It’s Tupe, but not as we know it

After years of tortuous deliberation the Government has proposed much-needed
changes to the law on the Transfer of Undertakings. Christopher Mordue assesses
their likely impact

At long last on 10 September the Government unveiled its consultation paper
on the proposed reform of the Transfer of Undertakings (Protection of
Employment) Regulations. Trade union opposition to the privatisation of public
services gives these reforms an added political dimension so it is no surprise
the proposals seek to strengthen employee protection in outsourcing cases, as
well as in business sales and mergers.

Tupe to apply to all outsourcings

The first proposal from the Department for Trade and Industry tackles
head-on the vexed question of when Tupe applies to outsourcings, particularly
to contractor changeovers. Domestic law consistently rejects European Court of
Justice rulings requiring a transfer of either assets or employees between old
and new contractors. The courts resist this approach because it creates a
loophole for employers – a new contractor can avoid Tupe simply by deciding not
to take on the outgoing employer’s staff. Tribunals are told to consider all
the facts of the case, including why employees do not transfer. But case law in
this area is hopelessly confused, leading to great uncertainty for contractors
and employees alike.

The proposed solution is that Tupe should apply to all changes of service
provider – whether or not there is a transfer of employees or assets would no
longer matter. The only issue would be whether, prior to a change of service
provider, there were employees "assigned to an organised grouping, the
principal purpose of which was to perform the service and activities in
question specifically on behalf of the client concerned". In other words,
the existence of an economic entity prior to a change of contractor would be
sufficient to trigger Tupe.

This special rule for outsourcing cases would be welcomed by contractors,
unions and employees. Existing service providers would know they could avoid
termination costs if they lost a contract. Those bidding for contracts would
have a level playing field – competitors could not undercut them on employment
costs. Those to whom the business transferred would not be prevented from
making post-transfer redundancies or reorganisations. Employees would have
greater protection if their function was outsourced or if their employer lost a
specific contract. Only a radical change in the services provided would prevent
the application of Tupe.

Even if the Government does not adopt this general approach to outsourcings,
it remains committed to its existing policy that transfers within the public
sector, and public to private sector transfers, should be dealt with as if Tupe
applied, even if the regulations do not strictly apply or their application is
unclear. However, while one key problem may be solved, the other main proposal
threatens additional complexity and litigation.

Transfer of pension rights

Currently, the major exception to the rights and liabilities that are transferred
under Tupe are rights under occupational pension schemes. On transfer, the
existing rights of employees are preserved but the new employer is not obliged
to offer any pension benefits at all to transferring staff. This is
particularly sensitive in the case of public to private sector transfers, given
the valuable nature of public sector pension schemes. For that reason,
government policy is that private sector transferees should offer pension
benefits "broadly comparable" to the public sector scheme and
certified as such by the Government Actuary’s Department. The Government
certainly intends to continue that policy.

But something more radical is also proposed: that Tupe protection should
apply to occupational pension rights. Where the transferor has an occupational
pension scheme, the new employer would also be obliged to provide such a scheme
for transferring employees. The key question is how this obligation would work.
What type of pension would be required? Could the new employer simply offer
membership of its own scheme?

The consultation paper proposes a variety of models. A requirement for
"broad comparability" is rejected as too complex and burdensome.
Instead, the new employer might have to provide the same type of scheme – for
example a contracted-out final salary or money purchase scheme – as the
transferor. If the transferor had a "contracted-in" scheme,
transferees might have to provide a Revenue-approved occupational pension
scheme with a specified level of benefits. Variations on these proposals would
allow the new employer to change the type of scheme or would place restrictions
on the degree of variation in benefits between old and new employer.
Alternatively, the new employer could be obliged to offer an occupational
pension scheme which met a specified benchmark.

Whichever proposal is adopted, employers taking on transferred staff will
face a major new burden. They are likely to require actuarial advice and there
is clearly much scope for costly disputes.

Notification of liabilities

The nature of the rights and liabilities which transfer under Tupe is
extremely wide, going far beyond a requirement to honour the existing
employment contracts of transferring employees. For example, the new employer
inherits liability for acts of discrimination by the old. Currently, there is
no obligation on transferors to declare liabilities to their successors. In
business acquisitions, the new employer normally seeks protection through due
diligence, indemnities and warranties. In outsourcing cases, these protections
are typically unavailable. Those bidding for contracts may find it difficult to
obtain clear or accurate information about contractual terms, let alone other
liabilities they could inherit, unless it is stipulated in the existing service

The Government proposes obliging transferors to notify the new employer in
good time before the transfer of all liabilities of which it is aware. If
liabilities are not declared and the new employer is sued by a transferring
employee, the transferor could be joined as a party to the proceedings. If
liability is established, a court or tribunal could determine what proportion
the transferor should pay as a result of its non-disclosure. This would improve
the position of incoming contractors, although it is not clear whether the
information would have to be provided at the bidding stage or only once the
contract was awarded. Purchasers of businesses would still be wise to carry out
due diligence and obtain all necessary indemnities, regardless of disclosure.

Changes to terms and conditions

A further highly controversial area of Tupe is how far – or for how long –
new employers must honour the employment contracts of transferring staff. They
frequently wish to harmonise terms and conditions at some stage, and at present
contracts can be changed by dismissal and re-engagement on new terms and
conditions, though this risks expensive automatic unfair dismissal.

More problematically, a simple variation by agreement risks falling foul of
European case law which states even such agreements are void where the transfer
is the reason for the variation. But, case law has yet to identify the extent
to which consensual contract changes are invalid, in particular whether only
changes made at the time of transfer are prohibited.

The Government proposes to make clear that transfer-related changes to terms
and conditions "made for an economic, technical or organisational reason
entailing changes in the workforce" are allowed. This is unsatisfactory.
It is not clear that such clarification would be enough to overcome the ECJ
rulings prohibiting even consensual variations. Further, it is established in
domestic case law that a mere change in terms and conditions does not
"entail changes in the workforce" and is therefore outside the scope
of the proposed amendments. The current proposal is therefore unlikely to
resolve this difficult problem.

Timing of changes

The Government intends to consult further once draft regulations are
published. These would be laid before parliament in the summer of 2002, with
the new regulations taking effect probably towards the end of next year. The
new provisions on pension rights would be implemented at a later date to allow
employers more time to adapt to the new regime.

These are major reforms which employers – particularly those involved in
outsourcing – should monitor carefully. Read the consultation paper, respond to
the DTI and watch this space.

Christopher Mordue is an associate at Pinsent Curtis Biddle

Tupe proposals at a glance

– New Tupe trigger for outsourcings,
based on existence of economic entity in hands of existing service provider.
Effect is that Tupe will apply to virtually all outsourcings.

– Existing policy of applying "Tupe-style" protection
to transfers involving public sector staff to be continued.

– Occupational pension rights to be no longer excluded;
transferor to be obliged to introduce occupational pension scheme – various
models proposed.

– Transferor obliged to notify new employer of all transferring
liabilities in good time before the transfer. Transferee and transferor jointly
liable for non-disclosed liabilities. Tribunals to apportion damages between

– Attempt to make transfer-related changes to terms and
conditions valid if made for an "economic, technical or organisational
reason entailing changes in the workforce".

– In insolvency cases, some pre-transfer liabilities will not
transfer; changes to terms and conditions agreed with employee representatives
will be permitted to ensure survival of the business.

– Transfer of trade union recognition declarations made by
central arbitration committee under Employment Relations Act 1999.

– Minor amendments to information and consultation regime.

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