Under the Transfer of Undertakings (Protection of Employment) (TUPE) Regulation, employees are afforded certain protections when their employment is transferred to a new employer. If your organisation is planning or has recently undertaken a business transfer, it will be important to understand how the law operates in this context, from the transaction itself and the transfer of employment, to whether you are lawfully able to make any changes relating to the transfer as to how your new employees work or who you employ – whether this be for economic, technical or organisational (ETO) TUPE reasons, or otherwise.
The following practical guide for employers looks at the use of ETO reasons in the context of the TUPE where the new employer is looking to make changes that will impact transferring employees.
The effect of TUPE on business transfers
The primary purpose of TUPE, or the Transfer of Undertakings (Protection of Employment) Regulations 2006 as amended, is to protect employees, and their employment rights, if the business in which they are employed changes hands, for example, following a merger or acquisition.
The effect of TUPE is to move employees, and specifically any rights, responsibilities and liabilities associated with them, from the old employer to the new employer.
Under the TUPE regulations, employees should not suffer detriment in respect of their existing employment rights. Instead, the new employer will take over their employment contracts, based on its existing terms and conditions, including the terms of any collective agreement incorporated into that contract.
Where TUPE applies, the new employer essentially steps into the shoes of the old employer. As such, following a business transfer, the TUPE regulations require that:
- All employees employed immediately before the transfer are automatically transferred to the new employer
- Employees are protected from changes being made to their terms and conditions in connection with the transfer
- Employees may be able to claim automatically unfair dismissal if, on account of the transfer, they are dismissed or made redundant.
TUPE and ETO reasons
In respect of any change to the terms and conditions upon which an employee works, regulation 4(4) of the TUPE regulations state that any purported variation of a contract shall be void if either “the sole or principal reason for the variation is the transfer itself or a reason connected with the transfer that is not an economic, technical or organisational reason entailing changes in the workforce.”
ETO TUPE refers to the basis upon which an employer is permitted to make changes under the regulations to an employee’s contract following a TUPE transfer or, where necessary, to dismiss an employee, namely for an “economic, technical or organisational” (ETO) reason.
Further, where a new employer seeks to vary the contract of employment, even in circumstances where it can be shown that the sole or principal reason for the contractual variation is an ETO reason resulting in changes to the workforce, the affected employees must still agree to this change.
In respect of dismissal, regulation 7(1) states that where either before or after a relevant transfer, any employee is dismissed, that employee shall be treated as unfairly dismissed if “the sole or principal reason for the dismissal is the transfer itself or a reason connected with the transfer that is not an economic, technical or organisational reason entailing changes in the workforce.”
Again, however, even if there is a clear ETO reason for dismissal, all proper dismissal or redundancy procedures must be followed, and the employer must act reasonably in their decision to dismiss or in their selection for redundancy.
The rationale behind the ETO rule under the TUPE regulations is to strike a balance between the protection of employee’s rights when transferring to a new employer and the need for an incoming employer to implement measures and make necessary revisions to meet the operational needs of their business.
As such, lawful variations can be made to an employee’s contract of employment following a TUPE transfer, and an employee can even be fairly dismissed, but only in circumstances where there is a legitimate and sound business reason to do so and these reasons are unconnected to the transfer.
What counts as an ETO reason?
What constitutes an ETO reason under TUPE is not statutorily defined. However, each ETO element can be explained as follows:
- Economic – this relates to the profitability or market performance of the new employer’s business including, for example, essential cost-saving requirements where output has fallen to such a level that the business cannot continue trading without dismissing employees.
- Technical – this relates to the nature of the equipment or production processes that the new employer operates including, for example, increased computerisation or mechanisation of activities reducing the number of employees required to carry out a particular function.
- Organisational – this relates to the management or organisational structure of the new employer’s business including, for example, the need for restructuring of an organisation resulting in redundancies, or dismissal in circumstances where it is impractical for employees to transfer to a new business because of where it is located.
Broadly speaking, to fall within the scope of an ETO reason, this must relate to a change in the day-to-day running of the business, rather than purely to make financial savings. Further, in each instance, it must be an ETO reason “entailing changes in the workforce”. In other words, the reason must involve a change in the number of employees or in the functions that they perform.
By way of example, where a company inherits new employees but needs to undergo a restructure based around a legitimate business need, leading to some of the new employees being made redundant, assuming a fair process is followed including selection from both the existing and transferee workforces, the redundancy dismissals would not necessarily be unfair.
In contrast, if the same company issues its new employees with contracts identical to those issued to its other employees, but where the terms are less beneficial than those previously enjoyed, the variation would almost certainly be void. Further, even where agreement was reached, in the absence of any clear business reason for the change, the new employees would still retain the right to challenge their new contract and assert their previous terms of employment.
Although it is not uncommon for a new employer to want to harmonise the terms and conditions of transferring employees to reflect those of their existing staff, the desire to achieve harmonisation will always be construed as by reason of the transfer, and so cannot constitute “an economic, technical or organisational reason entailing changes in the workforce”.
Consequences of acting without an ETO reason
As an incoming employer, if you seek to change the terms and conditions under which your new employees are expected to work without a clear business reason to do so, or dismiss any one of these employees in similar circumstances, this may give rise to a whole host of practical and legal problems.
In particular, the new employees may:
- Refuse to work under their varied contract of employment
- Elect to work under their varied contract, albeit under protest and treating the variation as a breach of contract
- Resign and claim constructive dismissal, where the variation under the contract is substantial
- Take a case to a tribunal for breach of contract or unfair dismissal, or even unlawful deduction of wages where the change affects their pay.
Unless there is an ETO reason to justify any changes to an employee’s terms and conditions, or any decision to dismiss, any attempt to vary a contract or dismiss an employee can carry with it significant compensation consequences.
It is also worth remembering that, in addition to any existing terms and conditions of employment, various other rights, responsibilities and liabilities transfer to the incoming employer under a TUPE transfer, including:
- Statutory and contractual redundancy payments
- Arrears of pay, holiday pay and sick pay, as well as any accrued holiday entitlement, and
- Liabilities for the acts or omissions of the outgoing employer, ie; any failure(s) on the part of the previous employer to observe an individual’s employment rights.
Preventing an ETO TUPE dispute
Where you are planning on implementing new measures, even where you have a valid ETO reason for doing so, you may still be met with resistance from new employees.
However, there are practical steps that you can take to minimise the risk of any disagreement or disputes, and to overcome any objections. In particular, engaging in a meaningful process of consultation with affected employees, both prior to and after the TUPE transfer, can be key to ensuring a smooth transition.
Prior to the transfer taking effect, both new and existing employers are, in any event, under a statutory obligation to inform and consult with representatives of affected employees. For small businesses, with fewer than ten employees, where there is no recognised independent trade union or existing appropriate employee representative(s), the employers can talk directly with employees.
The outgoing employer is also under a duty to supply the incoming employer with details in writing as to the contractual rights of its workforce, helping the new owner to understand the rights and responsibilities associated with its new employees. This is known as employee liability and due diligence information.
Consultation must cover any planned measures that the incoming employer is envisaging in connection with the transfer that will affect new employees. Measures can include many things, such as workplace relocation, redundancies, changes to working patterns or even pay dates.
However, even very minor departures from an employee’s existing employment contract will amount to measures within the meaning of TUPE and should be subject to formal consultation with the employees.
Further, the consultation must always be with a view to reaching agreement on the measures. As such, talking to your new employees, or their representatives, at the earliest possible opportunity and prior to any final decisions being made, can help to alleviate concerns and facilitate any change that meets the needs of both your business and your workforce.
The importance of consulting and communicating with employees and/or their representatives before making any decisions cannot be underestimated, not least in listening to employee concerns and considering how these can be addressed. This applies both before and after any transfer has taken place, although you can actually be penalised by a tribunal of up to 13 weeks’ pay per employee where you fail to inform and consult with employees about any planned measures.
In many cases, through open and honest discussion, this will allow you to reach a sensible agreement with employees on mutually acceptable terms. In contrast, by forcing a change through, either to the terms and conditions on which employees work or in relation to operational changes, this can not only lead to disharmony within the workplace or employees working under protest, it can also result in costly, and often highly complex, legal disputes.
The law surrounding TUPE transfers and the use of ETO reasons can in practice be extremely complicated, not to mention constantly evolving through various case law decisions. Moreover, where an employer gets the law wrong, there can be serious financial and practical consequences.
As such, it can be crucial to secure expert legal advice from an employment law specialist at an early stage, and prior to implementing any measures for change.
DavidsonMorris are experienced employment law specialists, with expertise in TUPE transfers and all associated risks.
We can advise from the initial stages of the process on how to meet your responsibilities under the provisions while ensuring focus on the commercial objectives of the transfer. We can provide practical guidance on the implementation process to follow and whether the circumstances are likely to fall within the scope of an economic, technical or organisational reason. Where required, we can also help you to explore other potentially lawful ways in which you can go about securing the necessary change to suit both the needs of your business and those of your workforce.
This can include, for example, utilising any variation clause contained within an employees’ existing contract of employment, such as a mobility clause requiring an employee to relocate, or even considering alternative ways to meet the operational needs of your business.
If you have a question or need advice on any aspect of the TUPE regulations, contact us.