How imminent changes to TUPE could reduce the cost of your supply chain

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As most retailers will testify, managing the risks and costs associated with TUPE can be a real problem when making changes to supply chains. As the law currently stands, a change of supplier or service provider will usually trigger the application of TUPE. The main effect of this being that the relevant employees (generally speaking those who are engaged in providing the work which is the subject of the transaction) will transfer to the incoming supplier or service provider on their existing terms and conditions. Not only does this mean additional overheads for the incoming provider, but it quite often works against the business’ primary reason for wanting to change the service provider in the first instance i.e. the fact that the people delivering the service are not providing the required quality.

Moreover, an incoming supplier will often wish to provide the services in a different way or from a different location. A significant change of location usually means that the employees are redundant, giving rise to redundancy and notice pay costs. In addition, the way in which TUPE currently works means that such geographically induced redundancies would be automatically unfair dismissals as well. This would mean additional costs for compensation for unfair dismissal (of up to £74,200 per employee). These costs are often significant and the costs, one way or another, will find their way into the price being quoted for the proposed new contractor (that new contractor being most vulnerable to these risks and costs).

As well as costs, the application of TUPE can often cause timing problems meaning that arrangements for changing your supply chain have to be delayed to ensure compliance. For example, in situations where twenty or more employees are to be made redundant, there is a requirement on employers to collectively consult with the representatives of those employees. This consultation must begin at least thirty days before the first redundancies take effect. However, employers can only rely on their own consultation for these purposes (rather than being able to rely on any consultation carried out by the client business or outgoing service provider). What this means is that in a situation where a new contractor wishes to change the location from where the services are provided, the relevant employees will be made redundant. Further, if there are twenty or more employees, the incoming contractor will have to collectively consult, but it will be unable to begin that consultation until day one of the transfer meaning that it has to absorb the cost of twenty or more employees for up to a month, even though it has no need/work for those employees. Again, such extra costs usually end up being factored into the overall contract price.

Two upcoming changes to TUPE will make it markedly easier and cheaper to deal with the above issues. From 31 January 2014 onwards, a change of workforce location following a TUPE transfer will no longer mean that any resulting redundancies are considered to be automatically unfair. This will mean a real reduction in dismissal costs in change of supply chain scenarios. Secondly, and again from 31 January 2014 onwards, an incoming contractor will be able to rely on the collective consultation started/carried out by the client or outgoing contractor. That way, clients and suppliers/contractors can work together so that any necessary redundancies can take effect from day 1 following the transfer, rather than the supplier/contractor having to wait until after the transfer to begin its collective consultation.

The above upcoming changes, together with hints of willingness from courts and tribunals to entertain arguments that TUPE might not apply in every case, represent a real opportunity for businesses to obtain better value from suppliers and contractors when making changes to their supply chain. Moreover, with careful planning, clients and suppliers can structure deals in a way which significantly reduces the time and liabilities which may arise following changes in location and/or redundancies.

If you would like to discuss any of the issues highlighted, please contact Andrew Rayment on +44 (0)113 283 2642 or