Times are changing for transfer of undertakings

TUPE is a law designed to protect employees when their employer changes ‘from underneath them’. This typically happens in a merger, an outsourcing or when the organisation in which the employee works is sold.

TUPE requires employers:

  • to take on all the existing staff with continuity of service intact. Failure to do so is normally an automatically unfair dismissal
  • not to make any changes to contracts of employment which are in any way worse for the employee (save to an extent with regard to pensions). Such changes are void even if they are reached with the agreement of the employee
  • inform and consult representatives of the affected staff.

On 15 March 2005, the government passed regulations enhancing pension protection under TUPE, which took effect on 6 April 2005. It also issued another public consultation document on revising the rest of TUPE.

Change in pensions

TUPE is bad news for incoming employers in relation to most issues, not least because it makes it hard to harmonise terms and conditions. But in terms of occupational pension schemes, the regulations put them in a better position. Until now, the regulations, at face value at least, gave incoming employers a free hand to remove all future occupational pension scheme rights and replace them with their own schemes – be it a worse scheme, a better one, or none at all.

Recent case law (Beckman and Martin) has determined that the exemption does not extend to enhanced redundancy payments payable under a pension scheme (which must still be paid by an incoming employer, if appropriate), and suggests that all early retirement benefits should transfer too. Nevertheless, an employer still had a chance to cut labour costs radically following a transfer.

Following the change to the law, there is still an opportunity to reduce pension provision following a transfer, but not by quite as much. An employer can now only do away with the transferor’s occupational pension scheme (at least in respect of accrual of rights going forward) if it replaces it with a contribution into a stakeholder scheme of at least 6% of salary, or pretty much any final salary scheme that provides accrual of benefits at 1/80 of salary for each year of service or better.

More changes brewing

The other new proposals, which are not yet law – and if Labour is not re-elected, may never be law – aim to ensure that more outsourcings, insourcings and changes of contractor are covered by TUPE. The proposal is that wherever an activity that is carried out by a dedicated group of people is outsourced, TUPE will apply unless that group is also assigned to other activities. This was the view that most cautious employers were taking anyway, but the clarity is welcome. It is possible that the government may still decide that this extended coverage should not encompass professional services.

The proposals also attempt to make it easier for employers to harmonise terms if there is a good business reason that would cause a numerical change in the workforce. The government thinks it is being helpful to business in this regard, but the proviso is probably too tight for this to be meaningful. In insolvency situations, it is proposed to have a more liberal regime, so that the company rescuing the business is not saddled with the costs that brought down the old employer.

The other major change is to require outgoing employers to give to their successors information about the workforce they are going to inherit. This is a laudable measure in theory, and it is aimed at a serious problem: bidders for outsourced business do not know the liabilities they are taking on until they have taken over. Unfortunately, the current draft only entitles the successful bidder to receive the information. In any case, the proposed maximum penalty of £75,000 will not deter an incumbent contractor from refusing to disclose information if it thinks this will help it hold on to a major piece of business.

Barring any major surprises on election day, these changes should take effect on 1 October 2005.

Gareth Brahams
Partner, employment and incentives department,
Lewis Silkin

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