Controversy surrounding the Tupe regulations has never been fiercer as Dr
John McMullen, National Head of Employment Law at Pinsent Curtis explains
The Transfer of Undertakings (Protection of Employment) Regulations 1981
(fondly named Tupe ever since Lord Wedderburn of Charlton QC coined the
expression) have been around for 20 years now. And, yet, the controversy
surrounding their application has never been fiercer. They are based on the EC
Acquired Rights Directive 77/187 and effect a number of basic rights.
Thus, they transfer employment rights (including accrued continuous service)
from transferor to transferee; they carry protection against transfer connected
dismissals (which are deemed to be automatically unfair unless for an
"economic, technical or organisational" reason (basically on a
redundancy); European Court case law has made it difficult for employers to
agree changes in terms and conditions of employment if the change is by reason
of the transferor; collective agreements and trade union recognition are
transferred and, finally there are important information and consultation
obligations applying before every business transfer, however small, and however
few employees are involved.
Over the years, the European Court has expanded the scope of the Acquired
Rights Directive (and hence Tupe) to an unexpectedly wide range of transactions
and situations.
They therefore potentially apply not only to mergers and acquisitions, but
to outsourcing (whether first generation (customer to contractor), second
generation (contractor to contractor on a contractor changeover) or
"contracting in" (when a customer ceases outsourcing and takes the
service back in-house), local government contracting out, tendering for
services from central government, facilities management and many other
situations where the management of an identifiable function (an economic entity
retaining its identity) is passed or entrusted to a third person (whether
voluntary or involuntary and whether by sale or otherwise)).
At present, the law is in turmoil. The chief issue is that of the
application of the law to outsourcing. After a period, following the decision
in Christel Schmidt [1994] IRLR 302, a very broad interpretation of the ARD
applied. Virtually every case of outsourcing was covered by Tupe. But following
the case of Ayse Suzen [1997] IRLR 255, the position changed.
Outsourcing was now only to be covered if there was a concomitant transfer
from one person to another of significant tangible or intangible assets or the
taking over by the employer of a major part of the workforce in terms of numbers
and skills.
Although this case has been followed by six further European Court of
Justice cases, three EFTA Court cases, one British Court of Appeal case and
innumerable EAT decisions, the EAT and, subsequently, the Court of Appeal, in
ECM v Cox [1998] IRLR 416; [1999] IRLR 559 has rebelled against it.
Although Suzen seemingly allows a contractor who requires no assets or
people to put in a non-Tupe bid, ECM stated that where Tupe decision hangs on
whether the staff are taken on, it is permissible for an employment tribunal to
examine the motive of the new employer in not taking staff on.
If the workforce is to avoid Tupe, the Regulations should still apply
nonetheless. The law is quite frankly in a mess. But the new Tupe Regulations
implementing new Directive 98/50 may give the UK a chance to correct matters.
First, what does the new Directive say?
The new Acquired Rights Directive
The purpose of the new Directive promulgated on 29 June 1998, is to amend
the original Directive 77/187 in the light of the impact of the internal
market, the legislative tendencies of the Member States with regard to the
rescue of undertakings in economic difficulties and ECJ case law. There is also
a need to marry up changes in relation to information and consultation in the
context of Tupe transfers with the amendments made to the Collective
Redundancies Directive as long ago as 1992.
"New" definition of a "transfer"
The new Directive does not therefore seek radically to alter the scope and
purpose of the original Directive and, in the main seeks to consolidate the
case law of the ECJ in this regard. It may be fair to say (see below) that the
main substantive changes occur in relation to insolvencies and in relation to
information and consultation.
Commentators were therefore disappointed to find that the definition of a
transfer altered only to the extent of incorporating the current ECJ case law.
Thus, the new definition of a transfer is that there is a transfer under the
Directive Article 1(1) (a) this Directive shall apply to any transfer of an
undertaking, business or part of an undertaking or business to another employer
as a result of a legal transfer or merger; (b) subject to paragraph (a) and the
following provisions of this article, there is a transfer within the meaning of
this Directive where there is a transfer of an economic entity which retains
its identity, meaning an organised grouping of resources which has the
objective of pursuing an economic activity, whether or not that activity is
central or ancillary; (c) this Directive shall apply to public and private
undertakings engaged in economic activities whether or not they are operating
for gain.
An administrative reorganisation of public administrative authorities, or
the transfer of administrative functions between public administrative
authorities, is not a transfer within the meaning of this Directive".
Certain intra public sector transfers excluded
Those in the public sector will also see, with some dismay, the codification
of the controversial decision in Henke v Gemeinde Schierke and
Verwaltungsgemeinschaft "Brocken" [1986] IRLR 701. which excludes
undertakings with purely administrative functions.
"New" definition of "employee"
The definition of employee is, as before, left largely to Member States save
that now, specifically, Member States will not be able to exclude contracts of
employment or employment relationships solely because of the following.
– The number of working hours performed or to be performed.
– Or because they are employment relationships governed by fixed duration
contracts of employment.
– Or because they are temporary employment relationships and the
undertaking, business or part of the undertaking or business transferred is
part of the temporary employment business which is the employer.
Occupational pension schemes, joint liability and disclosure of
information
By Article 3, as amended, Member States are specifically allowed to provide
for the transfer of obligations in relation to occupational pension schemes
(Article 3 of the present Directive and Regulation 7 of Tupe presently exclude
pension transfer). The question of joint liability of transferor and transferee
is left again to the option of the Member State. Member States are also allowed
to oblige a transferor to notify a transferee of all rights and obligations
which will be transferred to a transferee which is some concession in respect
of the practical problems surrounding second generation contracting out.
Insolvencies
The relaxation of the rules concerning insolvency will generally be welcomed
and include the possibility of non-transfer of a transferor’s debts arising
from employment contracts before the transfer or before the opening of
insolvency proceedings.
Also included is the facility to allow employee representatives and
companies to alter terms and conditions of employment in insolvency
circumstances to ensure the survival of the undertaking or business.
Information and consultation
The principal change here is that it will not be an excuse, in the case of
breach of the information and consultation obligations, that a controlling
undertaking was at fault in not supplying information to the transferring
undertaking to enable it to comply with the obligations under the Directive.
Government could go further than required by Directive – but will it?
There is scope, if the Government wishes, for it to amend Tupe itself to
create laws more favourable to employees than it is obliged to under the
Directive.
For example it would be possible for the UK to provide for pension transfer.
Also, there seems no reason why, as long as it is done by primary legislation
as opposed to regulations in a statutory instrument, the law could not be
amended to provide more of a presumption that Tupe will apply in contracting
out cases since the Directive specifically allows Member States to create laws
more favourable to employees than provided for in the Directive.
Whether the Government takes up this kind of option will be a matter of debate
over the coming months. It seems likely however that it will (see, for example,
Section 38 of the Employment Relations Act 1999, referred to below).
Progress on implementation of Acquired Rights Directive 98/50 and new
TUPE Regulations.
A Consultation Paper from the DTI is expected very shortly. At the moment,
discussions about the difficult decisions to be made under the Directive are
still ongoing. Some of these discussions have taken place under the auspices of
the "Tupe Forum", an informal forum comprising civil servants and the
social partners.
One thing that has emerged is a very serious attempt to reach an agreement
with the social partners on the best way of treating the definition of a
transfer and meeting the perceived problems of the Ayse Suzen decision. In a
speech delivered at the Municipal Journal Conference on 27 October 1998 on
behalf of Ian McCartney, minister of state at the DTI, the Government declared
its intention at the very least to make the new regulations clearer and more
straightforward.
The Government is also mindful of the general consensus among social
partners that there should be a level playing field in respect of the
application of Tupe to contracting.
"Certainly in the area of public sector contracting the consultations
which the Government has undertaken in the joint representations which have
been made show a very strong consensus between the contractors, the workers
representatives in the local authorities in favour of ensuring that the Tupe
Regulations apply to all situations where the same service is contracted out,
re-tendered or brought back in-house, in other words no more argument about
Tupe or non-Tupe bids; no more wrangling over the difference between first and
second generation contracts; no more second guessing about whether there may be
a later challenge as to whether Tupe applies or not.
"It should be clear up front to all parties whether what is being done
involves a Tupe transfer; and the assumption should be that the contracting out
re-tendering or bringing back in-house of a service contract does entail a Tupe
transfer of the employees unless there are special, clearly defined
circumstances where there really is no transfer of the same service to a
contractor.
"Of course, such an approach would go further than the terms of Article
1 of the Directive (which merely consolidates existing ECJ case law). But
Article 7 of the Directive allows the UK to make further provisions in the
interests of workers.
"We will use this provision if necessary to make the scope of the
Directive and its effects clear and comprehensive. To give an example we could
consider making a provision to prevent contractors evading the Regulations by
refusing to take on staff in a labour intensive organisation where no other
substantial assets are transferred, which is, of course, a problematic issue
under the current interpretation of the Directive following the case of Suzen."
By the spring of this year, the DTI was considering no fewer than four
options in respect of the Suzen problem ranging from a consolidation of the Suzen
decision but coupled with an anti-avoidance provision leading to a more radical
option of providing for a transfer where an activity of an economic nature
passes from one employer to another regardless of whether or not this involves
the transfer of an organised grouping of resources that retains its identity in
the process.
Section 38 of the Employment Relations Act 1999
Another factor, is that Section 38(2) of the ERA permits the secretary of
state by regulations to make similar provision as will apply under Tupe in
circumstances where there might not be a transfer under the terms of the
Acquired Rights Directive.
Section 38 will both empower the secretary of state to make regulations
amending Tupe which go further than Directive 98/50 and to make under Section
38(2) interim regulations conferring benefits on workers in public sector
transfers that might be otherwise excluded by Henke (see above).
The most recent example is the Transfer of Undertakings (Protection of
Employment (Rent Officer Service) Regulations 1999 (SI 1999/2511)).
The way forward with the new law on TUPE
A consultation document is expected, at the time of writing which will put
forward various proposals for the reform of the Tupe Regulations.
Its content, of course, is not known at the time of writing. It has been
speculated, however, that a broader definition than is contained in Directive
98/50 of a transfer of an undertaking will be proposed, that rights under or in
connection with an occupational pension scheme should be replicated by a
transferee, that there should be some fast track procedure enabling parties to
apply to an employment tribunal prior to a putative Tupe transfer to determine
whether Tupe applies, and that, otherwise, the requirements of Directive 98/50
will be faithfully adopted.
At the time of writing, it is widely supposed that the consultation document
will not contain draft Tupe Regulations but simply proposals, and that there
will be a three-month lead-in time for consultation.
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Given the complexity of such concepts as transfer of occupational pension
rights, it seems unlikely that new Tupe Regulations will be in force before
spring 2001. The ultimate cut-off date for implementation of Directive 98/50 is
17 July 2001.
Dr John McMullen is National Head of Employment Law at Pinsent Curtis and
author of Business Transfers and Employee Rights
