TUPE: when it applies and why employers need to know

The main purpose of the TUPE (the Transfer of Undertakings Protection of Employment Regulations) is to protect employees` terms and conditions of employment when their company is bought by, or transfers part of or brings back in house, a service to, or from, another company. TUPE ensures that all employee contracts automatically transfer to the new employer in the event of a company buy out. From the employee`s perspective, it should not matter who signs their pay check. Nothing should essentially change for them. From an employer`s perspective, the situation can be difficult to navigate and manage post purchase if the correct procedures have not been followed.

Recognising a TUPE situation is not always obvious and new employers need to be careful that the right questions are asked and full disclosure is obtained from the target company before the purchase because, if missed, a new employer will automatically assume unexpected employee liabilities, liability to pay damages for failure to inform and consult, and even end up with unwanted and unexpected staff turning up for work.

Our Employment Law expert looks at when TUPE will apply and some examples, and firstly emphasises why employers need to know about TUPE.

Why do employers need to know about TUPE?

If TUPE applies, the employees maintain a range of important rights and protections. These affect both the outgoing employer (called the transferor) and the incoming employer (called the transferee) and include:

• the transferee inherits employees from the transferor, including employee liabilities relating to those employees, such as ongoing discrimination liabilities;
• the transferring employees transfer on their existing terms and conditions and the new employer is significantly restricted from making changes to their contracts, even if this means they are on more generous terms than their existing staff;
• in the lead-up to the transfer, both employers have to share specific information with each other at particular times; 
• obligations to inform and consult with staff, usually through representatives are time sensitive and
• other than in limited circumstances, if an employee is dismissed; whether before, on, or after the transfer, and the sole or principal reason is the transfer, this is automatically unfair. Liability passes to the transferee.

Compensation for failure to inform and consult can be up to 13 weeks’ gross pay for each affected employee. Failure to take on employees who are transferring under TUPE will result in unfair dismissal claims. Specific provisions also apply where the business is insolvent.

When does TUPE apply to “undertakings”: sale of a business or assets?

This is a complex area of law, and each case is individual so legal advice is needed for certainty. However, as a summary, TUPE applies where there has been the ‘transfer of an economic entity which retains its identity’. The first element is to identify the economic entity. This means a business, or part of a business, which is capable of autonomy. When deciding whether that entity has transferred, there are different factors that the tribunal will consider.The factors include:  

• if physical or tangible assets (such as buildings and equipment) are transferred and the importance of those to the business;
• if intangible assets, such as a supplier database, customer database or intellectual property are transferred;
• if any staff transfer or similar staff are needed;
• how similar the activities are before the transfer to those carried out after; and
• if the activities of the business were suspended for any time.

Examples of TUPE transfers of undertakings

TUPE can apply in the following circumstances:

• sale of freehold or leasehold property – where the building is a serviced office block and will continue to operate as such after the sale;
• assignment of a commercial property lease – a tenant runs a restaurant at leased premises and a new tenant takes on the property at the end of the lease and also runs a restaurant from the premises. A temporary closure to allow the new owner to apply for a licence or to allow for a refit, would not necessarily prevent TUPE applying;
• an example from European case law – an airline company took over the charter flight contracts of a wound-up airline company and also developed a charter flight business on the routes the wound-up company served. It took on some of the leasing contracts for four planes, took on office equipment and employed staff who had been on secondment with the wound-up company; and
• when different parts of a business are divided up and taken on by new organisations.

When does TUPE apply for a change in service provider?

TUPE can apply in the following three scenarios in relation to a contract for the supply of services:

• outsourcing of a service from a client to a contractor;
• change from one contractor to another contractor; and
• insourcing, bringing the contract back in-house.

One-off or short-term contracts are unlikely to result in a TUPE transfer, for example security for a one-off event. Buying goods, rather than services is unlikely to be a TUPE transfer. Other conditions have to be met, including:

• there must be ‘an organised grouping of employees’ who are carrying out the work for the client. This can be just one employee; and
• the activities carried out before and after the transfer must be fundamentally the same, although they need not be identical.

If the work being carried out is split up and divided up between different providers, TUPE may still apply. The fragmentation of the activities between several contractors may mean that the activities can no longer be said to be the same. However, it has been found in cases that it is possible for an employee’s contract of employment to be split between more than one provider.   

Examples of when TUPE did and did not apply in change in service provider

TUPE did not apply where:

• a new contractor changed a catering service from hot food in a canteen to pre-prepared cold food from a kiosk;
• IT services to schools became fragmented at the end of the contract, with the new contractor initially taking on fewer than half the schools and five other contractors picking up the IT work for the remaining schools;
• vulnerable adults moved from a residential care home operated by an NHS trust to supported living in their own homes. The new care arrangements were run by private sector providers and were sufficiently different to the NHS service so as to prevent TUPE applying to the care workers.

TUPE did apply where:

• a property manager was allocated to managing a portfolio of properties in the Netherlands for a client and as such was a ‘one person department,’ and the management of the property portfolio moved to a subsidiary;
• a change in haulage company delivering a manufacturer’s products, where the outgoing contractor had its own fleet of vehicles and directly employed the drivers, but the incoming contractor did not own the vehicles or directly employed drivers. Instead, it acted as a middle man by putting each delivery out to tender to haulage companies who then did the deliveries; and
• a change in contractor providing accommodation and administrative services for service users involved a change in location and a change in the length of stay from up to four weeks to only one or two nights.

How we can help

The above examples demonstrate how complex TUPE can be. We can help you identify a possible transfer as early as possible. This should give you time to comply with your legal obligations, take the impact of TUPE into account for timescales and workforce planning and open up a window to negotiate protection for your business. Where necessary, we will work with our colleagues in other teams on due diligence and contract or lease negotiations.

For further information, please contact our Employment Team on York 01940 716000, Wetherby 01937583210 or Malton 01653 692247or email law@warekay.co.uk.