Lawyers view: (Transfer of Undertakings (Protection of employment) regulations

It’s all change with the TUPE (Transfer of Undertakings (Protection of
employment) regulations. John McMullen brings you up to the mark

We start our update with the confusing case law on when TUPE applies. The
following is an analysis of the present law following the Court of Appeal
decision in RCO Support Services v Unison [2002] EWCA Civ 464.

The Ayse Suzen case

In Suzen v Zehnacker Gabaudereinigung GmbH Krankenhausservice [1997] ECR
I-1259 it was held that a changeover of contracts providing services to a
customer is not of itself a transfer. In Ayse Suzen, which involved a
changeover of contractors providing cleaning services to a school, the European
Court held that the directive does not apply merely because a person who has
entrusted the cleaning of his premises to a first undertaking terminates that
contract and enters into a new contract with a second undertaking.

There has, for a transfer to take place, to be a concomitant transfer from
one undertaking to another of significant tangible or intangible assets or the
taking over by the new employer of a major part of the workforce in terms of
numbers and skills assigned by the predecessor to the performance of the

Three EFTA court decisions – Eidesund (Case E-2/95), Ulstein (Case E-2/96)
and Tor Angeir ASK (Case E-3/96) – also involving contractor changeovers have
approved Suzen, as have five further European Court decisions concerning
outsourcing (Vidal (C-127/96), Santner (C-229/96), Montana (C-74/97) [1999]
IRLR 132, Hidalgo (C-173/96) and Ziemann (C-247/96) [1999] IRLR 136 and a more
recent decision concerning intra-group subcontracting Temco Service Industries
v Imzilyen [2002] IRLR 214).

The approach in the UK
1) labour-intensive service contracts

The problem with Ayse Suzen is that it leads to an unfortunately circular
reasoning. In the type of outsourcing situation where no assets transfer (ie a
labour intensive function, such as, commonly, cleaning, security, maintenance)
whether a transfer occurs will depend on whether a major part of the workforce
is taken on.

The circularity is this: should it be right that whether I have the right to
transfer as an employee depends on whether I do transfer? The Employment Appeal
Tribunal and, subsequently, the Court of Appeal, in the case of ECM (Vehicle
Delivery Service) v Cox [1999] IRLR 559 introduced, in response, a
"motive" test. Under this, Suzen should prima facie apply, but if the
reason for the new contractor not taking on a major part of the workforce was
to avoid TUPE, then nonetheless TUPE should still apply.

The latest ruling in the UK on TUPE is the Court of Appeal decision in RCO
Support Services v Unison [2002] EWCA Civ 464. In this case, RCO won a contract
to provide specialist cleaning services at a new hospital to which an NHS trust
was transferring its operation. It offered jobs to employees of the outgoing
contractor, but only on a non-TUPE basis. The employee rejected the terms and
therefore no employees transferred and no assets transferred. The Court of
Appeal held nonetheless that TUPE applied.

The Court of Appeal in RCO Support Services v Unison is, for the moment, the
main reference point on the current position on labour-intensive service
contract creation and transfers. It should be noted, however, that leave was
granted to appeal to the House of Lords and, at the time of writing, the case
awaits hearing by their Lordships. A somewhat clearer view of the entire area
may be available towards the end of 2003.

The synthesis to be constructed from RCO v Unison is, I suggest, as follows:

– Employment tribunals must follow the Suzen case. It will be highly
material, therefore, in a labour intensive function that there is no taking
over of a major part of the workforce in terms of numbers and skills.

– At the same time, however, the fact that employees are not taken on will
not of itself prevent TUPE applying. There may be certain cases where no assets
or employees are transferred, where there may still be a TUPE transfer.

– This is because the Court prefers a "multi factorial" approach.
If all things are equal, the absence of assets and employees will be highly
material and militate against a transfer. However, there may well be, in many
outsourcing cases, other factors pointing towards the transfer.

– Questions that therefore, should be considered in the round, (and not as a
single factor) could include the motive of the new employer in wishing to avoid
TUPE obligations (see ECM v Cox, above). The particular factors pointing
towards a transfer in the RCO case were first, that RCO was not deliberately
seeking to avoid TUPE but was willing to take on employees (albeit on non-TUPE
terms). Second, the Court of Appeal emphasised the specialist nature of the
cleaning services in question that suggests the position could be different if
the services were not specialist.

Two subsequent cases have provided other examples of where it may be
legitimate for an employer not to take on employees, in which case Suzen would
apply. First, in Williams v Lockhart Security Services Ltd (EAT/1395/01) on a
changeover of security services the customer requiring the security service
stipulated that the new contractor should not hire any of the previous
contractor’s staff.

Furthermore, no assets transferred between the outgoing and incoming
contractor. The third party, customer’s, direction that no staff should be
taken on entitled the incoming contractor to decline employment to the first
contractor staff and there was no transfer. Second, in Ministry of Defence v
Carvey (EAT/202/00), the Ministry of Defence took back in-house the function of
guarding services at an army camp from its contractor, Rentokil Initial. No
assets were taken and no staff taken on by the Ministry of Defence. The reason
for not employing staff was that for strategic reasons armed guards were
required for the camp in the future. Rentokil Initial’s security guards were
not licensed to carry arms. Because the Ministry of Defence therefore had a
legitimate economic reason for not taking on the staff of the contractor, there
was no TUPE transfer.

The approach in the UK
2) asset-reliant service contracts

Where the economic entity is an asset-reliant function, a different enquiry
must be made. Unlike a labour-intensive function, the transfer of staff is less
determinative of whether there is a TUPE transfer. The transfer of assets and
other matters become much more important. Thus held the European Court in Oy
Liikenne AB v Liskojarvi and Juntunen [2001] IRLR 171. After a competitive
tendering exercise in Finland resulting in a change of bus operators on a number
of Helsinki routes, of 45 employees employed by the outgoing contractor, 33
were taken on by the new operator, albeit on less favourable terms and

No vehicles or other assets connected with the operation of the bus routes
concerned were transferred. Two drivers who had been re-engaged by the new
operator brought a case in the Finish courts arguing that a transfer of an
undertaking had taken place and that they were entitled to be employed on the
same terms and conditions as they had previously enjoyed with the outgoing bus

Here the European Court concluded that the Acquired Rights Directive did not
apply. In labour-intensive operations there might be a transfer even though no
assets were transferred. But if the undertaking depends on the use of
substantial assets – such as plant and equipment – the provision of the service
could not fairly be regarded as an activity based essentially on manpower alone
and other factors had to be taken into account.

Here it was impossible to run the bus routes without busses. It was an
asset-reliant service and as the busses were not in the main transferred there
was no transfer even though most of the employees were taken on.

The EAT has, as with labour-intensive service contracts, applied its
"multi factorial" softening approach to Oy Liikenne. This in P&O
Trans European Ltd v Initial Transport Services Ltd and Others [2003] IRLR 125
P&O was contracted to provide a petroleum delivery service.

There was no transfer of Shell’s fleet to P&O, but the majority of
Shell’s workforce were taken on by P&O. This was, though, to the exclusion
of certain administrative staff employed by another contractor, Initial.
Although it was argued that the facts of Oy Liikenne were indistinguishable
from the present case, the EAT was satisfied that the tribunal had weighed the
question of transfer of assets very carefully but was entitled to find other
factors in favour of a transfer.

Oy Liikenne was distinguishable principally because the drivers (the
majority of the workforce) were taken on "as if TUPE applied" a
factor that was not the case in Oy Liikenne.

This is therefore another example of the application, in the UK of the
"multi factorial" test which, while respecting cases such as Ayse Suzen
(in the latter case of labour-intensive functions) and Oy Liikenne (in the case
of asset-reliant functions) allows countervailing factors to be taken into
account if nothing else is equal.

Service contracts – practical pointers

It is possible to take the European Court cases of Ayse Suzen and Oy
Liikenne literally and rely on the absence of employees or assets to maintain
the position that TUPE does not apply. This position allows, for example, the
parties to consider non-TUPE bids in tendering for services. However, as will
be seen from the "multi factorial" test employed in the UK courts,
adopting a non-TUPE stance carries with it considerable risks.

Liability for failure to inform and consult under TUPE

If there is a failure to inform and consult by a transferor, leading to a
successful award under Regulation 11, is this a matter that would pass to the
transferee under Regulation 5 of TUPE or should it rightly stay with the
transferor, whose fault it was?

It was held in the case of Angus Jowett & Co Limited v National Union of
Tailors and Garment Workers [1985] IRLR 646 that a claim by an employee
representative for breach of the redundancy equivalent of Regulation 11 (a
protective award for non-consultation on multiple redundancies) was not a right
under, or in connection with, an employment contract so as to pass under
Regulation 5(2)(a) of TUPE.

However, it was speculated in Angus Jowett that an employee’s individual
entitlement under a protective award won by an employee representative was such
a right under or in connection with the employment contract. Although the EAT
regarded the competing arguments as "nicely balanced", it decided, in
Kerry Foods Limited v Creber [2000] IRLR 10 that an employee’s rights under a
protective award was a liability passing under Regulation 5 to a transferee. It
seems harsh as the transferee would then pick up liability for the default of a

The policy arguments in this area were therefore addressed more coherently
in TGWU v McKinnon [2001] IRLR 597, where the EAT held that Regulation 10
liability should stay with the transferor. For if it did not, there would be no
incentive upon a transferor to comply with the provisions of Regulation 10,
which would go contrary to the aims of the Acquired Rights Directive.

Nonetheless, the most recent EAT authority on this point followed Kerry
Foods. In Alamo Group (Europe) Ltd v Tucker (EAT/994/01), the EAT held that
liability for breach of Regulation 10 should pass to the transferee in view of
the breadth of the wording of Regulation 5. This area clearly needs addressing
at the earliest opportunity by the Court of Appeal. In the meantime,
transferees should ensure that they are indemnified against a transferor’s
breach of Regulation 10 in any transfer agreement to which they are a party.

The Pinsents 2003 TUPE Survey

The reader of this article will have concluded that the law on transfer of
undertakings is increasingly over complicated to the detriment of the end user,
whether employees, trade unions, employers or the legal practitioner.

The Pinsents Survey on TUPE, published in May will make some interesting

Some principal findings of this survey of HR directors are as follows:

– 77.1 per cent of the sample had experienced difficulty in the application
of the TUPE Regulations

– 77.9 per cent of respondents highlighted the inheritance of unsuitable
terms and conditions of employment as a major problem, while 81.7 per cent
complained about a difficulty in changing terms and conditions. Also 31.3 per
cent expressed concern about the inheritance of collective agreements and 29.4%
expressed concern about information and consultation with employee

– 59.2 per cent considered that TUPE had increased the expenditure of a
transaction, 34.7 per cent indicated that the existence of TUPE made the
respondent think of alternative ways to structure each transaction, 59.2 per
cent of respondents considered that TUPE slowed down the process of sale or
purchase or outsouring and 12.7 per cent considered that TUPE actually stopped a
transaction from going through

– An interesting aspect is the legal resourcing of TUPE advice, where 83.5
per cent of employers felt the need to obtain legal advice on their

– There was unanimous concern about the delay in implementing new TUPE
Regulations, promised some years ago, still under consideration and on which
DTI proposals have yet to be published.

Copies of the survey, when published, can be obtained from Pinsents. Contact

The new TUPE regulations

All this illustrates the need for new TUPE regulations, expected in draft
soon. These will, it is widely expected, allow for a more comprehensive TUPE
coverage to service contract operations (but excluding "high level
professional services"). By this, it means that TUPE will apply to most
contracting-out situations apart from where professional services are involved.

New TUPE will also introduce a requirement on the old employer to notify the
new employer of employment liabilities that will be transferring under TUPE.
The new regulations will clarify the circumstances in which employers can
lawfully make transfer-related dismissals and negotiate transfer-related
changes to employment terms. And the regulations will introduce some
long-awaited flexibility in the application of the regulations concerning
transfer of insolvent businesses, giving a sharper focus to the promotion of
the "rescue culture" of ailing businesses. For example, in relation
to insolvent businesses, it may be possible more easily to change terms and
conditions by collective agreement where this is necessary to ensure survival
of the undertaking.

Also likely are some improvements to the information and consultation rights
in favour of employee representatives. These amendments are in compliance with
Directive 98/50, which should have been implemented in July 2001.

The issue of coverage of occupational pension rights under TUPE is to be
considered separately and over a longer timescale as part of the pensions
review being undertaken in the government’s green paper, Pensions in the
Workplace, published last December.

However, it has already been stated in the pensions green paper that TUPE
will be extended to pensions. Where before a transfer of employer is in receipt
of pension provision, the new employer will be obliged to match an employee’s
contribution up to a maximum of 6 per cent of employee’s salary. This will be a
major change to the law and practice on TUPE, extending the current practice to
observe pension rights on TUPE transfers in the public sector, also to the
private sector.

Dr John McMullen is national head of employment law and author of
Business Transfers and Employee Rights, Butterworths, looseleaf and bulletins.
He is acknowledged as the leading expert on TUPE and has been involved in some
of the largest and most complicated TUPE transfers

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