2. When does TUPE apply?

Relevant transfers

For TUPE to apply there must be a “relevant transfer” as defined in Regulation 3. A relevant transfer can occur when:

• a business, undertaking or part of a business or undertaking is transferred from one employer to another as a going concern (a “business transfer”). This can include cases where two companies combine to form a new company; or

• when a client engages a contractor to provide services on its behalf, or reassigns such a contract. This includes bringing services in-house. This process is described in the TUPE Regulations as “service provision change”. Service provision change usually involves “outsourcing”, or “in-sourcing” in some way.

These categories are not mutually exclusive. Indeed, it is not unusual (for example, in the context of outsourcing) for a transfer to be both a business transfer and a service provision change.

The rest of this Chapter looks at the different elements of these definitions.

Basic principles

Unfortunately, since not all business transfers are service provision changes and vice versa, it is still necessary to look at the basic principles governing both classes of transfer.

TUPE rights do not apply to every change of employer. Broadly speaking, for both business transfers and service provision changes, the greater the similarity of the two businesses or service activities provided before and after the transfer, the more likely TUPE is to apply.

“Retention of identity”

Whether a particular transaction is a “business transfer” depends on whether there is an identifiable “economic entity” which has “retained its identity” after the transfer. This is often described as the “going concern” test. To decide whether a business transfer has taken place, tribunals will look at many different factors, including whether work is always carried out by the same staff, whether specific equipment is used, whether the business has assets such as premises, equipment or goodwill, and in each case whether they transfer (Süzen [1997] IRLR 255; Spijkers [1986] ECR 1119).

The focus on the need for an “economic entity” which “retains its identity” resulted in many transfers, especially in service-intensive industries, falling outside the Regulations, leaving employees unprotected. This prompted the introduction, in TUPE 2006, of new provisions to regulate “service provision change”. These are set out in Regulation 3 (1) (b) of TUPE 2006. The then Labour government hoped that the changes introduced by TUPE 2006 would “reduce … uncertainty in practice, by establishing a position in which service provision changes would be comprehensively covered by the legislation, subject to certain specified exceptions.”

This change was widely expected to make it much harder for incoming employers to argue that TUPE does not apply. A lot of the important reported case law since 2006 has concerned this issue, documenting the efforts of some incoming employers to find ways of avoiding the effects of TUPE. Under the service provision change test, there is no express requirement for anything to “retain its identity” post-transfer. Basically, all that is required is firstly, a change to the provider of a service, and secondly, an “organised grouping” of employees whose principal purpose before the transfer was to provide that service.

In Metropolitan Resources Limited v Martin Cambridge (UKEAT/0286/08), the incoming employer tried to argue that a requirement for retention of identity post-transfer should be implied into the service provision change provisions, but the EAT firmly rejected this suggestion, holding that the fundamental question, adopting a “common sense and pragmatic approach” is whether the activities pre- and post-transfer are “fundamentally or essentially the same.” Nevertheless, the effect of a number of recent “service provision change” cases (in particular Thomas-James v Cornwall County Council (ET1701021-22)) has been to undermine this difference between the two classes of transfer, weakening the protection offered to outsourced employees. These cases are looked at in more detail later in this Chapter.

It is worth being aware that the service provision change regulations are an example of what the current coalition government terms “gold-plating” — the practice of making regulations that provide protection beyond the requirements of European law. Before the May 2010 election, the Conservative party pledged to repeal the parts of TUPE 2006 that deal with service provision change, so their future must be uncertain.

Indeed a recent decision of the ECJ, CLECE SA v Maria Socorro Martin Valor and Ayuntamiento (Case C-463/09), is likely to strengthen the current government’s resolve to do away with the rules on service provision change.

In this case, a local authority in Spain had out-sourced the cleaning of schools and other premises belonging to it. It then decided to bring the services back in-house and terminated the contract with the outsourcing provider, but instead of employing the contractor’s staff, it hired five replacement workers to clean the premises through an employment agency. One of the cleaning staff employed by the contractor, Ms Martin, brought a claim on the basis that her employment had transferred to the local authority.

The ECJ concluded that the Acquired Rights Directive did not apply to transfer Ms Martin’s employment to the local authority, because a mere change of service provider is not a transfer of an undertaking for the purposes of the Directive. The ECJ applied the Süzen “business transfer” test described above, looking at various different factors to decide whether an undertaking has retained its identity post-transfer. No assets transferred from the out-going contractor in this case and none of its employees were taken on, so the ECJ concluded that the Directive did not apply.

If these events had taken place in the United Kingdom, there would have been a relevant transfer because of the effect of the regulations governing service provision change. In other words, in the UK, Ms Martin would have become an employee of the local authority.

Can there be a business transfer if none of the employees transfer?

Note that as explained above, as the law stands, this question is only relevant where a transfer does not qualify as a service provision change. There can still be a business transfer even if none of the employees join the new business. However, the tribunal will want to know why the employees are not transferring and in particular, whether the decision not to take on the employees is motivated by a desire to avoid the Regulations. If employees are not transferring because the purchaser genuinely has no plans to continue the business as a going concern, there will be no transfer.

The tribunal will look at the state of mind of the decision-maker to examine what is motivating the decision not to take on the employees. This has led to some troubling decisions for unions, especially in the context of insolvency, where there are sometimes legitimate suspicions as to whether a business owner has deliberately engineered the insolvency of the business in order to avoid its legal responsibilities to employees.

The case of Dynamex Friction v AMICUS [2008] EWCA Civ 381, looked at in more detail in Chapter 7 in the context of insolvency, provides a good example. The decision-maker in an insolvency situation, will be the registered insolvency practitioner, and Dynamex illustrates how a Court will generally not look behind that decision where there is no evidence of collusion or bad faith on the part of the insolvency practitioner.

What about the size of the organisation?

The size of the organisation (transferor or transferee) is irrelevant. It is well established that there can be a business transfer of just one person (Schmidt v Spar-und Leihkasse Der Früheren Ämter Bordesholn, Kiel Cronshagen: case C-392/92 ([1994] IRLR 302)).

As regards service provision changes, both case law and the TUPE Regulations themselves are clear that one employee can be an “organised grouping of employees” as long as the activity that transfers is that person’s main job (Hunt v Storm Communications Limited ET case no. 2702546/06).

What about share sales?

TUPE will not apply where a transaction takes the form of a share sale, even if the change means that different people are brought in to manage the business. This is because TUPE only applies where there is a change to the identity of the employer (Millam v the Print Factory (London) 1991 Limited 2007 EWCA Civ 322).

Can the transferor, the transferee or the employees contract out of TUPE?

The effect of TUPE is automatic. None of the parties (not even the employees) can contract out of TUPE if it applies to the employment. In other words, if an employee is “assigned” to the organised grouping of resources or employees immediately before the transfer date (sometimes referred to by HR professionals as being “in-scope” for the transfer) his or her employment contract will transfer automatically to the new employer, unless s/he objects to the transfer before it takes place.

Agreements to vary a contract of employment in breach of the TUPE Regulations are void, and a compromise agreement intended to agree a contractual variation in breach of TUPE will not be valid. These issues are discussed in greater detail in Chapter 5.

A compromise agreement can, however, be used to settle a claim for dismissal, even though the dismissal relates to a TUPE transfer (Solectron Scotland Limited v Roper EAT/0305/03ILB). A compromise agreement cannot be used to contract out of an employer’s duty to inform or consult under TUPE (see Chapter 4)

For TUPE to be triggered, does there need to be an actual transaction, such as a sale or merger?

No. TUPE can apply, for example, to intra-group transfers and reorganisations of employees between subsidiaries, as long as there is a formal change in the identity of the employer (Allen v Amalgamated Construction Case C-234/98 [2000] IRLR 119). Reps involved in intra-group reorganisations may not always realise that TUPE protection can be triggered in these circumstances.

The lack of a formal transaction can also make it difficult to be certain about the transfer date. However, this will not prevent TUPE applying to transfer the employment automatically from one legal employer to another, even if none of the parties appreciated this at the time (North Wales Training and Enterprise Council Limited (t/a Celtec v Astley [2006] UKHL29)).

Note that franchises, leases and dealerships can all count as economic entities if they transfer.

What are the basic requirements of a service provision change?

These are set out in Regulation 3. In summary, a service provision change will take place where:

• immediately before the change of provider, there is an organised grouping of employees which has as its “principal purpose” the carrying out of activities on behalf of the client (the contracting body); and

• the client intends that following the service provision change, the activities will be carried out by another service provider (or the client itself, where activities are brought back in-house).

Are there any exceptions in the Regulations governing service provision change?

The Regulations outline two specific circumstances in which TUPE will not apply to the transfer of services.

These are firstly a single specific event of short-term duration. TUPE will not transfer the employment where the new service provider is only intended to carry out activities for a single specific event or task of short-term duration. This will be a question of fact. For example, if the organisers of the Olympic games engage a contractor to give security advice for several years running up to the games, this will be a one-off event, but TUPE will apply because it is not “short-term”. However, if the contractor is hired just to provide security staff during the games themselves, TUPE will not apply, because the contract is only for a short period.

And secondly, TUPE will not apply to a contract where the activities consist wholly or mainly of the supply of goods. For example, a contract simply to supply food to a company will not be covered by TUPE, whereas TUPE will apply if the contractor is also responsible for running the company’s canteen.

What if only part of a business is transferred?

There can still be a transfer even if only part of a business is transferred. However, the requirement for an “economic entity” for a business transfer or an “organised grouping of resources” for a service provision change will mean that for the Regulations to apply, there will generally need to be an identifiable set of resources (including employees) “assigned” to the part of the business being transferred. The activities need not be the only role carried out by the group, but they must spend most of their time engaged on the transferred activities, as a dedicated group or team. If, before the transfer, employees work in a variable pattern over several parts of the business, there is less likelihood of a transfer of a part of the business being covered by TUPE.

On this basis, TUPE should only apply if a dedicated group or team of employees (or one employee) spends most of his or her time providing a service to a particular client-base. Where work is routinely carried out by different people on an ad hoc basis, there is unlikely to be a “grouping” of employees, and the re-contracting out or in of the service is unlikely to be a TUPE transfer.

Perhaps unsurprisingly, applying these principles in real world situations has given rise to some complex decisions.

What if the transfer is to more than one transferee?

TUPE can apply even if the transfer is to more than one transferee. For example, suppose that a cleaning contractor is also responsible for recycling and has a team of employees who carry out that particular task. Then the contract is terminated and a new contractor (B) is taken on to do the office cleaning but a separate contractor (C) is given the contract for recycling. Both are covered by TUPE, because each activity had a dedicated group of workers. The cleaners would transfer to contractor B and the recycling staff to contractor C.

In practice, this situation has led to some of the most difficult of recent TUPE decisions, especially where there are multiple transferees, as sometimes happens on the re-tendering of a service contract. The question for the tribunal to decide will be: which employees are assigned to which new employer. In practice, this often has more to do with working out who should bear the financial cost of dismissals that about continuing the employment.

This was the case in Kimberley Group Housing v Hambley [2008] IRLR 682. The claimants had been employed by a firm known as Leena, which provided accommodation to asylum seekers under a Home Office contract. When Leena lost the contract, it was awarded to two different companies — Kimberley Group Housing and Angel Services, neither of whom agreed that TUPE applied.

The EAT confirmed that there can be a service provision change where services are contracted out to more than one transferee, and that the correct approach (at least in theory) is to examine the link between the employees and the particular activities to be performed by the new employers, matching the employees to each of the new employers on the basis of the percentage split of those activities.

However, these cases have thrown up a new risk for employees, namely that on a transfer, the re-distributed services are so fragmented amongst different transferees that it is not possible for any employee to demonstrate that his or her employment (or the associated liability for unfair dismissal) has transferred to any particular transferee.

This is exactly what happened in the Legal Services Commission outsourcing case, Thomas-James v Cornwall County Council (ET1701021-22). The case concerned the allocation of Legal Services Commission (LSC) contracts. Cornwall County Council was one of 17 providers of free legal advice to the LSC and employed an organised team to resource this. LSC used a call-routing system. Calls were routed to the next available adviser from any one of the 17 contracted providers. In the re-tendering exercise, the number of providers was reduced to nine. The tribunal decided that there was no service provision change because, even though there was an organised grouping of employees dedicated to the LSC contract working at Cornwall County Council before the transfer, it was not possible to match specific functions carried out by the old contractor to specific functions carried out by the new contractor(s).

The tribunal was influenced, in particular by the random allocation of telephone calls between the 17 contractors, and the impossibility of making a direct match between the percentage of service provided and the allocation of hours pre- and post-transfer, as a result of the reduction from 17 down to nine contractors. The tribunal suggested that if activities had been defined alphabetically, by location, or in some other way and been allocated to the new contractors according to that definition, a different answer might have been reached.

These cases illustrate a trend known as “service fragmentation”. It has led to the unexpected conclusion that although (unlike the law governing business transfers) the Regulations governing service provision change do not require services to “retain their identity” post-transfer, in practice, changes in the organisation of services post-transfer can result in the removal of TUPE protection from affected employees.

Another example is provided by the case of Clearsprings Management Ltd v Ankers and others (UKEAT/2009/0054). In this case, again involving the provision of accommodation for asylum seekers, the Home Office re-tendered its contract with Clearsprings and awarded it to three new contractors. There was a four-month transitional period before Clearsprings’ contract came to an end. During that period, the new contractors acquired leases of properties to accommodate asylum seekers and the asylum seekers covered by the contract were randomly distributed between the new contractors. The EAT concluded that there was no service provision change and therefore no relevant transfer when a contract was re-let from one contractor to several new contractors in a fragmented way.

Clearly, these cases are highly fact sensitive. However, it is not difficult to imagine some employers taking advantage of decisions such as Clearsprings and the LSC case described above to structure contracting arrangements so as to avoid TUPE.

What if the transfer takes place in stages?

A transfer under the Directive must take place at one single moment. There can only be one “transfer date”. There is no such concept as “transfer over a period” (North West Training and Enterprise Council Limited (t/a Celtec v Astley) [2006] UKH29)).

It is important to identify the transfer date because this is the date on which the employer’s identity changes. In practice, mergers and reorganisations are often structured so that there are a number of separate TUPE transfers, with groups of employees transferring to the new organisation(s) on different transfer dates. Rather confusingly, Regulation 3(6) states that “a relevant transfer may be effected by a series of two or more transactions” but in any event, the case law is clear that there can only be one “transfer date” for each TUPE transfer.

Note that TUPE can apply even if immediately after the transfer, the business is merged into another business (Farmer v Danzas (UK) Limited EAT 858/93)

A TUPE transfer can take place even if operations come to a temporary halt

A transfer can still take place even if the change of employer happens during a temporary cessation of operations (Wood v Caledon Social Club Limited EAT/0528/09). In this case, a bar suspended operations when it lost its licence to sell alcohol, and Mr Wood was dismissed. When the bar re-opened a few weeks later under new management, Mr Wood was allowed to bring a claim for unfair dismissal against the new business.

What if an incoming contractor intends to carry out work in a “new” way, for example, replacing a manual process with a computerised one?

The government public consultation on the 2006 Regulations issued in February 2005 suggested that TUPE is meant to cover situations where the new contractor plans to carry out the work in a “novel or innovative” way, even if some of the employees under the old contract lack the necessary skills to carry out the re-designed activities.

The policy thinking behind this approach was that by transferring automatically to the new provider, these employees would benefit from better prospects for re-deployment using their existing skills, or re-training as a result of being part of a larger combined workforce.

However, the developing case law, particularly on service provision change, does not necessarily support this approach, although, as always, each case will turn on its own facts.

For example, in OCS Group UK Limited v Jones (EAT/0038/09), the EAT confirmed that TUPE cannot apply where there has been a fundamental change to the service being provided. In this case, OCS Group provided a full catering service to workers at the BMW car plant in Cowley, made up of a restaurant and deli bar serving hot food prepared by employees of OCS. BMW replaced OCS with a new contractor running “dry goods kiosks” which did not serve hot food. The role of the incoming contractor’s staff was to sell pre-prepared sandwiches and salads.

The EAT concluded that the services provided by the new contractor were “materially different” from those provided by OCS. This meant that there was no service provision change and TUPE did not apply to transfer the staff. Minor differences between roles would not prevent a service provision transfer, but material differences would.

It is worth noting that in this case, the tribunal was very influenced by the description of the relevant “services” in the providers’ contracts. Especially given the short deadline for bringing claims in the employment tribunal (three months from the date of dismissal) it is difficult to see how this can be avoided. Unfortunately, it offers scope for some service providers to tailor the description of their services by maximising the differences between the old and new services so as to avoid TUPE. This, in turn, emphasises the importance of collective action by unions to negotiate the best deal for staff in this situation.

What if there is a “run-off” of activities provided by the service provider before the contract is ended?

In Ward Hadaway Solicitors v Love ([2010] UKEAT/471/09), the Nursing and Midwifery Council, a client of law firm Ward Hadaway, re-tendered for its legal work. When re-tendering, the Council decided to make more use of its own legal department and much more limited use of solicitor firm B, who won the re-tender. The tribunal concluded that this was a “fundamentally different” set of activities.

In reaching this conclusion, the EAT was influenced by the fact that Ward Hadaway was given “run-off” time in which to complete existing cases before the end of the contract, with the result that there was not even a hand-over of current cases. The EAT concluded that there was no service provision change.

However, as always, each case depends on its own facts. For example, a service provision change was found in Metropolitan Resources Ltd v Churchill [2009]UKEAT/286/08 (another case involving the provision of accommodation for asylum seekers) even though there were still a few asylum seeker clients left at the transferor after the Home Office had terminated its contract.

Transfers within public administration

Although generally TUPE does apply to the public sector, both the Acquired Rights Directive and the TUPE Regulations make it clear that a reorganisation within a public administration or the transfer of administrative functions between public administrations is not a relevant transfer for the purposes of TUPE. This means that most transfers within central or local government are not covered by the Regulations.

Instead, such intra-governmental transfers are covered by the Cabinet Office’s Statement of practice: Staff transfers in the public sector which in effect guarantees TUPE equivalent treatment for the transferred employees.

The government also has powers under the Employment Relations Act 1999 to provide TUPE-like protection to other classes of employee falling outside the scope of the Acquired Rights Directive. These have led to the Transfer of Undertakings (Protection of Employment) (Rent Officer Service) Regulations 1999 (SI 1999/2511) and the Transfer of Undertakings (Protection of Employment) (Transfer of OFCOM) Regulations 2003 (SI 2003/2715).

Withdrawal of the Two-Tier Code

Note that with effect from 13 December 2010, the coalition government has withdrawn the Code of practice in workforce matters in public sector service contracts (commonly known as the Two-Tier Code). The Code applied when central government functions were outsourced to the private sector.

The Code, introduced in 2003 following extensive union campaigning, was intended to prevent a two-tier workforce developing following the outsourcing of public services to the private sector. Public sector employees’ contracts transferring into the private sector are protected by TUPE.

However, TUPE does not apply to new staff, so the Code (which was voluntary) was introduced to deter employers from taking on new recruits on less favourable terms.

A two-tier workforce, with colleagues working alongside each other doing the same jobs but on different terms and conditions, weakens union organisation and undermines collectively agreed rights. It also makes higher paid staff vulnerable in the event of a redundancy threat.

The Code has been replaced by a set of “Principles of good employment practice for government, contracting authorities and suppliers”, accessible on the Cabinet Office website at http://interim.cabinetoffice.gov.uk/media/431444/principles-good-employment-practice.pdf.

These include the following significantly watered-down commitment: “Where a supplier employs new entrants that sit alongside former public sector workers, new entrants should have fair and reasonable pay, terms and conditions. Suppliers should consult with their recognised trade unions on the terms and conditions to be offered to new entrants”.

The local government sector has its own version of the Two-Tier Code — the Code of practice on workforce matters in local authority service contracts. At the time of writing, this Local Government Code remains in place, but it is widely anticipated that it too will soon be abolished.