Untangling TUPE

With Westminster making significant cuts in the funding available to charitable organisations and arts groups, these organisations are being forced to reconsider the way they are structured so that they can complete for what little funding there is available. Organisations involved in acquisitions and mergers, or making significant changes to the way they provide services, may be faced with ensuring they comply with the Transfer of Undertakings (Protection of Employment) Regulations 2006, known as the TUPE Regulations. Essentially, these Regulations protect the rights of those who are employed by a business or organisation that is being transferred to a new owner. The transferring employees have the right to be employed by their new employer on the same terms and conditions as they were before transfer, and the Regulations apply to both private and public sectors and to organisations of all sizes (including not-for-profit organisations), wherever they are in the United Kingdom. They are complex however, and employers often have to seek legal advice before any transfer of an organisation, or part it, has even started.

In what situations does TUPE apply? It applies wherever there is a ‘relevant transfer’, meaning either a business transfer or a service provision change. A business transfer is where an ‘economic entity’ transfers and retains its identity following the transfer: a service provision change is where an organisation engages a contractor to do some work on its behalf (out-sourcing), or where the organisation changes contractor, or brings work previously out-sourced, back in-house.

What transfers? The employment contracts of staff employed by the transferor automatically transfer to the transferee on existing terms, notably those relating to pay, holidays, job title and benefits, but with the exception of those relating to occupational pension schemes. This principle applies to all employees who were employed immediately before the transfer (or who would have been if they had not been dismissed because of the transfer).

Are any changes or dismissals allowed? Any contractual changes which a buyer tries to impose on an employee are void unless they are for an “economic, technical or organisational reason” related to changes in the workforce (i.e. the number of employees or the functions performed by them). This ‘ETO’ exception is the only way that an employer can fairly either dismiss or change the terms of transferring employees. In other words, if the transfer means that the buyer has to reorganise its workforce because, for example, it has two box office managers after the transfer and only needs one, it may be possible for one to be dismissed, fairly, on the basis of this ETO exception.

What about unfair dismissal? TUPE provides enhanced protection against dismissal for transferring employees. Where an employee is dismissed, and the main reason for the dismissal is the transfer, the dismissal will be automatically unfair unless there is an ETO exception, as described above.

Once you have decided TUPE applies, what next? The transferee should undertake a due diligence exercise to check what is being acquired, in particular how many employees, their terms and conditions and what potential employment issues (such as outstanding grievances) will be inherited. The transferor, must disclose all that information to the transferee.

What do we tell the employees? Both transferee and transferor have an obligation to inform and consult ‘affected employees’, not only the ones transferring but potentially the ones remaining with the transferor, or already with the transferee. The employer must hold elections for employee representatives and then provide them with specific information about the transfer, including its implications for employees. Any changes envisaged which will affect the employees, for example, changes to the working location, must form part of the consultation, with a view to seeking agreement.

What are the risks? TUPE cannot be ignored. Last year, the 700 Club, a homelessness charity in Darlington, was successful in tendering for local authority work but ended up footing a £250,000 redundancy bill after it was deemed by a Tribunal to have taken on the staff of the Salvation Army who had previously delivered the services for the Council. This kind of story can lead to TUPE being perceived as a barrier for some organisations when deciding whether they can go ahead with a transfer, but provided the proper due diligence is performed, and the information and consultation process is carried out properly, there is no reason to fear it.

How can problems be avoided? Understanding where the risks lie is essential for any organisation facing a TUPE situation. For many employers, the risk is not in the informing and consulting stage, but before that, when determining which employees will transfer. Often, when service provision changes are proposed (as in the situation explained above), the employer simply does not know if a certain group of employees will transfer. Resolving that question is key before deciding if a transfer would benefit the organisation.

Can TUPE be avoided? TUPE cannot be avoided and transferor and transferee cannot ‘contract out’ of the effect of TUPE. But in very limited circumstances where, for example, in a service provision change situation, there would be a change in the nature of the service being provided after the transfer, TUPE will not apply and staff will not transfer. A recent example of this was the case of ‘OCS Group v Jones’ in which a change from a hot meal canteen to a sandwich and salad canteen was a big enough change to the nature of the service provided that TUPE did not apply. In an acquisition or merger scenario, the Regulations are more difficult to avoid.

If you feel that TUPE has left your brain in a tangle, don’t worry. The key thing is to be aware of its existence. If you are unsure about whether it applies, and its effects, take expert advice before entering into a contract to buy or sell a business, merge with one, or tender for the provision of services. Don’t let it put you off, just be aware of the possible pitfalls before it’s too late.