Transfer of undertakings is clarified by EU courts

application of TUPE in contractor changeovers is rather confusing for
employers. But EU rulings help to differentiate ‘labour intensive’ and
‘asset-reliant’ functions

In continental Europe, the application of TUPE and contracting
out, in particular to changeovers of contractors, is an issue of great
uncertainty in the courts.

A contributor has been the European Court of Justice, where recent case law
has led to a split analysis of how the Acquired Rights Directive (or TUPE in
the UK) should be applied to contracting for services.

The European Court’s approach is now as follows. Where the contract, the
subject of the disputed transfer, involves a ‘labour intensive’ function,
whether or not employees are hired by a transferee is a significant factor as to
whether there is a transfer. On the other hand, where the contract is regarded
as ‘asset-reliant’, the transfer of staff is not the main issue – other
factors, such as transfer of assets, will be decisive.

But this rebounded to the workers’ disadvantage in Oy Liikenne AB Liskoj„rvi
and Juntunen [2001] IRLR 171. After a competitive tendering exercise in
Finland, which resulted in a change of bus operators on a number of bus routes
in Helsinki, 33 of 45 staff employed by the outgoing contractor were taken on
by the new operator – albeit on less favourable terms and conditions. No
vehicles or other assets connected with the operation of the bus routes
concerned were transferred across.

Two bus drivers who had been re-engaged by the new operator brought a case
alleging that they were protected by the Acquired Rights Directive,
particularly as the majority of staff had been rehired. But the court ruled
that this was not a labour-intensive activity; the undertaking concerned
depended on the use of substantial assets as it is impossible to run the bus
routes without buses. Therefore it was an asset-reliant service, and as the
buses had not been transferred, then there was no transfer of rights from the
old company.

Following this unsatisfactory case, the European Court further explored the
distinction between labour-intensive and asset-reliant functions. In Carlito
Abler v Sodexho MM Catering Gesellschaft mbH (Case C-340/01), Sodexho took over
a hospital catering service contract from a previous contractor, Sanrest Großkuchen.

Sanrest contended that this was a transfer of an undertaking. However,
Sodexho refused to take on Sanrest’s staff, materials and stock. It also
therefore received no accounting data, menu plans, diet plans, recipes or
general records from the outgoing contractor. In short, it took no moveable
assets or staff.

Whether the operation was labour-intensive or asset-reliant, Sodexho refuted
that there was a transfer of undertaking on either basis. But the European
Court ruled that the catering function was asset-reliant. As such, the transfer
of staff (or here, the non-transfer of them) was not decisive. Despite
Sodexho’s refusal to take over moveable assets, it still took over the use of
water, energy and necessary kitchen equipment that had been provided to Sanrest
by the hospital.

Transfer of the use of assets was therefore a significant factor in the
changeover of an asset-reliant function. Furthermore, Sodexho had inherited a
circle of customers (even though they were ‘captive’ customers, being hospital
patients). These elements were sufficient criteria to amount to the transfer of
an undertaking in the case of an asset-reliant function.

The wider enquiry undertaken by the court in Abler, in contrast to it’s
ruling in Oy Liikenne, is welcome. As such, it is still a useful bridging
decision pending the introduction of new TUPE rules in October 2004, which will
apply TUPE more liberally to contracting for services than is presently
possible under UK and community law.

By John McMullen, National head of employment law, Pinsents