Transfer of undertakings

In
this series, we delve into the XpertHR reference manual to find essential
information relating to current hot topics. This month…

Summary

– When the whole or part of an employer’s business or undertaking is sold or
transferred as a going concern to another employer, a TUPE transfer is said to
occur

– When there is a relevant transfer, the purchaser of the former employer’s
business or undertaking (the transferee) inherits the contracts of employment
of the people employed by the seller (the transferor) immediately before the
transfer took place. The transferee also inherits the transferor’s rights,
power and duties and most, but not all, of the transferor’s liabilities in
respect of those employees

– An employee who is dismissed wholly or partly because of a relevant
transfer (either before or after the transfer takes place) is treated in law as
having been unfairly dismissed and will be awarded appropriate compensation.
However, that rule does not apply to an employee dismissed for an ‘economic,
technical or organisational reason entailing changes in the workforce’ (an ETO
reason) unrelated to the transfer in question

– Employers contemplating the sale or transfer of the whole or any part of
their business or undertaking (or the acquisition or purchase of another
employer’s business or undertaking) must first consult with ‘appropriate’
employee representatives. Failure to do so will inevitably lead to a protective
award (up to 13 weeks’ pay for each affected employee).

Future developments

On 29 June 1998, the European Council adopted Directive 98/50/EC amending
Directive 77/187/EEC. New Article 1(b) states that "there is a transfer
within the meaning of this directive where there is a transfer of an economic
activity which retains its identity, meaning an organised grouping of resources
which has the objective of pursuing an economic activity, whether or not that
activity is central or ancillary".

Member states had until 29 June 2001 to implement the new directive in their
separate territories. However, to date, there is no clear indication as to when
the directive will be implemented in the UK.

TUPE regulations 1981

The Transfer of Undertakings (Protection of Employment) Regulations 1981
came into force in the UK on 1 May 1982. They apply to the transfer of a
UK-based undertaking (or part of such an undertaking) from one entity to
another (eg from a local authority to a private company or from one company to
another) whether by sale or by some other disposition (other than by the sale
of shares), or by operation of law.

Such a transfer (which may be effected by a series of two or more
transactions, and may take place whether or not any property is transferred) is
referred to in the regulations as a "relevant transfer"; and it is
the meaning of that expression which has produced so many confusing and
contradictory decisions in the courts. The expression "undertaking"
includes any trade or business.

Meaning of relevant transfers

Although the meaning of "relevant transfer" has prompted a number
of rulings by the European Court of Justice, the benchmark test was laid down
by the ECJ in Spijkers v Gebroeders Benedik Abbatoir CV, 1986, 2 CMLR 486.

There, the ECJ held that the decisive criterion for establishing the
existence or otherwise of a TUPE transfer is whether the whole or part of the
undertaking transferred retains its identity after the change of ownership. In
other words, did the transferee carry on the acquired business or undertaking
in essentially the same way as it had been carried on by the transferor before
the transfer took place?

The factors that decide whether that condition had been fulfilled are:

– the type of undertaking (trade or business) in question and the activities
carried on by that business

– whether or not tangible assets (including furniture and equipment, raw
materials, stock in hand, finished product, and the like) were transferred to
the new owner of the business

– the value of intangible assets (such as goodwill) at the time of the
alleged transfer

– whether or not the majority of persons working in the business were taken
over by the new employer

– whether the new owner continued to do business with the same customers or
clientele after the alleged transfer took place

– the degree of similarity between the activities carried on before and
after the transfer, and the period (if any) during which those activities were
suspended.

Furthermore, for a transfer to be a "relevant transfer", there has
to be a transfer of a "going concern" or of a stable economic entity,
so that the purchaser can carry on the business without interruption. It does
not matter that there are modifications. Goodwill is often included, but is not
essential.

In Schmidt v Spar-und Leihkasse der Fruhren Amter Bordesholm, Kiel und
Cronshagen, 1994, IRLR 302, the ECJ added that the facts that the transferred
activities were only ancillary; that the business transferred involved only one
person; and that there was no transfer of any tangible assets, could not
themselves deprive the transferred employee of TUPE protection.

There have been a number of contradictory rulings by the ECJ and by the UK’s
domestic courts and tribunals on the meaning of "relevant transfer".
As the ECJ pointed out in Marleasing SA v La Comercial Internacional de
Alimentacion,1990, ECR 4153, the tribunals and courts must apply a purposive
construction to the relevant provisions of the Acquired Rights Directive and
the TUPE Regulations 1981 so as to achieve what they are manifestly intended to
achieve.

"Second generation" transfers: In Ayse Szen v Zehnacker
Geb„udereinigung GmbH Krankenhausservice and Lefarth GmbH, 1997, IRLR 255, the
ECJ ruled that, in the case of a second generation transfer, an activity may
not of itself constitute a stable economic entity. There would have to be a
significant transfer of assets and a transfer of the majority of skilled
workers from one contractor to the next before such a transfer could be held to
be a "relevant transfer".

In labour-intensive undertakings (such as contract catering or cleaning),
where there are no significant assets, there will not be a "relevant
transfer" unless the majority of the former contractor’s employees are
hired by the new contractor.

However, in ECM (Vehicle Delivery Service) Ltd v Cox and others, 1999, IRLR
559, the Court of Appeal cautioned that an employer could not prevent the TUPE
regulations applying by the simple expedient of refusing to take on a former
contractor’s employees. In such a situation, an employment tribunal can
challenge the second contractor’s motives before deciding whether the
changeover constituted a "relevant transfer" within the meaning of
the TUPE Regulations 1981.

Effect of transfer on contracts

When a "relevant transfer" takes place, the transferee inherits
the contracts of employment of those employed by the transferor immediately
before the transfer took place. The transferee also inherits the transferor’s rights,
powers, duties and liabilities (other than any criminal liabilities) under, or
in connection with, those contracts.

Anything done by the transferor in relation to any such contract, before the
relevant transfer took place, will be treated in law as having been done by the
transferee.

The transferee does not, however, inherit responsibility for an occupational
pension scheme within the meaning of the Social Security Pensions Act 1975 or
the Social Security (Northern Ireland) Pensions Order 1975.

Once a "relevant transfer" has taken place it is not open to the
transferee to vary the contracts of employment of the transferred employees
with a view to harmonising their working hours, rates of pay, holiday
entitlement, and so on with those of its existing workforce.

This rule applies even if the employees in question are happy to accept any
such variation in their terms and conditions of employment and are no worse off
as a result of that variation (Foreningen af Arbejdsledere i Danmark v Daddy’s
Dance Hall A/S, 1988, IRLR 315 and Rask v ISS Kantineservice A/S, 1993, IRLR
133 ECJ).

Any subsequent restructuring that is in no way connected with (or prompted
by) the purchase or acquisition of another employer’s trade or undertaking is
unlikely to be challenged by a tribunal or court.

Dismissal because of transfer

If an employee of the transferor or the transferee is dismissed, before or
after a relevant transfer, the employee will be treated in law as having been
unfairly dismissed if the transfer (or a reason connected with it) is the
reason or principal reason for the dismissal.

However, that rule does not apply if the employee’s dismissal was for an
"economic, technical or organisational reason entailing changes in the
workforce" (an ETO reason). An employee dismissed for an ETO reason will
be treated as having been dismissed for some other substantial reason such as
to justify the dismissal. Whether or not such a dismissal was fair will be a
matter for an employment tribunal to decide.

If a dismissal is wrongful or unfair, the employee may seek redress from the
tribunals and courts. In a TUPE situation, responsibility for paying any
subsequent award of damages, and/or compensation for unfair dismissal rests
with the transferee.

Employee’s refusal to transfer

There is no transfer of an employee’s contract of employment if the employee
in question informs the transferor or the transferee that they object to
becoming employed by the transferee.

In such a situation, the employee’s contract of employment with the
transferor comes to an end and the employee will not be treated, for any
purpose, as having been dismissed by the transferor.

The employee may, however, pursue a complaint of unfair constructive
dismissal if, save for the change in the employer’s identity, there has been so
substantial a change in their working conditions as to leave them with little
choice but to resign.

In tribunal proceedings, it will be for the employee to show that the change
that prompted their resignation was not only significant but also to their
detriment.

In Hay v George Hanson (Building Contractors) Ltd 1996 IRLR 427, the EAT
said that an employee who had expressed unhappiness about the prospect of
working for the transferee could not be said to have objected to the transfer.

Although the TUPE Regulations are not specific on this point, an employee
who refuses outright to transfer should, said the EAT, inform their employer of
this in clear and unequivocal terms (whether by word or deed, or a
combination).

Action point checklist

– If contemplating the sale or
transfer of the whole (or any part) of the business or undertaking, inform the
‘appropriate representatives’ of these plans and consult with them concerning
the likely effect the transfer will have on their future with the intended
transferee

– That same duty extends to you (the transferee) contemplating
the transfer of the whole or part of another employer’s business or undertaking

– During the course of consultations with trade-union-appointed
or employee-elected representatives, consider any representations by those
representatives and give reasons for the rejection of these

– If there is no trade union representation (or an insufficient
number of representatives to represent the interests of all affected
employees), afford the latter an opportunity to elect one or more of their
number to represent their interests in employer consultations

– Although employers in these circumstances have the right to
determine the number of employees to be elected, do not dictate who may or may
not stand for election or otherwise interfere in the conduct of those elections

– Make appropriate facilities available for the conduct of such
elections; and ensure the ballot is conducted in secret and that votes are
accurately counted

– Ensure employees understand they may object to being employed
by the new owner of the business (or part of that business), but that they will
ordinarily be denied any right to pursue a complaint of unfair dismissal should
they choose to exercise that right

– Discuss the contracts of employment (and related policy documents,
including staff and works handbooks, collective agreements, and so on) of
employees affected by a relevant transfer beforehand and make them available to
the prospective purchaser (the transferee) as soon as the relevant transfer
takes place

– Note that the transferee inherits the contracts of employment
of the transferred employees and any and all associated rights and liabilities
(save for criminal liabilities and liabilities in respect of occupational
pension schemes). Any post-transfer variation in those employees’ terms and
conditions of employment (whether consensual or otherwise) will be ineffective
if in any way connected with the transfer itself

– Note that the dismissal of a transferred employee will be
automatically unfair if it is for a reason in any way connected with the
relevant transfer. Such a dismissal may be justified for an "economic,
technical or organisational reason entailing changes in the workforce" but
not otherwise

Questions and answers

What constitutes a transfer of an undertaking?

When the whole or part of an employer’s business or undertaking is sold or
transferred as a going concern to another employer, a TUPE transfer is said to
have taken place. The transfer may be effected by a series of transactions and
may or may not include the transfer of property and other tangible assets.

Does the transferee inherit the contracts of employment from the transferor?

When a TUPE transfer takes place, the transferee (new employer) inherits the
contracts of employment of the people employed by the transferor (old employer)
immediately before the transfer took place. The transferee also inherits the
transferor’s rights, powers, duties and liabilities (other than any criminal
liabilities) in connection with those contracts. The transferee does not,
however, inherit the part of a contract of employment or collective agreement
that relates to an occupational pension scheme.

Can the transferee change the contracts of the incoming employees?

The transferee may not vary the contracts of employment of the transferred
employees for a reason that is connected with the transfer, even if the
employees are happy to accept variations and are no worse off as a result. A
subsequent restructuring of the entire business may lead to the imposition of
new terms and conditions. So long as the restructuring exercise is not
connected with (or prompted by) the purchase or acquisition of another
employer’s trade or undertaking, the variation in an employee’s contract is
unlikely to be found unlawful by a tribunal or court.

What happens to collective agreements when a business is transferred?

The transferee inherits collective agreements in respect of employees as if
they had been made between itself and the representatives in question. However,
voluntary collective agreements in the UK are generally not legally enforceable
and consequently the provisions that preserve collective agreements in respect
of transferring employees have little effect in practice. However, terms from a
collective agreement that are incorporated either expressly or are implied in
transferring employees’ contracts will be preserved.

What happens to trade union recognition when a business is transferred?

If the transferred undertaking maintains a distinct identity from the remainder
of the transferee’s undertaking, any independent trade union recognised by the
transferor shall be deemed to be recognised by the transferee. If the
transferred undertaking does not maintain its identity, the recognition
agreement no longer applies.

Can an employee refuse to transfer?

The employee can inform the transferor or the transferee that they object to
becoming employed by the transferee, in which case the employee’s contract with
the transferor comes to an end. The employee may pursue a complaint of unfair
constructive dismissal if there has been, or is about to be, so substantial a
change in their working conditions as to leave them with little choice but to
resign. In tribunal proceedings, it will be for the employee to show that the
change that prompted their resignation was not only significant but also to
their detriment.

Can an employee be dismissed before or after the transfer?

An employee of the transferor or transferee dismissed before or after a TUPE
transfer will be treated as having been automatically unfairly dismissed if the
transfer (or a reason connected with it) is the principal reason for the
dismissal. That rule does not apply if the employee’s dismissal was for an
"economic, technical or organisational reason entailing changes in the
workforce". A tribunal will treat such a dismissal as having been for some
other substantial reason of a kind such as to justify the dismissal of the
employee.

Are employers obliged to consult with employees about a transfer?

Employers contemplating a transfer must inform and consult with appropriate
employee representatives for long enough before the proposed transfer as to
enable meaningful discussions to take place. Failure to consult could lead to a
complaint to an employment tribunal and the imposition of a protective award
equivalent to up to 13 weeks’ pay to each employee.

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