The long-awaited Transfer of Undertakings (Protection of Employment) Regulations (TUPE) 2006 finally came into force on 6 April 2006 and apply to relevant transfers that take place on or after that date. TUPE 2006 replaces the old 1981 Regulations.

Examples of TUPE transfers in property transactions are: the sale of a property, or the grant or termination of a lease where the premises are to be used for the same or a similar purpose after the change (for example, shopping centres, pubs, restaurants and nursing homes); the transfer of operational management of a business before a lease purchase contract is concluded; and transfers which take place as part of stamp duty schemes. The purpose of TUPE is to protect employees, and, in cases of doubt, employment tribunals often find that it applies.

What is a relevant transfer?

TUPE 2006 introduces a reworded general definition of a TUPE transfer, which is basically the same as the old definition, updated to reflect case law. TUPE 2006 will apply where there is:

… a transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in the United Kingdom to another person where there is a transfer of an economic entity which retains its identity [paragraph 3(1)].

An ‘economic entity’ is ‘an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary’ [paragraph 3(2)].

Service provision change transfers

One of the biggest changes made by TUPE 2006 is to extend the definition of a relevant transfer to cover a ‘service provision change’. This is intended to clarify (and extend) when TUPE applies for labour-intensive service contracting operations such as cleaning, catering, security, caretaking and maintenance, car-park attending, refuse collection, and machinery maintenance. Some transfers may fall within both the general definition and the service provision change definition; the two categories are not mutually exclusive.

Under TUPE 2006 there is a service provision change when: a service provision is contracted out; there is secondgeneration contracting-out; or there is a contracting-in. For there to be a service provision change in these circumstances, the following conditions need to be met:

(1) immediately before the service provision change there must be an organised grouping of employees situated in Great Britain which has as its principal purpose the carrying out of the activities concerned on behalf of the client;

(2) immediately before the service provision change the client intends that the activities will, following the service provision change, be carried out by the transferee other than in connection with a single specific event or task of short-term duration; and

(3) the activities concerned do not consist wholly or mainly of the supply of goods for the client’s use. For example, there could be a service provision change where a shopping centre stops employing its own cleaners and starts to use a cleaning contractor to provide this service. There could also be a service provision change if a shopping centre changed the cleaning contractors it used or if it terminated the cleaning contract and took responsibility for cleaning back in-house.

Who transfers?

Under TUPE 2006, it is only those who are employed by the transferor who transfer. Early on, the employees moving across need to be identified. This is not always as straightforward as it sounds. Businesses will often have a variety of different contracts in place. In a property situation, for example, the transferor may employ a full-time head of security, engage self-employed landscapers and have its cleaning and general security work carried out by agency staff whose contracts are with the agency which employs them. Taking the arrangements at face value, only the head of security is the transferor’s employee and would transfer under TUPE. The problem is that the label that the parties put on the relationship is not always correct and sometimes there is no formal contract in place at all. Often businesses will have to dig deeper.

There are four key tests in establishing whether there is an employment relationship: the control test; the integration test; the economic reality test; and the multiple test.

In property situations, a big issue is often whether agency staff are actually employed by the transferor. In triangular arrangements between an individual, an employment agency and a client, employment tribunals have found an implied contract between the individual and the client. The longer the period of time that agency staff have worked for the transferor, the more likely it is that they could be deemed to be the transferor’s employees. Agency staff can cause real problems as the transferee will want as much information about them as possible, but the transferor may not have access to their contracts.

It is important for the transferee that standard pre-contract enquiries and questionnaires cover all people working on site and not only those who the transferor believes are its employees and with whom it has written contracts of employment. Site visits could help identify employees that may simply have been forgotten, such as a solitary car-parking attendant or part-time staff.

TUPE will transfer those employed by the transferor and assigned to the organised grouping of resources or employees that is subject to the relevant transfer, unless they object to becoming employed by the transferee. This will not cover employees assigned to the business on a temporary basis.

Where only part of a business transfers it will not always be clear whether particular employees are ‘assigned to’ the transferring part of the business. Some employees’ time may be split between the transferring part of the business and the retained part. For example, a chain of petrol stations may employ a regional manager who covers 20 sites, five of which are being sold. In this situation, the transferor would need to check whether the manager is assigned to the stations which are being sold.

When a tribunal looks at the question of assignment, it takes into account all the circumstances of the case. Whilst the amount of time an employee spends working in the transferring business is important, the fact that an employee may spend the majority of their time working in the transferring business in itself will not be decisive. The tribunal will look at the employment relationship as a whole, taking into account factors such as the terms of the employee’s contract showing what they can be required to do, as well as what they do in practice, and how the cost of the employee’s services are allocated. The tribunal will consider whether the employee is ‘integral’ to the transferring business unit or really primarily attached to another part of the transferor’s business.

Employees who work at a number of different sites, including the one which is the subject of the transaction, may not be assigned to any of them in particular, even if in practice one of them takes up most of their time.

Many transferors try to dump poor staff by assigning them to part of the business they are planning to get rid of or pulling out good staff. This is something to watch out for.

What transfers?

The transferee will take on all the transferor’s rights, powers, duties and liabilities arising from the employees’ contracts of employment, except for criminal liabilities and some benefits under occupational pension schemes. This means that employees transfer on their existing terms and conditions of employment. The transferee will also inherit discrimination claims, wage disputes etc, so it is important to get to the bottom of any employee problems. The transferee will normally seek warranties and indemnities from the transferor in respect of transferring liabilities. The usual position is that the transferor will agree to indemnify the transferee in respect of all pre-transfer liabilities, whilst the transferee will be responsible for all post-transfer liabilities.

Employee liability information

Another significant change introduced by TUPE 2006 is the obligation on the transferor to notify the transferee of specified ‘employee liability information’ relating to each employee assigned to the transferring business and any employees that have been automatically unfairly dismissed in connection with the transfer. Standard pre-contract enquiries and due diligence questionnaires should cover all employee liability information.

Employee liability information includes information such as: the identity and age of the employee; the particulars of employment required under s1 Employment Rights Act 1996; certain disciplinary action or grievances brought against or taken by an employee within the previous two years; any court or tribunal case, claim or action brought by an employee against the transferor in the last two years or that the transferor has reasonable grounds to believe an employee may bring against the transferee arising out of employment with the transferor; and any applicable collective agreements.

If there is a breach of the employee liability information rules, the transferee can claim compensation. The minimum award is £500 per employee in respect of whom the transferor failed to comply with the notification rules (or less if the tribunal considers it just and equitable). The transferor and transferee could apportion liability for any awards in the transfer contract, but this will not be binding on the tribunal.

Collective consultation

The rules for collective consultation and the consequences of non-compliance (protective awards of up to 13 weeks’ pay per affected employee) are almost unchanged. However, significantly, TUPE 2006 makes transferor and transferee jointly and severally liable for compensation payable for the transferor’s non-compliance with information and consultation requirements.

Transfer-related changes to terms and conditions

Under the old 1981 Regulations, changes to transferring employees’ terms and conditions were invalid if the reason for the change was transfer-related. This could be a major headache for new employers, who often want to harmonise terms following a transfer. Usually a convincing non-transfer-related reason for any change had to be found. Although time was not a decisive factor, many employers had to wait before implementing changes. Another alternative for validly effecting changes was to dismiss employees and offer them re-engagement on new terms. This carried the risk of successful unfair dismissal claims and an (often disastrous) effect on employee relations.

Under TUPE 2006, purported changes to contracts of employment will be void if the sole or principal reason for the variation is the transfer or a transfer-connected reason that is not an economic, technical or organisational (ETO) reason entailing changes in the workforce.

So, for example, if the owner of a store decided to change staff terms and conditions to make the business more attractive on a proposed sale, prospective purchasers are likely to ask when and why any changes were made. Because these changes will be transfer-related and may be ineffective, causing problems for a new employer, the contract variation may actually make the business less saleable.

Changes to terms and conditions for a transfer-connected reason will potentially be effective if there is an ETO reason for them (subject to agreement between the parties or their representatives). This exception is less helpful than it sounds as cases have held that ‘entailing changes in the workforce’ means either changes in employee numbers or significant changes to employee functions. Usually this will not apply to harmonisation and so employers may still have to rely on (potentially risky) alternative routes. If changes are unconnected to the transfer, TUPE has no impact.

Transfer-related dismissals

Transfer-related dismissals are risky as they will generally be classed as automatically unfair (although employees normally need one year’s service to claim). Where, either before or after a transfer, any employee of the old employer (transferor) or new employer (transferee) is dismissed, it will be an unfair dismissal if the sole or principal reason for the dismissal is the transfer itself or a reason connected with the transfer that is not an ETO reason.

Where the sole or principal reason for the dismissal is connected with the transfer and is an ETO reason (of either the transferor or the transferee before or after the transfer), the dismissal will not be automatically unfair, but an employment tribunal will look at whether the usual tests for a fair dismissal in redundancy or ‘some other substantial reason’ cases have been satisfied. Therefore, it is important to consult with employees and comply with fair dismissal procedures. TUPE 2006 does not affect dismissals unconnected with a transfer.

TUPE 2006 makes it clear that the transferee inherits liability towards employees who would have transferred had they not been unfairly dismissed by the transferor prior to the transfer for a transfer-related reason.

The new Regulations also bring back the lower threshold test for constructive dismissal where a transferring employee resigns because the transfer involves or would involve a substantial change in working conditions to the employee’s material detriment. A fundamental breach of contract is not required (unlike in most cases of constructive dismissal). However, such a dismissal will not be automatically unfair; the reasonableness of the employer’s actions will be taken into account. If an employee resigns in these circumstances, the employer will not have to pay damages for failing to pay wages for a notice period which the employee has failed to work.

TUPE 2006 introduces a new basis for claiming automatic unfair dismissal (for which no qualifying service is necessary) if an employee is dismissed because they have brought proceedings under TUPE 2006 or have alleged an infringement of the rights conferred by it.

Insolvency

To promote the ‘rescue culture’ and the sale of insolvent businesses as going concerns, TUPE 2006 provides for more flexibility where the transferor is insolvent. In certain cases, some of the transferor’s pre-existing debts to employees will not transfer, but will be met by the Secretary of State through the National Insurance Fund. There will also be room for the transferor or transferee (or an insolvency practitioner) and ‘appropriate representatives’ of relevant employees to agree permitted transferrelated changes to terms and conditions, if certain conditions are met.

Pensions

Major changes to the impact of TUPE on occupational pension schemes have already been introduced under the Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005. The changes introduce a minimum standard of protection for the occupational pension rights of privatesector employees on a transfer, as long as certain conditions are met.

Previously, certain rights and liabilities under occupational pension schemes did not transfer. However, rights and liabilities not relating to benefits for old age, invalidity or survivors under an occupational pension scheme did transfer. TUPE 2006 does not change this. Nor does it change the position regarding non-occupational pension schemes (rights and obligations in respect of which have always transferred).

Final thoughts

Employees are increasingly aware of their rights and so the risk of claims related to property transactions is growing. Understanding the new rules will be important in protecting a business on a transfer. © Property Law Journal