Crushing defeat for TUPE Bill

The recent Bill that attempted to extend TUPE legislation to cover takeovers by private equity firms that purchase a majority shareholding (rather than buying all company assets outright, where TUPE already applies) was described as “using a sledgehammer to crack a nut” by Johnny Nichols, head of HR at law firm Bird & Bird.

TUPE (Transfer of Undertakings (Protection of Employment) regulations) protects employee terms and conditions during the sale of a company and forces owners to consult employees before transfer. But it does not apply to staff who work for a company which has the majority of its shareholding bought by a private equity or venture capitalist firm.

The Private Members’ Bill, Nichols believes, singled out private equity firms for no logical reason, and risked causing them a completely unnecessary administrative nightmare. “The pinnacle of all this seemed to be when private equity firm KKR took over Alliance Boots last summer,” says Nichols. “Because the private equity people involved didn’t have their own PR up and running, there were lots of accusations of secrecy and lack of transparency. People jumped on the bandwagon and there were all these headlines about huge redundancies that might happen. It seemed to me that the Private Members’ Bill was trying to put in a legislative framework to deal with the issue.”

Tough nut

But the ‘nut’ was tougher than it looked, and it came as no surprise to Nichols last month when the Bill failed to reach committee stage. Labour MP John Heppell, who was behind the Bill, admits he got into deeper water than he’d anticipated. “The bottom line was that I wanted to see employees protected under takeovers involving private equity share transfers, a practice that is increasing all the time. But as I moved further with the Bill, I began to realise what a complicated issue this is, and I now accept that it’s not the right course of action,” he says.

What Heppell does not accept, however, is the view of numerous employment lawyers that the issue will simply die a death. “Far from it,” he says. “The minister, Pat McFaddon, acknowledged that there was an issue about the need for more transparency and consultation during private equity transfers and that the Bill acts as a vehicle for moving forward on it. He suggested round-table discussions with unions, the British Private Equity and Venture Capital Association (BVCA), private equity firms and others interested in trying to come up with a solution that everyone can agree on. So in some respects, you could say the Bill had the required effect.”

If TUPE regulations are not extended, Heppell is less clear about the alternatives, but he speaks of wanting “ground rules” rather than guidelines. “We already have guidelines and I accept that the majority go along with them,” he says. “The problem is the ones who don’t, and guidelines, by their nature, are voluntary, so we need to give this issue some teeth so that the very worst people are stopped from mistreating employees.”

The TUC and private sector union Unite, both of which backed the Bill, agree with Heppell that it’s wrong that workers can still legally be kept in the dark by their employers, and that workers should know what a private equity bid means for their pensions, wages and jobs. There is no doubt, the unions point out, that private equity has become a major player in the UK economic scene. According to the BVCA, 8% of the private sector workforce – more than a million people – are employed by companies owned, or controlled, by private equity.

But Matt Jenkins, head of employment at law firm Morgan Cole, maintains that there is no problem. “The reason TUPE does not apply to transfers by way of a share sale is because when a company’s shares are sold to new shareholders, there is no transfer of a business or undertaking: the same company continues to be the employer,” he explains.

He adds that to target private equity firms exclusively, rather than other types of company, when extending TUPE rights to share sales, could drive their investments and operations overseas – essentially frightening them off through onerous restrictions.

If TUPE was extended, breaches of requirements could lead to claims of unfair dismissal, which has a current compensation cap of £63,000. In addition, any variations to contracts of employment would be potentially void even if employees consented to them, and failure to follow the information and consultant requirements could also result in an award of 13 weeks’ pay per affected employee.

Employees’ rights already protected

Like many employment lawyers, Jenkins has remained confident throughout that the government would not give in to Heppell’s wishes. “TUPE was only amended in 2006 and had there been a real desire on the part of the government to extend the scope of TUPE to cover share sales, they would have done so at that stage,” he says.

Gareth Kervin, employment lawyer at Kingsley Napley, believes UK law already provides a great deal of protection for employees of companies acquired whether by private equity or other buyers, notably the Trade Union Labour Relations (Consolidation) Act 1992, Employment Rights Act 1996 and the Information and Consultation Regulations 2004. “Emp­loy­ees employed by companies that receive private equity have the same rights as other employees,” he says.

Andy Cook, managing director of Marshall-James HR consultancy, believes there is also lack of clarity around timing. “The fundamental issue will be the requirement to consult at the earliest possible moment and what is considered to be the earliest moment,” he says.

Cook adds that the “smoke and mirrors world of private equity has begun to disappear”, and that sufficient pressure to become more transparent has already been put on firms by trade unions.

The CBI, the most vitriolic of all organisations on this issue, goes as far as claiming the Bill was in danger of compromising broader economic prosperity and job creation. “Private equity has had a positive impact on employment and prosperity in the UK,” says a spokeswoman. “While some deals have resulted in short-term job losses, these are more than made up for in the longer-term by consequent growth in employment.”

Too much power for unions

The CBI adds that the provisions of the Bill went well beyond TUPE law by giving employee representatives the right to commission an expert study, give a formal opinion and receive a reasoned response before the transfer. “This would potentially give employee reps the power to delay transfers almost indefinitely as these proposals adopt the worst practice from other EU states,” says the spokeswoman, who adds that the Bill also went beyond TUPE law in seeking to institutionalise the role of trade unions. She concludes: “The Bill would have created a ludicrous double standard where it was more favourable to buy a business than to buy shares in it.”

Greg Campbell, partner in the employment group at Mishcon de Reya, even calls the Bill a knee-jerk reaction to some of the more unpopular private equity sales, such as Gate Gourmet and the AA. “Drafting extensive legislation on the basis of a couple of isolated incidents is not the way to legislate,” he says.

No private equity firms or HR directors would provide comment for this article – a fact that Mike Emmott, adviser for the Chartered Institute of Personnel and Development, believes speaks volumes. “TUPE is highly complex and frequently ill-understood, and I think the proposed extensions to private equity transfers caused people even more confusion. It is something that they tend to seek professional legal advice about. And private equity firms have to think of their reputations and have so far adopted a statesman-like attitude to TUPE.”

What you need to know

  • Labour MP John Heppell’s Private Members’ Bill aimed to extend TUPE legislation to cover instances when private equity companies take over an organisation by buying a majority shareholding.
  • TUPE regulations protect employee terms and conditions during the sale of a company and forces owners to consult employees before transfer.
  • The Bill failed to reach its committee stage on 7 March 2008.
  • Despite rumours that Heppell would refine the Bill, he has told Employers’ Law that he has withdrawn it altogether.
  • However, Heppell is confident that round-table discussions between unions, the BVCA, private equity firms and other interested parties, will come up with a new solution to ensure the protection of employee rights.
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