17 May 2005

The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) are designed to protect employees' rights when a fully functioning business is taken over and their direct employer changes.

The underlying principle is that when a business transfers from one employer to another, as far as the employee is concerned the only change will be the identity of their employer. His terms and conditions will largely remain the same and transfer with him.

The DTI has recently published Draft Regulations entitled the Transfer of Undertakings (Protection of Employment) Regulations 2005. These Regulations will be laid before parliament during July 2005, to come into effect on 1 October 2005. They will amend the Transfer of Undertakings (Protection of Employment) Regulations 1981 and some of the key changes are set out below. What follows is based on the Draft Regulations as they currently stand.

Who is covered? The Regulations apply to all employees who transfer and who:
• have a contract of employment, and
• are mainly employed in the business concerned, and
• are employed at the exact point in time when the transfer takes place.

Workers who are self-employed are not covered.

What constitutes a TUPE transfer? A transfer occurs when:
• ownership of a business changes hand, e.g. one company sells a business to another; or
• the operation of a business passes from one employer to another without a change of ownership e.g. contracting out.

When is it likely to apply in the hospitality industry? • Where ownership of, for example, a bar, restaurant or hotel changes hands.
• Where it is decided to contract out services previously carried out in-house, for example laundry or cleaning services.
• Upon a change of franchise.

Service provision changes- contracting in/out situations There has been considerable confusion over whether certain service provision changes constitute a TUPE transfer. The Draft Regulations state that for a service provision change to constitute a TUPE transfer, prior to the change of service provider, there must be an "organised grouping of employees" who are carrying out the service activities in question. If such an organised grouping exists the TUPE Regulations should apply and; the party responsible for carrying out the service activities before the change shall be treated as the transferor and the party responsible for the carrying out of the service activities after the change shall be treated as the transferee.

The term "organised grouping of employees" means the service provider must have an identifiable team of employees to carry out the service activities, dedicated to meeting one particular client's needs. It follows that for a TUPE transfer to occur the employees in question must serve a single specific client, rather than clients in general. This is designed to cover first time contracting out, contracting out to a subsequent contractor and taking a service back in-house. It should be noted that where the arrangement between client and contractor is wholly or mainly for the procurement or supply of goods for the client's use, the Draft Regulations aim to exclude these cases. Therefore, if you engage a contractor to supply sandwiches to the staff canteen, there will be no transfer under the Draft Regulations if the contract is later switched to a different supplier.

Dismissal- What are ETO reasons? If an employee is dismissed or made redundant either before or after the transfer purely because of the transfer itself this will be automatically unfair. Dismissal can be fair if it can be proved that it was not because of the transfer itself or that it was because of the transfer but there was an economic, technical or organisational (ETO) reason "entailing changes to the workforce". This also assumes a fair process.

Examples: • turnover drops so to remain profitable some employees have to be made redundant
• employees do not have the technical know how or experience to do their jobs because of new equipment
• the merging of transferring staff into existing structures results in an overlap of responsibilities.

What constitutes terms and conditions? The employee is entitled to exactly the same terms and conditions as they had previously.
The terms which transfer must have been part of the contract i.e. employee must have been informed either in writing or verbally.

If a particular element is discretionary or voluntary the right to it will not transfer.

If the term or condition arises out of custom or practice (e.g. well know custom in the business that happens consistently) that term will transfer.

What about pensions? The Pensions Act 2004 has now introduced, for the first time, a minimum standard of occupational pension entitlement to be afforded to all transferred employees who had such entitlement prior to the transfer. However, there is no obligation under the Act on the transferee to match exactly the type or value of the scheme from which the employee benefited under the transferor. Instead, the transferee is free to choose the type of scheme he wants to provide for transferred employees - either a defined benefit (DB or ‘final salary') scheme, defined contribution (DC or ‘money purchase') scheme, or stakeholder arrangement.

Do I need to call in an expert? A breach of the Regulations could lead to employees bringing unfair dismissal claims and/or claims for awards because they have not been consulted with in accordance with the Regulations (see below). Depending on the number of affected employees this could potentially be a very large risk for the employer to take and employers should consider seeking advice in order to minimise the risk.

How soon after a transfer can I alter terms and conditions? Is it OK to alter them after a year? The Regulations do not stipulate a length of time within which the terms and conditions cannot be changed.

The key factor is that the change cannot be connected to the transfer and if it can be traced to the transfer it will automatically be void. However, if for example, after six months an employee is appraised/reviewed and his terms and conditions changed as a result of the review, this might not be in breach of the Regulations. The longer the passage of time, the easier it is to argue that it is not connected to the transfer.

The Draft Regulations aim to make it clearer to employers, as to when it is possible to make changes to employees' terms and conditions on a transfer. Variations for which the sole or principal reason is a reason connected with the transfer that is an ETO reason will be potentially fair as long as the employees agree to the changes.

What if it is my employees who may transfer to a third party? What information am I obliged to supply? Employers are under a legal obligation to consult with an "appropriate representative" about the proposed transfer. This may be a recognised trade union or employee representatives specifically elected for that purpose.

The following must be provided in writing to the appropriate representatives: • confirmation that there is a proposed transfer, when it is likely to be take place and why it is happening
• the legal (the relevant law applicable and how it will be applied), economic (financial status of the new employer and other financial matters) and the social implications for the transferring employees.
• any action which is to be taken in connection with the transfer which will affect remaining employees or any action which the new employer has indicated will affect the transferring employees

Consultation has to take place where measures are to be taken in relation to any affected employees with a view to reaching agreement. This means:
• explaining what measures are proposed
• why they are needed
• discussing the issues involved
• considering alternative proposals
• if alternatives are not feasible providing reasons in writing.

The Draft Regulations provide for the transferor and transferee to be jointly and severally liable for any award of compensation made by an employment tribunal for failure by the transferor to comply with the above information and consulting requirements. Making both parties jointly and severally liable has an advantage in that if such a liability were to pass wholly to the transferee, there would be little incentive for the transferor to comply with the relevant information and consultation requirements. Under a system of joint and several liability the employee seeking redress will be able to choose whether to take action against the transferor or transferee or both. A sole defendant in such an action would have the possibility of joining others who are jointly liable in respect of the same liability.

Notification from Transferors Under the present law, the business which is transferring employees to the transferee is under no formal obligation to provide information such as a description of the affected employees and terms and conditions of employment etc. The Draft Regulations provide that the transferor is required to notify the transferee of all the rights and obligations in relation to employees that will be transferred, so far as those rights and obligations are or ought to be known to the transferor at the time of the transfer. This includes the identity of every employee to be transferred and the notification must be in writing.

Any complaint concerning breaches by the transferor of its notification requirements should be submitted to the High Court, who are able to issue a maximum fine of £75,000 to the transferor.

Jonathan Exten-Wright is a partner and Andrew Twomey is a trainee solicitor in the Employment Department of DLA Piper Rudnick Gray Cary UK LLP.
jonathan.exten-wright@dlapiper.com / www.dlapiper.com


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