Outsourcing an activity to a new supplier, or transferring the activity offshore, often to a low-cost destination such as India or China, can result in job losses. In January outsourcing provider Capita confirmed it would close its site in Wythall, Birmingham, with the loss of more than 370 jobs. It is to transfer the work to India and other parts of the UK, including Glasgow.
Outsourcing started in the IT sector in the 1980s when specialist companies started to run customers’ IT services which had been operated by in-house staff. Now it has spread far and wide and is commonplace in many sectors. An understanding of TUPE is essential for employers involved in outsourcing.
Employee protections under TUPE
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) provide protection to employees where there is a “transfer of an undertaking” or a “service provision change”.
In the context of an outsourcing, there is likely to be a service provision change in three different circumstances: when an activity is outsourced by a customer to a supplier, when there is a change in supplier and when the activity is taken back in house.
Where TUPE applies, employees who are assigned to the undertaking or the organised grouping of employees which is the subject of the transfer, will automatically transfer on their existing terms and conditions of employment, together with all associated rights, powers, duties and liabilities. The transferee (the new employer) effectively “steps into the shoes” of the transferor (the current or previous one).
Employees with at least one year’s service may be able to claim unfair dismissal rights if the reason or principal reason for their dismissal is the transfer – or a reason connected with it, which is not an economic, technical or organisational reason entailing changes in the workforce – a so-called ETO reason.
A dismissal will be automatically unfair if the reason for it is the outsourcing, or a reason connected with the outsourcing, unless the employer is able to establish an ETO reason.
A redundancy will normally be an ETO reason. Compensation for unfair dismissal is currently capped at £63,000 plus a basic award based on salary, age and length of service, so the potential liabilities are considerable. It is crucial for the parties to address who should accept liability for these risks in the outsourcing agreement.
Who makes the redundancies?
In practice the parties often proceed on the basis that any employees that are surplus to the transferee’s needs are made redundant by the transferor before the transfer.
However, in Hynd v Armstrong and Others it was held that the ETO reason must relate to the employer carrying out the dismissal and so the transferor cannot rely on the transferee’s reduced need for employees. It is therefore difficult for the transferor to implement redundancies before the transfer without assuming this risk.
In Holis Metal Industries Limited v GMB the Employment Appeal Tribunal confirmed that TUPE may apply to transfers from the UK to another country (offshoring), whether the transfer is to a country inside or outside of the EU. Any dismissals made as a result of the offshoring are therefore automatically unfair unless for an ETO reason.
There will potentially be a place of work redundancy as employees are no longer required in the UK. In these circumstances, communication of the offshoring itself gives rise to increased risks. Employees may resign and claim that the transfer overseas involves a substantial change in their working conditions to their material detriment, or claim constructive dismissal as a result of an anticipatory breach of contract (being a change of their place of work).
In practice, most employers seek to minimise potential liabilities by treating employees as redundant.
Under TUPE, employers are required to give information in relation to the transfer to appropriate representatives of affected employees and, where the transferee envisages taking any “measures” in relation to the employees (such as redundancies), employers must also consult with those representatives with a view to reaching agreement on the intended measures. The penalty for failure to inform and/or consult under TUPE is an award of up to 13 weeks’ pay for each affected employee.
In addition, where 20 or more redundancies are proposed within a period of 90 days or less, the employer must notify the Secretary of State, and a redundancy consultation process must be commenced at least 30 days before the first dismissals take effect. If more than 100 redundancies are proposed, the consultation process must commence at least 90 days beforehand.
A protective award of up to 90 days’ pay per employee may be awarded for a failure to consult. A transferee will often want the process to be commenced by the transferor before the transfer so that redundancies can take effect on or shortly after the transfer. This causes difficulties under the legislation as it is the transferee that is the employer proposing the redundancies, so it should conduct the consultation process.
A cautious approach is therefore for the transferee to commence the consultation following the transfer.
The Department for Business, Enterprise & Regulatory Reform takes a practical approach to the notification process and has said that it is not concerned who sends the notification so long as they have been informed of the key details of the redundancies. While this does not appear to comply with the wording of the legislation, it may be arguable, following the case of Susie Radin Limited v GMB, that the amount of any protective award should be significantly reduced where a full and meaningful consultation process has been carried out by the transferor prior to the transfer, albeit not by the employer proposing the redundancies.
However, this is an unresolved issue and the parties would be well advised to identify the potential risks of this approach and decide who should be responsible for the risks and liabilities in the outsourcing agreement.
Emma Sinclair, associate, employment team, Norton Rose
More on outsourcing: EC considers issue of TUPE and cross-border transfers
Your policy should include the following considerations:
- If TUPE applies, identify all the transferring employees
- The terms and conditions of transferring employees and whether the transferee can replicate them
- Whether the service provider (transferee) is proposing material changes to terms and conditions or working conditions
- Which party is liable for what liabilities prior to the commencement of the outsourcing and following its commencement
- Actions to take if transferring employees claim they should not transfer
- -What to do if employees who should not have transferred claim that they should have transferred
- Identifying employees who are essential to the provision of services to be undertaken by the transferee (the new service provider)
- Requesting information about personnel used by the new service provider to perform the services.
- TUPE is likely to apply to an outsourcing arrangement (including offshoring).
- Unless an ETO (economical, technical, or organisational) reason exists, dismissals will be unfair and result in financial penalties.
- Financial penalties can apply if employers do not inform and, if relevant, consult about the transfer.
- Consider legislation governing collective redundancies if 20+ redundancies are proposed. Failure to do so may result in financial penalties.
- Liabilities should be allocated between the parties and documented accordingly.