TUPE changes promise clarity, at a cost

What’s new?

The draft regulations propose several key changes to the current version of TUPE including:

  • Specific provision for “service provision changes” – outsourcing, including the initial contracting-out of a service, a change in service provider as well as contracting-in by taking a service back in house – will come within the scope of TUPE, subject to certain conditions
  • Clarification of when transfer-related dismissals or changes to terms and conditions can be made for economic, technical or organisational reasons entailing a change in the workforce
  • Provision for parties to agree to transfer-related changes to terms and conditions (even where there is no economic, technical or organisational reason) in certain types of insolvency proceedings
  • A requirement for sellers to notify buyers, in writing, of all associated rights and obligations in relation to transferring employees, icluding any subsequent changes before completion
  • Joint and several liability will fall on buyers and sellers where there has been a failure to comply with information and consultation requirements
  • Removal of the territorial restrictions in TUPE, bringing it into line with other employment legislation where international law determines whether an employee working abroad is able to bring a tribunal claim.

The draft regulations are intended to come into effect on 1 October 2005.

A minimum standard of protection for the occupational pension rights of transferring employees is dealt with separately under the Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005, due to come into force on 6 April 2005.

What is improved?

In some respects the draft regulations offer certainty but they are likely to produce a more restrictive environment for business transactions. This is amply demonstrated in one of the headline issues – outsourcing.

A vast improvement in the draft regulations is the attempt to expressly bring outsourcing within their scope, removing the uncertainty that has pervaded this point for many years. 

The draft regulations expressly cover service provision changes where there is an “organised grouping of employees… which has as its principal purpose the carrying out of the activities concerned on behalf of the client.”

The definition effectively excludes situations where a contractor is engaged by a client to provide services on an ad hoc basis (rather than through a specific team, permanently assigned to a function).

It also excludes situations where organised groups of employees carry out services on behalf of several clients rather than one particular client.

Some outsourcing situations have been expressly excluded from the draft regulations, for example where a client buys in services from a contractor on a one-off basis without intending to enter into an ongoing relationship. 

However, the DTI has made it clear that this is not a loophole for avoiding TUPE by the parties entering into a series of short-term, one-off contracts.

A further exception applies where the arrangement is wholly or mainly for the procurement of goods rather than services, for example the supply of food and drink to a staff canteen rather than catering services.

A professional business services exception (for example, business consultancy or legal advice) is subject to consultation.

A new TUPE pitfall

There is no exception in the draft regulations for situations where an incoming contractor carries out services in a new or innovative manner, for example by using a computerised process rather than a manual one post-transfer. 

At present, this could take an outsourcing situation outside of the remit of TUPE but under the draft regulations it will be covered. 

By ensuring that employees transfer in this situation, the DTI expects the number of redundancies to drop. 

Instead of being made redundant by the old employer who is unlikely to have any further work for the employees, they could be redeployed by the new employer. 

The DTI also argues that this change creates certainty in tendering exercises, by ensuring a “level playing field” for contractors, regardless of how they intend to carry out the service.

Weighing up the pros and cons

The major advantage of the revised regulations is certainty, particularly in outsourcing situations.  However, the extension of the scope of TUPE could also prove to be problematic.

The changes mean that TUPE will apply to a wider range of business transfers and outsourcing situations than under the existing regulations and even the European Acquired Rights Directive, which is implemented by TUPE. 

Ultimately, this results in more restrictions on business transfers than in some other European countries, which may leave employers and service providers wondering whether the cost of clarity and certainty has come at too high a price.

Stefan Martin is employment partner at City law firm Alan & Overy

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