TUPE and outsourcing: advice on two common scenarios

With many organisations outsourcing employees, Kylie Morsley advises on how TUPE applies to two common situations.

When the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) is mentioned to business managers, most groan due to the association between TUPE and extra consultation obligations, protected employment terms and tricky dismissals. Well, to a certain extent they are right. TUPE is a difficult beast to tame, but with a bit of careful planning and consideration from the outset, it doesn’t have to stop businesses from achieving their objectives, even in these difficult times.

There has been a significant increase in requests for advice regarding more complicated outsourcing TUPE scenarios that employers are facing since the start of the recession. For example, in order to cut costs many international businesses are outsourcing work abroad. Additionally, businesses are winning and losing contracts, and with that comes all the potential liabilities associated with second-generation outsourcing.

International outsourcing

There is the potential for TUPE to apply even where the transfer is from the UK to a country outside of the EU. However, the position is not settled by binding case law and, therefore, employers face uncertainty when dealing with TUPE in a cross-border setting.

A prime example of this is businesses that look to reduce costs by outsourcing work currently carried out in the UK, for example, call centres to India.

In this situation, if TUPE applies, the employment of the employee(s) whose principal purpose is carrying out the relevant activities that are transferring would automatically transfer from the UK company to the company in India. However, the employees would still be situated in the UK after the transfer and are unlikely to want to relocate.

From a UK employment law point of view, if TUPE applies then one solution is for the company in India to make the employees in the UK redundant following the transfer. However, there may be issues with pooling and alternative employment as well as Indian employment law considerations, which makes the process far from intellectually or practically straightforward.

For this reason, some employers decide to take the risk and assume that TUPE does not apply to international outsourcing and deal with matters as a straightforward redundancy situation from the UK company. While in practice this may never be challenged by the affected employees, there are inherent risks in this approach, not least the possibility of awards for failure to inform and consult under TUPE (which could cost the employer up to 13 weeks’ uncapped pay per affected employee).

It therefore pays to take a step back and consider seeking legal advice at the outset before starting a consultation process.

Second-generation outsourcing

In simple terms, second-generation outsourcing occurs when a customer has contracted work out to a service provider, and later decides to change to another service provider. For example, if company A contracts with company B to clean its offices but decides to change to a new cleaning company (company C), this may result in a TUPE transfer from company B to company C of any employees whose principal purpose is carrying out the activities that are transferring. The upshot is that company A may end up getting the same cleaners back despite the change in service provider.

quotemarksThe advice for businesses is to consider the employment law aspects of a transaction from the outset.”

In a climate where contracts are won and lost on price, second-generation outsourcing is becoming more common. But what implications are there for both businesses losing contracts and those winning them?

Where TUPE applies to a second-generation outsourcing situation, the default position is that the company winning the contract will inherit any employees whose principal purpose is carrying out the activities that are transferring and the majority of the liabilities attached to those employees. The customer might think that this does not affect them, as they are neither the transferor nor the transferee. However, commercially, there may be provisions in the agreement with both the outgoing and incoming service providers that dictate who will shoulder any liabilities in connection with the transferring of employees. This is the time to review your agreements and check what you signed up to at the beginning, and also to consider properly the draft contract with the new service provider before signing.

If the contract with the original service provider offers inadequate protection to the customer or does not contain appropriate exit provisions, they may find themselves with a difficult negotiation. The new service provider is likely to demand indemnities and warranties in respect of the employees who are transferring to them, and the outgoing service provider will have no incentive to commit to any new indemnities given that they are losing the contract.

Therefore, depending on the bargaining position, the customer may find that its options are limited either to giving the requested indemnities to the new service provider in respect of the transferring employees (and therefore sign up to some potentially large liabilities) or agreeing to an increase in the price (or a pricing adjustment mechanism) for the contract to compensate the incoming service provider for the liabilities they might be taking on.

Either way, it is not an attractive situation for the customer, particularly if there are a lot of long-serving employees transferring or those who have significant employment benefits, such as final-salary pension schemes or enhanced redundancy terms.

The incoming service provider also needs to be wary about what potential liabilities it is taking on from the outgoing service provider, and ensure that it has adequate contractual protection from the customer from the outset. They would be well advised to find out as much about the transferring employees as possible before committing to a price.

Additionally, the outgoing service provider is going to have no interest in providing any more information than the basic employee liability information that they are required to provide under TUPE, so due diligence exercises are hampered by a lack of cooperation.

So how can employers navigate through this legal minefield?

The advice for businesses is to consider the employment law aspects of a transaction from the outset, and before the business has committed to a particular contract or course of action. If there are contracts already in place that might affect potential liabilities (as with second-generation outsourcing), it is worth reviewing the relevant provisions early on to find out what exposures there might be along the way.

If there are international aspects to the transaction, advice should be sought regarding the potential legal liabilities and the laws of the different jurisdictions that may be involved from the outset. Forewarned is forearmed.

XpertHR’s Good Practice Guide on TUPE

Service provision change

TUPE applies where services are outsourced to a third-party provider. This includes when an organisation:

  • stops doing an activity itself and engages a third party to provide the activity, known as “first-generation outsourcing”;
  • appoints a new contractor to take over from another contractor already providing outsourced services, known as “second-generation outsourcing” or “subsequent-generation outsourcing”; or
  • brings outsourced services in-house and performs them itself, known as “insourcing”.

TUPE applies in each of these circumstances provided that, before the change took effect, there was an organised grouping of employees with the principal purpose of carrying out the activities, in other words employees were performing a service in respect of which the provider has changed.

However, TUPE is not triggered if, following the change, activities are undertaken for a single event or as a short-term task, for example catering for a one-day conference, or if the activity is mainly the supply of goods for the client’s use, for example supplying packaged food for a canteen.

Identifying a transfer

The following guidelines can help employers to determine whether or not TUPE applies:

  • Assume that TUPE applies: The parties to a transaction are not at liberty to agree that TUPE will not apply. The ambit of TUPE is far-reaching, so to avoid liability, the safest course of action is to assume that it applies to any business sale and outsourcing or insourcing situation, and to deal with the consequences accordingly.
  • Employees follow the work: In complex contracting or business structures, a useful principle is to trace the work as it moves. If the work can be identified throughout its journey, the likelihood is that employees will transfer under TUPE.
  • Look out for less obvious transfers: Employers should be alert to a business change that may trigger TUPE unexpectedly. For example, a group reorganisation in connection with, or following, a share purchase may be captured by TUPE, and where an outsourced service provider is subcontracting some or all of its services, TUPE applies to transfer the relevant employees to the ultimate subcontractor.

This is an extract from XpertHR’s new good practice guide to TUPE.

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