TUPE – latest cases and outcomes reviewed

TUPE – or the Transfer of Undertakings (Protection of Employment) Regulations 2006 – implements a European Directive designed to protect employee rights when a business transfer takes place. This can include the sale or purchase of a business or the outsourcing of a function or service. It provides protection in three ways:

  • by safeguarding employees against dismissal in connection with a business transfer
  • by obliging the employer to inform and consult affected employees
  • by transferring all rights, liabilities and obligations in relation to the employees to the new employer

This may sound straightforward enough, but as with so many employment protection laws, the devil has proved to be in the detail. Recent case law has focused on the extent of the duty to inform and consult, the transfer of liabilities in relation to equal pay claims and the application of TUPE in an insolvency context.

Good news for employers came in the form of the recent landmark case of Amicus & Ors v City Building (Glasgow) LLP & Anr, which concerned an alleged failure to inform and consult employees.

TUPE obliges an employer to inform and consult employees in relation to any measures it envisages taking in connection with the transfer. The case, which was brought by three unions on behalf of more than 1,500 employees, looked at whether City Building, to which Glasgow City Council had outsourced its building services function, was required, after the transfer had taken place, to consult with the employees who transferred from the Council in relation to any such measures it may have had in mind.

The Employment Appeal Tribunal (EAT) ruled in City Building’s favour, establishing that the transferee employers were under no obligation to consult with transferred employees after the transfer.

This was a previously untested point of law and, if the EAT had not ruled as it did, there was a concern that the consequences could be extensive for all UK employers involved in future transfers. Had the union propositions been accepted, there would be a requirement to consult over changes which needed to be put in place after the transfer had taken place. These might have included, for example, a relocation of the transferring employees to a new site.

As you cannot meaningfully consult after the event, changes like these, which may in practice be necessary to achieve the transfer, would be stalled. Many business transfers might in turn have been slowed, or even halted altogether. With the market in its current state, any further obstacle to business deals could have been a significant blow for employers. It is not yet known whether the unions will appeal the EAT’s judgment.

A further grey area of TUPE of which HR professionals should be aware concerns the requirement for the transferor employer to provide the transferee with certain information regarding the transferring staff. This includes, among other things, details of certain employment terms, their grievance/disciplinary records and of any legal action taken against the employer.

It is not clear precisely what information will suffice, and what liability will arise if the information is not provided or is incorrect. How much detail is required in relation to any disciplinary or grievance procedure or any legal action? Will a copy of the grievance or claim suffice?

Employers continue to second-guess what level of information will discharge the burden placed on them and the stakes may be high if they get it wrong – a tribunal can award such a sum as it considers just and equitable, subject to a minimum of £500 per employee, though no more detailed guidance is yet available on the approach to be taken.

Equal pay litigation continues to be a huge challenge in the public sector and an important decision has been taken recently, which highlights the risk of equal pay claims transmitting when there is a TUPE transfer. The EAT has clarified in Sodexo Limited v Gutridge, that an employee is able to bring a claim for equal pay against a transferee employer, which arose during employment with the transferor, based upon a pre-transfer comparison. This can be so even if the comparator did not transfer, and can relate to a period post-transfer as well as pre-transfer. If the employee is successful in an equal pay claim, they could be entitled to an increase in current pay, as well as up to five years’ back pay in Scotland or six in the rest of the UK.

It is possible that such claims may not come to light until many years after the transfer has taken place and the transferee is then faced with the difficult task of providing evidence about the pay of people it has never employed. This is an important risk, especially for contractors who bid for work from public sector bodies, as a profitable contract may become much less lucrative if a number of the transferring employees have rights to increased pay in line with the levels enjoyed by comparators who remain in the transferor’s employ. It should be noted, however, that this decision has been appealed, so there may be further developments later this year.

In the current climate, the application of the insolvency provisions of TUPE have also become the focus of litigation in particular, the circumstances in which employment liabilities pass under TUPE to the buyer of the assets of an insolvent company.

The EAT recently ruled in the case of Oakland v Wellswood (Yorkshire) Limited, which appears to open the way for buyers of insolvent businesses to escape having to take on the former owner’s obligations in relation to the employees of the business.

TUPE provides that no employees or liabilities transfer, and any dismissals are not automatically unfair, when the transferor is “subject to bankruptcy proceedings which have been instituted with a view to liquidation of the assets of the transferor”. Conversely, TUPE will apply (subject to certain special rules), if insolvency proceedings have begun, but not with a view to liquidation of the assets of the company.

When administrators were appointed in Oakland, a new company was set up and many of the assets of the old company transferred to the new company by way of a pre-pack sale – where an agreed sale takes place immediately after the appointment of administrators. This included a number of the employees who were to be employed by the new company, but on much reduced pay.

Due to the scale of the old company’s insolvency, the administrators were of the view that rescuing the company as a going concern was not achievable. Their efforts were instead concentrated on achieving a better result for creditors than would have been likely on a winding up of the company.

The EAT concluded that if, based upon the administrator’s subjective analysis (mainly as set out in the administrator’s statement of proposals), the purpose of the insolvency is the eventual liquidation of the assets of the company, then the transfer was exempt from TUPE.

The result of this ruling is that the buyer of the assets did not have to take over the employees or honour their old contracts or liabilities connected with them. This comes as welcome news for companies which may now consider purchasing a business, or assets of a company, subject to administration proceedings. This might allow them to cherry-pick employees, avoid the restriction on post-transfer changes to terms and conditions and avoid inheriting liabilities that would otherwise transfer under TUPE.

As the recession worsens, business failures can become opportunities for buyers to acquire the assets and goodwill of insolvent companies, and it appears that this can now potentially be done without the complications of TUPE.

This decision, however, goes against the Department for Business Enterprise and Regulatory Reform guidance on the application of TUPE to various insolvency procedures, which states that administration is not analogous to bankruptcy.

In the current economic climate, it is likely that further cases of this sort will soon be test the scope of this TUPE exemption.

Lesley Murphy, associate, Shepherd and Wedderburn

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