UK: TUPE 2005: A New Dawn?

The Transfer of Undertakings (Protection of Employment) Regulations 1981 ("TUPE") provide various protections to employees of a business which is transferred. Their employment is transferred to the transferee, they have rights to be notified and consulted with about the transfer and its implications and dismissals associated with a transfer of a business are automatically unfair.

As a result of a new TUPE Directive at European level, new UK TUPE regulations have been due for some time. New regulations ("TUPE 2005") were finally published in draft in March. We are now in a period of consultation which will continue until 7 June 2005. The intention is for the Regulations to be in place by 1 October 2005. Given that the consultation document states that the consultation exercise is purely to consider whether the Regulations effectively implement policy decisions that were made some time ago, and that there is no intention to reopen a debate on those policy issues, there is a strong likelihood that the Regulations are in their final form already. Guidance is promised for later in the year.

The main changes contained in TUPE 2005 are in relation to outsourcing/service provision contracts, changes to terms and conditions following a transfer, liability for failure to inform and consult and the application of TUPE in insolvency situations. Changes to how pensions are dealt with under TUPE are contained in separate recently enacted legislation.

One of the major areas of uncertainty under the 1981 TUPE regulations has been whether TUPE applies in outsourcing situations. TUPE 2005 provides that, with some limited exceptions, where there are changes to service providers (i.e. when a business contracts out services, changes contracts or brings a service back in house), there will now always be a TUPE transfer. In the consultation document, it states that it will not be a TUPE transfer where there is no identifiable group of employees essentially dedicated to meeting one client’s needs or where a client buys in services from a contractor without intending to enter into an on-going relationship with that contractor. The Government is undecided as yet (and is consulting on) whether there should be a "professional business services" exemption to cover situations where a client engages, for example, a firm of solicitors and then wishes to change that firm of solicitors. There are strong business arguments for allowing for such an exemption but it will be a rare situation in any event where a solicitor in private practice is dedicated to the needs of only one client.

Under the current TUPE regulations any changes to terms and conditions of employment, if connected to or as a result of the transfer, are void, even if the employee agrees.

The only safe way to implement a change to terms and conditions is to dismiss the employee and re-engage on the new terms. This leave open the possibility of a claim arising out of the dismissal.

Under TUPE 2005 changes to terms and conditions which are as a result of, or connected to, the transfer will be permitted if they are for economic, technical or organisational (ETO) reasons entailing changes to the workforce and if they are agreed between the parties.

On the face of it this looks like a helpful change. On closer inspection, however, the benefits may be limited. The existing ETO defence to an automatic unfair dismissal—"economic, technical or organisational reasons entailing a change in the workforce"—has been notoriously difficult to invoke. Often changes to terms and conditions in a transfer context would be changes such as introducing effective restrictive covenants for the management team but such a change is unlikely to "entail changes in the workforce" and so qualify for the defence. Further, simply wanting to harmonise terms with existing employees may not "entail changes in the workforce". It is hard to see what that expression means in the context of changes to terms and conditions.

It may be therefore that we are still left in the original position where in most cases dismissal and re-engagement is still going to be the only (or the only safe) way to implement changes.

Currently, a dismissal for which the sole or principle reason is a TUPE transfer is automatically an unfair dismissal, unless it is for an ETO reason, in which case the fairness of the dismissal falls to be assessed against the ordinary criteria under the Employment Rights Act 1996 ("ERA"). TUPE 2005 changes this, so that where the sole or principle reason for the dismissal is the transfer and there is an ETO defence, the reason for dismissal will be taken to be redundancy, if the appropriate test under the ERA for redundancy is met. The employer will then need to demonstrate a fair selection process was followed in the ordinary way for redundancy dismissals. The employees could then claim redundancy payments.

It also appears from the consultation document that relocating the transferred business may constitute an ETO defence under TUPE 2005 allowing transferred employees to be made redundant in those circumstances. They first need to be offered positions that exist at the new site.

A completely new provision under TUPE 2005 will be that a transferor is required to provide the transferee with "Employee Liability Information" which is information about the transferor’s rights, powers, duties and liabilities under the contracts of employment of the transferring employees. The information has to be supplied in advance of the transfer (and by no later than completion) and must be in writing. This will be a useful provision for transferees who often struggle to obtain all the relevant information in a TUPE transfer situation. The transferee can seek compensation from the transferor for breach of this obligation of up to £75,000.

Whilst the existing requirement to inform and consult with employee representatives will remain unchanged, the liability for any failure to consult under TUPE 2005 will now be shared jointly and severally between the transferor and the transferee.

Entirely new insolvency related provisions in TUPE 2005 aim to promote the sale of insolvent businesses as going concerns. Two major changes are proposed:

1. in qualifying insolvency situations a transferee will be able to take a transfer of staff from the insolvent business without inheriting at least some of the arrears of pay and other outstanding obligations to the employees;
2. again, in qualifying insolvency situations changes to terms and conditions can be made (without the need for an ETO defence) provided that they are agreed with the employee representatives (or trade union representatives) and provided that they are designed to safeguard employment opportunities by ensuring the survival of the undertaking.

As mentioned earlier, separate regulations have already implemented changes to how provisions are dealt with under TUPE. From transfers taking place on or after 6 April 2005, occupational pension rights are no longer fully excluded from TUPE. If the transferor provides benefits under an occupational scheme, be it salary related or money purchase, the transferee is obliged to establish one of the following for any transferring employees who were either members of that scheme, had a right to join it or were in a waiting period in order to become eligible to join it:

1. a stakeholder pension arrangement;
2. an occupational money purchase scheme; or
3. an occupational salary related scheme.

Into this scheme, the employer must pay contributions which match contributions made by the employee up to a maximum of 6%. Alternatively, if the scheme is a salary related one, the transferee employer may instead offer employees benefits in the scheme which either:

1. meet the reference scheme test, which is the test of minimum benefits that a scheme must provide before it is permitted to contract out of the state second pension; or
2. provide benefits which are equivalent to those that would be provided by a 6% of salary employer contribution, excluding any compulsory employee contribution.

Changes to the terms of pension contributions at any time following the TUPE transfer can be made with the employee’s agreement, whether or not this is for an ETO reason.

Our pensions department has prepared a more detailed commentary on this area and if you would like to receive a copy please contact Toni Hooper in our marketing department.

Overall the changes appear to be a positive move to deal with some of the anomalies under the 1981 TUPE regulations. A number of new areas of uncertainty have, however, been created, particularly in relation to the pension related changes and the insolvency provisions. It is likely that TUPE situations will remain, therefore, a regular source of litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.