The Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’) is one of the most complicated areas of employment law and if you believe that it may apply to your business, it’s important to seek legal advice from a specialist TUPE lawyer so that you are fully aware of what your business needs to do to comply with the law. Below are the answers to some of the more frequent questions our employer clients ask about TUPE.
- What is TUPE?
- When will TUPE apply?
- 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?
TUPE applies to businesses regardless of their size, it was introduced to protect employees working in a business that transfers to a new employer, and offers similar protection to employees as those who work in a company that is sold on.
TUPE impacts both the employer who is making the transfer (the transferor) and the new employer taking over the business (the transferee). The three main concepts introduced by TUPE are:
- The automatic transfer principle: employees transfer to the new employer (transferee) who inherits all rights, liabilities and obligations.
- Protection against dismissal: when this is connected to a TUPE transfer.
- Obligation to inform and consult: with representatives of employees affected by the transfer.
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.
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 keeps its identity. To decide whether the economic entity is still in existence after the transfer you should consider 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 is changed; or
- A service provision change: this might be outsourcing work to a contractor when it was previously performed in-house, changing a current contractor, or bringing work in-house that was previously contracted out. 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 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.
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 and fairly 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.
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.
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.
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. If there is no trade union and no elected representatives, where there are at least 10 employees (micro businesses with less than 10 employees are allowed to directly inform and consult without elected representatives) employers will be required to hold fair elections so that information relating to the transfer can be passed to elected employee representatives.
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.
This information must be provided to the representatives long enough before the transfer to enable the transferor to consult meaningfully with the affected employees. There is a duty to inform on every TUPE transfer, but only a duty to consult where an employer anticipates taking measures in respect of affected employees. A failure to comply with these obligations exposes the parties liable to pay compensation equivalent to up to 13 weeks’ uncapped pay. 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, 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. Therefore, if your business is a transferee, thorough and timely due diligence is essential to ensure that you know what you are potentially taking on. 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 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 but where a 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 ‘organised grouping’ transferred maintains an ‘identity distinct’ from the rest of the transferee’s undertaking after the transfer, to be autonomous and independently organise work within the transferred entity, 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, there is no obligation on the transferee to provide a similar arrangement for transferring employees after the transfer, provided it has not 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 for these to be changed. 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.
Further, having a good awareness and sound knowledge about TUPE from the outset and seeking professional advice 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 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 inhouse, 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 entirely beneficial to the employee or completely unrelated to the transfer these 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, but if there is an ETO reason, the dismissal may potentially unfair. In these circumstances there will 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 so the dismissal is fair, this will usually be for ‘some other substantial reason’ or on the grounds of redundancy.
If there is a resignation by an employee in response to detrimental changes to an employee’s terms and conditions 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 ages, 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 (it will liquidate the transferor’s assets) there is more relaxation of TUPE than in other insolvency situations. For example, where the insolvency is terminal, employees will not automatically transfer to the transferee, and dismissals 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 opportunities 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.