This guide is based on UK law. It was last updated in June 2011.
What is TUPE?
The purpose of TUPE is to protect employees if the business in which they are employed changes hands. Its effect is to move employees and any liabilities associated with them from the old employer to the new employer by operation of law.
TUPE is an acronym for the Transfer of Undertakings (Protection of Employment) Regulations. The Regulations were first passed in 1981 but overhauled in 2006. TUPE is a significant and often tricky piece of legislation adopted by the UK in order to implement the European Acquired Rights Directive.
Why do you need to know anything about TUPE?
TUPE applies every day to an enormous number of different business transactions and it is essential that employers of all sizes understand what employment liabilities can arise. TUPE can apply (to name but a few of many examples) when employers:
- sell or buy part or all of a business as a going concern;
- outsource or make a "service provision change" involving either (a) an initial outsourcing of a service (e.g. where services transfer from the customer to an external contractor); (b) a subsequent transfer (e.g. where services transfer from the first external contractor to a different external contractor; and (c) bringing the service back in-house (e.g. where services transfer from an external contractor back to the customer);
- grant or take over a lease or licence of premises and operate the same business from those premises.
What do you need to know about TUPE?
To protect your business from claims, you need to understand:
- when TUPE is likely to apply;
- what TUPE means legally;
- what you have to do to comply with TUPE and the penalties for failing to do so; and
- what other steps you can take to protect your business from the effects of TUPE.
When is TUPE likely to apply?
In essence, TUPE applies where there is a "relevant transfer". The 2006 Regulations clarified complicated case law to determine that a relevant transfer means the "transfer of an economic entity which retains its identity". In determining whether this has happened, the courts take into account factors such as:
- the type of undertaking being transferred;
- whether any tangible assets (buildings, moveable property etc) are transferred;
- whether any intangible assets are transferred and the extent of their value;
- whether the majority of the employees are taken on by the new employer;
- whether any customers are transferred;
- the degree of similarity between the activities carried on before and after the transfer;
- the period for which the activities were suspended, if any.
The question of exactly when TUPE does and does not apply is a very complex one. If you think a transaction you are involved in might be covered by TUPE you should always take specialist legal advice. Virtually all service provision changes are covered so it is safe to assume that TUPE applies to most outsourcing without the need for protracted legal argument. However, because of the uncertainty surrounding when TUPE applies, it is common for this issue to be regulated by contract.
What does TUPE mean legally?
Employees who are employed in the undertaking which is being transferred have their employment transferred to the new employer. Employees can refuse to transfer (or "opt-out"), but depending on the circumstances of the case, they can lose valuable legal rights if they do. TUPE states that "all the transferor's rights, powers, duties and liabilities under or in connection with the transferring employees' contracts of employment are transferred to the transferee". This all-embracing concept encompasses rights under the contract of employment, statutory rights and continuity of employment and includes employees' rights to bring a claim against their employer for unfair dismissal, redundancy or discrimination, unpaid wages, bonuses or holidays and personal injury claims etc.
Employees therefore have the legal right to transfer to the new employer on their existing terms and conditions of employment and with all their existing employment rights and liabilities intact (although there are special provisions dealing with old age pensions under occupational pension schemes). Effectively, the new employer steps into the shoes of the old employer and it is as though the employee's contract of employment was always made with the new employer. For this reason it is essential that employers know all about the employees they might inherit if they are planning to take over a contract or buy a business and that they make sure that the contract protects them from any employment liabilities which arose before they became the employer. This is helped by the fact that the old employer is required to provide to the new employer written details of all employee rights and liabilities that will transfer (see below).
For example, if Armadillo plc has been carrying out a contract to supply an insurance company with IT services and then loses the contract to Bear Ltd, Bear Limited will not only take over the contract to supply IT services, but will also inherit all the employees of Armadillo plc who were formerly involved in supplying the IT services to the insurance company. If Armadillo plc has failed to pay its employees their wages for the past few weeks, Bear Limited will inherit the liability to the employees for the unpaid wages under TUPE.
Any dismissals will be automatically unfair, where the sole or principal reason for the dismissal is the transfer. This is also the case where the sole or principal reason for the dismissal is a reason connected to the transfer, unless it is for an economical, technical or organisational reason (an "ETO" reason) requiring a change in the workforce. This ETO defence is narrow in scope and can be difficult to rely upon. Even if the employer can rely upon an ETO defence and the dismissal is not automatically unfair, it may still be unfair for other reasons (such as a failure to consult properly in a redundancy situation).
As the new employer is required to take on the employees on their existing terms and conditions of employment, it is prohibited from making any changes to the terms and conditions of employment of the transferred employees if the sole or principal reason for the variation is the transfer. This is also the case where the sole or principal reason is connected to the transfer, unless there is an ETO reason for the change, usually requiring a change in number of the workforce. This often makes it difficult, if not impossible, for incoming employers to harmonise terms and conditions of employment of staff after a TUPE transfer.
Where an independent trade union has been recognised by the outgoing employer in respect of transferring employees, recognition will transfer to the incoming employer to the same extent.
What do you need to do to comply with TUPE?
(1) Outgoing employer must inform and consult with staff
Employers involved in a business transfer must inform appropriate representatives of the affected employees of the transfer and any measures proposed, and must consult on any proposed measures. Certain specified information must be provided to the representatives long enough before the transfer to enable the outgoing employer to consult with them about it.
If there are any changes or proposals for changes following the transfer, these "measures" will have to be discussed with the representatives of the affected employees The incoming employer is required to provide the outgoing employer with information on proposed measures to allow the outgoing employer to comply with its duty to inform and consult. There is no set timetable for consultation, but the larger the transaction and the more staff affected, the longer the timetable will need to be.
If there is a failure to inform and consult, a complaint can be made to the Employment Tribunal. If successful, the Tribunal can award whatever compensation it considers just and equitable having regard to the seriousness of the employer's failure up to a maximum of 13 weeks' pay per affected employee. Information and consultation failures can result in joint and several liability between the outgoing and incoming employers, although the contract governing the transfer can cater for apportionment of liability here.
(2) Outgoing employer must provide employee liability information to incoming employer
The outgoing employer has a duty to provide the incoming employer with written details of the transferring employees (including identity, age, particulars of employment, disciplinary and grievance records, employee claims and collective agreements) together with all associated rights and liabilities that will transfer. This information must be given not less than 14 days before the transfer, although in practice the incoming employer will aim to attain this information much earlier.
If there is a failure to comply with this duty by the outgoing employer, the incoming employer can apply to the Tribunal for compensation which will be assessed with regard to the losses suffered with a minimum award of £500 per employee.
A failure to comply with TUPE could therefore expose employers to claims large enough to undermine the entire transaction.
What other practical steps can you take to protect your business from the effects of TUPE?
Although there is nothing anyone can do to prevent TUPE applying (it is not possible to contract out of TUPE), there are steps which both the outgoing and incoming employers can take to divide up TUPE liabilities contractually between them. Whilst under TUPE employment liabilities connected to the transferring employees will always transfer to the incoming employer (so employee claims should always be made against the new employer), the parties can still agree contractually to divide up the liabilities between them in a different way. This ought to be done by means of contractual indemnities. If this is something you think would be useful for your business, you should always take specialist legal advice.
TUPE in insolvency
Finally, TUPE is relaxed to protect incoming employers where the exiting employer is insolvent. The liability for redundancy, notice and some other payments to employees will not transfer to the incoming employer. Also, if it is agreed with the trade union or employee representatives, terms and conditions of employment can be changed (without an ETO) if the change is designed to save a failing business. The idea is that companies will be more inclined to "rescue" insolvent businesses, thereby safeguarding employment, where the inherited liabilities are not so onerous.
If you are an employee in need of advice: please note that our law firm does not tend to act for individual employees. We generally act for organisations only. You can contact the Law Society if you need help finding a solicitor or if you want additional guidance on your rights, you could try ACAS, which runs a helpline on 08457 47 47 47 to answer employment questions in confidence.