that you know what you are potentially taking on. There can be potentially costly liabilities that you could inherit as part of a TUPE transfer such as final salary pension schemes and generous enhanced redundancy terms. Specialist legal advice to guide you through the due diligence process is recommended to ensure that you are not left with costly surprises in terms of employees taken on once the transfer has taken place.
The automatic transfer principle does not just relate to pay, but to all statutory and contractual benefits including holiday pay, health insurance, company car, bonus or commission schemes, profit share schemes, and enhanced maternity and redundancy packages. It also relates to non-contractual benefits connected with the contract provided they would have been enforceable against the transferor before the transfer.
Any acts or omissions of the transferor before the transfer are treated as having been done by the transferee, including where there may be claims for unfair dismissal, discrimination or personal injury. Again, thorough due diligence and well-drafted indemnities in the business transfer or outsourcing agreement can protect your business from financially damaging liabilities and so employment law advice is recommended.
Collective agreements and actions taken in relation to them by the transferor will pass to the transferee. Although collective agreements are not usually legally enforceable between the employer and the relevant trade union, certain provisions in collective agreements may be binding on the employer if the employee’s contract incorporates provisions of collective agreements agreed from time to time. Collective terms will not automatically transfer if agreed after the date of the transfer and the transferee is not a participant to the collective bargaining. Union recognition also transfers to the transferee, but only where the transferred undertaking or organised grouping maintains an ‘identity distinct’ from the rest of the transferee’s business after the transfer and retains its autonomy. In order to be considered autonomous, the transferred entity or organised grouping needs to have the power to govern itself without direct instruction from the transferee and independently organise work within it, give orders and instructions and allocate tasks to employees. It is advisable to seek legal advice if your business wishes to derecognise a union.
Which rights and liabilities do not automatically transfer under TUPE?
- Pensions: The major exceptions to the principle of automatic transfer are old age, invalidity and survivors’ benefits under occupational pension schemes, including pension instalments paid to a member after they pass normal retirement age, if the sole purpose is to support the employee after retirement. Transferring employees are unable to make any claim against the transferor for breach of contract or constructive dismissal arising out of a loss or reduction in their rights under an occupational pension scheme as a result of the transfer.
However, if an employment contract refers to an employer paying a percentage of salary into the employee’s personal pension scheme that obligation will automatically transfer under TUPE. Early retirement benefits and benefits intended to enhance the conditions of such retirement paid in the event of dismissal to employees who have reached a certain age are not ‘old age, invalidity or survivors’ benefits’ and therefore will be covered by the automatic transfer principle. The transferee will only assume liability for enhancements to an early retirement pension that are no longer available to a transferring employee following the transfer, not for the full amount of an early retirement pension. However, transferred employees become deferred members in the seller’s scheme on the TUPE transfer, so they cannot make a double recovery by claiming entitlement to a full early retirement pension from the buyer too. It is advisable to seek professional advice on pensions and warranties and indemnities to best protect your business in respect of pensions liabilities. - Profit share and share schemes: some profit share and share schemes may not be able to be transferred. If an arrangement is non-contractual or the right to participate does not arise in connection with a contract of employment, there is no obligation on the transferee to provide a similar arrangement for transferring employees after the transfer unless it has become an implied contractual term through custom and practice.
- Share schemes: generally become exercisable or vest on redundancy and courts and tribunals have interpreted a TUPE transfer as triggering the redundancy provisions in a share scheme, entitling transferring employees to exercise their options or awards. If a share scheme is a contractual right for transferring employees, in practice, it is not possible for a transferee to provide that the transferred employees will remain in the transferor’s share scheme after they leave the transferor’s group of companies or provide an identical scheme itself. If rights to participate in a share scheme are contractual, the transferee is obliged to provide an equivalent scheme, although it is not clear how an equivalent scheme is measured. Alternatively, it may have to buy out those employees’ rights.
- Restrictive covenants: whilst restrictive covenants automatically transfer with the rest of the employment contract, the restrictive covenants will relate to the transferor at the time the contract was entered into and so may not be that useful to the transferee. The transferee may in that case have to pay the employee to agree to change these covenants to best protect the transferee. If you are seeking to change terms and conditions of employees which have transferred under TUPE see Contracts affected by TUPE – Changing terms of employment below, but it is again advisable to seek specialist employment law advice on this to take into account the specific needs of your business.
- Contracts with third parties: The liabilities relating to contracts between the transferor and third parties which are not related specifically to employment do not pass to the transferee on a TUPE transfer.
How can you protect against the effects of TUPE?
It is not lawful to contract out of TUPE and recent attempts to try and avoid TUPE by way of complex corporate dealings and using share sales instead of asset sales have not been successful. However, there are steps which both the transferor and transferee can take to minimise the impact of TUPE liabilities. For example, contractual indemnities can be used to share out any liabilities reasonably in the sale contract negotiated between the buyer and seller, before the transfer takes place. Negotiating TUPE terms in the transaction documents can take some time, so it’s important to start preparing for a TUPE transfer as early as possible.
Further, having a good awareness and sound knowledge about TUPE from the outset and involving specialist employment lawyers at an early stage, should minimise costly mistakes. If you are well prepared before a TUPE transfer, it will make the due diligence and entire TUPE process run more smoothly, lowering both your costs and time spent. If you are selling or outsourcing your business, you should have as open a dialogue with employees through employee representatives as you are commercially able to and ensure that you are transparent on information relating to employees and their employment with the buyer. If you are buying a business or bringing work in-house, it is important to do clear, thorough and timely due diligence to ensure the decision is the correct one for your business and you are fully aware of the liabilities your business may face.
Contracts affected by TUPE - Changing terms of employment
One of the key points about TUPE is that it preserves the terms and conditions of employees so that they are employed by the transferee on the same terms as the transferor. For this reason, changes to employee terms and conditions are only lawful in limited circumstances. If the sole or main reason for a change in an employee’s terms of employment is the transfer itself, this will be void unless:
- there is an Economic, Technical or Organisational (ETO) reason;
- if the reason for the change is the transfer, but the contract allows the employer to make the particular change;
- the terms are incorporated from a collective agreement, the change takes place more than a year after the transfer and when considered together the terms are not less favourable for the employee; or
- if the transferor is subject to ‘relevant insolvency proceedings’ there are certain ‘permitted variations’ which can be made.
If a change to terms and conditions is completely unrelated to the transfer these changes are permitted, but if a transfer is about to take place or has just taken place, it may be difficult to prove the changes are not as a result of the transfer. If they are as a result of the transfer and are not for an ETO reason, they may be void, as a transferor may enhance employee terms and conditions to increase costs for the incoming transferee and the transferee will not then be bound by the enhanced terms. It is best if you are looking to change employee terms and conditions just before or after a transfer to seek specialist legal advice.
Employee protection against dismissal under TUPE
Another key point of TUPE is that employees are protected from dismissal as a direct result of a transfer. Dismissals will be automatically unfair if the sole or main reason for the dismissal is the transfer itself, unless there is an ETO reason. Even if there is an ETO reason, there will still be an unfair dismissal if an employer has not acted reasonably in deciding that the ETO reason was sufficient to justify dismissal. However, if the ETO reason is sufficient to justify a dismissal under the circumstances and a fair process is followed, the dismissal is likely to be fair on grounds of ‘some other substantial reason’ or redundancy.
If there is a resignation by an employee in response to substantial change to an employee’s terms and conditions to the employee’s material detriment as a result of a transfer or a repudiatory breach of contract connected to the transfer, then the same enhanced protection against dismissal applies to those employees.
Employee Liability Information
At least 28 days before a transfer, the transferor must provide the transferee with Employee Liability Information (ELI). ELI is certain information about the transferring employees, such as their terms of employment, age, length of service and any outstanding claims, grievances and disciplinaries amongst other things. If this information is not provided fully and on time, a transferee can make a claim under TUPE against the transferor.
How does TUPE apply when the employer is insolvent?
To try and rescue failing businesses and make them more attractive to buyers some TUPE provisions are relaxed where the transferor is insolvent to make the business’ liabilities less onerous to take on.
If the insolvency proceedings of a transferor are terminal (and they have been initiated with a view to liquidating the transferor’s assets) there is more relaxation of TUPE than in other insolvency situations such as an administration. For example, where the insolvency is terminal, employees will not automatically transfer to the transferee, and dismissals because of or connected to the transfer will not be automatically unfair. Whereas in non-terminal insolvency situations, the employees will still transfer, but the transferee will have more scope to change the employees’ terms than they would have had under normal circumstances and some of the transferor’s debts relating to employees will not transfer, instead they will be paid by the Secretary of State from the National Insurance Fund. However, in both terminal and non-terminal insolvency situations some obligations will remain the same, for example the obligation to inform and consult and so specialist legal advice in this area is essential.
