TUPE: Detail inspection

Five years after first being promised amendments to the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE), the Department of Trade and Industry (DTI) has finally published new regulations.

The DTI has announced that there will be a consultation period running until 7 June, with the new regulations coming into force by 1 October 2005. The new TUPE pension rules are already in force.

The government does not want feedback on the policy issues underlining the new draft regulations as part of the consultation exercise. Instead, it has stated that it simply wants feedback on whether the proposed drafting changes work properly. That said, there are still some important areas where the government has either requested, or would benefit from, detailed feedback.

The main impact of the new regulations will be felt in the private sector, as the public sector is already governed by policies that contain significantly more protection for employees on TUPE transfers than under TUPE itself in its current form.

Wider definition of transfer

In its consultation document, the DTI admits that the current TUPE regulations are “operating less effectively than they might do”. Anyone who has had to grapple with the central question of whether TUPE applies to a particular outsourcing situation would agree. Over the past 10 years or so, a huge amount of case law has emerged on just when TUPE applies at both a UK and European level.

To address the particular difficulties with outsourcing of services, the government has proposed a wider definition of a transfer to include ‘service provision changes’. This definition expressly includes all aspects of outsourcing, namely the original outsourcing, any re-tenders, and any insourcing back to the original client. The only requirement is that the service activity in question must be assigned to an organised group of staff before the transfer.

This wider definition should help to reduce the commercial uncertainty that exists as to whether a particular outsourcing scenario comes within the ambit of TUPE. Indeed, the government claims in its consultation document that currently 25% of transfers fall into an uncertain bracket, but under the new proposed regulations this will fall to between 5% and 10%.

Despite the long wait since the government’s last major consultation document on TUPE back in September 2001, it has still not decided whether to include professional services within the new definition of service provision changes. The concern expressed by many is that ‘white-collar’ professional business services, such as law, should not come under TUPE. There is, however, a good chance that such services could be caught in certain situations by the current TUPE regulations as they stand.

Whichever way the government decides to jump on this issue, some uncertainty will remain. This is the one policy issue where the government has invited feedback as part of the consultation exercise.

Occupational pensions

The new TUPE pension provisions have been in force since 6 April under the Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005. This marks another significant change for the private sector, as it will have a major impact on price for many companies bidding for services contracts.

The old position was that occupational pension rights under company pension schemes were excluded from TUPE, so that the only rights that did transfer were in relation to personal pension schemes, which can be taken from job to job.

Now, a transferee employer must contribute to a money purchase or stakeholder pension scheme and to match an employee’s level of contributions up to a maximum of 6% of salary. It is important to note that the new provisions stop well short of imposing an obligation on a transferee employer to set up a pension scheme comparable to the transferor’s scheme (as is the case in the public sector), so, for example, if a transferor employer operates a final salary scheme there is no obligation on the transferee to replicate such a scheme.

In practice, staff who were in final salary schemes are still likely to be worse off in respect of their pension benefit after they have transferred. However, in some cases it is possible that the transferring staff could become better off. If a transferor operates a stakeholder or money purchase scheme to which it does not contribute, the transferee could end up having to contribute to match employee contributions up to 6% under the new regulation.

Providing information

The current TUPE regulations do not require a transferor employer to provide information about the transferring workforce to the transferee employer, and this frequently causes problems at a commercial level, particularly on re-tendering exercises where services have been outsourced.

The new regulations look to rectify these problems by requiring the transferor organisation to notify the transferee employer not only of the identity of the transferring employees, but also the rights and obligations that will be transferred with the staff. This appears to go beyond what is now seen in commercial contracts. It will require transferor employers to furnish information not only about terms and conditions of employment, but also claims and potential claims by employees.

The sanction for failure to provide the requisite information will be a fine of up to 75,000. The government wants views on whether the employment tribunal would be a better forum than the High Court.

The new regulations on this issue leave many unanswered questions. It is hoped the consultation process will prompt the government to insert additional drafting.

Terms and conditions of employment

This is another area which has caused problems for employers at a commercial level, but the new regulations show there is little the government can do to improve matters, given the current state of European case law. At issue is that European case law makes any changes to employment terms made in connection with a TUPE transfer void, even if such changes have been agreed by the employee.

The government seeks to clarify certain technical issues that have not been made clear by the case law, but the underlying problem for transferee employers will remain.

The only area in which the new regulations will definitely resolve the situation is in relation to the transfer of insolvent businesses. In insolvency situations only, a transferee will be able to change terms and conditions of employment post-transfer, even if such changes are in connection with the transfer, because the revised European directive underlying TUPE has allowed the government to make this change.

Consultation under TUPE

Another change to be welcomed under the new regulations is the move to make both transferor and transferee jointly and severally liable for any failure to inform or consult with trade union or employee representatives about a TUPE transfer.

While there is conflicting case law on the point, as TUPE currently stands, the liability for a transferor’s failure to inform and consult about TUPE will transfer across to the transferee. This results in there being little commercial incentive for a transferor to consult properly, particularly in outsourcing scenarios where there is no contract between transferor and transferee.

The proposed change should help those bidding for outsourced contracts. It will be interesting to see if the government will help purchasers of insolvent businesses.

Given the long wait for the new regulations, and previous consultation exercises, significant issues have still to be sorted out before October.

Charles Newman is a partner and head of the specialist TUPE Unit at national law firm Beachcroft Wansbroughs

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