12. Business transfers and contracting out - TUPE

Key principles

The basic aim of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) regulations is to protect the employment terms and conditions of existing employees when the business that employs them is transferred from one organisation to another. There are some exceptions. In particular, pensions do not transfer (see Pensions).

TUPE protects only employees (see Chapter 2), not agency workers or the self-employed. TUPE is only triggered when there is a change in the legal identity of the employer, in other words, where one employing organisation is replaced by another. That is why TUPE is not triggered by a share sale. TUPE applies to both the public and the private sector. It applies whether or not a business is "for profit".

TUPE applies regardless of the size of the employer or the number of employees transferring to the new employer. There can even be a TUPE transfer where only one employee is affected (Schmidt v Spar-und Leihkasse der Fruheren Amter Bordesholn (C 392/92 [1994] ECR I-1311), Hunt v Storm Communications Limited (EAT2702546/06)).

A key characteristic of the TUPE regulations is their automatic effect. All employees who are "assigned" to the organised grouping of transferring resources or employees will have their employment transferred automatically under TUPE on the transfer date, unless they object. The implications of this "automatic effect" are explored further below.

It is now well established that the TUPE regulations can apply to transfers to a business based outside the UK, including transfers to a non-EU country, as long as the transferor is based in the UK (Hollis Metal Industries Ltd v GMB & another [2008] IRLR 187). This is important because it means unions can claim a protective award from the UK-based business if the consultation obligations under TUPE are not met.

It is also well established that TUPE applies to inter-group transfers and reorganisations where staff are moved between different subsidiaries (Allen v Amalgamated Construction C-234/98 ([2000] IRLR 119)). TUPE can also apply to changes to franchise arrangements and distributorships, and to the assignment of commercial leases (LOM Management Ltd v Sweeney UKEATS/0058/11/81).

There is no time limit to protection under TUPE, but in practice, the more time that passes, the easier it will be for the employer to show that the change is for a reason other than the transfer.

TUPE cannot be avoided by structuring a transaction so that the transfers take place in various stages (regulation 3(6)). There can be only 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 vital to identify the transfer date clearly, not least because this is the date on which the employer's identity changes.

What the future might hold

The coalition government is generally hostile to TUPE, viewing the regulations as bureaucratic and a drag on growth and flexibility. However, there is a limit to the changes the government can introduce because of the need to comply with European law: TUPE was enacted to meet the requirements of the Acquired Rights Directive (77/187).

To the extent that TUPE provides protection beyond the minimum requirements of the Directive (described by the government as "gold-plating") the government would like to dismantle that protection. It published a Call for Evidence in November 2011 inviting evidence as to how the regulations work in practice. Its stated aim is to "maximise flexibility for both parties while protecting fairness".

The "service provision change" regulations in particular are vulnerable to repeal. Before the 2010 election, the Conservative Party committed to their abolition. The Acquired Rights Directive does not cover transfers of pure service providers (CLECE S.A. v Maria Socorro C487/09). In other words, the service provision change regulations are an example of the so-called "gold-plating" that the Conservative Party have promised to remove.

The coalition government has also indicated, in its Call for Evidence on the collective redundancy consultation rules (November 2011), that it is considering modifying the collective consultation rules where redundancies are carried out by the new employer after a TUPE transfer.

Relevant transfers

For employees to be protected by TUPE, there must be a "relevant transfer". Confusingly, the 2006 TUPE regulations provide for two kinds of "relevant transfer":

• a standard transfer of an economic entity which retains its identity; and

• a service provision change. A service provision change takes place when the employer's activities are either contracted out, given to a different contractor or brought back in-house.

There is some overlap between the two categories, but since some transfers only fall into one category or the other, it is still necessary to approach each category separately.

Standard transfer of an economic entity that "retains its identity"

The first type of transfer is a standard transfer of an economic entitly which retains its identity. An "economic entity" is defined as "an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary". This is sometimes called the "going concern" test. It asks: is what is being transferred a distinct business capable of functioning as a going concern? Tribunals decide each case based on its facts, looking at many different factors. These include, for example:

• the type of undertaking;

• whether its assets are transferred - including, goodwill, equipment, premises (and if not, why not);

• whether the majority of its employees are taken over by the new company, and if not, why not. Even if no staff transfer, you can still have a transfer protected by TUPE if they were dismissed unlawfully before the transfer for a TUPE-related reason, for example because the buyer had its own staff and refused to take on the seller's workforce. The key issue is why the employees have not been taken on by the new employer;

• whether its customers transfer (and again, if not, why not?);

• the degree of similarity between the activities carried on before and after the transfer;

• the period, if any, during which the activitiesare suspended.

This focus on the need to find an "economic entity" which "retains its identity" led to many transfers, especially in service-intensive industries, falling outside the regulations, leaving employees unprotected. Some did satisfy the test, but others did not, resulting in confusion and uncertainty.

This led to the service provision change regulations enacted in 2006. As a result of these regulations, many more transfers in service-intensive (i.e. people-intensive) sectors are now covered by TUPE.

Service provision changes

All that is needed to trigger the service provision change regulations is:

• a change to the provider of the service; and

• an organised grouping of employees whose principal purpose, before the transfer, was to provide the service.

Despite the apparent simplicity of the regulations, in practice, a series of recent decisions, many brought by employers anxious to avoid the regulations, have undermined the practical difference between the two types of transfer. In particular, current case law suggests that a valid service provision change probably also requires the transferred activities to remain intact and fundamentally unchanged, after the transfer, even though the legislation does not require the post-transfer business to "retain its identity" following a service provision change. (See for example Thomas-James v Cornwall County Council (ET1901021-22), Clearsprings Management Ltd v Ankers (UKEAT/2009/0054) and OCS Group UK Limited v Jones (EAT/0038/09) discussed below).

The service provision change regulations apply to insourcing, outsourcing and changes of provider. A series of tests will be applied to decide whether there has been a service provision change:

The first task in establishing whether there has been a service provision change is to identify the activities that cease to be carried out by the old employer (the transferor) and are carried out instead by the new service provider(s) (the transferee) (Enterprise Management Services Limited v Connect-up Limited UKEAT/0462/10/CEA).

There will only be a service provision transfer if the activities carried on after the transfer are fundamentally and essentially the same as those carried out before the transfer (Metropolitan Resources Ltd v (1) Churchill Dulwich (in liquidation) (2) Cambridge & others [2009] IRLR 700, EAT).

Minor differences in the way activities are carried out pre-and post transfer will not stop TUPE applying, but where a new service provider carries out services in a fundamentally different way, there is unlikely to be a transfer. If there is no transfer, employees of the transferor must look to their existing employer for any remedy, which will usually be unfair dismissal or a redundancy payment. but which, with a large employer, could be redeployment by the transferor to another part of its business.

It is worth noting that in the OCS case, the tribunal was very influenced by the description of the relevant services in the new provider's contracts. Especially given the short deadline for bringing claims in the tribunal (three months from the dismissal date), it is difficult to see how this can be avoided, but it does offer incoming service providers scope to tailor the description of their services, maximising differences between the old and the new services to avoid liability under TUPE. This in turn emphasises the importance of strong independent unions to protect the interests of staff caught up in these situations.

Sometimes unions find themselves on the other side of the fence, arguing against the presence of a TUPE transfer and forcing the existing employer to look at redeployment opportunities within its own business or to pay redundancy compensation. The coalition government's "Any Willing Provider" strategy for NHS care is a good example, where external commercial and third sector providers are invited to tender to provide services to the public in place of the NHS. Unions are very concerned, in particular, about the long term viability of some of the smaller providers, and especially the fact that TUPE protection does not apply to pensions.

These issues can be seen playing out in the following case:

Have the activities ceased to be carried on by the first service provider?

As a general rule, a service provision change requires the "activities" to have ceased to be carried on by one contractor and to have been taken over by a new contractor. So, for example, there was no service provision change when a firm of solicitors, Ward Hadaway, lost its contract to provide legal services to the Nursing and Midwifery Council under a tendering process, partly because after the new contract was allocated, Ward Hadaway carried on doing "run-off" work i.e. finishing off cases it had already started for the Council, and would be carrying out this "run-off" activity for many months. This was inconsistent with the idea of the services transferring on a fixed transfer date from one provider to another (Ward Hadaway v (1) Love (2) Scott (3) Capsticks Solicitors LLP UKEAT/0471/09).

What if the service provision by the new contractor is too "fragmented" for TUPE to apply?

TUPE can still apply even if, as a result of the transfer, the work is split up between several different new contractors, or if only part of it is contracted out, with the rest staying with the old employer.

For example, suppose 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 re-tenders 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.

But real life situations are rarely as straightforward as this, leading to some of the most difficult of the recent TUPE decisions. Particular problems arise where there are multiple transferees, as often happens on the re-tendering of a service contract. The test for a tribunal is a factual one. Its task is to decide which employees are assigned to which new employer. 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, and to match up the employees to each of the new employers, on the basis of the percentage split of the activities shared between the different new providers (Kimberley Group Housing v Hambley [2008] IRLR 682). In practice, this exercise often has more to do with working out who should bear the financial cost of dismissals than about continuing any employment.

These cases have thrown up a new risk for employees, namely that on a transfer, the re-distributed services will be allocated in such a fragmented way amongst different transferees that it is simply not possible for any employee to demonstrate that his or her employment (and the associated liability for unfair dismissal) has transferred to any particular transferee (Clearsprings Management Limited v Ankers UKEAT/0054/08/LA).

This is exactly what happened in the Legal Services Commission outsourcing case:

This development, known as service fragmentation, offers yet more scope for service providers tendering for contracts to avoid TUPE by organising their workforce and their contractual documentation so as to maximise opportunities for arguing that TUPE does not apply.

Is there an "organised grouping of employees?

TUPE will only apply to a service provision change if, immediately before the change in provider, there is an "organised grouping of employees" whose "principal purpose" is to carry out the transferred activities.

In other words, there must be a consistent group or team of employee(s) whose main role is dedicated to carrying out the transferred activities. The activities do not have to be the only task the team carry out, but they must have been their main task prior to the transfer for TUPE to bite. If, before the transfer, employees work in a variable pattern over several parts of the business, there is much less likelihood of TUPE being triggered.

For example, a company has a contract to clean offices and the same group of cleaners cleans the offices every day (except during holiday and sickness absences, when cover is provided by other workers). If the contract is then given to a different firm, this will be a service provision change that is protected by TUPE.

But if the first cleaning contractor sent in different cleaners every day, according to whoever happened to be around, there would not be an "organised grouping of employees" who could transfer and therefore TUPE would not apply.

The phrase "organised grouping" means a group of employees which is less than the entire workforce, "deliberately organised for the purpose of carrying out the activities required by the particular client and who work together as a team" (Argyll Coastal Services Limited v Stirling (UKEATS/0012/11). An organised grouping can be made up of just one person (regulation 2(1) of TUPE). A recent case, Eddie Stobart Limited v Moreman & Others (UKEAT/0223/11), illustrates how there will only be an "organised grouping" of employees whose principal purpose is to carry on activities for a particular client where those employees have been deliberately organised into a dedicated team to provide services to that particular client:

The case shows the scope for employers (and clients) to set up their activities so as to avoid the application of TUPE by ensuring that employees are never organised in "dedicated teams" whose main purpose is to look after a particular client.

Statutory exceptions

There are two specific circumstances in which TUPE will not apply to the transfer of services. These are:

• where the new service provider is only intended to carry out those activities in connection with a single specific event or task of short-term duration; or

• where the activities consist wholly or mainly of the supply of goods. TUPE will not apply to a contract simply to supply food to a company, for example, but will apply if the contractor is also responsible for running the company's canteen.

To illustrate what is meant by "short term duration", guidance by the Department for Business Innovation and Skills (BIS) gives the example of a security contract for the Olympic Games. A contract to give security advice for several years running up to the Games relates to a "single specific event" but it is not of "short term duration", so TUPE will apply. But if the contractor is hired just to supply security staff during the Games themselves, TUPE will not apply because the contract is only for a short period.

Is the employee "assigned" to the "organised grouping" of employees?

This is the final question that determines whether TUPE applies to transfer the employment. The regulations state that all employees who are assigned to the organised grouping will transfer on the transfer date, unless they object. Whether an employee has been assigned to the group will depend on all the surrounding facts and circumstances.

Employees who would have been employed immediately before the transfer but who were dismissed because of the transfer are also covered.

The automatic effect of TUPE means that an employee whose role puts him or her inside the group of transferring employees on the transfer date cannot be forced to remain with the old employer. Instead s/he will transfer automatically, whatever the parties might otherwise believe (Royal Mail Group Limited v CWU UKEAT/0338/38). Similarly, it is likely that an employee operating under a straightforward secondment arrangement would transfer automatically to the transferee on the date of transfer. This is illustrated by the case of Capita Health Solutions v BBC [2008] UKEAT34/07:

The fact that none of the parties in the Capita case had realised that TUPE had operated to transfer the employment on the transfer date, and that everybody was under the impression that Ms McLean had been "seconded", made no difference to the question whether she had preserved the right to object.

This case shows that if employees want to remain with the transferor employer, reps they should try to negotiate fresh terms and conditions, before the transfer, that clearly take those employees outside the pool of transferring workers and resources.

Generally speaking, an employee whose role falls within the scope of the transfer but who remains in post after the transfer date is likely to find that the employment contract has transferred. Only an objection before the transfer date can prevent the transfer. However, be aware that a straightforward objection is unlikely to be in employees' interests.

The EAT has said that when deciding whether an employee is "assigned" to the transferring group, a tribunal must look at where the employee is assigned to work in practice, bearing in mind that the purpose of TUPE is to protect employees (Duncan Web Offset (Maidstone) Ltd v Cooper [1995] IRLR 633). Difficult questions can arise where an employee divides his time between two or more parts of the business, only part of which is transferred.

An employee who is off sick when the transfer takes place will still transfer (Fairhurst Ward Abbots v Botes Building [2004] IRLR 304). So will an employee on maternity or adoption leave. An employee working temporarily for the part of the business that transfers will not transfer. "Assigned" means "assigned other than on a temporary basis" (regulation 2).

In G4S Justice Services (UK) Ltd v Anstey, Simpson & GSL UK Ltd EAT/0698/05, employees dismissed before a TUPE transfer but reinstated on appeal transferred to the new employer.

But in the following case, a shop steward was denied the protection of TUPE even though he was awarded interim relief in his trade union victimisation claim:

Objecting to the transfer

An employee cannot be forced to transfer if s/he does not want to, and can object to the transfer by informing either the old or the new employer. The objection must be lodged before the transfer. Otherwise, the transfer will go ahead automatically.

If an employee objects, the employment contract will terminate automatically and s/he will not be treated as having been dismissed. This means that there will be no right to claim either redundancy or unfair dismissal.

Substantial change in working conditions

The "right to object" to a transfer, discussed above, needs to be distinguished from the position where the transfer involves (or would involve) a substantial change in working conditions to the material detriment of a transferring employee (regulation 4(9) of TUPE). This regulation allows a transferring employee in this situation to treat him or herself as having been dismissed and to claim unfair dismissal or a redundancy payment.

In practice, however, the value of this right is limited because the regulations allow the employer to argue that even though a substantial change to working conditions is detrimental to an individual employee, nevertheless, the change amounts to a valid economic, technical or organisational (ETO) reason entailing changes to the workforce. A fair ETO reason can be used to justify dismissal. This is explained further below.

Where a resignation under regulation 4(9) of TUPE results from the employer no longer needing as many (or any) employees, this may trigger the right to a redundancy payment (see Chapter 11: Redundancy). The leading case on regulation 4(9) is Tapere v South London and Maudsley NHS Trust ([2009] UKEAT 0410/08/1908).

The case illustrates a number of important points about the scope of this provision:

• Unlike a claim for constructive dismissal, there is no need to establish a fundamental breach of the employment contract in order to bring a claim under regulation 4(9). A substantial change in working conditions can be either a significant change to contract terms, or to physical working conditions. So, for example, the regulation could be relied on where an employee is forced to relocate to new premises, but the contract contains a mobility clause.

• A claim can be brought either before or after the transfer. The case law is not clear as to how long it might be safe to wait after the transfer.

• Whether a change is to an employee's material detriment must be examined from the individual employee's perspective, asking whether the employee's position is reasonable, taking into account his or her individual circumstances. Everyone's personal circumstances will be different.

All three of these points were followed in a new case, Abellio London Limited v Musse (UKEAT/0283/11), in which the EAT confirmed that five bus drivers operating from a London depot that suited their family circumstances were entitled to resign and treat the resignation as a dismissal under regulation 4(9) of TUPE, following Tapere. As a result of a transfer, they were expected to work out of a new depot which would have added substantial travel time by public transport to and from work, at awkward shift times when transport services are limited. This was a "substantial change" to their "material detriment" entitling them to resign. The test was factual, not contractual, so the presence of a contractual mobility clause did not help the employer. It was also a constructive dismissal. Like Tapere, the case contains helpful guidance on the construction of "mobility" clauses in the context of TUPE transfers.

It is important to note that regulation 4(9) only protects employees who are inside the pool of transferring employees. Anyone outside the pool who is detrimentally affected by a transfer (because, for example, their workload substantially increases) would need to establish a fundamental breach of contract, and bring a constructive dismissal claim.

Consultation and collective rights

TUPE provides for collective information and consultation in regulations 13 and 14. Where there is a recognised union, consultation takes place with representatives of that union. If there is no union, consultation takes place with either reps who have been appointed or elected generally for consultation and information purposes, or reps elected specifically for TUPE purposes.

If no representatives are elected, the employer should inform and consult employees directly (Howard v Millrise Ltd & S G Printers t/a Colourflow EAT/0658/04 [2005] IRLR 84). Representatives should be allowed access to employees and appropriate facilities.

Affected employees include not just those staff who transfer, but also those who may transfer and those whose jobs are at risk as a result of the proposed transfer (UNISON v Somerset County Council [2010] ICR 498).

All employees who could be affected by a change of employer have the right to be informed in advance of what is happening. The duty to inform arises on every transfer. The duty to consult arises whenever an employer "envisages" that it will take "measures" in relation to the "affected employees".

Strictly speaking, the transferring employer (the transferor) is obliged to consult with its own workforce, and the new employer (the transferee) is obliged to consult with its own workforce - in both cases before the transfer takes place. There is no obligation to consult with each other's workforces before the transfer, although this is clearly best practice. Likewise, there is no obligation under TUPE to consult collectively after the transfer has taken place (UCATT v Glasgow City Council [2008] UKEAT/7/08), unless the new owner proposes collective redundancies covered by the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) (see Chapter 11: Redundancy).

Both employers have a duty to inform their respective employee representatives of:

• the fact that the transfer is taking place, the reason why, and the proposed date;

• the likely legal, economic and social consequences for the affected employees; and

• what measures are likely to be taken in relation to affected employees (or if no measures are to be taken, confirmation of this).

This information must be provided long enough before the transfer to allow consultation to take place.

Where the obligation to consult is triggered, the employer must consider any representations and reply, with reasons for objection where appropriate.

"Measures" is not defined in the regulations, but it is to be widely interpreted and "includes any action, step or arrangement…deliberately done…over and above what necessarily happens as a result of the transfer itself" (Todd v Strain and others UKEATS/0057/10/BI). For example, changing job functions, making redundancies and relocating are all obviously "measures". In Todd, the fact that a new employer was responsible for wages was not a "measure", because it was an inevitable result of the transfer, but the fact that wages would be paid early was a measure. So was the making of payment arrangements for untaken holiday. Neither of these were an inevitable consequence of the transfer, so Ms Todd was obliged to consult with staff reps about them.

The fact that measures are beneficial to employees is irrelevant to the question whether the duty to consult is triggered. In Todd, early payment of wages was still a "measure" that required consultation, even though no employees were likely to object. The point about consultation is to enable employees to have the fullest possible picture of the likely impact of a transfer on them.

In Nationwide v Benn [2010] (UKEAT0273), the EAT indicated that "job mapping" is likely to be a measure. They rejected the employer's suggestion that "job mapping" is not a "measure" because it involves projections about manpower rather than positive steps to achieve manpower reduction.

Unlike in a collective redundancy consultation, there is no minimum number of affected employees required to trigger the TUPE information and consultation obligations. They can be triggered even if just one employee transfers.

Unlike the rules on collective redundancy consultation, there is no specified minimum period of time over which consultation must take place. However, the collective redundancy cases regarding what amounts to meaningful consultation, and as to what factors are likely to result in a protective award, are equally relevant here (see Chapter 11: Redundancy).

If the employer fails to inform or consult the appropriate reps (or the individual employees if there is no rep) a complaint can be made to the employment tribunal. This must be made within three months of the date of the transfer.

The tribunal can make an award of up to 13 weeks' pay. According to the EAT, this should be determined in the same way as for a protective award in cases of redundancy. This means it should reflect the seriousness of the employer's failure and the maximum amount should only be reduced if there is mitigation (Sweetin v Coral Racing EAT/0039/05 ([2006] IRLR 252)). A "week's pay" for the purposes of a protective award under TUPE is "uncapped". In other words, the award is of an actual week's pay (Zaman & others v (1) Kozee Sleep Products Limited (2) Dorlux Beds (UK) Ltd [2010] UKEAT 0312 10).

The employer's duty is to consult on the position as it genuinely believes it to be. The employer does not promise that its interpretation of TUPE is correct. In Royal Mail Group v CWU [2009] EWCA Civ 1045, the Court of Appeal accepted that Royal Mail genuinely (but mistakenly) believed, on the basis of legal advice, that TUPE did not apply to the transfer of a number of post office branches to WH Smiths because of contractual arrangements with employees enabling it to offer redeployment or redundancy. The employer consulted on this basis with the CWU. Even though this belief turned out to be mistaken, the Court of Appeal held that the employer met its statutory obligation to consult, because it consulted on the basis of its genuine understanding of the legal position, however flawed.

However, it seems unlikely that this "escape clause" would help an employer who fails to provide any information or to engage in any consultation at all until after the transfer date has passed as a result of failing to recognise the possibility that TUPE might have been triggered.

The 2006 regulations make the transferor and the transferee jointly and severally liable for compensation for a failure to consult. This provision is especially useful where there are doubts over the solvency of one of the parties, or where the transferee is situated outside the UK, making enforcement more difficult.

An employer who fails to consult adequately may be able to rely on special circumstances making it not reasonably practicable to perform the duty, as long as the employer can show it took all reasonably practicable steps in the circumstances. The principles and the illustrative cases on "special circumstances" for collective redundancy purposes apply equally here (see Chapter 11: Redundancy).

The time limit for a claim is within three months of the transfer date. As usual there is a discretion to extend time, although it is rarely exercised.

Duty to provide employee liability information

The TUPE 2006 regulations introduced an obligation on the transferor to provide the transferee with specific information about the employees to be transferred, called "employee liability information". It consists of:

• the identity of the transferring employees

• their age

• individual statements of employment particulars

• collective agreements

• disciplinary and grievance record over preceding two years

• legal action by employees against employer over preceding two years and any potential legal claims

Transfers within public administration

Although TUPE applies to both the public and private sector, both the Acquired Rights Directive and TUPE are clear that a reorganisation within a public administration or the transfer of administrative functions between public bodies is not a relevant transfer for the purposes of TUPE. This means that most transfers within central or local government (as opposed to transfers from the public to the private sector and vice versa) are not covered by TUPE.

Instead, intra-governmental transfers are covered by the Cabinet Office's Statement of Practice: Staff transfers in the Public Sector (COSOP). COSOP applies to cabinet staff transferred to the private sector as well as those who move to different roles within the Civil Service. COSOP promises "TUPE equivalent" treatment for staff involved in these transfers. COSOP was considered by the Courts in Law Society v Secretary of State for Justice and Office for Legal Complaints [2010] EWHC352, a case concerning staff caught up in the replacement of the Law Society's legal complaints service with a new Office of Legal Complaints. The Court confirmed that COSOP is a statement of policy rather than a piece of legislation, and that as such, ministers are not bound to apply it. However, the Court also indicated that a failure by ministers or public sector employers to take COSOP into account in future transfers could have judicial review consequences.

COSOP's apparent lack of directly enforceable status is of grave concern to unions in the current climate, and unions encourage as many non-members as possible to take up union membership, to strengthen the union's collective negotiating hand in securing the TUPE equivalent treatment promised by COSOP.

Withdrawal of the two tier code

One of the earliest acts of the coalition government was to scrap the "two tier code". The code operating at central government level (the Code of Practice in workforce matters in public sector service contracts) was withdrawn in December 2010, while the equivalent local government code (the Code of practice on workforce matters in local authority service contracts) was abolished in March 2011.

The purpose of these two Codes, introduced in 2003 following extensive union campaigning, was to prevent a two tier workforce developing with the outsourcing of public services to the private sector. Public sector employees transferring into the private sector are protected by TUPE, but TUPE does not apply to new joiners. The Codes aimed to deter employers taking on new recruits on less favourable terms, undermining collectively agreed pay and conditions, weakening union organisation and creating a demoralised workforce, in which some receive better wages than others for the same job.

The central government Code was replaced by a set of six "principles of good employment practice for government, contracting authorities and suppliers" (available at: www.cabinetoffice.gov.uk/sites/default/files/resources/Principles%20of%20Good%20Employment%20Practice.doc).

The new "Principles" effectively pave the way for a two tier workforce, with new entrants taken on to work alongside former public sector workers, at lower rates and worse conditions. The third principle states: "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 effect of TUPE on terms and conditions

The purpose of the TUPE regulations is to protect employees' terms and conditions when their employment is transferred to a new employer. The effect of the transfer is to treat the existing contract of employment (excluding pension rights) as if it had been made with the new employer (the transferee). This means that continuity of service is preserved and will run from the date employment began with the old employer (the transferor). Existing terms and conditions are maintained, except for occupational pension schemes.

TUPE does not provide transferring employees access to better terms that may be enjoyed by the transferee's workforce:

All the old employer's rights, duties and liabilities to his employees transfer automatically to the new employer. These include, for example, liability for acts of discrimination or for personal injury. The law behaves as if these acts were done by the new employer. Advice should be taken to make sure any claim to the tribunal is brought against the correct employer. Criminal liability does not transfer.

What happens to collectively agreed terms?

Collective agreements made by a recognised union with the old employer transfer to the new employer under regulation 5. They are treated as if they had been made with the new employer, so any transferred employees continue to benefit from the terms in that agreement (except in respect of occupational pensions).

However, transferred employees may only be able to enforce the pay and conditions specified under the collective agreement as it was at the time of the transfer. That is to say, TUPE protection does not necessarily entitle transferred employees to the benefit of any later changes to the collective agreement negotiated between their previous employer and union after the transfer (Parkwood Leisure Ltd v Alemo-Herron [2010] EWCA Civ 24). This important case has been referred by the Supreme Court to the European Court of Justice (ECJ)) and a decision is awaited.

Trade union recognition

Under regulation 6, trade union recognition transfers to the new employer as long as the group of employees who transfer retain a distinct identity.

Maintaining terms and conditions

Where TUPE applies, an employer's attempts to impose changes to an employee's terms and conditions as a result of a transfer will be void (unenforceable) wherever those change are to the employee's detriment. A variation to change wages, overtime pay, holiday entitlements, notice periods or retirement dates will be void and cannot be enforced by the employer if the reason for making the change is to bring the terms and conditions of the transferred workforce into line with those of the new workforce (a process known as "harmonisation").

The government is hostile to this ban on harmonisation, which results from the Acquired Rights Directive. In its Call for Evidence on the effectiveness of TUPE (November, 2011), the government describes the prohibition as "a problem for an employer who wants to agree with employees to harmonise employment terms across his workforce: the only option may be to increase all of the terms and conditions to the most favourable level".

The rule - that changes as a result of a transfer will be void wherever they are to the employee's detriment - was set by an important Court of Appeal judgment in Power v Regent Services Limited ([2007] UKEAT/499/06):

It is not open to an employer to argue that changes to contract terms should be read "as a whole" and that the overall "value" of the package of terms is not changed by a variation.

A change to the method of payment is still a breach of TUPE even though the employee receives the same pay overall (Chubb Security Personnel v Bates EAT/0358/04).

The fact that employees have agreed to (and have even signed up to) the changes will not prevent them being void. Neither will the fact that the employer has sought to "pay" for the changes through, for example, a wage increase (Wilson v St Helens Borough Council [1998] IRLR 706).

Contractual redundancy terms can transfer (Lansing Linde Severnside v Spiers EAT/1490/01; see also Solectron Scotland v Roper and others EAT/0305/03 ([2004] IRLR 4)). But in one case, an employee who accepted promotion after a transfer was found to have accepted a new contract, thereby losing his entitlement to an enhanced redundancy scheme which otherwise would have been protected by TUPE (Barry v Bateman Catering EAT/1515/00).

How long are terms protected?

There is no time limit to the right to maintain terms and conditions under TUPE. An employee who has a contractual term that has transferred from the old employer continues to have the right to benefit from that term until it is lawfully changed (Taylor v Connex South Eastern (UKEAT/1243/99); But the more time that passes following the transfer, the more difficult it will be to show that the transfer was the reason for any contractual change. Over time, an employer can point to reasons unrelated to the transfer, for example difficult economic conditions, to justify the change. The more fast-changing the economic climate, the easier it will be for employers to justify change.

A recent case, Spaceright Europe Limited v Baillavoine [2011] EWCA Civ 1565, has confirmed that TUPE can still apply even if there is no prospective transferee on the horizon, as long as the sole or principal reason for a variation is to make the business more saleable as a going concern i.e. a transfer-related reason (as opposed, for example, to simply needing to cut costs). This follows CAB Automotive Limited v Blake (UKEAT0298/07), a case which arose out of the administration of MG Rover.

TUPE can also apply where there are a number of potential transferees who might acquire the business, or where the eventual purchaser is not the one identified at the time the contract variations were made. These are still transfer-related reasons even though the identity of the transferee is not known.

Changes that are allowed

Changes for a reason unconnected to the transfer

Contractual variations to the contract that are unconnected to the transfer are allowed, although they must be agreed in the same way as they would in any non-transfer situation.

Changes for an economic, technical or organisational reason

Changes can also be agreed for a reason connected with the transfer if they are for an economic, technical or organisational reason (usually referred to as an "ETO reason").

The ETO reason must be a reason entailing changes in the workforce. The key case in defining what "entailing changes in the workforce" means is Delabole Slate Ltd v Berriman ([1985] IRLR 305):

A change in the workforce requires a change in the numbers or functions of the workforce. This means that one person leaving and someone else taking their job cannot be a change in the workforce, because the numbers and the job stay the same. Even if an employer dismisses all its employees and replaces them with new ones, this cannot be a change to the workforce because there are the same number of workers doing the same jobs. However, dismissing all the employees and replacing them with franchisees operating through limited companies (who may, or may not be the same individuals) can be a change in the workforce (as long as the arrangement is not a "sham" (Meter U Limited v Ackroyd UKEAT/0207/11).

"Harmonisation" - the process of simply changing terms and conditions to bring them into line with those of the buyer's workforce - is unlawful and this kind of change will be void, because it does not "entail changes to the workforce" (London Metropolitan University v Sackur & others EAT/0286/06).

But if the employer proposes redundancies or redeploys staff into different jobs, this can amount to an ETO reason entailing a change in the workforce.

In practice, recent case law has confirmed that it is increasingly easy for an employer to establish an ETO reason entailing changes to the workforce, by re-drawing job functions and at the same time, changing pay and conditions. There can still be a "change in the workforce" even though only the terms of the transferring workforce are changing, or even where the changes relate to only one section of the transferring workforce.

For example, in Nationwide Building Society v Benn UKEAT/0273/09, only the contracts of the transferring managers were affected, but even so, the tribunal still found that the employer had a valid ETO reason justifying the downgrading of the ex-Portman managers' contractual bonus terms to bring them into line with that of the new workforce:

Protection against unfair dismissal

Neither the old employer (transferor) nor the new employer (transferee) may fairly dismiss an employee:

• because of the transfer; or

• for a reason connected with the transfer, unless that reason is economic, technical or organisational (ETO) reason entailing changes in the workforce (regulation 7(2) TUPE).

If there is no valid ETO reason for the dismissal, it will be automatically unfair. If there is a valid ETO reason, and it is the only or main cause of the dismissal, the dismissal will be fair as long as the employer met all the other requirements of a fair dismissal: in other words, provided the employer:

• acted reasonably in treating that reason as sufficient to justify the dismissal; and

• met all the other requirements of the general law of unfair dismissal under section 98(4) of the Employment Rights Act 1996 (see Chapter 10: Dismissal).

If the dismissal is because of redundancy, the usual redundancy principles will apply including the need to search for alternative employment and the entitlement to a redundancy payment (see Chapter 11: Redundancy).

Protection against unfair dismissal is available whether employees are dismissed before or after the transfer, whether the dismissal is carried out by the transferee or the transferor and whether or not the employee is one of the transferring employees.

TUPE also protects against contructive unfair dismissal, and "deemed" dismissal, where an employee resigns as a result of a substantial and detrimental change in working conditions.

The TUPE regulations do not stop an employer dismissing fairly for a reason not connected with TUPE, for example gross misconduct or failure to follow a reasonable instruction.

A dismissal will only be automatically unfair under the regulations (and liability for the dismissals will only transfer to the new business) if the dismissal is for a reason relating to the transfer (as opposed to another unrelated reason, such as an administrator's inability to pay wages) (Dynamex Friction v Amicus [2008] EWCA Civ 381).

Service

Employees wanting to bring a claim for automatically unfair dismissal under regulation 7 of TUPE must have at least one year's service. Employees starting their employment contract on or after 6 April 2012 will need two years' service.

Economic, technical or organisational reasons for dismissal

Some illustrations of economic, technical or organisational (ETO) reasons for dismissal include:

• economic reasons: where the new business lacks demand for a product line the transferor used to produce;

• technical reasons: where the new business uses new technology for which transferring employees lack skills (and cannot reasonably be trained);

• organisational reasons: where merger has resulted in a duplication of functions, or a need to change location (and relocating new staff is not reasonable).

The way in which tribunals interpret "economic, technical or organisational reason(s)" "entailing changes to the workforce" is discussed in Changes for an economic, technical or organisational reason.

An employer will only be allowed to defend a dismissal on the basis of an ETO reason, if that employer is making the dismissals in order to carry on the business itself. The ETO defence is not available to sellers or administrators who dismiss staff in order to make business more attractive to buyers (Hynd v Armstrong (Court of Sessions) [2007] CSIH 16, confirmed by the Court of Appeal in Spaceright Europe Limited v Baillavoine [2011]EWCA Civ 1565).

There is no time limit for protection against dismissal under TUPE, but the more time that passes, the more difficult it will be to demonstrate a link between the transfer and the dismissal. In Taylor v Connex South Eastern EAT/1243/99, a dismissal two years after the transfer was still related to the transfer and therefore automatically unfair. This issue is addressed in more detail in Changes for an economic, technical or organisational reason.

Who to claim against

The claim should usually be brought against the transferee (the new employer) even if the employee does not transfer. This is because liability for the dismissal will usually transfer to the new employer. However, this is not always the case, and this is a complex area, so legal advice should be taken. If there is any doubt about who the employer is, or as to whether the liability transferred, it is better to bring the claim against both employers, and for the issue to be resolved at an early stage of the tribunal proceedings.

Insolvency

The 2006 TUPE regulations introduced a new insolvency regime intended to encourage the rescue of failing businesses to safeguard employment opportunities (TUPE regulations 8 and 9).

These rules distinguish between transfers where an insolvency practitioner's primary aim is to sell the business as a going concern, and asset sales where the liquidator's primary aim is to sell off the assets, pay off the creditors and wind up the business.

TUPE will not transfer the employment of employees of the transferor where an insolvency procedure "analogous to bankruptcy proceedings is started "with a view to the liquidation of the assets" under the supervision of an insolvency practitioner (regulation 8(7)). This does not mean that TUPE is irrelevant in this situation. In particular, the duties to inform and consult are still triggered.

Employees caught up in an insolvent liquidation will be able to claim outstanding wages from the appointed insolvency practitioner. Some debts, including holiday pay and wages, are "preferential", meaning that they must be paid before certain other debts.

An insolvent employer may not have the resources to pay the full amounts owed to employees. In these circumstances, employees can claim basic minimum debts from the National Insurance Fund. These claims are for:

• redundancy;

• wages up to a maximum of eight weeks;

• holiday pay up to a maximum of six weeks; and

• statutory notice.

Weekly pay is subject to the statutory cap (£430 per week from 1 February 2012).

Transfer of a business as a going concern

Where an insolvency practitioner transfers a business as a going concern, TUPE will apply to transfer the employment contracts to the new employer, but special rules, set out in regulation 9 of TUPE, allow the insolvency practitioner limited freedom to change terms and conditions (for example, cutting pay or hours), as long as the changes are designed to "safeguard employment opportunities" by ensuring the survival of the business. The freedom to agree changes in these circumstances is tightly regulated by regulation 9. In particular:

• where a union is recognised, variations must be agreed with the union rep, who is entitled to paid time off to negotiate;

• where there is no recognised union, variations must be agreed with the non-union rep and:

• • the agreement must be in writing and signed by each non-union rep; and

• • before it is signed, a copy must be given to each affected employee, together with an explanation in writing.

Once the variation has been agreed by the representative, it becomes a part of the employees' contract terms.

This limited freedom to change contract terms in insolvency situations is only available if an insolvency practitioner has been appointed before the TUPE transfer takes place (Secretary of State for Trade and Industry v Slater [2008] ICR 54).

As well as being allowed to make limited changes to employment terms, the new buyer is helped by legislation removing some of the financial liabilities that would otherwise have passed to it under TUPE. Specifically, regulation 8(3) makes the insolvency fund rather than the new employer liable for the cost of any redundancies, holiday pay, the basic award and statutory notice (capped as above).

Administrations

It has been confirmed by the Court of Appeal in Key2Law (Surrey) LLP v De'Antiquis [2011] EWCA Civ 1567 (following OTG Ltd v Barke and Others [2011] UKEAT0320/09/1662) that TUPE will apply to transfer employment contracts and employment liabilities to the new employer in all insolvent administrations, including so-called "pre-pack" administrations. TUPE will apply in its modified form, allowing the administrator limited freedom to change terms and conditions (see above).

These cases settle a long-running dispute and are good news for employees caught up in insolvent administrations who will now benefit from certainty, as well as the prospect of negotiating to retain at least some jobs, with a new, solvent employer.

Pensions

Any provisions relating to old age, invalidity or survivors' benefits under an occupational pension scheme are specifically excluded from TUPE by regulation 10 and do not transfer.

Before 6 April 2005, where a business changed ownership, there was no obligation on the new employer to provide membership of a similar scheme to that provided by the old employer, or even to allow transferring employees into its existing scheme, unless specified in the Sale and Purchase Agreement. The only legal obligation was that the new employer had to at least allow employees voluntary access to a designated stakeholder pension scheme. The new employer did not have to contribute any of its own money to the stakeholder pension scheme.

However, new laws were introduced on 6 April 2005. These new laws only apply to employers who provide employees with membership of an occupational pension scheme (i.e. money purchase, final salary or career average).

Under the Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005, if the old employer provided a pension scheme, the new employer must provide some form of pension for those who were eligible to join. It does not have to be equivalent, but it must be of a minimum standard. Further details can be found on the website of the Pensions Advisory Service at: www.pensionsadvisoryservice.org.uk/workplace-pension-schemes/final-salary-schemes/tupe.

Time limit: Since occupational pension schemes do not transfer under TUPE, it is important to note that the time limit for a claim that relates to an occupational pension provided by the original employer runs from the date of transfer (Powerhouse Retail Ltd v Burroughs [2006] UKHL 13 ([2006] IRLR 381).

Unlike pensions, early retirement provisions do transfer. The key case is a decision of the European Court: Beckmann v Dynamco Whicheloe Macfarlane C-164/00. The case concerned rights for over-50s. An NHS scheme provided for redundant employees aged over 50 to receive an early retirement pension. The ECJ held that early retirement benefits are not old-age, invalidity or survivors' benefits and are therefore not covered by the pensions exclusion, which, it said, must be narrowly interpreted.

This principle was applied again by the ECJ in the case of Martin and others v South Bank University Case C-4/01 ([2004] IRLR 74):