Since the early 1980s, the intention behind the Transfer of Undertakings (Protection of Employment) Regulations – better known as TUPE – has been to provide protection for employees by continuing their employment on the same terms as before their employer's business (or part of it) was taken over or contracted out.

Anyone taking over a business turns a blind eye to the implications of TUPE at their peril. This is because the purchaser automatically acquires those employees who are part of the business, together with any liabilities in respect of them. However, TUPE does not apply to all business acquisitions and there are practical steps which can be taken to see when TUPE applies and how it may best be dealt with.

TUPE applies where there is a transfer of an undertaking or part of an undertaking from one owner to another, though share sales do not fall under it. TUPE applies whether the transfer happens because of one transaction or a series of transactions. Attempting to avoid TUPE by transferring each of the assets, such as plant, equipment and employees, separately will not work.

An ‘undertaking' means any trade or business including non-commercial undertakings. The definition of what is an undertaking is continually being re-assessed by case law. In particular, the business needs to have some specific identity but may be part of a larger business. In the TUPE context, ‘part of an undertaking' means a part of a business or trade which is capable of being a self-contained or severable part of the whole, e.g. back office activities dedicated to the particular activities put into run-off.

TUPE specifically states that any attempt by either the seller or the buyer to contract out of TUPE will be void. The best plan is to try to structure the transaction by:

  • planning ahead by downsizing in good time (probably easier said than done); or

  • selling assets only with no passing of the business to the buyer; or

  • the buyer agreeing to terms with the employees before the transfer so that they refuse to transfer and thus have no claim,

    though this may be seen as an attempt to contract out of TUPE, which is not permitted); or

  • dismissing employees for a reason not connected with the transfer or under the economical, technical or organisational (ETO) exception.

    The effects of TUPE are that employees are taken over on their current terms and conditions. Their contracts act as if they were made between the employees and the buyer, and a trade union recognised by the seller is deemed recognised by the buyer.

    Although liability for criminal offences does not pass across as part of the purchase, liability for employment-related claims does. Any employees dismissed by the seller in order for the transfer to go ahead automatically become unfair dismissals in most cases. Unless the buyer can show justification under an ETO defence, any employees dismissed by the purchaser for reasons connected with the transfer are automatically classed as unfair dismissals. In both cases, the employee must have been employed for a minimum of one year for an unfair dismissal claim to take place. If employees decided not to transfer, they are treated as if they have resigned and lose any right to bring a claim for unfair dismissal or redundancy against either the seller or buyer.

    Outsourcing

    Outsourcing involves a business agreeing with another business to provide certain services which are normally not part of the main activities of the client business, and covers the situation under which the client decides to put out to tender a service which it previously carried out itself.

    There is clearly a transfer when the client outsources work it was previously undertaking. Although there is no direct transfer in the case of a new contractor taking over, TUPE still applies. There might be difficulties as the client may want to change the contractor because of problems with the employees. The client needs to ensure that it reserves sufficient power to require the contractor to deal with problem areas properly, otherwise the employer may inherit the problem or a claim, or may limit its ability to have another contractor take over.

    Following recent European cases, TUPE still applies even if there are no assets transferred provided that there is an identifiable business or economic entity (which may comprise only the staff in labour-intensive sectors such as cleaning) which is carried on before, and which continues after the transfer but by a different person.

    One practical difficulty is that the terms and conditions of transferring employees will differ from those of existing employees. If this situation remains, there is a significant risk that equal pay/discrimination claims may be brought in the future. The buyer must implement some form of harmonisation programme. However, any changes to an employee's detriment will need to be offset by enhancements to other terms so as to avoid breach of contract/constructive unfair dismissal arguments.

    TUPE and the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 1999, impose certain obligations on both the seller and the buyer in advance of a TUPE transfer to inform and consult with either recognised trade unions or elected employee representatives.

    The duty to inform involves the seller providing certain information in respect of the employees affected by the transfer, either directly or by the measures taken in relation to it. Information includes the fact, time and reasons for the transfer; implications of the transfer and any measures which will be taken, e.g. redundancies or reorganisations.

    In the event of a failure to inform or consult, the employee representatives or any affected employee may bring a claim for a protective award. Compensation is limited to 13 weeks' actual pay per employee.

    On the dismissal front, the buyer can wait until after the transfer but the difficulty is that there is no golden rule as to when the dismissals will cease to be transfer-related, and they have been deemed to be connected up to two years after a transfer took place. Alternatively, the buyer can invoke the ETO defence which must entail changes in the workforce.

    This does not include harmonising terms and conditions of employment for logistical reasons. Even if an ETO reason can be established, this does not, of itself, make the dismissal fair; the normal tests of reasonableness still have to be satisfied. The ETO defence is available in respect of dismissals by the seller prior to transfer. A very recent case has established that, if the dismissal is found to be for an ETO reason but is still unfair, this liability will remain with the seller.

    Practicalities of the contract

    The buyer should obtain from the seller an indemnity in respect of any liabilities arising before the transfer, a warranty as to the accuracy and completeness of the information about the terms of employment of the transferring employees, and an indemnity in respect of dismissals which have taken place and may be caught by TUPE.

    However, these are only worthwhile if the seller is still of some financial substance and has not taken flight to sunnier climes. Administrative receivers of insolvent companies will not give any such assurances, although it may be possible to negotiate a retention in certain cases.

    In addition, the seller should obtain an indemnity from the buyer in respect of any liabilities arising after the date of the transfer. Both may wish to obtain indemnities in respect of any claims arising out of either party's failure to inform/consult with employees under TUPE.

    Brian Palmer is a partner at London law firm Charles Russell. His area of expertise is contentious and non-contentious employment matters including recruitment, service contracts, disciplinary procedures, terminations, the employment aspects of acquisitions and unfair and wrongful dismissals. He has a particular expertise in the protection of confidential information and critical teams of employees.