The law on transfers of undertakings is intended to support a relatively simple underlying purpose: to protect and preserve an employee’s rights if the business that employs them changes hands. The legislation itself, however, is notoriously complex and technical.
It is therefore important, especially for the incoming employer, to understand when and why the statutory provisions come into play and, where applicable, how these work to protect an employee from any unfair disadvantage when moving to a new employer.
The rules relating to transfers of undertaking can be found under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (as amended), otherwise known as TUPE.
Equally, it is also important for both the incoming and outgoing employer, prior to any transfer taking place, to understand what obligations under TUPE may or may not have been triggered. These can include an obligation to inform and consult with their employees or employee representatives, as well as an obligation on the outgoing employer to supply to the incoming employer what’s known as ‘employee liability information’.
Below we examine the circumstances in which TUPE is triggered, and what this means for the incoming and outgoing employers and their employees, in this way providing an indirect but illustrative answer to the commonly asked question: “When does TUPE not apply?”.
What is the difference if TUPE does or does not apply?
The difference between a scenario where TUPE does or does not apply can be significant. For the incoming and outgoing employers, where TUPE applies, this triggers all kinds of information and consultation obligations prior to any transfer taking place. Post-transfer, the application of TUPE will then determine the extent of the employee’s rights moving forward.
The net effect of TUPE, where applicable, is to transfer all assigned employees – together with any associated rights, powers, duties and liabilities arising under or in connection with their employment contracts – from the outgoing employer to the incoming employer by operation of law. Essentially, this means the incoming employer will step into the shoes of the outgoing employer, as though the employees’ contracts of employment were originally made with them.
The legal consequences of TUPE include:
- Automatically transferring at the point of transfer all employees who were employed immediately before the transfer by the outgoing employer to the incoming employer;
- Maintaining continuity of employment for those employees, where they will carry with them their continuous service from their original start date, and enjoy the same terms and conditions of employment, but for certain occupational pension arrangements;
- Transferring all existing statutory and contractual liabilities, in some cases including the liabilities of those whose employment was terminated prior to the transfer taking place;
- Rendering a dismissal automatically unfair where the sole or principal reason for the dismissal is the transfer;
- Transferring recognised trade union relationships in relation to those employees covered under agreements with the outgoing employer;
- Transferring any collective agreements between the outgoing employer and trade union that cover employee’s terms and conditions to the incoming employer;
- Triggering information and consultation obligations on the part of both the outgoing and incoming employer toward employees or employee representatives;
- Triggering the supply of employee liability information by the outgoing employer to the incoming employer.
- What does the law say on determining whether or not TUPE applies?
The starting point to ascertain when the provisions under TUPE do not apply, is to first ascertain the circumstances in which they do. This could either be, for example, when a company is sold, where activities are outsourced or brought in-house, or where a contract for services is moved from one provider to another.
In more technical terms, TUPE is only triggered when a ‘relevant transfer’ takes place. A ‘relevant transfer’ is defined under Regulation 3(1) of the 2006 Regulations as either:
A business transfer, where the whole or part of a business is transferred to a new employer as a going concern. This can include mergers, a change of franchisee, the sale of a sole trader’s business, the transfer of a lease, a management buyout or an intra-group transfer;
A service provision change, where a client engages a contractor to undertake work on its behalf or reassigns a contract, including bringing the work in-house. This can include contracts to provide workplace catering or office cleaning and other labour-intensive services, as well as professional business services such as accountancy and legal services.
The TUPE regulations can apply regardless of the size of the transferred business, and whether or not the business operates for gain, such as a charity. How the transfer takes place is also not relevant, where it can result from a single transaction or a series of transactions.
However, the undertaking must be situated in the UK immediately before the transfer, and, in the context of a service provision change, where there is an organised grouping of employees situated in Great Britain immediately before the change. There are certain qualifications to these provisions, for example, where employees ordinarily work outside the UK, provided the undertaking itself is situated in the UK. There are also complex rules relating to what constitutes either a business transfer or a service provision change.
Key factors to determine whether or not TUPE applies
When determining whether or not TUPE applies, the rules relating to what constitutes either a business transfer or a service provision change can become extremely complicated, where the application of the 2006 Regulations will depend on the facts of each case. The following summary therefore highlights just some of the key factors that must be taken into account.
For a business transfer to be covered by the 2006 Regulations and for assigned employees to enjoy the rights under them, the transfer must involve the transfer of “an economic entity which retains its identity” — see Regulation 3(1)(a).
The economic entity test for business transfers is whether the business operation is continuing, in other words, where it is doing essentially the same thing as it was before. For example, if a business or part of a business either moves to a new owner or merges with another business but continues to offer the same services and products to existing customers of the old company, TUPE is likely to apply.
Even if the transfer falls within the same group of companies, or where two companies close and combine to form a new third company, TUPE should still apply. TUPE will not, however, apply to transfers by share take-over because, when a company’s shares are sold to new shareholders, there is no transfer of the business itself.
To qualify as a TUPE business transfer, the identity of the employer must change. In a share sale, for example, in which a subsidiary is acquired by a parent company, but the subsidiary continues to operate under its own name and retains control of the day-to-day running of the business, TUPE is unlikely to apply. This is because this is an acquisition of shares but no formal transfer of staff or assets, where the same company continues to be the employer.
Service provision changes
A service provision change can include where a contractor takes over the activities from a client (outsourcing); where a new contractor takes over activities from a previous contractor (re-tendering); or where a client takes over activities from a contractor (insourcing).
However, for a service provision change to be covered by the 2006 Regulations, the activities carried out by the old contractor (or client) and the new contractor (or client) must be “fundamentally the same” — see Regulation 3(1)(b).
This essentially means that if the service requirement is changed significantly post-transfer, there would be no service provision change under TUPE. That said, minor differences between the nature of the tasks involved would not normally on their own be sufficient to mean the activities are not fundamentally the same. For example, if a company contracts with a catering business to cook and serve hot canteen dinners, where the new contractor continues to provide the same service as the previous contractor but the ingredients are sourced from a different supplier and they provide new utensils, TUPE is still likely to apply.
In contrast, if the old catering contractor served hot dinners in the company canteen, but when the contract expired the contracting company decided to change the terms to provide and stock self-service fridges containing pre-prepared sandwiches and drinks, TUPE would be unlikely to apply where a new catering contractor wins the tender.
Even if the activities are fundamentally the same after a change in service provision, for TUPE to apply to the transfer, the following conditions must also be satisfied — see Regulation 3(3):
- An organised grouping of employees must exist immediately before the transfer to provide the delivery of a service for a particular client, although this can be a single employee;
- Employees should be assigned to the group immediately before the transfer, where the roles that transfer should be linked to the delivery of services for that particular client;
- The client should remain the same, where TUPE will not apply if the client changes and the services are being performed for a new client;
- The activities should not become overly fragmented at the point of transfer, where the more split the activities between different providers the less likely it is that TUPE will apply.
Exceptions to TUPE
In addition to the general provisions set out under Regulation 3(3), where there must be an organised grouping of employees with the principal purpose of carrying out the activities on behalf of the client, there are also specific exceptions which mean TUPE may not apply to some service provision situations. These include:
- If the service is for single-event activities, such as a conference or exhibition, or for activities of short-term duration, such as isolated repairs to property;
- If the activities consist wholly or mainly of the supply of goods for the client’s use, where the transfer must also include the supply of services.
Common errors when determining if TUPE applies
There are various common errors to avoid when deciding if TUPE applies, not least where the parties proceed under the misapprehension that they can opt out of their statutory obligations, agreeing to something entirely different between themselves. This is strictly not permitted as a matter of law. That said, the incoming and outgoing employer are free to negotiate contractual warranties and indemnities before proceeding with the transfer. In this way, the parties can agree who will bear the financial costs of any pre-existing employee liabilities or in consequence of any failure to comply with the TUPE Regulations.
Where TUPE is a potential consideration, in either a proposed business transfer or service provision change — please note that TUPE will be a consideration in virtually all service provision changes— specialist legal advice should always be sought. In this way, as either the incoming or outgoing employer, you can safely navigate the TUPE process, where applicable.
Equally, because of the uncertainty surrounding when TUPE applies in certain scenarios, your expert legal advisor can help you to regulate any potential risks and liabilities by contract so as to protect yourself and your business from the effects of TUPE moving forward.
DavidsonMorris’ employment lawyers can help with all legal aspects of company reorganistions, including business transfers and the applicability of the TUPE provisions. Working closely with our specialists in HR, we provide comprehensive guidance on how to approach and implement organisational change projects to minimise legal risk while ensuring commercial goals are achieved and employee engagement is optimised. For help and advice, speak to our experts.
When does TUPE not apply? FAQs
In what circumstances does TUPE not apply?
There have been numerous cases covering the various scenarios when TUPE does or does not apply, depending on whether the ‘relevant transfer’ is a qualifying business transfer or service provision change as defined under the TUPE Regulations 2006.
Does TUPE always apply?
TUPE does not apply to every single business transfer or service provision change. There are various qualifying conditions to constitute a ‘relevant transfer” as defined under the Transfer of Undertakings (Protection of Employment) Regulations 2006.
How do you know if TUPE applies?
The law relating to the transfer of undertakings as set out under the TUPE Regulations 2006 (as amended) is highly complex and technical. Where TUPE is a potential consideration, specialist legal advice should always be sought.
How do you avoid TUPE transfer?
It is not possible to opt out of your statutory obligations if TUPE applies. Given the uncertainty surrounding its’ application, it is therefore common for any potential risks and liabilities to be regulated by contract to manage its effects.
Last updated: 3 June 2021