Simon Auerbach, Pattinson & Brewer, London

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Title: TUPE Workshop

INDUSTRIAL LAW SOCIETY
ANNUAL OXFORD CONFERENCE

12 - 14 September 2003

PROPOSED REVISION OF TUPE

On 10 September 2001, the Government opened a consultation on the reform of TUPE. A consultation paper and a detailed background paper are posted on the DTI’s website. That consultation closed on 15 December 2001 but it was not until 14 February 2003 that the DTI made any further announcement on the subject. This was in the form of a brief press release indicating that the Government proposed to carry out a public consultation on draft revised TUPE Regulations in the first half of 2003, with a view to placing these before Parliament in the Autumn and the final Regulations then coming into effect in Spring 2004.

However, at the time of preparing these notes the draft Regulations have yet to appear. Nevertheless, some indication of their possible content may be gleaned from the ideas floated in the 2001 consultation papers and the 2003 press release. However, it must be noted that the press release is very short and highlights only a few of the issues covered by the 2001 consultation exercise. On the issues mentioned the press release contains little by way of detail. A paper from the Department of Work and Pensions published in June 2003 gives more guidance on the Government’s intentions with regard to pensions. It remains to be seen to what extent, or how, the Government intends to proceed in relation to areas other than pensions and the topics mentioned in the press release.

The 2001 consultation papers indicated that proposals for reform were being set out against a background in which some aspects of TUPE are operating less satisfactorily than they might. They commented that the main impact of the 1998 revision to the Acquired Rights Directive (which came into force in July 2001) was to give Member States a number of new optional flexibilities to tailor their implementing measures to national circumstances. This approach is consistent with the Government position that it is not in fact essential to amend TUPE to secure compliance with the amended Directive.

Scope of Tupe

The consultation papers recognised that the scope of TUPE is the most extensively debated and litigated aspect and that it is desirable so far as possible for all concerned to know where they stand. The Government’s proposed way forward was essentially to adopt the wording of the definition of transfer now contained in the amended Directive.

In relation to transfers within public administration, the Government proposed to continue to apply the approach of the Cabinet Office Statement of Practice on Staff Transfers in the public sector of January 2000. In addition, subject to prior consultation, measures might be taken in particular cases, by specific legislation or Regulations made under s.38 of the Employment Relations Act 1999, to ensure that cases that would not otherwise fall within the scope of TUPE are covered by equivalent provisions.

In relation to changes in service provision contracting the consultation papers invited views on whether or not additional measures going beyond the wording of the Directive should be taken and if so, in what form. They canvassed the possibility that the coverage of TUPE might be extended either specifically for parts of the public sector or by a more general extension of TUPE’s scope for both the public and private sectors, using s.38 of the 1999 Act. Such an extension might be to the effect that wherever there is an organised grouping of workers assigned to the performance of a service on more than a "one-off" basis, a change of provider would be treated in the same way as a TUPE transfer.

The 2003 press release indicated that the Government had decided that the revised TUPE will apply "more comprehensively" to labour-intensive service contracting operations, such as office cleaning and catering, security and refuse collection, while leaving unaffected the position in relation to professional services such as accountancy, consultancy and legal advice. It therefore seems likely that the law will be taken back to something closer to its post-Dines, pre-Süzen state, whilst recognising the need, highlighted in Rygaard, for something more than a one-off contract, and providing reassurance to those who may be concerned about their gardening arrangements.

Pensions

The 2001 consultation papers noted that the Government’s policy is that former public sector employees transferred to the private sector should continue to have pension provision made for them. Existing guidance indicates that in such transfers, the transferee should be required to offer "broadly comparable" pension provision. The papers noted the argument that a failure to procure such provision could give rise to a constructive dismissal claim, but that this legal risk has been widely discounted in the private sector, so that in practice private sector employees may find themselves in a worse position than those transferring from the public sector.

The consultation papers proposed that the legal uncertainty should be resolved. Although this could be achieved by expressly providing that ongoing occupational pension rights would not be transferred, this was not the Government’s preferred approach. Two other possibilities were canvassed, namely amending TUPE to enshrine the approach currently taken by the Government but in the public sector only, or amending TUPE to provide a degree of protection for occupational pension rights in respect of both the public and private sectors. The background paper envisaged that changes in this difficult area would have a later implementation date than other parts of the new Regulations.

The background consultation paper outlined a number of different possible options as to the requirement that might be put on the transferee depending, for example, on whether the transferor’s pension scheme was final salary or money purchase and on what is considered to be the minimum standard of provision that the transferee should be required to meet. The paper also postulated that in exceptional circumstances transferees might be permitted to pay transferred employees adequate alternative compensation where it was not reasonably practicable for them to meet the new requirements.

The Government also proposed that the benefits which the EAT found in the Frankling case fell within the occupational pensions exclusion under TUPE should pass across in a TUPE transfer, and TUPE should be amended accordingly. Later in 2002 the ECJ handed down its decision in Beckmann v Dynamco Whicheloe Macfarlane Limited, ruling that early retirement benefits paid to employees whose employment ends before the normal retirement age are not "old age" benefits. Therefore they are not covered by the exclusions in Article 3 and Regulation 7. Therefore contractual obligations to provide such benefits do transfer to the transferee and must be honoured by it if the circumstances to which they are applicable in due course arise.

The 2003 press release indicated that the application of TUPE in relation to occupational pensions is to be "considered separately and to a longer timescale" as part of the Government’s overall pensions review following on from the pensions Green Paper which was published in December 2002. In June 2003 that agenda moved forward with the publication of a further document by the Department of Work and Pensions: "Simplicity, security and choice." That document indicated that the Government now intends that the amended TUPE will provide that where the transferor was making some pension contribution, then the transferee will be obliged, at least, to arrange for a stakeholder pension scheme in respect of which the transferee would match employee pension contributions up to at least 6%.

However, beyond the above minimum requirements, the transferee will not be obliged to provide the same type of scheme as the transferor, nor to make broadly comparable provision, as is expected in public sector transfers.

Provision of Workforce Information

A cornerstone of TUPE is that the transferee "inherits" the employees who work in the transferred undertaking on the basis of their existing contracts of employment, with continuity of employment preserved. Furthermore, the transferee inherits all the transferor’s "duties and liabilities" under or in connection with any such contract; and anything done prior to the transfer by the transferor "in respect of that contract or a person employed in that undertaking" is deemed to have been done by the transferee.

These familiar principles apply by operation of law, regardless of the wishes of the parties (except in the case of an employee who validly exercises the right to object and does not enter the transferee’s employment at all). Indeed, they apply even if the employees concerned do not know that a TUPE transfer has occurred or who the transferee is.

TUPE, as presently worded, makes no provision for joint and several liability. Nor is there any statutory obligation on the transferor to notify the transferee of the obligations which it may expect to inherit (nor even the names or number of employees who work in the undertaking). Where there is a business sale or other transaction involving a direct contract between the transferor and the transferee, the "due diligence" process and contract negotiations will provide the transferee with a mechanism for ascertaining the extent of its liability and, indeed, seeking to offset an element of its exposure against the transferor, through provisions for disclosure, warranties, indemnities, price adjustment and so forth.

However, a transferee who is successful in a bid for a second or subsequent generation contract will have no contractual relationship with the outgoing previous contractor. Although the original contract made by the awarding authority with the transferor may contain provisions requiring it to furnish up workforce information at the conclusion of its contract, that is not guaranteed to be the case. Even a successful contractor who wins a contract put out to tender for the first time (and therefore does have a direct contract with the awarding authority as transferor) may lack the bargaining power to insist on the full warranties that would routinely be negotiated in a private sector business sale.

The Government proposes to address this problem by amending TUPE to introduce a new statutory requirement on transferors to notify the transferee of the employment liabilities that will be transferring. This is one of a number of proposed amendments to TUPE that will take advantage of options afforded to Member States by the revised Acquired Rights Directive. Article 3/1 and 2 of the 2001 consolidated Directive provides as follows.

1. The transferor’s rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer shall, by reason of such transfer, be transferred to the transferee.

Member States may provide that, after the date of transfer, the transferor and the transferee shall be jointly and severally liable in respect of obligations which arose before the date of transfer from a contract of employment or an employment relationship existing on the date of the transfer.

2. Member States may adopt appropriate measures to ensure that the transferor notifies the transferee of all the rights and obligations which will be transferred to the transferee under this Article, so far as those rights and obligations are or ought to have been known to the transferor at the time of the transfer. A failure by the transferor to notify the transferee of any such right or obligation shall not affect the transfer of that right or obligation and the rights of any employees against the transferee and/or transferor in respect of that right or obligation."

In the February 2003 press release the Government indicated that the revisions to TUPE will

The September 2001 background paper suggested (para. 63) that the transferor should be placed under an obligation to give written notification to the transferee of all rights and obligations in relation to transferring employees and to update that notification as necessary if any of those rights or obligations change after the original notification is given. Such notices would have to be given "in good time before the completion of the transfer" or, if "special circumstances" make this not reasonably practicable, as soon as reasonably practicable "and in any event no later than the completion of the transfer."

The background paper (para. 69) noted that such measures would ameliorate both the problem of lack of disclosure of detailed liabilities and such "sharp practices" as transferors deliberately increasing liabilities shortly before the transfer (for example, increasing pay) or "staff switching" (where contracts of employment are sufficiently flexible to enable this) in the run-up to the transfer. Absent contractual warranties and disclosure, transferees remain vulnerable to such tactics at the moment.

A number of questions occur, such as:

What will be judged to be "in good time"?

What will be the scope of the "special circumstances" defence, given the narrow way in which that defence has been construed where it already appears in TUPE and the collective redundancies provisions of the 1992 Act? Will it be confined to the question of timing?

Will the transferor be expected to make at least the first disclosure before the moment at which the transferee becomes contractually committed to the transaction giving rise to the transfer (which may be some time before the transfer itself occurs); or, even earlier, before a prospective tenderer puts in a bid?

What if the transferor does not know the identity of the transferee and/or is not told until a very late stage?

Will there be a more general defence that the obligation was one of which the transferor neither was nor ought to have been aware, as appears to be contemplated by the Directive? Is so how will any such test be applied?

What will be the remedy for failure to comply with these obligations?

The background paper envisaged (para. 70) that the prospective transferor might choose to give the requisite workforce information to the "client", that is, the authority awarding the contract, for it to pass on to the transferee. This might provide a solution to the problem of the "unknown transferee". But the transferor would not thereby be absolved from its duty to notify the transferee, and might be expected to seek an indemnity from the client against any failure by the client properly to pass the information on in due course. The paper also envisaged that, under this approach, the current contractor might agree that the client could make the information available to all tenderers, not just the successful bidder, enabling bidders to compete on a level playing field. However, this might give rise to data protection/confidentiality problems or other objections by current contractors. The document invited views on whether provision of information via the client should be optional or mandatory.

On the question of enforcement, the background paper (para. 64) suggested that a remedy by way of a simple right to claim damages against the transferor might be unworkable in practice as, given that failure to notify would not affect the fact that the liability in question will have transferred in any event, it might be difficult for the transferee to demonstrate a quantifiable financial loss.

The background paper, however, canvassed an alternative possibility which it appeared to prefer (para. 65). This would be to give the transferee power, in respect of any claim brought against it by the employee concerned, to apply for the transferor to be joined in the proceedings; and to give the court or tribunal a corresponding power to apportion liability between the transferor and transferee on a just and equitable basis. The transferee would be able to run a defence to the effect that it neither knew nor reasonably could have been expected to know of the liability when the transfer occurred. This approach would take advantage of the Member State option conferred by Article 3/1 of the Directive.

The background paper noted that this remedy, however, would be of no application in a case where the employee’s claim did not give rise to litigation. If, for example, the employee asserted that she had a contractual right to a particular benefit that had not been notified to the transferor, once evidence had been produced to demonstrate this fact, the transferee might feel obliged to concede the entitlement.

Some commentators have suggested that there is a role in this area for criminal sanctions or "civil fines" not dependent on proof of specific loss. But it must be remembered that this measure is optional under the Directive in any event. The background paper invited respondents to make alternative suggestions as to remedies. It remains to be seen which approach will now attract the Government most.

Unfair Dismissal

The consultation papers indicated that the Government proposed to re-draft the dismissals provisions of TUPE (Regulation 8) to clarify that the categories of dismissals which are connected with the transfer and which are for an ETO are not mutually exclusive, but rather that ETO dismissals are a subset of transfer-connected dismissals.

Changes in Terms and Conditions

The litigation in Wilson v St Helen’s Borough Council confirmed that where an agreement to changes to particular terms to the disadvantage of the worker is made, that agreement is not valid if the reason for it is a TUPE transfer. The 2001 consultation papers indicated that the Government proposed to provide in the new Regulations that this would not preclude transfer-related changes to terms and conditions being agreed for an ETO reason. Some commentators have questioned whether such a measure would conform to the standards of Community law. It would appear that the Government is prepared to risk a challenge along such lines, as the 2003 press release confirmed its intention to proceed with this proposal. However, it is unclear how much such a change would in any case affect the paradigm case of "harmonisation", given that the concept of ETO found in Regulation 8(2) has been held not to embrace dismissals that involve changes only to the terms on which the same number of employees are engaged to perform the same functions.

Insolvency

The Directive allows Member States to adopt two options designed to promote the so-called "rescue culture" in cases of certain types of insolvency, such as administration and voluntary arrangements. The 2001 consultation papers indicated that the Government was inclined to take some advantage of both these options. This would mean, first, that, in insolvency cases of the relevant types, where sums due from the transferor fell within the categories and maximum amounts that could be claimed from the National Insolvency Fund, those debts would not pass to the transferee. However, if they did not fall within those categories or limits, then the debts would pass to the transferee as at present.
The Government also proposed to take up the option that, in the relevant kinds of insolvency, appropriate representatives would be enabled to agree changes to terms and conditions by reason of the transfer, even though not for an ETO, if they are designed to safeguard employment opportunities by ensuring the survival of the business. Additional safeguards would apply where this involved non-union representatives.

The 2003 press release confirmed that the revised TUPE regulations will contain greater flexibility in relation to the transfer of insolvent businesses, "giving a significant boost to … the ‘rescue culture’", but once again the detail must await the draft Regulations themselves.

TUPE and Statutory Recognition

The 2001 consultation papers proposed that the amended TUPE should confirm expressly that the provisions relating to continuity of employee representation following a transfer mean that the effect of union recognition declarations made by the Central Arbitration Committee would be preserved through a transfer. The Government’s intention to proceed on this and related points was confirmed in the review of the Employment Relations Act 1999 published in February 2003, which is expected to translate into a Bill in the 2003/4 session of Parliament. According to the consultation papers TUPE’s provisions concerning informing and consulting representatives would also be tightened in some minor respects to ensure that they comply fully with the Directive.

Miscellaneous

The 2001 consultation papers noted that case law now establishes that liabilities for personal injury transfer under TUPE but that the insurance cover effectively transfers as well, so that the transferee is able to benefit from the transferor’s insurance. The Government proposed to amend TUPE to ensure that where the transferor is a public sector employer exempt from the legal insurance requirement, there is joint and several liability for injury or disease arising from pre-transfer employment.

The Government proposed in the 2001 papers to remove the current limitation of rights under TUPE to employees who ordinarily work in the UK, but to retain the current restrictions on coverage of seafarers. The Government proposed also to amend the regulations to clarify that where there is a transfer of a ship and its crew as part of a business, TUPE will, in principle, apply.

Finally, on the question of reform of TUPE, it may be noted that there was no proposal in the 2001 consultation papers to introduce a special procedure for seeking an advance determination as to whether a transaction will amount to a TUPE transfer. The background paper revealed that the Government had examined the pros and cons of this idea and decided against it.
B. THE TWO-TIER WORKFORCE IN LOCAL GOVERNMENT
Whilst TUPE Regulation 5 protects the terms and conditions of employees who transfer from the employment of the transferor to that of the transferee, TUPE has no bearing on the ability of the transferee to recruit additional staff to work alongside the transferring employees on whatever terms the market will bear. Thus the possibility arises of there being two groups of staff working in the undertaking under the transferee’s management, both doing the same jobs, but with those newly-recruited post-transfer receiving less pay, or other less favourable terms and conditions, than those who came across under TUPE: the so-called "two-tier workforce". For some time public sector trade unions urged that this problem as it exists in local government should be addressed by Government action.
The General Obligation
After a protracted and fraught political dialogue with the TUC and CBI, the Government’s answer to this problem was set out in a Code of Practice published on 13 February 2003. The key principle is that new joiners recruited following a TUPE transfer in relation to a local government contract to work alongside transferred employees must be given "fair and reasonable terms and conditions which are, overall, no less favourable" than those of the transferred employees. In judging whether this has been achieved the package of pay and terms and conditions – other than pension provision – is looked at "in the round", so a trade-off between different individual elements of the package is in principle permissible.
Pensions
The Code places distinct obligations on new contractors in relation to the pension arrangements which they make for new recruits who are brought in to work alongside TUPE transferees. Such recruits must be covered by one of the following:

Membership of the local government pension scheme, where the employer has "admitted body status" and makes the requisite contributions; or

Membership of a "good quality" employer scheme, either final salary or defined contribution. For defined contribution schemes the employer’s contribution must match employee contributions up to at least 6%; or

A stakeholder scheme, under which the employer will match employee contributions up to at least 6%.

Worker Representatives

The Government plainly recognised the considerable scope for dispute as to whether the package of terms offered to new recruits meets the standard of being overall no less favourable than that enjoyed by transferring employees. No doubt with this in mind paragraph 9 of the Code provides that:

The service provider will consult representatives of a trade union where one is recognised, or other elected representatives of the employees where there is no recognised trade union, on the terms and conditions to be offered to such new recruits. The arrangements for consultation will involve a genuine dialogue. The precise nature of the arrangements for consultation is for agreement between the service provider and the recognised trade unions. The intention is that contractors and recognised trade unions should be able to agree on a particular package of terms and conditions, in keeping with the terms of this Code, to be offered to new joiners.

It may be noted that, as with the duties of collective consultation and information giving under TUPE and in respect of collective dismissals, the Code stipulates that the primary track for such dialogue will be any recognised union, with the option of consulting with worker representatives available only where there is no such union. There is also an obligation to have a "genuine dialogue", giving us a third version of what may be seen as a duty to inform and consult in good faith to add to the case-law and statutory versions of that duty attaching to other measures imposing duties to inform and consult.

The Code leaves the mechanisms for such dialogue to be worked out by the employer and unions; nor is there any mechanism for determining with which other representatives it may be appropriate to deal in the absence of a recognised union. Further, whilst there must be a "genuine dialogue", the contractor cannot may be compelled to conclude a collective or workforce agreement.

There is some industrial precedent for processes of this kind, in the practice of new contractors seeking to agree with recognised unions arrangements for reasonable "harmonisation" of terms and conditions of transferring employees with those of employees who were already working for the contractor prior to the transfer (notwithstanding the risk that such agreements may be attacked by dissenting employees relying on the doctrine in the Daddy’s Dance Hall case.)
Enforcement

What will be the sanctions for non-compliance with the Code’s requirements? The Code does not afford a direct right for aggrieved employees or representatives to bring a legal complaint against a contractor. Instead it envisages a cascading series of enforcement measures. Local authorities should ensure that contracts when awarded contain a requirement for the Code to be followed. They will then have an ongoing power to request information from contractors to enable monitoring of whether they are in fact complying with the Code’s requirements. Complaints of non-compliance should be raised first with the contractor then with the local authority, which may, if not satisfied that the contractor has adequately addressed the problem, enforce the contract or strike the contractor from the list of approved tenderers.
The Code stipulates that the contracts awarded by local authorities should also contain provision for Alternative Dispute Resolution, to which recognised unions or other representatives should have access. In June 2003 the Local Government Association, the Employer’s Organisation for Local Government, the TUC and CBI agreed a disputes procedure, which provides in its final stage for reference to independent binding determination. If the independent person determines that the contractor is not meeting the Code standards s/he may draw up terms and conditions which do, and require the contractor to apply them.

Ultimately the Audit Commission will look over the shoulder of the local authority itself.

Simon Auerbach
Pattinson & Brewer

2 September 2003

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Presented by Simon Auerbach Partner, Pattinson & Brewer, London

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Presented by Simon Auerbach
Partner, Pattinson & Brewer, London