An employer's guide to TUPE

What is TUPE?

TUPE stands for the Transfer of Undertakings (Protection of Employment) Regulations. Its aim is to protect employees if the business they work for changes hands.

Contract law provides that if a business passes into new ownership, the contracts of employment of employees come to an end. The employees do not have to be retained by the new employer, but if they are retained, their contractual terms and conditions can be altered to their detriment.

To give employees protection in these circumstances, the Transfer of Undertakings Regulations were introduced in 1981, the latest version of these regulations is the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). In 2014, further changes to some of the regulations came into force under The Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2013.

These regulations protect the employee’s employment status, protect the employee from being dismissed as a result of a transfer, protect their terms and conditions from being changed as a result of the transfer, and set out specific obligations for the existing employer (the Transferor) and the new employer (the Transferee) to consult with the employees before a transfer takes place.

The regulations do not just apply to the sale of a business, or part of a business, but also to the contracting out of part of a business to an external provider. It may apply when a customer changes external contractors or where a customer changes a supplier of services.

The regulations have a justified reputation for complexity and have been subject to much litigation, which has generated an often confusing body of case law in the UK and across Europe.

When does TUPE apply?

The regulations apply to a “relevant transfer”. This is defined as a transfer of a business, undertaking, or part of a business or undertaking where there is a transfer of an economic entity that retains its identity after the transfer. TUPE can also apply to a “service provision change”. This is where a client engages a contractor to do work on its behalf, reassigns such a contract or brings it “in house”. However the “supply of goods” or the “one off buying in of services” are not covered by the regulations.

First, it should be noted that this does not apply to the transfer of shares in a business. This does not affect the employees' rights because there is no change in the identity of the employer. The employees are still employed by the same company even if the entire shareholding has been transferred to new owners. Of course, especially in a small company, this may have a profound effect on the employees, but it does not fall under the protection of the regulations.

A relevant transfer

The definition of a relevant transfer involves three key elements:

• An economic entity;
• The transfer of the entity; and
• That the economic entity retains its identity after the transfer.

An economic entity is an organised grouping of resources that has the objective of pursuing an economic activity. The resources can be physical resources, e.g. buildings or machinery, employee resource, i.e. the staff who carry out the activity, or intangible resources, such as goodwill or knowledge.

The first step in deciding whether there is a TUPE transfer is to see if it is possible to identify an economic entity. This does not have to be a separate entity prior to the transfer, it could be one constituent element of the Transferor business. It will be necessary to identify the people and assets which comprise the entity. This might include employees, the premises or buildings, machinery, stock, goodwill, work in progress and know-how.

The entity must transfer as a 'going concern' and must retain its identity after the transfer. Generally, the more similar the entity is before and after the transfer, the more likely it is to be a TUPE transfer. A significant break in the operation of the entity may point to there being no TUPE transfer. Similarly, if the entity ceases to be identifiable as a separate entity as a consequence of the transfer, there is unlikely to be a TUPE transfer.

Service provision change

This covers three possible circumstances:

• Where a business has been carrying out an activity “in house” and decides to engage another business to carry it out on its behalf (contracting out);
• Changing the contractor that carries out the activity on the end user’s behalf;
• Bringing the activity back “in house” (contracting in).

For this provision to apply, there must be an identifiable and organised grouping of employees whose main job is to carry out the activity immediately prior to the transfer. The activities which are carried out after the service provision change must be “fundamentally the same as the activities carried out previously”. A service provision change can apply to as few as one employee. Contracts wholly or mainly for the supplying goods for the client’s use are not covered.

Who transfers?

Employees who are part of the business or work on the contract will transfer. If only part of the business is to transfer only employees who work in that part of the business will transfer. In a service provision change, only those employees who are assigned to the relevant contract will transfer. This relates to employees working in the relevant area at the time of the transfer. Workers who are temporarily assigned to the business or part of the business to transfer will not transfer with it. 

The position can be complicated where there are workers who spend some of their time working in the part of the business that is to transfer and the rest working elsewhere in the business. It is also complicated if an employee works for part of his time on a contract where there is to be a service provision change but the rest of his time working on other contracts which are to remain with the Transferor.

As a general rule, if a worker spends the majority of their time working in the part of the business to transfer, they will go with it. However, in the case of a service provision change, the workers must be organised to be working on that contract, rather than working on it by coincidence. However, this relies very much on the individual facts of the case and it is not always easy to decide who should transfer in these circumstances. Advice should always be sought in these circumstances.

Transfer of the contract of employment

Where TUPE applies, the contracts of employment of all employees transferring will also automatically transfer from the Transferor to Transferee. All the Transferor’s rights, powers, duties and liabilities under or in connection with the contracts of employment and any acts or omissions of the Transferor before the transfer are treated as having been done by the Transferee.

There is one major exception to the general rule that transferring employees retain their pre-existing terms and conditions. This relates to pensions. Regulation 10 of TUPE 2006 contains the 'pensions exception' in its current form.

While the Transferee will be required to provide the transferring employees with a pension if the Transferor did so, the Transferee does not have to match the Transferor’s pension arrangements. The Transferor is required to provide certain minimum standards of pension provision. This can be done in three ways:

• By providing a money purchase occupational scheme, matching employee contributions up to a maximum of six per cent;
• By providing a final salary occupational pension scheme; or
• By exercising auto-enrolment as required under the Pensions Act 2008.

Even if the Transferor had no pension provision or had not yet reached their staging date for auto enrolment, the Transferee will be obliged to give them access to a pension scheme. If an employee of the Transferor has opted out of auto-enrolment, the Transferee must ignore this and deal with them as they would a new recruit.

It is important to note, however, that some early retirement pension benefits, and enhanced pension payments on redundancy may transfer. Please seek advice from your HR Rely advisor if you have any concerns. 

Please see Guide to Pensions for more detailed information. GUIDANCE ON PENSIONS.

Employees who refuse to transfer

Employees may object to being transferred. If they do so, they will not transfer and their contracts will terminate at the date of the transfer. There is no need for the objection to be in writing, it is important to be clear that the employee objects to transferring to the Transferee as opposed to being unhappy about the fact there is a transfer situation.

Ordinarily an employee who objects to being transferred will be treated as having resigned and there is no obligation on the transferor to find the employee another job. This is unless the objection is due to a substantial change in working conditions (see below) in which case the employee may be able to treat themselves as constructively dismissed.

Protection against dismissal

Employees who are subject to a TUPE transfer have enhanced unfair dismissal rights. Subject to the employee having the requisite service to bring a claim, an employee is automatically unfairly dismissed if the sole or principal reason for the dismissal is the transfer and there is no an 'ETO' defence (see below).

If an employee resigns and claims constructive dismissal after the transfer as a result of transfer related changes made to his contract of employment, this will also be considered to be automatically unfair.

The following employees are potentially protected in this way:

• Those dismissed by the Transferor before the transfer;
• Those who remain in the employment of the Transferor and do not transfer;
• Those who transfer to the Transferee and are subsequently dismissed by the Transferee;
• Those in the Transferee’s original workforce who are dismissed as a result of the transfer.

There is a defence to this type of claim. If the employee is dismissed as a result of an “economic, technical or organisational” reason entailing changes in the workforce (ETO reason) (see below).

Was the dismissal due to the transfer?

This is a question of fact and it is for the employee to show that the dismissal was due to the transfer. However, if dismissals take place at the time of the transfer, or shortly after, it will not be difficult for employees to give some support to this being the reason. The employer will then have to demonstrate that the dismissal was not due to the transfer. To do this, the employer will have to show that the dismissal would have happened in any event e.g. for disciplinary or performance reasons or because a redundancy exercise was carried out which did not arise because of the transfer. Even if the reason for the dismissal is the transfer, it will not automatically be unfair if the employer is able to show an ETO reason.

Pre-transfer dismissals

Where the dismissal is either for a reason unconnected with the transfer, or if the dismissal is because of the transfer and the Transferor has an ETO reason for the dismissal, then the normal principles of fairness relating to a dismissal will apply. If the dismissal is unconnected with the transfer, any claim for unfair dismissal will be the potential liability of the Transferor. If the dismissal is because of the transfer, but for an ETO reason, liability could lie with either the Transferor or Transferee.

If the dismissal is because of the transfer and there is no ETO reason, the dismissal will be automatically unfair and liability will be with the Transferee.

Post-transfer dismissals

There is no time period laid down after the expiry of which it is safe to dismiss an employee subsequent to the transfer. The longer the period of time that has passed after the transfer the easier it will be to argue that the dismissal is not because of the transfer. It is always safest to be able to point to some circumstances either unconnected with the transfer or that would have happened whether or not the transfer had taken place as the reason for the transfer. In the absence of such a reason, there is always the possibility that even years after the transfer that the dismissal will be considered to be because of the transfer.

A dismissal by reason of the transfer will be automatically unfair and liability will fall on the Transferee. If there is an ETO reason for the dismissal, the Transferee will still have to show that it has complied with the usual requirements for a fair dismissal.

ETO reasons

An ETO reason must relate to the day-to-day running of the business. It is likely to include:

• A reason connected with the profitability or market performance of the business (an economic reason);
• A reason associated with the nature of equipment or the production process which the business operates (a technical reason);
• A reason related to the management or organisational structure of the business (an organisational reason); or
• A change in the place of work.

An ETO reason must entail changes in the size and make-up of the workforce, except where the reason is a change of work place location, rather than mere changes in the employee’s contractual terms. Further, the ETO reason rests with the person who enacts the dismissal. If the Transferor dismisses, they cannot rely on the Transferee’s ETO reason and vice versa.

Examples of ETO reasons might include redundancy dismissals where, after the transfer, the Transferee has more employees than are required for the business or dismissals associated with the closure of a site if production is to be concentrated on one site after a dismissal. This is a complex area and any employer contemplating dismissing in these circumstances should seek advice from their HR Rely advisor.

If a dismissal is for an ETO reason, it will not be automatically unfair. However, it will still be subject to the ordinary principles governing a fair dismissal. The employer will still have to demonstrate that it acted reasonably in line with s. 98 of the Employment Rights Act 1996. Where the dismissal is for an ETO reason, it will almost inevitably either be a redundancy or for some other substantial reason. All the usual procedures appropriate to such a dismissal will apply.

Constructive dismissal

The usual right to claim constructive dismissal is expressly preserved in the TUPE Regulations. If a Transferee states that it will make changes to an employee’s terms and conditions, this may be an 'anticipatory' breach of contract, giving rise to a claim for constructive dismissal. Similarly, a change in terms and conditions after a transfer may also give rise to a constructive dismissal. As the dismissal would be as a result of the transfer, unless there is an ETO reason for the change, it would be automatically unfair. If there is an ETO reason, it would still be a potentially unfair dismissal and would be subject to the law in relation to a conventional constructive dismissal claim.

Regulation 4(9) of TUPE gives an employee who would in the normal course of events transfer under the Regulations the right to resign and claim constructive dismissal if the transfer would include a substantial change in working conditions to a material detriment. This right is different to a conventional constructive dismissal claim, as there does not have to be a fundamental breach of the employee’s contract of employment.

There are three necessary elements of such a claim. There must be:

• A substantial change — this will depend on the particular circumstances of the case, in its guidance, BIS acknowledges that “what might be trivial changes in one setting might constitute a substantial change in another”.
• In the employee’s working conditions — this is wider than contractual terms. In Tapere v South London and Maudsley NHS Trust (2008) the EAT considered a change of workplace that interfered with child care arrangements to be a substantial change in working conditions even though the Trust had a contractual right to enforce a move in these circumstances. In Merckx and Neuhuys v Ford Motors Belgium SA (1996) the European Court of Justice held that moving salesmen from one dealership to another where there was no guarantee of a client base or sales figures and which had a potential adverse effect on commission was a change to working conditions.
• To their material detriment — the BIS guidance suggests that this would include “a major relocation of the workplace which makes it difficult or much more expensive for an employee to transfer, or the withdrawal of a right to a tenured post.” For example, in Abellio London Ltd v Musse and others (2012), bus drivers resigned and brought regulation 4(9) claims as a result of a relocation of 6 miles. The EAT held that, in London, a move from north to south of the river was substantial, and an increase in the working day of between 1-2hrs was a material detriment. It was irrelevant that their contract contained a mobility clause. 
• In assessing the impact of a proposed change, this should be considered from the employee’s point of view. A Tribunal should ask whether the employee considered the changes to be detrimental and, if so, whether that was a reasonable standpoint.

Post-transfer contractual changes

Contractual variations are not valid where the main reason for the change is the transfer itself, and there is not an ETO reason entailing changes in the workforce. This means that, except for changes in work place location, there must be a change to the size and makeup of the workforce in addition to contractual changes for those changes to be valid. Typically this would involve a reorganisation including some redundancies.

This applies even where the affected employees specifically agree to the changes. In practice, changes that are entirely positive for the employees are never likely to be challenged, but where the changes are part of a package which is a mixture of positive and negative changes for the employee, challenges may arise. This is the case even if an overall assessment of the new contractual terms would conclude that the changes were on balance favourable to the employee. From the employer’s point of view, the worst outcome would be if the employees were to retain the positive contractual changes but not the negative ones.

Apart from changes to the work place location, if an ETO defence is to be used, this must entail not just a change in contractual terms, but also a change in the size and makeup of the workforce. Changing terms and conditions in the context of a redundancy exercise after a transfer may amount to an ETO reason. However, merely harmonising terms and conditions after a transfer will not. Even where an ETO reason applies, the employer still needs to follow a proper process for changing terms.

Valid contractual changes

A change to the contract can be valid if the change(s) is not by reason of the transfer, but instead is as a result of some intervening event or events which break the link with the transfer. An example of this would be a change in working hours because of customer requirements. This change would be caused by the customer’s request rather than an earlier transfer.

Variations to the contract are also permissible where the contract itself allows the change, such as the right to require employees to change shift pattern or be flexible in their job duties.

Any changes might be introduced as part of an overall review of contractual terms involving both employees who have transferred in and pre-existing employees. This is a valid approach as long as there are changes across the board; if it could potentially be characterised as a 'tidying up measure' to harmonise terms and conditions, it may fall foul of the regulations.

Collectively agreed terms can be varied at least one year after the transfer as long as, when the whole contract is considered together, the employee’s terms and conditions are no less favourable. Additionally, the transferee will not be obliged to apply changes to collectively agreed terms after the transfer if it is not part of the collective bargaining body making the changes. For example, where employees from a public sector employer transfer to a private sector employer.

Another valid way of effecting a contractual change would be to dismiss employees and re-employ them on the new terms and conditions. If the employees accepted the new contracts, this would be a valid change. However, if the dismissal was by reason of the transfer it would be automatically unfair unless an ETO reason could be established. There may be circumstances where this is an approach an employer might wish to take, but advice should be sought from your HR Rely advisor before going down this route. In any event, a proper process needs to be followed whenever terms and conditions are changed.

Information and consultation

Regulation 13 of the TUPE regulations place obligations on both the Transferor and the Transferee to inform and, in certain circumstances, to consult with representatives of all employees affected by a relevant transfer. For organisations with fewer than 10 employees, the obligation to inform and consult can be carried out directly with the employees affected. 

Consultation must be carried out “long enough before the relevant transfer to enable the employer of any affected employees to consult the appropriate representatives of any affected employees.” There is little guidance as to what is a long enough period, but in Cable Realisations v The GMB (2008), the EAT upheld a Tribunal decision that, in providing information on 15 August 2007 for a transfer to take place on 3 September 2007 when there was an annual shutdown between the 20 and 31 August 2007, Cable Realisations had been in breach of the regulations. The Tribunal had been entitled to take into account the shutdown period when representatives had been unable to consult with their members or speak to management. In LLDY Alexandria Ltd v Unite the Union and another (2014), a period of 10 business days was held to be insufficient time to enable proper consultation.

Affected employees are defined as “any employee of the Transferor or Transferee (whether or not assigned to the organised grouping of resources or employees that is the subject of the relevant transfer) who may be affected by the transfer or may be affected by measures taken in connection with it.”

There are three possible groups of affected employees:

• Employees who are to be transferred;
• Employees of the Transferor who are not to be transferred but whose jobs may be affected by the transfer; and
• Employees of the Transferee whose jobs may be affected as a result of the transfer.

Information

The obligation to inform arises out of regulation 13(2) of the regulations. The information to be communicated is:

• The fact that the transfer is to take place, when it is likely to happen and the reason for it.
• The legal, economic and social implications of the transfer for the affected employees. This would include the protection they have under the regulations.
• Obliged to give information about any measures that the Transferee is contemplating in relation to employees who transfer. The Transferee is obliged to provide the Transferor with the necessary information to comply with the requirement.
• The number of agency workers working in the business, what part of the business they are working in and the kind of work they are carrying out. LETTER TO INFORM REPRESENTATIVES OF PROPOSED TUPE TRANSFER AND RELATED MEASURES.

Consultation

Where it is contemplated that measures will be taken, there is an obligation to consult on these proposals. “Measures” is given a wide interpretation and includes positive acts and omissions by the employer. In Todd v Strain and others (2009), the EAT held that changes in pay arrangements following the transfer, including a change in the payment day and a tax rebate, were measures which required consultation. This was despite the fact that it was held that the changes were not disadvantageous to the employees. The EAT commented that the purpose of the regulations was to enable transitional arrangements to be explained to the employees and for them to be reassured that they would not be prejudiced by them.

The duty to consult falls on either the Transferor or the Transferee depending which is proposing to take measures in connection with the transfer. The requirements in relation to consultation are:

• The employee representatives must be provided with clear information on what is being proposed and why;
• Employee representatives should be given adequate time to consider the proposal and respond to it;
• The Transferor/Transferee should enter into the consultation with an open mind as to whether its proposal will need to be amended; and
• Proper consideration should be given to the representative’s responses and they should be taken into account in formulating the final proposal. If the employee representatives make counter proposals, these should be replied to and, if rejected, there should be an explanation as to why.

The regulations do not require that there should be a negotiation with employee representatives. However the regulations do stipulate that the process should be undertaken with a view to seeking the representative’s agreement to the proposed measures. To this end, it is very important that no announcement is made before the end of consultation that indicates an irreversible decision has been taken to implement the proposed measures.

Consultation pre-transfer regarding redundancies

If the Transferee is proposing to make redundancies after the transfer, they are permitted to commence collective consultation with elected employee representatives prior to the transfer taking place. This consultation will count towards the minimum 30 day period of consultation where there is a proposal to dismiss 20 or more employees within a 90 day period (or the minimum 45 day period where 100 or more dismissals are proposed). However, this provision only applies if the Transferor agrees, preferably in writing, to the Transferee doing so and the dismissals may only take place after the transfer. If agreement is obtained, the obligation to notify the Secretary of State by completion of the HR1 form can also take place prior to the transfer.

Selection of the representatives

If the affected employees are covered by collective bargaining arrangements with a recognised trade union, then consultation will take place with the representatives of that union or unions even though some of the affected employees may not be members of the union. In the absence of collective bargaining arrangements or where collective bargaining arrangements do not cover all the affected employees, the options are as follows:

1. To consult with representatives who have been selected for a purpose other than a business transfer consultation, but whose authority is wide enough to represent the employees on a TUPE consultation exercise. This is likely to be the case if the representatives are part of a works council or staff negotiating committee. It is unlikely to be so if the representatives are part of a social committee.

2. To organise the election of representatives. The regulations set out requirements for this type of election. The following requirements must be complied with:

• All employees who are affected by the proposals must be entitled to vote.
• Candidates for election must be employees who are affected by the proposal at the time of the election. If only one candidate comes forward, they can be appointed without an election.
• There must be sufficient representatives to represent the interests of the affected employees.
• Each employee must be entitled to vote for as many candidates as there are representatives. Link to ballot form for Election of Representatives — TUPE.  
• So far as is possible, the ballot should be secret.
• If a representative ceases to act in that capacity, there must be an election for a new representative to fill the vacancy.

3. To consult directly with employees if the organisation has fewer than 10 employees.

During the consultation, the representatives should be given access to the affected employees and provided with appropriate accommodation and facilities to fulfil their role. This might include access to a telephone, photocopier or computer.

The representatives are entitled to reasonable paid time off to carry out their duties and to have relevant training. It is unlawful for a representative to be subject to a detriment because he is a representative and any dismissal for this reason would be automatically unfair. This protection includes employees who stand as candidates in an election for representatives. These rights apply regardless of length of service.

If there is a failure to comply with the regulations relating to consultation, a Tribunal may award up to 13 weeks’ gross pay for every affected employee. The Tribunal must make the award on the basis of what is just and equitable having regard to the seriousness of failure by the employer to comply with its duty. The award is not compensatory and is effectively a sanction imposed on the employer in breach. The Tribunal can make an award against the Transferor or the Transferee depending on which is at fault. It can make an award against both if the circumstances warrant it.

Employee liability information (ELI)

In addition to taking over the employees on their existing contractual terms the Transferee assumes responsibility for any legal liability the Transferor had towards its employees. The only exception relates to criminal liability towards employees. The Transferee’s liability, therefore, could include, for example, claims for discrimination, equal pay, personal injury, health and safety, National Minimum Wage as well as claims under the Working Time Regulations. The Transferee retains the benefit of any insurance the Transferor had against these risks.

As a result of this, the law requires the Transferor to provide the Transferee with ELI before the transfer so the Transferee can understand the potential liabilities it is assuming. It is important to be mindful that this may involve the disclosure of employees’ personal data. 

The following information should be disclosed:

• The identity and age of the employees;
• Their main terms and conditions of employment as required by section 1 of the Employment Rights Act 1996;
• Information about any disciplinary action taken against the employee or any grievance brought by the employee in the last two years;
• Information about any court or Tribunal claims brought by the employee in the past two years, or which the Transferor has reasonable grounds to believe an employee may bring; and
• Information regarding any collective agreement affecting the transferring employees.

The information must be provided in writing or made available in a readily accessible form and given to the Transferee no less than 28 days before the transfer. If that is not reasonably practicable, the information should be provided as soon as practicable after that. There are circumstances where this information may be provided indirectly via a third party e.g. where an outgoing contractor provides information via the client business to the new contractor. LETTER TUPE NOTIFICATION OF EMPLOYER LIABILITY.

If the Transferor fails to provide the relevant information about one or more of the transferring employees, a Tribunal may award compensation which will not be less than £500 per employee unless the Tribunal considers it just and equitable to award less. In assessing the correct level of compensation, the Tribunal will take into account the value of any loss sustained by the Transferee as a result of the failure to provide the relevant information.

The information required to be provided under ELI would not necessarily contain all the information that the Transferee wants. If the Transferee is in a position to ask for more information, the attached checklist may be a helpful starting point, subject to any due diligence exercise. (See Due Diligence checklist).

Government contracts

When granting contracts, both central and local government require that the successful contractor complies with the principles of the regulations, even where there is doubt as to whether the regulations actually apply. Companies contemplating tendering for government contacts should seek advice before doing so.