From an employment perspective, the main piece of legislation to consider when outsourcing or in-sourcing in the UK is the Transfer of Undertakings (Protection of Employment) Regulations 2006 or TUPE for short.
What is TUPE?
TUPE implements the European Acquired Rights Directive (“the Directive”) in the UK. It aims to ensure continuity of employment for employees who are transferred from one employer to another either due to the ownership of a business (or part of a business) changing or when services are outsourced. TUPE is supplemented by both UK and European case law.
TUPE is a complex area of employment law. The information below is intended to give a general understanding of how TUPE applies in an outsourcing situation. Specific legal advice should be sought if it is possible that TUPE applies to a particular proposed transfer.
When does TUPE apply to an outsourcing?
There will be a transfer and TUPE will apply where:
(i) service activities cease to be carried out by one business and are taken up by a new business (outsourcing) or are transferred back to the original business (in-sourcing); and
(ii) prior to the changeover there is an organised grouping of employees situated in Great Britain, whose principal purpose is to carry out those service activities.
Specifically, Regulation 3(1)(b) of TUPE provides that a service provision change occurs in the following situations:
(i) activities cease to be carried out by a person (“a client”) on his own behalf and are carried out instead by another person on the client’s behalf (“a service provider”);
(ii) activities cease to be carried out by a service provider on a client’s behalf (whether or not those activities had previously been carried out by the client on his own behalf) and are carried out instead by another person (“a subsequent service provider”) on the client’s behalf; or
(iii) activities cease to be carried out by a service provider or a subsequent service provider on a client’s behalf (whether or not those activities had previously been carried out by the client on his own behalf) and are carried out instead by the client on his own behalf.
However, TUPE will not apply on a service provision change if:
- The client intends the services to be carried on for a specific event or for a short-term duration; or
- The services consist wholly or mainly of the supply of goods for the client’s use.
It should be noted that there is no requirement under this part of TUPE for the service provision to “retain its identity”. It is merely necessary for one organisation to cease to provide the activities and for another to take them over. Accordingly TUPE may well apply even where the service provider envisages carrying out the services in a new or innovative manner.
The effect of TUPE applying on an outsourcing
The basic principle
Under TUPE, the employment of all of the people who are employed by a client and “assigned” to the undertaking immediately before the outsourcing will automatically transfer to a service provider.
Employees transfer on their existing terms and conditions of employment, with their continuity of service intact and together with all rights and liabilities arising from the employment relationship with the client.
Personal Injury (PI)
Liability for pre-existing actual and potential PI claims will transfer, together with the benefit of the client’s employers’ liability insurance in respect of them. Public sector employers usually “self insure” so have no insurance cover to pass on, but under TUPE/2006 a public sector client will have joint and several liability with a private sector service provider for pre-transfer PI claims.
Pensions
A general exception to the transfer of terms and conditions under TUPE is that most rights under occupational pension schemes do not transfer. The service provider is not required to continue to provide pension age retirement benefits, death benefits or ill-health benefits from such schemes after the transfer.
However, a service provider must meet certain minimum requirements for pension provision. The service provider can choose whether to make provision through an occupational defined benefit (final salary) scheme, an occupational money purchase scheme or a stakeholder scheme.
Collective agreements and union recognition
Any collective agreements between the client and a recognised union will automatically transfer to the service provider insofar as they are applicable to the transferring employees.
Where the client recognises a union in respect of the transferring employees, the service provider must recognise the union in respect of those employees.
Restrictive covenants
The exact wording of any post-termination restrictions will transfer. This means that covenants which are closely tailored to the client may no longer be reasonable or appropriate in the context of employment by the service provider.
Who exactly transfers?
“Assigned” to the Undertaking
Where part only of a business transfers it will not always be clear whether particular employees are assigned to the transferring business or not.
Whilst the amount of time an employee spends working in the transferring part of the business is important and one would expect this to represent the majority of their working time, this in itself will not be determinative. Rather, consideration must be given to the employment relationship as a whole. Factors such as, the terms of the employee’s contract showing what they can be required to do, what they do in practice, and how the cost of the employee’s services are allocated must be taken into account. It is necessary to consider whether the employee is “integral” to the transferring business unit or really primarily attached to another part of the client’s business.
An employee who is temporarily assigned to the transferring business will not transfer.
Employees who are assigned to the business, but who, at the time of the transfer, are absent from work, for example on sickness or maternity leave, do transfer.
Objecting to the transfer
Although TUPE provides for the automatic transfer of employees, an employee cannot be transferred to the service provider against his will.
If an employee expressly objects to the transfer, then the transfer will have the effect of terminating their contract of employment with the client, but the employee will not be treated as having been dismissed.
If the employee’s objection is linked specifically to any substantial and detrimental change of working conditions which is to take effect after the transfer (whether or not in breach of his contractual terms) or, in limited cases, if the objection is linked to the identity of the service provider, then there is scope for the employee to claim constructive (unfair) dismissal.
Further employees might exploit their right to object to a transfer as a means of achieving an immediate exit from their employment without serving notice or being put on garden leave, and as a way of potentially rendering their post termination restrictive covenants unenforceable
Transfer Related Dismissals
Automatically unfair dismissals and the ETO defence
Only employees with more than one year’s service are protected against TUPE related unfair dismissals.
It is automatically unfair for either the client or the service provider to dismiss an employee by reason of a transfer to which TUPE applies. The only exception to this rule is where an “economic, technical or organisational reason entailing a change in the numbers or functions of the work force” (an ETO reason) applies, most obviously, a genuine redundancy situation.
A redundancy situation may arise, for example, where the service provider intends to operate the business from a different location after the transfer. Careful thought must be given to how and when this will be handled and in a commercial transaction there will normally also be negotiation as to the allocation of the related costs – both with regard to redundancy pay and potential claims.
If the client makes an assigned employee redundant and they are then immediately recruited by the service provider, their continuity of service will almost certainly remain unbroken both for employment protection and redundancy pay purposes.
If an ETO reason does apply to a particular dismissal then the dismissal will not be automatically unfair but it will be necessary to demonstrate that it was fair according to the normal unfair dismissal rules – i.e. that there was a fair reason for dismissal, a fair procedure was followed, and it was reasonable to dismiss in all the circumstances.
Liability for transfer related dismissals made by the client will automatically transfer under TUPE to the service provider. It is, however, arguable that where an ETO reason applies, liability for a pre-transfer dismissal will remain with the client.
Transfer related contractual changes
Extra protection in respect of contractual changes
Any detrimental change to terms and conditions made in connection with a TUPE transfer will be ineffective, even if it is accompanied by a new benefit which means that on balance the employee is no worse off. Since it is not possible for an employee to “contract out” of their TUPE rights, even if the employee has agreed to the change it will still, strictly speaking, be invalid and open to challenge later on.
The only exception to the rule that a change will be ineffective (other than if the change is unrelated to the transfer) is where the change is for a reason connected with the transfer and is an ETO reason (see above).
The exception is going to be limited in practice, since there must be a change in the numbers of the workforce or possibly their job functions. It should be stressed that this exception does not allow a service provider to harmonise the transferred employees’ terms and conditions of employment with those of its existing employees.
Terms which cannot practically transfer
There may be some terms and conditions which it is either difficult or indeed impossible for the service provider to continue after the transfer, for example a bonus scheme linked specifically to the employer company’s performance or a share option scheme.
The service provider will need to put a replacement benefit in place of substantially equivalent nature and value. Alternatively it might try to “buy out” the benefit (see below).
Information on employee liability
The client must provide the service provider with information about the employment liabilities which it will inherit. The information to be provided includes:
- the employee’s identity and age;
- information contained in the written particulars of employment given under s1 of the Employment Rights Act;
- information on disciplinaries, grievances, Court or Tribunal cases, claims or actions brought in the last two years or which the client has reasonable grounds to believe may be brought; and
- information on any collective agreement which will have effect after the transfer.
The information must be correct and the client must provide written notification of any changes.
Failure to provide the relevant information can result in an Employment Tribunal awarding the service provider such amount as it considers just and equitable, but, in most circumstances, the award will be a minimum of £500 per employee.
Duty to Inform and Consult
TUPE requires the client and the service-provider to inform the trade union representatives or, if none, elected representatives of any affected employees about the transfer.
The employee representatives must be informed in writing and in good time of:
- the fact that the transfer is to take place;
- why and when it is to take place;
- whether it will have any “legal, economic or social implications” for the affected employees; and
- whether it is expected that any “measures” will be taken in connection with the transfer either by the client or by the service provider in relation to their employment.
If any such changes or measures are anticipated by either party then the duty upon the client is not just to inform but also to consult with the employee representatives.
The service provider is obliged to inform the client in writing and in good time of any measures which it envisages taking after the transfer (in a “measures letter” or “statement of intent”) so as to enable the client to properly fulfil its obligations to inform and consult under TUPE.
There is also a duty, under TUPE, for the service provider itself to inform (and consult with, if appropriate,) the representatives of its own existing employees if they are likely to be affected by the transfer.
Both the client and the service provider can be liable for a failure to inform and consult.
Protective awards for a failure to comply with the TUPE collective information and consultation rules are determined according to what the Employment Tribunal considers to be just and equitable and can be up to 13 weeks gross pay for each affected employee.
Preventing Illegal Working and TUPE
Overseas employees must have permission to work in the UK. Where an employer has obtained and checked certain specified documents before employing an individual it will have a defence to the civil offence of negligently employing an illegal worker. Service providers are not allowed to rely on immigration checks carried out by the client. Service providers have 28 days ‘grace’ from the date of transfer to carry out original document checks.
In addition, if the service provider inherits any employees that have been sponsored by the client it and/or the client must notify the UK Border Agency (UKBA) of the change of sponsorship. If the buyer is not already a sponsor it will have to apply to become one within 28 days of the transfer. If it does not do so, UKBA is likely to reduce the permission of the sponsored migrants to remain in the UK to 60 days.
Practical Tip
- Either party should take advice if they believe that TUPE may apply.
- Identify the transferring employees early on in the process.
- Plan consultation with affected employees carefully, particularly if it is expected that any measures will be taken in connection with the transfer.
- The service provider should obtain as much information as possible from the client about what it will be taking on in terms of the contractual entitlements and employment history of the affected employees. In the context of a commercial deal this information will be obtained through the due diligence process.
- The service provider normally should seek warranties and indemnities from the client in respect of transferring liabilities. The usual position is that the client will agree to indemnify the service provider in respect of all pre-outsourcing liabilities whilst the service provider will be responsible for all post-outsourcing liabilities.
- The service provider should be aware that post-termination restrictions of transferring employees may not protect its business interests. There is little that can be done to rectify this due to changes in contractual terms due to a transfer being invalid.
- The service provider should carry out document checks on all employees it inherits due to an outsourcing within 28 days of the transfer.
This section was contributed by Jayne Sinclair, Associate in the Employment Team at Manches LLP. Jayne can be contacted on jayne.sinclair@manches.com.