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TUPE Reform – what lies ahead?

People sat in chairs looking at paperwork - photo taken from above Print publication

11/10/2013

The Government’s response to its consultation on TUPE was issued in early September and paves the way for changes to TUPE expected to be introduced in January 2014.  In this Business Insight we examine the proposed changes, their practical implications and what businesses should be aware of at this stage.

Service Provision Change (SPC) rule

The SPC rule (which very broadly means that the majority of outsourcing situations are covered by TUPE) will not be repealed.  This is much to the relief of many businesses engaged in outsourcing, including the 67 per cent. of consultation respondents who were against its repeal primarily because of the legal uncertainty it would cause.  The Government’s view is that it ‘gold-plates’ TUPE in that it goes over and above the requirements of the Acquired Rights Directive but is, nevertheless, necessary and not burdensome for business.  The Government will, however, make an amendment to TUPE to confirm that, for there to be a service provision change, the activities carried on post-transfer must be ‘fundamentally or essentially the same’ as those carried on before it.  This can be viewed as a house-keeping point which confirms the approach already set down and followed in case law.

It is important to be aware that the SPC rule has its limitations.  It only applies to outsourcings where there is an ‘organised grouping of employees whose principal purpose is the carrying out of the activities being transferred’.  That is not always clear cut in practice – if the transferor’s employees are not ‘organised’ with the ‘principal purpose’ of carrying out the activities concerned then there will be a potential argument as to whether or not TUPE will apply.  For example, it is not uncommon in an outsourcing scenario for the outgoing contractor’s employees to service a number of different clients and work on different activities.  Also potentially fatal to the SPC rule applying is where the incoming contractor is to provide the services in a fundamentally different way.

Contractors obviously need to consider these points at the very outset of a transaction as they are fundamental to the contract price and nature of the negotiations.

Employee Liability Information

The Government intends to extend the period prior to the transfer by which the transferor must provide information about the transferring employees from 14 to 28 days.  Although this reflects concerns raised during the consultation that the previous timescale was insufficient, 28 days is still likely to be seen as too short a period by many transferees where the nature of the transaction allows for a longer timescale.  This highlights the desirability of ensuring that, where possible, a suitable period is negotiated at the outset and covered in the heads of agreement.  It should be borne in mind that the employee liability information required to be provided under TUPE is relatively basic, therefore there is no substitute for a sound due diligence process (enabling accurate risk assessment) and well drafted warranties and indemnities.  Of course, contractors in competitive tendering exercises (or in an insolvency situation) may not have this luxury.

Post-transfer harmonisation of terms

Regulation 4 of TUPE currently renders void any contractual changes where the reason for the change is the transfer itself or a reason connected to the transfer that is not an ‘economic, technical or organisational reason entailing changes in the workforce’ (an ‘ETO’ reason).  The Government proposes to limit this prohibition on contractual changes to changes where the reason for the change is the ‘transfer itself’.  In other words, the current wider prohibition on changes for a reason ‘connected to the transfer’ will be removed.  The Government’s aim is to more closely reflect the wording of the Directive.  However, this is a fine distinction to make and there will inevitably be some practical challenges involved in ‘unpicking’ this point to ensure that employers stay on the right side of the law.  The Government’s guidance on this point will be eagerly awaited for this reason.

On a separate but connected point, the Government has stated that unilateral variations to contracts will be permissible where they are pursuant to a contractual provision (for example, an existing mobility clause) and where such a change would have been permitted had there not been a transfer.

HR practitioners may wish to familiarise themselves with the Government’s response in advance of the reforms being implemented to absorb the nuances of these proposed changes.

Place of work changes

The Government intends to amend TUPE so that a change in the location of the workplace post- transfer is within the meaning of ‘entailing changes in the workforce’ and therefore can be capable of being an ETO reason.  This means, helpfully, that post-transfer redundancies due to workplace relocation will no longer be automatically unfair although, of course, a fair procedure must still be followed to avoid a successful unfair dismissal claim.

The changes also mean that if the employee actually wants to move to the new work location rather than be made redundant, the contract can be varied by agreement to provide for the new location to be the place of work.  This is obviously a sensible and welcome change to TUPE.

Protection against dismissal

Regulation 7 of TUPE currently provides that an employee will be automatically unfairly dismissed if the reason for the dismissal is the ‘transfer itself’ or a reason ‘connected with the transfer that is not an ETO reason’.  As with Regulation 4 (see above), the Government proposes to amend Regulation 7 to remove the second limb (i.e. ‘a reason connected with the transfer’) so that the Regulation more closely reflects the wording of the Directive.  The aim is to reduce the likelihood that TUPE is interpreted more widely than the Directive and thereby reduce legal risk and provide more clarity.  This will effectively create a new test for whether a dismissal is automatically unfair.   This is likely to lead to initial uncertainty which will require clarification both by the Government’s new guidance and, over time, case law.

Collective Agreements

The Government proposes to amend TUPE to clarify that a ‘static’ approach to collective agreements will apply.  This means that transferees will be bound by the terms of a collective agreement applying at the date of transfer but will not be bound by future terms and conditions negotiated via collective bargaining to which they are not a party.

In addition, terms deriving from a collective agreement can be re-negotiated one year post-transfer (even where the reason for the change is the transfer itself).  The caveat to this, however, is that the overall change must be ‘no less favourable’. The Government will provide further guidance on what this means but disputes over whether changes are no less favourable overall are foreseeable, especially in unionised workplaces.

Collective redundancy consultation

Another welcome point of clarification for employers here – pre-transfer redundancy consultation will count for the purposes of collective redundancy requirements (i.e. will count towards the statutory 30 or 45-day consultation period) as long as the transferee and transferor agree and the consultation is ‘meaningful’.  The transferor will not, however, be able to make the redundancies pre-transfer based on the transferee’s ETO reason so the employees will have to actually transfer to the transferee (even if only for a day) before the dismissals can then be effected by the transferee.

Micro-businesses

Employers of 10 or less employees with no trade union or employee representative body will be able to inform and consult directly with employees prior to a transfer thus avoiding the need to elect employee representatives.

Walker Morris comment

The proposed changes can be viewed as generally employer-friendly and should help to oil the transactional wheels, for example, with regard to collective redundancy consultations and post-transfer relocations.  That said, they do not provide total clarity nor will they remove many of the current frustrations and uncertainties experienced in respect of issues such as post-transfer harmonisation of terms and conditions.  There will inevitably be a need for some judicial interpretation of the amendments to Regulation 4 and 7 outlined above.  Our advice continues to be that businesses should take specialist advice on TUPE transactions, not least to ensure that the risks are identified in advance and the commercial agreement provides adequate, tailored protection.

If you require any further advice on this subject please let us know.

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