A Critique of TUPE 2006
Written by Adam Wickes, The AP Partnershup Ltd
Contents
Contents………………………………………………………………………………………………………….. 2
Introduction……………………………………………………………………………………………………… 3
Background to the TUPE Regulations……………………………………………………………………. 5
How the did the business / legal community react to TUPE (1981)?…………………….. 6
Formation of Acquired Rights Directive (ARD) (1998)……………………………………….. 10
Service Provision Changes…………………………………………………………………………. 11
Employee Liability Information……………………………………………………………………. 12
Pensions…………………………………………………………………………………………………. 12
Formation of TUPE (2006)……………………………………………………………………………. 12
Service Provision Changes…………………………………………………………………………. 13
Employee Liability Information……………………………………………………………………. 14
Pensions…………………………………………………………………………………………………. 16
Variation of Terms and Conditions and TUPE………………………………………………………. 17
Restrictions of Contract Variation……………………………………………………………………. 17
Changes due to the transfer itself…………………………………………………………………….. 18
The Terms of the Transfer………………………………………………………………………….. 18
Changes connected to the transfer……………………………………………………………….. 18
Harmonisation strategies………………………………………………………………………………… 20
Natural Re-alignment………………………………………………………………………………… 20
ETO Defence – Dismissal and Re-engagement………………………………………………. 20
A Choice of New Terms……………………………………………………………………………. 22
Pre-transfer Changes……………………………………………………………………………………. 22
Was the Government’s Approach to Contract Variation Correct?…………………………. 23
Insolvency and TUPE………………………………………………………………………………………. 25
Background………………………………………………………………………………………………… 25
ETO in Insolvency Situations………………………………………………………………………. 26
Insolvency and the TUPE 2006 Regulations………………………………………………………. 27
Pre-pack insolvency……………………………………………………………………………………… 30
Permitted Variations of Terms and Conditions…………………………………………………… 31
Has a ‘Rescue Culture’ been created?……………………………………………………………… 32
Conclusion……………………………………………………………………………………………………… 35
Appendix……………………………………………………………………………………………………….. 37
Definitions of Insolvency Scenarios………………………………………………………………….. 37
Bibliography…………………………………………………………………………………………………… 38
Introduction
The Transfer of Undertakings (Protection of Employment) TUPE (2006) Regulations is widely regarded as some of the most complex employment law legislation within the Human Resources and Legal sectors. The aim of this script is to provide a review of this notorious legislation; to assess its success in terms of efficacy of transfer, missed opportunities, new problems and legal loopholes that have been created. Due to the constrictions on the document’s length, it is not possible to encompass all aspects of 2006 Regulations. As such, we shall focus some of the more forward thinking and intriguing angles of this multifaceted legislation.
The TUPE Regulations are the domestic implementation of the European Acquired Rights Directives (ARD). In this implementation, the UK Government had some flexibility in its design. We shall examine the success of this design in terms of business and employees.
In this text we shall also discuss the Directives, and how these have shaped or domestic legislation in terms of their original construction and subsequent interpretation through the European Court of Justice’s judgements. It is important to discuss the evolution of the TUPE Regulations in order to assess the success and failures of TUPE 2006 and any possible future developments.
TUPE (2006) had a lot of ground to make up. For example, its predecessor – TUPE (1981) – was designed at a time when service transfers were far less common and as such TUPE (1981) did not legislate for actions. Tribunals attempted to deal with this deficiency, and this spawned a raft of conflicting legal precedence. As such, one of the main aspects of TUPE (2006) was to provide legislation to deal with service transfers. Interestingly, TUPE (2006) removed the requirement for the retention of identity for service transfers. This provision was to combat a practice known as ‘innovative bidding’ where an employer tenders for a contract and includes scope for the service to be carried out in a different manner, thereby altering the identity and removing the TUPE Regulations being triggered. We shall consider the success of the Government’s strategy to close this and other loopholes to ensure the Regulation’s efficiency.
The Regulations were also severely delayed, with consultation starting 2001. This was due to the UK Government’s attempt to include legislations for the transfer of pensions. However, and somewhat perversely, the Regulations only provided for a diminished right to transfer pensions: encompassing only a fraction of what the UK Government aspired. The script will analyse the Government’s attempts to improve TUPE to facilitate pension transfers and the success and these attempts.
Varying the terms and conditions of employees’ contracts is not easy at the best of times, however in a TUPE scenario it is far more complex, with the new employer required to show an economical, technical, or organisational reason, and a reduction in the number of employees. The formation of the TUPE 2006 Regulations provided an opportunity to the Government to install the machinery to facilitate changing terms and conditions, however this was not taken. Instead, changing terms and conditions without dismissal was left to the extreme strategy of dismissal and re-engagement, which has associated risks for the new employer. We shall discuss why this opportunity was not taken and the knock on effect on today’s legal landscape.
Recently, the media has paid significant attention to so called ‘pre-pack’ insolvency procedures whereby a business can be sold prior to administration proceedings and where the company faces liquidation, the TUPE Regulations permit variations to the terms and conditions of employee contracts, dismissals, reduced redundancy payments and pensions and removal of potentially substantial debts. Moreover, ‘phoenix deals’ have blazed through the media, where the management of a financially struggling business resurrect the organisation via the TUPE Regulations, inciting public animosity. The Regulations’ ability to facilitate this kind of action will be discussed in terms of fulfilling the ARD’s purpose.
The TUPE Regulations have always been controversial and not easily understood. Since the inception of the original domestic legislation to the tumultuous formation of the 2006 Regulations, TUPE is one of the most intriguing aspects of UK employment law. This dissertation attempts to unwrap its success in meeting the needs of business and employees alike.
Background to the TUPE Regulations
The Transfer of Undertakings (Protection of Employment) (TUPE) Regulations 1981 were originally created in order to comply with the EU Acquired Rights Directive 1977. The Directive addressed the needs of the European business community; to encourage and facilitate mergers and acquisitions. The Directive was intended to address the needs of employees where the business in which they work is taken over by another. It was also aimed to provide benefits to employees to counteract those provided to business and at the same time allow employees to move into the hands of a new employer but maintain previous terms and conditions and hence minimise objections. When the Directive was constructed, the subcontracting of services between businesses was unusual, and hence no such provision was included. Today, the business world is very different and we shall look closer at the development of the TUPE (2006) Regulations later in this script. We shall now consider how the UK implemented Acquired Rights Directive and the subsequent reaction from the legal and business community.
How the did the business / legal community react to TUPE (1981)?
When the Directive and Regulations were originally drafted they could not foresee the way the business community would react to them or evolve in itself. The TUPE Directive and Regulations were being applied to scenarios for which they were not designed. The two main areas that caused problems were contracting services and retention of identity.
We shall look at some of the landmark cases that defined not only the use of TUPE (1981) but the development of the Acquired Rights Directive (1998) and TUPE (2006).
Service transfers
The Suzen1 case is pivotal in how the TUPE (1981) regulations were interpreted by creative lawyers to incorporate the contracting of services.
Suzen worked for a cleaning contractor cleaning a school. The contract was taken away from Suzen’s employer and awarded to another contractor. Suzen’s employer issued her with a termination of employment, however this was insufficient notice and Suzen claimed that her employment continued over to the new contractor.
The case was passed on the European Court of Justice (ECJ) for clarification. The ECJ set out to the essential minimum content of the phrase “transfer of an undertaking” and for such a definition to fit with observations of the Members States.
The ECJ’s definition was largely built on the Spijkers2case; a landmark case that defined “transfer of an undertaking” by whether the business retained its identity. This retention of identity was a major feature of the TUPE (1981) Regulations and will be discussed later in this text.
The ECJ held that, generally, there is no transfer of a service unless a substantial majority of staff were transferred from one business to another. Normally, a transfer would consist of staff and other factors (for example, property assets). However, if the business in question was labour intensive, a group or workers engaged on a permanent basis may constitute an economic entity capable of maintaining it’s identity post-transfer. The ECJ then left it to the National Courts to decide whether this scenario should be considered a transfer.
1Suzen v Zehnacker Gebaudereinigung G.m.b.H.Krankenhausservice [1997] I.C.R 662
2Spijkers v Gebroeders Benedik Abbattoir CV [1986] ECR 1119
In the UK, cases followed that placed service transfers outside the TUPE Regulations. For example, Betts v Brintel Helicopters3, where Brintel Helicopters had a contract with Betts to provide services, the part of the contract was awarded to KLM. Brintel appealed against an EAT decision providing transfer rights to Betts and others. The appeal was allowed by the Court of Appeal, stating that whilst there was retention of identity no assets were transferred, only staff, and hence there was no transfer of undertakings.
As the case law progressed, it became clear that the Suzen case was too narrow and in 2000 the case of RCO Support Service v UNISON4 started to open up the interpretation of the domestic legislation to permit the transfer of a service to be covered by the TUPE Regulations. In the instant case, the ET and EAT ruled that a transfer of a cleaning contract, with no transfer of assets, did constitute a transfer of undertakings. The EAT ruled that the willingness of the transferee to re-employee workers after they resigned from their former positions was indicative of the retained identity of the undertaking.
Non-transfer of staff
The case of ECM (Vehicle Delivery Service) Ltd v Cox5provides a good example of lawyers creating strategies to circumvent the TUPE (1981) Regulations. At this time, several case cases occurred where no staff where transferred – on the basis that if no staff were transferred, there could be no transfer of undertakings.
Cox and others were employed as van drivers and yardmen by A, who had a contract with VAG to deliver cars from Grimsby docks to location across the UK. The drivers spent 50 per cent of their time on the contract. A lost the contract to EMC who did not take on any of the staff, although significant assets were transferred and the business retained its identity. Cox believed that he and others should have transferred
under TUPE and took action for automatic unfair dismissal against EMC as the transferee. The Tribunal held that the dismissal had been automatically unfair and that undertakings had been transferred. Appeals were made via the EAT and Court of Appeal based on the Suzen case that if the only remaining factors post transfer was the service then no undertaking could be transferred. Both appeals were held, stating the ET was correct in applying a broad approach to the case. The business was essentially a service and this was transferred, hence there was a transfer of undertakings.
Moreover, Tribunal found that ECM had not transferred redundant staff because they were contemplating claiming unfair dismissal. In addition, ECM claimed that if there was no transfer of staff there could be no transfer of undertaking. The Court of Appeal did not agree and stated that neither the Directive nor Regulations stated such a provision.
3Betts v Brintel Helicopters [1997] 2 All E.R 840
4RCO Support Service v UNISON [2000] IRLR 401
5ECM (Vehicle Delivery Service) Ltd v Cox[1999] 4 All E.R 669
The instant case is a good example of organisations transferring factors other than staff to try to side step the TUPE regulations and hence test it’s strength. However, the courts made several judgements that demonstrated that if the only reason staff weren’t transferred was to avoid a transfer of undertakings, then TUPE regulations would still apply. This demonstrates the Tribunal systems ability to interpret the TUPE Regulations to maintain their stability and obtain an outcome in line with the ARD’s purpose.
Another good example of testing the TUPE Regulation’s strength is the case of ADI (UK) v Firm Security Group Ltd6. The Firm Security Group Ltd (FSG) took over a contract supplied by ADI and carried out the work from the same premises using the same equipment but where no staff transferred. The Court of Appeal stated that in its opinion there had not been a transfer of an economic entity and, moreover, as the nature of employment was labour intensive any finding that the employees were not taken on in order to circumvent the Regulations would suggest that there had been the transfer of undertaking.
The afore mentioned cases shaped lawyers interpretation and strategy of the TUPE (1981) Regulations, however this was a side effect of the Regulations construction – unforeseeable at the time of their writing. The impact of this case law can be seen in the development of the updated Acquired Rights Directive and TUPE (2006), where this legislation has attempted to close such loopholes.
The question of identity retention, stated in the Suzen case, has been very important in interpreting the domestic UK regulations. We shall now examine how case law has evolved in this area in order to understand the construction of TUPE 2006.
Defining an economic entity/ retention of identity
An early important ruling from the ECJ was that of Schmidt7, where the ECJ ruled that the contracting out of a single cleaner came with the scope of the ARD and so constituted a transfer. Notably, the ECJ concluded that the retention of the company’s identity is the decisive criteria for established whether a business transfer has occurred.
The Spijkers case followed on from this case in the sense that the ECJ set out an early list of a factors that should be considered when defining economic entity post transfer and hence whether identity was retained. The list is as shown:
The type of business or undertaking concerned
Whether the intangible assets are transferred
The value of the intangible assets at the time of transfer
Whether or not the majority of the employees are transferred over
6ADI (UK) v Firm Security Group Ltd [2001] 3 C.M.L.R. 8
7Schmidt v Spar-und Leikhasse der fruheren Amter Borrdesholm [1994] IRLR 302 ECJ
Whether the customers are transferred
The degree of similarity of the between the activities before and after the transfer
The period for, in any, for which those activities are suspended.
This Spijkers ‘shopping list’ remains good law today when identifying an economic entity post-transfer. It became a hot topic in case law, as creative lawyers sought to alter organisations’ functions and circumvent the Regulations. Let us now look at some example of how the Regulations were manipulated.
In order for a transfer to be confirmed, the pre-transfer economic entity must be identified post-transfer. Once the type of business has been identified before the transfer, the activity can be identified and also the key requirements of the business. Although a business is more than an activity – and must include a structure, resources, assets and staff – unless the activity transfers then there can be no transfer.
If the new owner does not operate the old business, but instead changes it, then no transfer of undertakings takes place. We shall now discuss how Tribunals view identity retention.
In Crook v H Fairman Ltd8, the owner of a dress shop sold the lease to Fairman and sold all the stock to the public in final sale. The owner then paid off all the staff and handed then their P45s. Fairman then opened a new dress shop, which targeted a different market and different branding. Although the staff from the old shop were taken on, they were then dismissed after seven months as they were seen not be suitable for the new customer base. The EAT held that this was not a transfer of economic entity, the new business had a new identity, different customers and new brand and logo.
In Mathieson and Cheyne v United News Shops9, the EAT reached a similar decision. Mathieson and Cheyne had been employed in a shop in an NHS establishment. The shop was purchased by United News and renovated. Whereas the old shop sold newspapers, confectionary and flowers, the new shop had a wider range of products to include clothes, toys, sandwiches etc. The EAT deemed that the new shop had a different identity. Notably, it found too many differences between the old and new shops including opening hours, stock and commercial setup.
This is a common angle taken by Tribunals; if there is more than one factor changed from the old entity to the new then the identity is deemed to have been altered. This highlights the sensitivity of the legislation and this was picked up lawyers in order to facilitate the purchase of business without transferring undertakings. Essentially, by changing two more factors in the new business can nullify TUPE action.
8 Crook v H Fairman Ltd EAT [1990] IDS 412
9 Mathieson and Cheyne v United News Shops [1995] IDS Brief 541 EAT
Purchasers of a business can take the strategy of claiming that they were purchasing the premises and some of the equipment of the old organisation, then setup a new business with a new identity from that premise. This is a weak point in the TUPE (1981) Regulations and this has been transposed to the 2006 Business Transfer legislation. The weakness is intrinsic to the transfer of a business. However, as will be discussed later the 2006 Regulations removed the requirement for service transfers to show retention of identity to trigger TUPE actions.
Defining ETO’s
Dismissals related to the transfer of undertaking can be justified by using an economical, technical or organisation (ETO) reason. The provision for the ETO defence has been in existence for a substantial period prior to TUPE 2006. The Acquired Rights Directive (ARD) provides for dismissals related to the transfer of undertaking provided they are for an ETO reason (Article 4). This provision was transposed into the TUPE (1981) Regulations and again into TUPE (2006).
There is no statutory definition of ETOs however the BIS guidance notes of TUPE define ETOs in the following manner:
Economical - a reason related to the profitability or the market performance of the new employer’s business.
Technical – a reason relating to the nature of the equipment or production processes which the new employer operates.
Organisational – a reason relating to the management or organisational structure of the new employer’s business10.
To date, the ETO defences have attracted little attention of the ECJ and EU Commission and as such it not a main focus of this script so will not be analysing case law to seek further definition clarification. We will, however, be discussing how the ETO defence can be used to vary contracts later in the text, hence it is important that the reader understands their definitions.
Formation of Acquired Rights Directive (ARD) (1998)
In 1994, following over 40 rulings from the ECJ on the ARD, the EU decided to amend the Directive. The European Commission tendered proposals for amendments to the 1977 Directive. The Amended Directive was adopted at the Cardiff Summit in June 1998, with Member States given three years to implement. Further updates were made in 2001.
We shall now consider the Directives Amendments in more detail. The main areas of focus were the service provision changes, employee liability information and pension rights. As such we shall look at the amendments to these areas before discussing how these were then integrated in the UK domestic legislation. The inclusion of insolvency legislation will be discussed in a later chapter because of its breadth.
10Department for Business Innovation and Skills, Employment Rights on the Transfer of an Undertaking, 2009
Service Provision Changes
As discussed, the European Commission original attempted to clarify the ARD’s position on the contracting out of services by amending Article 1(1) to exclude a mere ‘activity’ and require an ‘economic entity’. However, this was met with a fierce repulsion from the EP and was subsequently completely withdrawn. The amended script was based on a number of ECJ rulings and this really dampened the end results clarity. Article 1(b) states;
“where there is a transfer of an economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether that activity is central or ancillary”.
The definition provides little clarity and hence we are led back to case law. Intriguingly, the Amending Directive’s Recital 4 states the amendment does not alter the meaning of the original Directive – which seems somewhat bizarre given that it was the lack of clarity that triggered the Amendment.
This leads us back to European case law for clarification and, somewhat predictably, to attempt to reconcile the Schmidt and Suzen cases. As discussed, the Schmidt case involved a first generation contracting out of a cleaning contract. Although only one member of staff was transferred and no tangible assets, this was deemed to be a transfer of undertakings. This approach contrasts that of Suzen, a second-generation contracting out service, where it was ruled that an activity in itself does not constitute an economic entity. ECJ stated that the fact that a similar activity is carried pre and post transfer does not confer a transfer of undertakings. In a labour-intensive scenario, (as per the Suzen case) there will only be a transfer if the new employer takes on the majority of the staff. This decision makes no attempt to reconcile with that of the Schmidt case, and, moreover, opened up an avenue for abuse where employers avoided transfer of undertakings by not transferring staff. In an organisation where the workforce is unskilled there is little incentive to assume responsibility for pre-transfer staff. This, in effect, relegates the rights of the unskilled workforce and creates a multi-tiered system.
The paradoxical approach purported by Suzen has been partially corrected by UK case law. Where Suzen determines the rights of an employees to transfer on whether other staff transferred, ECM (Vehicle Delivery Services ) Ltd v Cox, looks at the motivation behind non-transfer of staff and suggests that if the that motivation to avoid transfer of undertakings then such an undertaking will still exist.
Employee Liability Information
The ARD states that “Member States may adopt appropriate measures to ensure that the transferor notifies the transferee of all the rights and obligations which will be transferred to the transferee under Article 3.2, so far as those rights and obligations are or ought to have been known to the transferor at the time of the transfer”.
With this amendment the ARD outlays the basis premise of Employee Liability Information on which TUPE 2006 is based. We shall discuss the UK domestic interpretation of this Article later.
Pensions
Article 4a. of the ARD states “unless Member States provide otherwise, paragraphs 1 and 3 shall not apply in relation to employees’ rights to old-age, invalidity or survivors’ benefits under supplementary company or intercompany pension schemes outside the statutory social security schemes in Member States”.
The Article provides that the rights of employees to transfer their rights and obligations and for the transferor to notify the transferee of such rights does not apply to occupational pension schemes save from benefits links to old age, invalidity or survivors. This text was directly transposed in to the TUPE Regulation 10(2) and will be discussed in further detail in the contact of the domestic legislation.
Formation of TUPE (2006)
The reformation of the TUPE (1981) Regulations took sometime. This was, firstly, due to the Directive undergoing amendments and then, secondly, by a complex domestic consultation process. The latter was really due to the UK Government’s original intention of placing provision for occupational pensions within the TUPE Regulations. The delay meant the new Regulations came into effect on 6 April 2006, and, perversely, did not contain any provision for occupational pensions.
Although TUPE 2006 does make some substantial advances in the areas of insolvency scenarios, employee liability information, and contracting out services, the UK Government was not able to incorporate all the changes it sought because these were integrated in to the ARD. In fact, outside of the areas mentioned above, the vast majority of the changes to the ARD from the 1977 version are word alterations to align European and Member State legislations with current case law findings.
We shall now discuss some of the changes of TUPE 2006 before moving on to an in-depth analysis of two major areas of this script: TUPE 2006 in insolvency scenarios, and the ability of TUPE 2006 to facilitate changes to employees Terms and Conditions.
Service Provision Changes
As previously discussed, one of the main features of TUPE (2006) is the addition of a provision from contracting out of services. This definition of a relevant transfer was not transposed from the ARD but an innovation of the domestic legislation. In the Regulations, this is referred to as “service provision changes” (SPC). This legislation is an extension and clarification of precedent case law based on TUPE 1981, some of which has been previously discussed (notably the Suzen, Spijkers, Schmidt and ECM cases).
The SPC mirrors the legislation for the undertaking of a business (reg. 3(1a) apart from the substantial omission of the need for the relevant transfer to retain its identity post-transfer. This was put in place by the UK Government to stop the practice of “innovative bidding”.
We have previously discussed the nature of identity retention and outlined some key cases that demonstrate the court’s parameters. The parameters of identity retention are sensitive and, as we have discussed, changing more than one aspect of a business has proven to alter the businesses identity in the eyes of the court. This sensitivity was exploited by creative lawyers by tendering for a contract and including scope for carrying out the service in different manner, thereby not retaining the business identity and transferring undertakings. This process was coined “innovative bidding”.
Let us now look at the 2005 Government consultation paper’s reasoning behind differentiating between an SPC and business transfer:
If the incoming contractor intends to carry out the service activities in a novel manner – for instance, using a computerised process in place of a previous manual one – it is likely that some of the employees who have been performing the activities for the old contractor (or, in the case of an initial contracting-out, the client) will lack the necessary skills and will have to be made redundant. There are, however, clear advantages in providing for the organised grouping of employees to transfer to the new contractor before any redundancies are made, even in cases where there would not be a transfer under draft Regulation 3(1)(a) in any event. If the employees
remained with the old contractor, the likelihood is that they would all have to be made redundant (as, on losing the contract, the old contractor would probably have no work at all for them to do). Some, however, may be able to retain their jobs with the new contractor, if they happen to have the skills necessary to adapt to the new working methods, or can be easily retrained, or can be reallocated to other parts of the new contractor’s business13.
This is in-line with the employment protection aim of the Regulations, and would also be likely to assist the new contractor in reducing recruitment and training costs. Additionally, and importantly, treating all contractors – including those making “innovative bids” – on an equal footing will contribute toward the key policy objective of creating a “level playing field” in tendering exercises, and increased certainty and confidence for all concerned.
11TUPE, Draft Revised Regulations, Public Consultation Document, Employment Relations Directorate Department of Trade and Industry, March 2005
The removal of the need to show retention of identity for SPC has certainly diminished the practice of innovative bidding and as such has shown the move by the UK Government to introduce a separate Regulation for SPC and differentiate from a business undertaking to be successful, for which it should be commended.
However, this type of strategy – whereby the transferee setups the transfer, pre-transfer, has shifted to pre-pack insolvency proceedings. It could be argued that the latter is more the extreme version of this type of tactic. Certainly, the fact that the business has to be insolvent means that the range of companies where this strategy can be applied is narrower than of innovative bidding, however the rewards are far greater. So, although innovative bidding may have disappeared, it could be said that it has morphed into pre-pack administration.
Employee Liability Information
Draft Regulations 11 and 12 are designed to implement the Government’s decision to take advantage of the Member State option in Article 3.2 of the Directive. This is an option to introduce provisions requiring the transferor to notify the transferee of all the rights and obligations in relation to employees that will be transferred – so far as
those rights and obligations are or ought to be known to the transferor at the time of the transfer.
The Regulations state the following information should be provided12:
identity of employees who will transfer;
the age of those employees;
information contained in the ‘statement of particulars’ of those employees;
information relating to any collective agreements which apply to the employees;
instances of disciplinary action within the proceeding two years taken by the transferor in respect of those employees in circumstances where the statutory resolution procedures apply13 or from 6 April 2009 of the ACAS Code of Practice on disciplinary and grievance procedures;
instances of any grievances raised by those employees within the preceding two years in circumstances where the statutory dispute resolution procedures apply or from 6 April 2009 the ACAS Code of Practice on disciplinary and grievance procedures;
instances of any legal actions taken by those employees against the transferor in the previous two years and instances of potential legal actions which may be brought by those employees where the transferor has reasonable grounds to believe such action might occur.
12 BIS, Employment Rights on the Transfer of an Undertaking, 2009
13 These circumstances are set out in the Employment Rights Act 2002 (Dispute Resolution) Regulations 2004.
Draft Regulation 12 sets out the remedy that is to be available to a transferee in a case where the transferor breaches the requirements of draft Regulation 11. The claim must be made within three months of the date of transfer and the compensation will be no less than £500 per employee. This is a severe penalty, designed to ensure that TUPE 2006 Regulations do not falter on business lack of motivation to provide accurate information – for without this, the whole transaction could fall apart.
The legislation benefited not only to the employees who transfer but also to the transferees themselves.
The legislation has improved transparency in the transfer process and to prevent instances of sharp practice – such as where, shortly before a transfer is completed, the transferor changes the terms and conditions and/or the composition of the workforce assigned to the undertaking in question, to the disadvantage of the transferee.
In addition, it has promoted competitiveness by removing a significant disincentive to some businesses – particularly those, such as small firms, that may have insufficient bargaining power to negotiate equivalent contractual safeguards – becoming involved in transfers in the first place.
However, the Regulations require in the transferor to pass over the employee information at least two weeks before the transfer. This can pose a problem; in a large transfer scenario, there will be huge amount of data to analyse in only two weeks. The transferee may have to trawl through thousands of employee files and assess how the impact of any outstanding high profile issues, say for example an ongoing tribunal case.
Moreover, the Terms and Conditions of the employees’ contract may not be divulged until two weeks prior to transfer, and this may throw up some serious issues with integrating the staff. In reality, where the transfer is a merger or acquisition the employees’ information – especially the Terms and Conditions – would be handed much sooner than two weeks before the transfer. The transferee would insist on viewing the Terms and Conditions and any other information that it considered important when the finance was being negotiated.
However, where the transferee is being handed over from one contractor to another, and hence there is no relationship between transferor and transferee, the employee is likely to be handed over just two weeks before the transfer because the transferor can be agitated due to losing the contract. This is probably the main problem with the Employee Liability Information Regulations and the problem is exacerbated by the indemnities.
In a transfer of undertakings the transferor and transferee will indemnify against the information being inaccurate and costing one of the parties’ money in tribunal claims. However, if there is no business link between transferor and transferee then taking out this insurance is not normally viable.
The timeline of two weeks is not defined in the ARD but rather legislation put in place by the UK Government. In the opinion of the writer, this timeline is too constrictive. A smaller company will probably have fewer records to sort through, however it will also have limited resources, and a larger company could potentially have thousands of records to analyse. What is the benefit of such a tight time constraint? Possibly, the shorter the period the transferee has the T&Cs, the less likely amendments are to be effected. However, as will be discussed later, the ability to vary T&Cs during a transfer of undertakings is limited and as such the process may have benefited from a longer period between exchange of employee information and the transfer date.
Pensions
As discussed, the introduction of the TUPE 2006 Regulations was delayed due to complexities of including a provision for the transfer of occupational pensions. However, due to these complexities, no such provision was included in the Regulations, nor the ARD.
The Regulations state that no occupational pension should be transferred (Regulation 10(1a) as defined by The Pension Schemes Act s1 (1993). This has the effect of not totally embargoing all rights related to pensions. For example, there are many pensions schemes that only just fall short of the definition of an occupational pension – such as where an employer pays a regular sum into the employers personal pension plan. This type of pension would transfer.
In addition, Regulation 10 (2) states that:
“any provisions of an occupational pension scheme which do not relate to benefits of old age, invalidity or survivors shall not be treated as part of the scheme”.
As such, these benefits are not part of the occupational scheme and therefore will be transferred. These benefits could include private medical insurance, life insurance, and long-term disability benefit. Note that ‘old age’ benefits are triggered by retirement.
The principle problem that both the European Commission and UK government encountered when trying to implement the transfer of occupational pension in via the ARD and TUPE, respectively, was the fundamental problem of the transferees’ financial capacity. Essentially, if the transferee cannot afford to carry the occupational pensions provided to the transferors’ employees then the merger/acquisition will fail, compromising the Directive and Regulations. Hence, the legislation provided is really the maximum facilitation of pension transfer, with state pensions and some benefits being more transferable that full occupational pensions.
The Pensions Act was introduced in 2004 and set a minimum standard of occupational pension entitlement to be afforded to all transferred employees who had such an entitlement prior to the transfer; and as discussed, the Government continued to follow the more generous policy set out in A Fair Deal for Staff Pensionsfor the public sector. The introduction of this legislation two years prior to the new TUPE Regulations meant that the similar TUPE Regulations were low impact.
Variation of Terms and Conditions and TUPE
The business world can be fast paced and this sometimes requires changes in the workforce and the Terms and Conditions (T&Cs) of its contracts. Varying T&Cs can tricky at the best of times however in a TUPE scenario it can be very difficult. The TUPE (1981) Regulations did not provide any legislation for contract variation. As such, the revamped 2006 Regulations offered a great opportunity to provide the business world with a tool to implement T&Cs. However, the Government decided not to use this opportunity, instead leaving precedent case law to guide the business and legal community. In this chapter we will map out the legal landscape and the options that are available to vary T&Cs.
Restrictions of Contract Variation
The ARD is designed to protect the employees’ original rights and, more specifically, the T&Cs of employment by ensuring s/he will enjoy the terms post-transfer. A landmark case in contract variation is Foreningen AF Arbedjsldere I Danmark v Daddy’s Dance Hall14.
The case went to the ECJ and concerned the transfer of the lease on some restaurants and bars from Irma Catering to Daddy’s Dance Hall. The ECJ found that the ARD covered the transfer. An employee, Tellerup, had previously worked for Irma and was then taken on by Daddy’s Dance Hall. The T&Cs of the new contract, taken as a whole showed no detriment when compared to the old Terms. However, when the individual terms of the contract were compared, some were advantageous, some disadvantageous. The advantageous terms were enforceable, and the disadvantageous were not, hence the employee came out with a far superior contract. However, the ECJ ruling was clear – employees were not able to agree changes to their contract that were caused by the transfer.
The TUPE (2006) Regulations set out that change to an employee’s T&Cs cannot be made where the sole or principal reason is:
the transfer itself;
a reason connected to the transfer which it not an economical, technical, or organisational reason entailing changes in the workforce.
Note that ‘changes in the workforce’ refers to change in the numbers of staff. We shall now discuss each of the above bullet points.
14Foreningen AF Arbedjsldere I Danmark v Daddy’s Dance Hall (1988) IRLR 315
Changes due to the transfer itself
Since the Daddy’s Dance Hall case, several other cases have posed the question of whether the inability of an employee to agree to detrimental contractual changes only applies where the transfer is the sole reason for the change, or does it extend to when the change is connected to the transfer?
The case of Ralton v HaveringCollege of Further and Higher Education15clarified the situation. In the instant case, three college lecturers employed were on terms called the ‘silver book’ – a collective agreement between local authorities and the Unions. Two were on fixed term contracts and when these expired they were offered employment on the college’s terms, not those of the silver book. The third worker was on an ongoing contract but accepted a promotion on the college’s terms. All three claimed they should have been employed on the silver book terms. The EAT indicated that the transfer had to be the sole reason for the change. There are two main aspects to the EAT decision; the terms of the transfer under the Directive, and whether the change was connected to the transfer and therefore invalid.
The Terms of the Transfer
In the Ralton case, the EAT held that the employees transfer on their existing terms. If they had remained in the employment of the local authority they would have probably maintained the silver book terms and conditions, although not legally bound to do so. The EAT stated that all three lecturers should receive the silver book terms post-transfer. However, the college was free to offer new T&Cs on promotion or renewal of fixed term contract.
Changes connected to the transfer
In the instant case, the EAT found that additional factors had influenced the colleges decision to not provide the silver book T&Cs. The demand for courses, the promotion and the renewal of fixed term contracts were all factors and hence the change was valid.
TUPE Regulation 4(4) states that:
“any purported variation of the contract shall be void if the sole of principal reason for the variation is …”
So, as in the Ralton case, additional factors will permit the variation to the contract. This creates an opportunity to circumvent the TUPE Regulations by ensuring that other factors exist. If no other factors can be shown then there is a second opportunity to validate the change to T&Cs by providing an ETO defence.
15Ralton v Havering College of Further and Higher Education (2001) IRLR 743 EAT
The case of Martin and ors v South Bank16 seeks to clarify whether variations made to T&Cs where the reason for the change is connected to the transfer are void and then subsequently remedied in the manner of Daddy’s Dance Hall.
The claimants worked at Redwood College of Health Studies as nursing lecturers. Their employment was governed by the General and Nurses and Midwives Whitely Council (GWC) and they were members of the pension scheme. The scheme provided enhanced retirement pension compensation in the event of redundancy; in the interests of the efficiency of the service; or an organisational change. Redwood College then became part of South Bank University (SBU). SBU then informed the claimants that they would be able to remain in the NHS pension scheme. Three options were offered to the claimants:
leave the NHS pension scheme and start a new arrangement;
transfer from the NHS pension scheme to a SBU scheme;
leave the NHS pension scheme alone and not take out a new pension scheme.
The claimants did not accept the Terms and Conditions of the SBU contract. They joined the Teacher’s Superannuation Scheme and applied for the NHS pension to be transferred. Martin was not able to do this because she was over 60 at the time of the transfer of undertaking. Because of changes made by the government, SBU contacted all academic staff aged over 50 and advised them that they may not be able to take early retirement after 31 March 1997. Martin chose to take early retirement before this date. Martin then complained that she should have received a more favourable retirement package under the T&Cs of GWC.
The case concluded with a multifaceted analysis. However, the judgement we are interested is:
“SBU wished to bring the terms upon which it offered early retirement to the transferred employees into line with those offered to its other employees. In such circumstances, an alteration of the employment relationship had to be regarded as connected to the transfer, and any consent given by transferred employees to the alteration was invalid in principle”.
So, alterations to employees’ T&Cs that are either the ‘reason or principal reason for the change’ or ‘a reason connected to the transfer’ will invalidate the variation and the transferee will be deemed responsible for making amends.
So, how can we validate changes to T&Cs that are related to the transfer? Firstly, it should be noted that the strength of the connection between the transfer and the change to T&Cs will not weaken over time17. We shall now look at some strategies to vary T&Cs in connection to a relevant transfer.
16Martin and Ors v South Bank (2003) E.C.R. I-12859
17Taylor v Connex South Eastern (2001) Emp L.R 72
Harmonisation strategies
The central motivation behind aligning new employees that have arrived to the business via TUPE with existing employees is create a workforce that is aligned. Inconsistencies in T&Cs can spread industrial relations unrest. It may be that the advantageous T&Cs are not visible to other members of staff. However, it may be that not only are the T&Cs highly visible but also highly disruptive. For example, a merger of two high street retailers where the shops are re-branded as one and the two sets of staff are contracted to different working hours. This would be very disruptive to the working environment of the shop; with employees working unaligned shift patterns. So what strategies can be used to harmonise the potentially multi-tiered workforce?
Natural Re-alignment
The obvious solution to harmonise contracts is by natural re-alignment, whereby as employees leave the company, new employees are brought in on T&Cs favoured by the business. However, this has two main problems. Firstly, the process can take a very long time and is passive – in the sense that the business does not have a firm control over progress. Secondly, as the process takes a long time, the requirements of the business may change, and hence the T&Cs of the workforce will need to adapt. So, in effect the business is chasing a moving target.
ETO Defence – Dismissal and Re-engagement
The use of the ETO defence is based on the case of Wilson v St.Helens Borough Council Meade and Baxendale v British Fuels Ltd 18. In the instant case, Lancashire County Council held the contract to mange a care home owned by a Trust. The Council could no longer afford to run the home and the contract was offered to St.Helens, whom accepted the offer on the condition that it did not become an additional financial burden. Such a financial burden would be negated by reducing staff numbers and negotiating payments. There were 162 employees working at the home, all of which were made redundant. A total of 72 workers transferred to St.Helens, some which carried out different duties and had different remunerations; some staff were placed at an advantage some at a disadvantage.
18Wilson v St.Helens Borough Council and Meade and Baxendale v British Fuels Ltd (1997) IRLR 505 CA; (1998) IRLR 706 HL.
The House of Lords made the following decisions in relation to the dismissal and re-engagement.
Dismissals connected to the transfer are automatically unfair unless there is an ETO reason under Regulation 8(2);
The dismissal are not void but are effective, the employment does not transfer to the new employer;
However, unless an ETO defence is substantiated, employment liabilities will transfer to the new employer;
As the old contract has ended, the dismissed employee can be re-engaged on a new contract with the new employer. Although the employee can still seek compensation, re-engagement of previous T&Cs, or re-instatement.
The strategy to dismiss employees pre-transfer and then new employer re-engage on new T&Cs appears to be legally sound. Although, there is the risk that the employees take action against the transferee for unfair dismissal. The process is extreme and poses the problem that if more than 20 employees are being dismissed then collective redundancy consultations have to be held.
Let us take a closer look at the process that would have to be followed to carry out the variation of T&Cs by dismissal and re-engagement using an ETO defence.
the employer must have a valid ETO defence;
the employer should draft the proposed T&Cs (in-line with transferee’s current T&Cs);
if more than 20 employers are to be dismissed then collective redundancy consultations should be followed;
the draft proposal should be able to be amended during the consultation process;
during consultation the employee or Union representatives may Agree to the new T&Cs and this should be the aim;
individual employees must be consulted;
notice can then be served to the employees;
these employees can then be re-engaged by the transferee.
A Choice of New Terms
Another strategy used by transferees in an attempt to harmonise the transferred employees with the older workforce is to present the new employees with new T&C’s that are overall more favourable than those contained in their previous contract. This will seem attractive to the employee. In practice, this can be effective because if the employee favours the T&Cs s/he is, hopefully, unlikely to seek legal recourse.
However, legally it is fraught with problems. As discussed, the Daddy’s Dance Hall case set a precedence to allow the employee to go though each of the T&Cs and ‘cherry pick’ the best from both the contracts – which clearly is not an attractive outcome for the employee.
Pre-transfer Changes
Is it possible for the transferor to vary the staff’s T&Cs who will transfer? The case Mairs (HM Inspector of Taxes) v Haughly19 sheds some light on this strategy. The instant case concerned the privatisation of Harland and Wolff. The employees would transfer to Harland and Wolf 1989 Ltd on new T&Cs. The main change was that after a two year period they employees would forego their contractual enhanced redundancy entitlement. In return they received 30% of the redundancy payment they would received at the time in addition to £100 per year of service. The case was related to the tax payable on the sump sum payable. The employees won the case: there was no tax payable because the redundancy payment would have been exempt. However, the case does highlight the possibility for pre-transfer contract variations without the requirement for dismissal and re-engagement. In this case the employees signed a statement accepting the new T&Cs, which were activated upon transfer. The strategy requires additional review by the Tribunal system. However, it may be that in this scenario the employees were concerned with receiving a tax-free payment and not concerned with restoration of pre-transfer rights.
19Mairs (HM Inspector of Taxes) v Haughly (1993)IRLR 551 HL
Was the Government’s Approach to Contract Variation Correct?
The advent of the TUPE (2006) Regulations provided an opportunity for The UK Government to gift the business and legal community legislation to vary T&Cs on the transfer of an undertaking. However, this opportunity was not taken. Instead, it has been left to precedent case law to map out the options available for employers. Has this strategy been successful? Was it to correct strategy to take?
Let’s take it back to the ARD’s purpose regarding variation to T&Cs in a TUPE scenario; to ensure the employees enjoy the same T&Cs post-transfer as they did pre-transfer. The Daddy’s Dance Hall case is perfect to illustrate how this ethos has been carried out. In the event of T&Cs being varied, detrimental variation will be come void and the employee can enjoy cherry picking from both the contracts. Effectively, the employee contracts are preserved and there lies potential to for a punitive remedy towards to transferee by improving the employee’s contract.
Moreover, case law has demonstrated that this protection exists whether the alteration to the T&Cs is the ‘reason or principal reason’ or ‘a reason connected to the transfer’.
The only proven strategy is to use the ETO defence to dismiss and to re-engage. This is an extreme strategy and contains risk of claims for unfair dismissal, compensation, and re-instatement of previous T&Cs. This is an intriguing legal landscape because what it effectively means that employers have to be in a very tight spot to take on the risk of reprisal, and also, have good communication between transferor and transferee – hence this would not be viable in service provision between two contractors. In addition, this confrontational strategy can easily damage industrial relations. Thus, it is really only a viable option for very specific situations.
Over recent years there has been discussion by the Labour Government permitting contract variation under TUPE via an ETO without dismissal. This would reduce the risk taken compared with dismissal and re-engagement. At the time of writing the Coalition Government’s views on this action are unknown. However, the Government, notably Cameron, has voiced concerns with the business world becoming over run with too much employment law legislation, as would be expected from a Conservative voice with strong links to big business. This would infer that the TUPE Regulations may be relaxed to spur on mergers and acquisitions by permitting contract variation with an ETO without the need for dismissal. This would certainly be significant step to take and add a very interesting angle to the TUPE Regulations. But is such action limited by European Law?
The ARD does not provide any specific legislation on the Member States providing legal machinery to facilitate amendments to T&Cs. We have seen from case law how an ETO defence can be used when coupled with dismissals and this action is unsupported by the ARD. Could the boundary be pushed farther to accommodate an ETO defence without dismissals? This would be have be tested the ECJ.
Moreover, should the UK Government have proceeded to provide legislation to facilitate T&Cs variation via an ETO defence without dismissal upon the construction of the TUPE (2006) Regulations? The ARD does not provide any legislation for T&C variation via an ETO defence with dismissals. As such, this part of the TUPE Regulations was a departure from the ARD and could have been shown to be contradicting the Directive. However, given that this Regulation 7(2) was transposed from the 1981 Regulations, why not facilitate mergers and acquisitions in 2006 rather than wait until a later date?
Whilst putting place legislation to vary T&Cs via ETO without dismissal would be benefit employers and stimulate mergers and acquisitions, it would of course, remove protection afforded to the employees. It is this balance that both the ARD and TUPE Regulations attempt to find. It should always be remembered that the ARDs purpose is to permit employees to enjoy the same T&Cs pos- transfer and they did pre-transfer. It is possibly for this reason the UK Government has not put such legislation in place and has remained true to the ARD.
Insolvency and TUPE
Background
The 1977 ARD did not provide any legislation on the transfer of undertakings in an insolvency setting as such the TUPE 1981 Regulations were also weak in this area. The TUPE 1981 Regulations did state that any dismissal made in connection with the transfer, or had the dismissal as its primary reason, was automatically unfair unless it was for economical, technical or organisation (ETO) reason. This meant that the transferee took on the staffs’ employment contracts and these could not be altered after the sale of the business. This acted as a major disincentive to prospective buyers of the insolvent company because the ability to impact and manipulate the staff setup.
The landmark case with the ECJ with regards to the ARD and insolvency situations is Abels v Administrative Board of the Bedriftsvereniging voor Metaalindustrie ende Electotechnische Industrie20. In the instant case, the ECJ first set out its now well versed opinion:
“It cannot be concluded that Directive no.77/187 imposes on the Member States the obligation to extend the rules laid down therein to transfers of undertakings, businesses or parts of businesses taking place in the context of insolvency proceedings instituted with a view to the liquidation of the assets of the transferor under the supervision of the competent judicial authority”
This opinion is echoed throughout the TUPE Regulations in insolvency situations, as we shall now discuss.
20Abels v Administrative Board of the Bedri
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