TUPE Obligations When Transferring Your Business
A Guide For Buyers and Sellers
Taking the leap into buying your own business takes a tremendous amount of confidence and knowledge. A little luck never goes astray either. If you have decided self-employment is your future and your plan to buy a business, you need to understand (among many other things) your obligations under TUPE.
The same goes for business sellers. Transferring your enterprise to another can be like saying goodbye to your child; you have nurtured and grown your organisation, and now it is time to let it go. And if you have employees, you too will have TUPE responsibilities.
Now when I talk about TUPE, I am not referring to a man’s hair-piece. TUPE is an acronym for the Transfer of Undertakings (Protection of Employment) Regulations 2006.
Without the protection of TUPE, employees could be treated like any other asset in a business – potentially disposable. As you can imagine, this is not good public policy. Although TUPE’s details can be complex, the premise is simple; TUPE is designed to protect the employment rights of employees before, during, and after the transfer of a business.
When does TUPE apply?
When a buyer is interested in acquiring a business, there are two options; either they acquire the entire issued share capital of the company which owns that business (known as a ‘share purchase’), or they obtain the collection of assets that comprise the business, which may include machinery or equipment, property, intellectual property rights, employees and contracts (known as an ‘asset purchase’).
A ‘share purchase’ involves buying the organisation ‘warts and all’. The buyer purchases the whole company, including its liabilities (unless otherwise agreed). And because employees’ contracts remain in force and whatever rights, obligations, powers, and liabilities the company has towards past, present and future employees remain the same (with limited exceptions), TUPE does not generally apply.
Exceptions where TUPE will apply to share transfers:
- where an asset transfer carried out prior to a share sale
- in cases of an intra-group asset transfer
- in cases of a share sale, in which a subsidiary is bought by a parent company, where there has been no formal transfer at all of staff or assets from that subsidiary to that parent, but the parent in fact takes over control of the everyday management of the subsidiary’s business
In the case of an asset sale, the seller and purchaser agree which liabilities and assets will transfer; therefore, TUPE does apply to asset purchases.
TUPE not only applies to business transfers. The obligations also kick in when there is a service provision change. For example, where work previously outsourced to the contractor is brought back in house or re-assigned to another contractor (provided certain conditions are present).
What are the consequences when TUPE applies?
If TUPE applies to a business transfer, the buyer steps into the seller’s shoes, taking on all the duties, responsibilities, and rights relating to the employees of the company.
TUPE provides protection to employees by ensuring:
- employees taken on immediately before the transfer are transferred to the buyer
- existing employment terms and conditions cannot be changed in connection with the transfer
- if an employee is dismissed because of the transfer, they can claim for automatic unfair dismissal
- the seller and buyer have a duty to inform and consult with employees or their representatives
The seller and the buyer cannot agree to contract out of TUPE. However, they can agree to share the risks and apportion the costs of TUPE obligations between them. This is usually achieved via warranties and indemnities.
What are the steps to take in a TUPE transfer?
Many aspects of a TUPE transfer will depend on whether what is being transferred is a ‘normal’ business or a provision of services. However, the key steps remain the same and are listed below:
- Identify the ‘affected’ employees– unfortunately, this may not be as simple as it initially seems. Employees who are on short-term sabbaticals, maternity leave, and holiday will be included in the transfer. If an employee is on a fixed-term contract, they will be included in the transfer, however, agency workers won’t be. Workers on secondment or long-term sick-leave may be included, but this will depend on the length of their absence. In the case of I Lab Facilities Ltd v Metcalfe & Ors, the claimants were employed in one part of the business. Facing insolvency, the owner looked to transfer both parts of the organisation, but in the end only transferred one part, in which the claimants were not employed. The claimants brought a case to the Employment Tribunal, against both the employer and transferee, stating they had jointly breached their information and consulting obligations under regulation 13 of TUPE. The claim was upheld by the Tribunal but dismissed on appeal on the grounds the claimants were not ‘affected’ employees. One of the reasons stated was that no claim could be brought in respect of a transfer which had not proceeded. An employee will be ‘affected’ if they; a) are part of the group which will or may be transferred, b) their job is in danger due to the transfer, or c) they have a job application pending to a position which will or may be transferred at the time of the transfer.
- Undertake information and consultation – once ‘affected’ employees are identified, the information and consulting process needs to begin. The consultation will be with either; a) a union representative, b) an employee representative, or c) in the case of a business with fewer than 10 employees, the workers themselves. Under regulation 3(2) of TUPE, the employer must inform affected employees about the date of the proposed transfer, the reason for the transfer, the legal, economic, and social implications of the transfer for the affected employees, and any other matters in connection with the transfer which may affect employees. Failure to comply with the informing and consultation requirement could result in an employer having to pay compensation to the tune of 13 weeks’ wages to every affected employee.
- Provide information to incoming employer – anyone buying a business or taking over services has a responsibility to undertake due diligence to check if they have any responsibilities under TUPE. This is usually done by the incoming employer’s solicitor. In addition to this, the outgoing employer must provide written notification to the incoming employer about the rights of the transferring employees. This should be done at least 28 days before the transfer.
How TUPE affects employment terms and conditions
When it comes to terms and conditions, the general rule is that they cannot be varied by either the transferor or the transferee if the only reason the variation is being made is on the grounds of the transfer. Often incoming employers will want to harmonise the employment terms and conditions of the employees who become part of the organisation because of the transfer, and pre-existing employees. This can cause major headaches for the HR department, because to lawfully vary terms and conditions following a transfer, one of the following exceptions to the general rule must be present:
- the reason for the change is unrelated to the transfer – unfortunately, the sole reason for a harmonisation exercise in such circumstances is generally the transfer; therefore, in most cases any variation to Ts & Cs on this ground will be void
- any variation is beneficial to the employees
- there are economic, technical or organisational (ETO) reasons for the variation and all parties agree to the changes – this is the most common reason cited
- the employment contract permits a variation
- certain insolvency situations
In the case of collective agreements, variations to the employment contract will be legal if:
- the variation takes place more than a year after the transfer takes place, and
- taken as a whole, the rights and obligations of the employment contract are no less favourable to employees than those which applied before the variation
Employees dismissed for a reason which is directly related to a business transfer, will have a claim for automatically unfair dismissal. However, an employer can defend this claim by stating there was an ETO reason for their actions.
ETO is not defined in TUPE. Examples of ETO reasons derived from case law include:
- Economic – where cost-saving methods are deemed essential to the organisation’s survival
- Technical – replacing certain processes with automation
- Organisational – this can include situations where the business location has changed, and it is impractical to transfer certain employees for this reason
Establishing a defence of ETO is a two-limbed test. Firstly, the employer must prove the ETO reason. Secondly, they must show the reasons ‘entail changes in the workforce’. In Delabole Slate Co Ltd v Berriman  IRLR 305), it was held that “changes in the workforce” means a difference in the number of employee or their job functions. An example of the latter is seen in Osborne and others v Capita Business Services Ltd and others UKEAT/0048/16, where the Employment Appeal Tribunal held that because the defendant had split the job functions of seven employees and redistributed these over several different sites, the requirement of “changes in the workforce” was fulfilled.
There are several ways an employer can vary terms and conditions following a transfer, but all bar the first is very risky. You can:
- Simply wait – the more time that passes, the less likely the variations to contractual terms and conditions can be linked to the transfer.
- Sack everyone and re-hire them – an often-used method by large corporations; the employer terminates all transferred employees’ contracts, then re-hires them on new terms. Legally, such a strategy constitutes automatically unfair dismissal, but employees may be keen enough to keep their jobs as to accept the new terms and simply “get on with it”.
- An employer could offer a financial incentive for employees to accept the variation in terms; however, this would not bar them from bringing a claim.
- Red-circling – this is a common strategy which involves freezing any wage increases upon transfer, until those who are paid less for the same work reach the same pay levels as the incoming employees.
Before embarking on any of these methods, check with a solicitor to ensure you mitigate your risks of a claim being brought against you.
Pensions and TUPE
One of the most complex aspects of TUPE is pensions. The starting point is that although TUPE protects the contractual employment rights of employees on their transfer to the transferee, reg 10 of TUPE generally excludes rights relating to occupational pension arrangements from transferring. This is known as TUPE’s pensions exception.
Note: The TUPE exception does not apply to employees’ contractual rights to benefits under a personal pension scheme. Therefore, if the transferor was contributing payments to transferring employees personal pension schemes, the transferee will be liable for the same amount following the transfer.
If the pension rights are not related to old age, invalidity, or survivors’ schemes, they may be transferrable under TUPE. These are known as ‘Beckmann rights’ and derived from two key cases: Beckmann v Dynamco (Beckmann)  OPLR 289 and Martin v South Bank University (Martin)  OPLR 317.
In Beckham, an employee who had been transferred under TUPE from the NHS to the private sector was made redundant two years after the transfer. She claimed that she was entitled to receive from her private sector employer the same early retirement benefits she would have received had she been made redundant while in the employment of the NHS. This was because these benefits did not amount to old age benefits as they were payable on a redundancy.
The case went before the European Court of Justice (ECJ—now known as the Court of Justice of the European Union (CJEU)) which stated that old-age benefits are benefits which are paid to an employee at the end of their working life. Therefore, early retirement pensions do not constitute old-age pensions. And finally, the CJEU held that provided that the benefits arise under or in connection with a contract of employment, an employment relationship, or a collective agreement, they are capable of transferring under TUPE.
Although the case was referred back to the UK courts, it was settled before a decision could be delivered.
In Martin, there had been a transfer from the NHS to the South Bank University. The latter’s early retirement scheme was unfavourable compared to that offered by the NHS and the claimants argued they should be granted the same early retirement rights they would have received under the NHS.
The court agreed with Beckmann and concluded that a right and obligation can transfer under TUPE even if the implementation (such as the offering of early retirement) was discretionary.
The key principle for employers to take away from the Beckmann and Martin decisions is to carefully consider before offering early retirement or making redundancies if the terms and conditions in the pre-transfer employment contract/s offers more favourable provisions than exist in the employer’s current employment contract/s. Otherwise, employers may be liable for considerable lump sum and annuity payments. In addition, employers should obtain indemnities against early retirement liabilities in all TUPE scenarios.
Complying with TUPE can be a minefield of exceptions, waivers and indemnities which may or may not apply or be legal. When it comes to business transfers where TUPE applies, seeking legal advice could not only save you time, money, and stress, it will protect you from any reputational damage as a consequence of an employee claim.
If you have any questions regarding points that have been mentioned in this article, please call us on 020 3588 3500.