TUPE flaws

After five years in the making, the Transfer of Undertakings (Protection of Employment) (TUPE) Regulations 2006, which came into force on 6 April, and replaced the TUPE Regulations 1981, should have been sufficiently robustly drafted to clear up most outstanding problems of interpretation.

Sadly, this is proving not to be the case. It is true that the law on outsourcing is considerably improved and clarified by the new regulations, which will apply in almost all cases of service provision changeover. But other aspects leave employers less than happy.

A surprise motion to annul TUPE by Lord Hunt in the House of Lords on 3 May on behalf of R3 (the representative body for insolvency practitioners in England and Wales) was defeated by only two votes, by 79 to 77. Annulment of the regulations shortly after they were passed by Parliament would have been a major embarrassment for the government. TUPE survived the vote, but the problems remain.

Insolvency

Insolvency practitioners complain that, in particular, the definition of when TUPE applies on insolvency is less than clear. Instead of defining which kind of insolvency procedure is caught by TUPE, the regulations copy out the wording from the EC Acquired Rights Directive 2001/23, which leaves considerable room for argument.

Regulation 8 applies to transfers after insolvency proceedings that have been “opened in relation to the transferor not with a view to the liquidation of the assets of the transferor”. This probably means that, in practice, TUPE does not apply following a compulsory winding up of a company but applies to other insolvency procedures; although it would have been better had this been made clear in the regulations.

And although the law is relaxed in insolvency sales that are covered by TUPE (so that, for example, a transferee does not take on liability for pre-existing unpaid employment debts that are met from the National Insurance Fund), employers have complained that the Department of Trade and Industry (DTI) guidance on this point is misleading.

Interestingly, the Insolvency Service Redundancy Payments Office has taken the unusual step of clarifying the DTI guidance through a letter dated 3 April addressed to all UK insolvency practitioners. While this letter does improve the original DTI guidance, it also openly acknowledges the uncertainty over what kind of insolvency procedures are covered by TUPE and concludes that “it is inevitable that an employment tribunal will eventually determine this point”.

Changing terms and conditions

Another complaint by employers is that in the consultation prior to new TUPE regulations coming into force, the government promised to make it much clearer when employers could change terms and conditions of transferring employees after a TUPE transfer.

Under the TUPE Regulations 2006, Regulation 4(4), a purported variation of an employment contract is void if the sole or principal reason for the variation is either the transfer itself or a reason connected with the transfer that is not an economic, technical or organisational (ETO) reason entailing changes in the workforce.

However, the new regulations do create a new ground under which the employer may now lawfully effect a contract change where this is connected with the transfer. This is where, under Regulation 4(5), there is an ETO reason entailing changes in the workforce. Be warned that previous case law means that to lawfully change terms and conditions under this new provision, an employer must point to a workforce reduction before it can do so (see the Court of Appeal decision in Berriman v Delabole Slate Limited [1985] ICR 546).

Clearly, most employers wanting to change terms and conditions of employment – for example, when they are harmonising the terms and conditions of transferring staff with their own workforce – do not wish to shed labour. They require the same workforce but on different terms and conditions. Therefore, the new leeway to change terms and conditions will apply only sparingly in practice.

Constructive dismissal

Under the TUPE Regulations 1981, it was always possible for an employee to make a claim for constructive dismissal when, after the transfer, the new employer had broken or threatened to break the employees’ terms and conditions that had transferred under TUPE.

Although this has been retained, the 2006 regulations create a new right for an employee to claim constructive dismissal where there has been “a substantial change to the employee’s working conditions to his material detriment”. This additional claim can be pursued by an employee without having to show that the change in terms and conditions also amounts to a breach of contract.

Employers are worried that they may no longer safely be able to change non-contractual terms of an employment contract in a material way (for example, the terms of a discretionary bonus or commission scheme) without risking liability for a claim by the employee.

These are just a few of the teething troubles experienced with the new TUPE. And this is before it has even been considered by the courts.

TUPE 2006

TUPE 2006 entirely replaces TUPE 1981. The main changes are:



  • A wider definition of TUPE so that service provision changes (contracting out and similar exercises involving business services) are more likely to be covered by TUPE. This was to achieve greater certainty and practice for all concerned, thus reducing unnecessary disputes resulting in litigation and lowering transaction costs. This new definition includes professional services (previously proposed to be excluded).

  • Clarification of the effect of the regulations in relation to transfer-related dismissals and when employers may change terms and conditions.

  • The introduction of a requirement on the old employer (transferor) to notify the new employer (transferee) of the identity of the employees and of various specified rights and liabilities that would pass on a transfer.

  • Greater flexibility in the regulations’ application in certain cases where the transferor is insolvent, these provisions being in line with the government’s policy to promote the so-called ‘rescue culture’.

VARIATIONS IN THE TERMS OF A CONTRACT

A variation of an employment contract is void if the sole or principal reason for the variation is:



  • the transfer itself
  • a reason connected with it that is not an economic, technical or organisational (ETO) reason entailing changes in the workforce.

An employment contract may lawfully be varied where the sole or principal reason for the change is:



  • a reason unconnected with the transfer
  • a reason connected with the transfer that is an ETO reason entailing changes in the workforce.
  • The new leeway to make changes in employment terms will be limited in practice.
  • There is a new right to claim constructive dismissal on substantial change of working conditions to an employee’s material detriment, even where there is no breach of contract by the employer.

Dr John McMullen is partner and head of employment law at Watson Burton

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