Employment Law ChangesTUPE

Russell Brimelow and Jonathan Carr

23 April 2013

What we will cover

• Quick recap of TUPE

• Recent case law – eroding the certainty of service provision changes

• The Government’s proposals for reform of TUPE – what is likely to happen and when

• What practical steps should you be taking in readiness for the changes to TUPE and in light of recent cases

Quick recap ...

• The Transfer of Undertakings (Protection of Employment) Regulations 2006

• Implements the Acquired Rights Directive so similar laws exist throughout the EU (but some important differences apply)

• Main aim: ensure employment of employees assigned to a particular business (or identifiable part) transfer when that business is sold or taken over by another employer.

TUPE 1981

• TUPE 1981 - a single test A transfer of an economic entity (an organised grouping of resources

which has the objective of pursuing an economic activity) which retains its identity (“Old TUPE”);

Focused on extent to which main assets of business had transferred or been acquired

E.g. premises, clients, IP, equipment, people etc. Later cases suggested the transfer of people but little

or no other assets may be enough in labour intensive undertakings

Led to confusion and ambiguity over whether TUPE applied in outsourcing situations – had the “identity” been retained?

TUPE 2006

• TUPE 2006 – two alternative testsOld 1981 test retained (applicable in business sales)New service provision change (SPC) test added, where

“activities” carried on by an organised grouping of employees are taken over by a third party.

SPC includes :

Contractor A Contractor B

Client

Key points

• Employees transfer with: continuity of service same terms and conditions (except pensions)

• Difficult to lawfully harmonise terms and conditions with an existing workforce BUT unlikely to be an issue if the changes overall are no less favourable

• Information and consultation obligations apply

• Transferor required to provide “employee liability information” to Transferee pre transfer

Key points

• Automatic unfair dismissal of employee if dismissed by reason of the transfer or for a reason connected with the transfer that is not “an economic technical or organisation reason entailing changes in the workforce” (ETO)

• Redundancy will usually be an ETO.

• Sometimes difficult to identify who is assigned to the organised grouping of resources

• Transferee inherits any pre-transfer liabilities to transferring employees and collective agreements

Service provision changes

• For a service provision change to applyThere must be an organised grouping of

employees situated in the UKthe principal purpose of the organised grouping

of employees must be to carry out the activities;Activities must be services based – not wholly or mainly

supply of goods to the client; andIntention must be for transferee to carry out activities other

than in connection with a single specific event or task of short term duration (2012 Olympics held out as an example of the SPC exemption)

Example Service Provision Change - Now

UK plc tenders its IT contract every 5 years. A is the incumbent with 25 people on site. B wins the bid, promising a radically different approach which will be better and cheaper – with the work being done by its existing remote teams. B doesn’t need any of A’s 25 people.

• Is this a Service Provision Change?

• Who picks up the liability for the 25 people?

Service provision changes

• Until 2009/10 prevailing view that SPC was a near certainty in outsourcing cases.

• Relatively little case law scrutiny of the SPC test pre 2009/10

• Activities need not be identical before and after the transfer – just “fundamentally or essentially the same” (Metropolitan Resources Ltd v Churchill Dulwich Ltd)

• Case law has been unravelling the SPC test ever since and it now looks set to go....

Recent case law – SPCs

• Several different themes in cases over last 3-4 years have significantly eroded the number of cases in which SPCs are found to apply:

Do the activities remain the same?Is there an organised grouping, organised by reference to the

client?Fragmentation of activities between multiple providersIs it the same client?Meaning of “single specific event or task of short term duration”

• Presumption of SPC in outsourcing cases is now dangerous

Do the activities remain the same?

• Metropolitan Resources (2009) - minor differences not significant but...

• Scrutinise the nature of the activity OCS v Jones (2010) – change of food service from prepared

hot food to selling packaged sandwiches. Required different types of staff, different facilities etc, so not same activity even though at high level summary was still providing lunchtime food service at car plant

Notts Healthcare NHS Trust (2011) – residential care homes closed, activity switched to home based care – not the same

Do the activities remain the same?

• Scrutinise nature of the activity (continued)Johnson Controls (2012) – secretaries took over booking

cabs, not the same as centrally coordinated ‘middle-man’ service. Look at way work is done, not just tick box approach of what is done

Ward Hadaway (2009) – relevant activities defined as work in progress not expectation of future work so no activity transferred

Enterprise Management (2012) – two activities pre transfer, only one of which continued post transfer (resulted in 15% reduction of work) – held to be significant to scope of activity

Do the activities remain the same?

• Still occasional cases leaning the other way:Islington v Bannon (2012) – post transfer some aspects of

activity abandoned or neglected because of resourcing issues – fact that could not provide the service to the same standard not material, the activities were still fundamentally the same

• So difficult now to know how deeply you need to scrutinise the activity to look for differences

• Prevailing trend in the cases effectively gives clients power to reduce likelihood of an SPC by altering the nature of the activity. Transferees may argue doing it a different way

Organised grouping

• Must be organised by reference to the clientEddie Stobart (2012) – although employees exclusively

packed for a particular client by dint of shift pattern, there was no deliberate planning or intent to organise them by reference to this client. It was not their principal purpose (perhaps surprising decision on the facts)

Seawell v Ceva (2012) – fact that an employee spends a majority or even all of his time on a contract is not necessarily enough. One person can be an organised grouping but in this case the teams were organised by reference to outbound and inbound freight not by reference to this client.

Fragmentation

• Where services are so fragmented between multiple providers that it effectively becomes impossible to determine to which provider particular activities have transferred then no SPC - Kimberely Housing (2007), Thomas-James v Cornwall CC (2007) , Clearsprings Management (2008)

• Need to be able to identify specific activities and be able to trace them to a specific transferee employer.

Other important recent cases

• McCarrick v Hunter (2012) so SPC where the activities carried out by different contractors before and after the change are not for the same client

• Liddell’s Coaches v Cook (2012) – a contract for a single specific event need not necessarily be of short term duration. One year contract to decant children temporarily to an alternative school was a single specific event

• Spaceright Europe Ltd v Baillavoine (2011) A pre-transfer dismissal can be "connected with the transfer“ regardless of whether the identity of the transferee was known at the time

Govt AnnouncesTUPE ReformsKey ThemesRemoving “gold plating” where we go further than European Directive requires - SPCGreater flexibility for employers (timing of TUPE related redundancies, and greater freedom around changes to terms and conditions)Addressing case law anomalies (ability to claim automatic unfair dismissal on a detrimental change of location)Deregulation and simplification (electing employee representatives, employer liability information)

Timeline

• “Call for evidence” began November 2011

• Consultation on proposed changes began January 2013 (just closed)

• Confirmation on detail of the reforms awaited (summer 2013)

• Most changes expected to come into force in October 2013 but SPC abolition may be delayed

The Daily TUPEgraph- Since 1981

Proposed reforms - SPCs

• SPCs – the big changeSPCs to be abolished – so back to the old 1981 testMay cause uncertainty in the short term in outsourcing cases

but not much certainty under current case law anyway!Will be winners and losers – main losers will be incumbent

employers who may be left with staff or big redundancy bills when they lose contracts

Implementation of this change may be delayed a few years for this reason

Government considering over-ruling ECM v Cox (TUPE deemed will still apply if transferee avoids taking on staff to try to circumvent TUPE)

Example Service Provision Change – After SPC’s are abolished

UK plc tenders its IT contract every 5 years. A is the incumbent with 25 people on site. B wins the bid, promising a radically different approach which will be better and cheaper – with the work being done by its existing remote teams. B doesn’t need any of A’s 25 people

• Is this covered by TUPE?

• Who picks up the liability for the 25 people?

Proposed reforms – ELI

• Requirement to provide employee liability information to be scrapped

• Transferor and transferee left to sort out and agree what information to be given, under threat of potential information and consultation liabilities if they don’t act sensibly. Fine for business sales where parties have a contracting relationship but will be a lottery with many outsourcing cases (where competitors out to make life difficult for each other)

Proposed reforms – changing terms

• Government’s hands are partly tied by EU law but reforms will mirror continental approach of giving most freedom permitted by the Directive

• TUPE 2006 went too far (probably by mistake) so this is widely welcomed

• Variations by reason of the transfer will still be void (unless the employer has an ETO) but not those for a reason connected with the transfer

• Unlikely to make a massive difference in practice but many businesses already adept at tip-toeing round this problem

Proposed reforms – location changes

• Technical problem currently exists that a change of workplace location on a transfer:

May be a material detriment under 4(9)Current lawOften won’t have a valid ETO defence because does not entail

“changes in the workforce” So in theory can amount to an automatic unfair dismissal

without the transferee doing anything other than being based in a different location

• Government will overrule this so a change in workplace location in the context of a TUPE transfer is treated consistently with an ordinary redundancy and on merit

Other Proposals for reform

• Rectifying case law anomalies:Permitting consultation by the transferee with employee

representatives of the transferring employees before the transfer date to count towards any collective redundancy consultation obligations

transferor employers should be able to fairly dismiss employees before the transfer date, relying on the transferee’s ETO reason

• Allowing small employers (<10 employees) to inform and consult with employees directly and dispense with electing representatives

The practical stuff....

• There will be winners and losers from the demise of SPCs

• The impact may partly depend on whether the Government opts for a long lead in time before SPCs are abolished

• A long lead in time will allow for many contracts to expire naturally under the current regime or at least give the parties time to adjust their planning

• Given case law has eroded the application of SPCs anyway and the Government is keen to be seen to help businesses in the current climate, it may opt to make the change sooner

Are you an incumbent service provider?

• You probably entered many of your current client contracts in the belief that assigned employees would transfer on at the end of each contract. Now they may not

Think about whether you meet the test for an “organised group” and can evidence they are organised by reference to the client

Will you have a TUPE 1981 (old test) argument to fall back on? Is the service labour intensive? Will a new provider require some employees for continuity?

Review your contract terms – do any operate independently of TUPE to share redundancy costs or protect you in other ways?

Are you an incumbent service provider?

Think about a contingency budget for redundancy costsCan you redeploy staff in the latter stages of the contract or

not replace natural attrition to minimise potential redundancy costs?

Consider now whether any applicable redundancy terms may become prohibitively expensive if TUPE doesn’t apply and you are forced to make many more redundancies

Is there merit in having a proactive discussion with the client to extend the contract to defer the issue and give longer term certainty – exercise care until the date for SPC abolition is confirmed

Are you a client?

• Do you want to alter the activities/services in some way to reduce the likelihood of employees transferring back to you or to a successor provider under the current regime?

• An outgoing service provider will soon not be required to provide any employee liability information – make sure you have a contractual right to require this in good time and can share it with bidders and the eventual replacement

• You may be expecting the service provider’s staff to transfer at the end of the contract to you or a new provider. If they don’t is that a continuity problem?

Are you a prospective service provider?

• Factor into pricing the likelihood that staff will probably not transfer on expiry/termination or negotiate some contribution to any necessary future redundancy costs

• Ensure the contract addresses both possibilities of TUPE applying and not applying at the end

• Scrutinise extra carefully any contractual redundancy terms or long notice terms which apply to staff that will transfer to you on the commencement of the services. This may materially affect your costs on exit

Are you a prospective service provider?

• Don’t accept that SPC will apply at the moment without analysing whether the incumbent has an organised grouping of employees organised by reference to the client and whether the activities are essentially the same

• Ideally, ensure you have some contractual flexibility to redeploy staff in the latter stages of a contract

• If the changes mean you are likely to carry staff or operate a bench arrangement between contracts, look at employment and remuneration structures to reduce unnecessary overheads

Thank you