Industrial Law Society Evening Meeting 20 April 2005

Introduction

1.      In 1998 the EC Acquired Rights Directive, which underpins TUPE, was revised, under the UK Presidency.  The revisions came into force in July 2001. [1]    In September 2001, the Government published two consultation papers on the reform of TUPE.  These indicated that proposals were being set out against a background in which some aspects of TUPE were operating less satisfactorily than they might.  They commented that the main impact of the revision to the ARD was to give Member States new options to tailor their implementing measures to national circumstances.  That approach is consistent with the Government view that it was not essential to amend TUPE to secure compliance with the amended Directive.

 

2.      Following the closure of that consultation, it was not until 14 February 2003 that the DTI made any further formal announcement.  This took the form of a brief press release [2] indicating that the Government proposed to carry out a public consultation on draft revised TUPE Regulations in the first half of 2003, and setting out the main policy points of the Government’s proposals in key areas.

 

3.      The draft Regulations were however not published until March 2005. [3]   These will put into effect the policy decisions already taken following the 2001 consultation and announced in 2003.  Accordingly, the Government has indicated that – with one exception described below – the 2005 consultation is confined to canvassing technical views as to whether the drafting does indeed achieve the Government’s stated objectives.  The consultation closes on 7 June 2005 and it is intended that the final version of the Regulations will come into force on 1 October 2005. [4]  

 

4.      In the meantime, a separate track has been pursued regarding the impact of a TUPE transfer in relation to pension arrangements.  The Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005 contain provisions which came into effect on 6 April 2005. [5]   In addition the Employment Relations Act 2004 enables Regulations to be made concerning the impact of a TUPE transfer in relation to statutory recognition.  These provisions have been brought into force [6] but Regulations have yet to be made.

 

5.      These notes consider the main changes to TUPE contemplated by the draft TUPE Regulations, the Government’s proposals in relation to the impact of TUPE on the statutory recognition process, and the changes which have already been effected in relation to the impact of a TUPE transfer on pension arrangements.

 

Scope of Tupe

 

6.      The 2001 consultation papers recognised that the scope of TUPE has been the most extensively debated and litigated aspect in recent years, and that it was desirable so far as possible for all concerned to know where they stand.  The Government’s proposed way forward was essentially to use the starting point of adopting the definition of a relevant transfer now contained in the amended Directive.  However, two areas were identified for further consideration.

 

7.      The first concerned transfers within public administration.  Here, the Government proposed to continue to apply the approach of the January 2000 Statement of Practice on Staff Transfers in the Public Sector.  That is, tendering exercises in the public sector are generally conducted on the basis that TUPE will be treated as applying, even if there might be room technically to argue in some particular cases that it might not.  In addition, subject to prior consultation, measures might be taken in particular cases, either by specific legislation or by Regulations made under section 38 Employment Relations Act 1999, to ensure that specific operations that may not fall within TUPE are covered by equivalent provisions.

 

8.      The second area for specific consideration was changes in service provision contracting – contracting-out, re-letting of an existing contract or contracting-in.  Here, the 2001 consultation papers suggested that the coverage of TUPE might be extended by providing that, in appropriate cases, where 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 as covered by TUPE.

 

9.      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. 

 

10.  The 2005 consultation document confirms the approach that is to be taken in relation to each of these areas.  In relation to transfers within public administration the Government will follow the approach canvassed in the 2001 consultation of dealing with the matter by following the 2000 Statement of Practice [7] and/or specific ad hoc measures in particular cases, rather than revising TUPE itself. [8]

 

11.  As to service provision changes, the 2005 consultation document confirms the Government’s intention to extend the scope of TUPE by ensuring that, subject to certain limited exceptions, these are comprehensively covered by the new wording “so that employers can plan effectively in a climate of fair competition and affected employees are protected as a matter of course.” [9]   The draft Regulations apply to transactions within either Reg. 3(1)(a) or Reg. 3(1)(b). Reg. 3(1)(a) sets out the general definition of a relevant transfer drawn from the Directive, namely:

 

“a transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in the United Kingdom to another employer where there is a transfer of an economic entity which retains its identity.”

 

Regulation 2(2) defines “economic entity” as meaning “an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary.”

 

12.  Reg. 3(1)(b) then extends the reach of the new Regulations to include a “service provision change.”  This is defined, in summary, as a situation in which activities cease to be carried out by a client and are carried out instead by a contractor, or cease to be carried out on the client’s behalf by a contractor and are carried out instead by a subsequent contractor, or cease to be carried out by a contractor (or subsequent contractor) and are carried out instead by the client.  Many such transactions will, in light of the domestic case-law, be caught by the general definition of a TUPE transfer in any event.  But this extension will remove uncertainty about, for example, the potential impact of the transferee not taking on most or any of the transferor’s former employees. [10]

 

13.  This extension is subject to the conditions in Reg. 3(3) being satisfied.  This provides that before the change there must be “an organised grouping of employees situated … in the United Kingdom which has as its principal purpose the carrying out of the activities concerned on behalf of the client”; and that the client must intend the activities to be carried out by the transferee “other than in connection with a single specific event or task”. 

 

14.  Thus these extended provisions will only apply in cases where the incumbent provider has in place an existing team principally dedicated to servicing the client in question.  The consultation document also notes that this provision will not apply where there is an organised grouping of employees which services several clients, rather than a single specific client. [11]

 

15.  These extending provisions will also not apply to single event or single-task contracts. [12]   Thus they will not apply where a client buys in services on a one-off basis, and then switches to another supplier for similar services.  However, the Government notes that the test will be one of intention.  That is, a client that truly intends to establish an ongoing relationship with a contractor covering several events or tasks, would not be able to avoid TUPE merely by adopting an artificial arrangement, letting a series of separate contracts, event by event. [13]

 

16.  New draft Regulation 3(3)(b) will also exclude from the reach of the “service provision change” definition, activities which relate wholly or mainly to the procurement or supply of goods.  So a change to a contract merely for the supply of sandwiches to an in-house canteen will not be caught by the extended definition; but a change to a contract for the running of the canteen would. 

 

17.  The impact of the extending provisions on “professional business services” is the one policy area on which the Government is seeking further views.  Draft Regulation 3(3)(b) provides for the exclusion from the extending provisions, of some categories of professional business services that would be listed in a schedule to the final Regulations.  The document canvasses the arguments for and against, and practical implications of, catering for such an exclusion.  Consultees who support the idea are asked to identify specific services which might deserve to be excluded and the features they have that might justify that approach. [14]

 

18.  The 2001 consultation contemplated that the extension of TUPE might not apply where the new contractor was going to carry out the services in a novel manner, for example using a computerised system instead of a manual one.  However, the Government was persuaded in the consultations that it should not specifically exempt such cases from the reach of the extended TUPE.  This will mean that the incoming contractor will be responsible for dealing with any redundancy situation created by its change of approach; and will ensure that all bidders will know that TUPE will apply, regardless of the approach of their bid. [15]

 

Who transfers?

 

19.  The existing Regulation 5 of TUPE provides that employees of the transferor employed “in the undertaking or the part transferred” transfer to the employment of the transferee.  Its replacement, new draft Regulation 4, will instead refer to employees “assigned to the organised grouping of resources or employees that is subject to the relevant transfer”.  This reflects the language of the case-law.  Assignment is a question of fact, although case-law provides guidance as to the tests to be applied. [16]   Draft Regulation 2(1) however, specifically excludes from the definition, employees who are assigned to the undertaking only on a temporary basis.  There is support in the case-law for that approach. [17]

 

20.  The reference in the existing Regulation 5 to employees covered being those whose contracts “would otherwise have been terminated by the transfer” has been deliberately omitted from draft Regulation 4(1), removing potential for avoidance or anomalous results.  Draft Regulation 4(3) also codifies the Litster [18] principle, by providing that references to the relevant employees of the transferor are to those employed immediately before the transfer, or who would have been so employed had they not been unfairly dismissed contrary to draft Regulation 7(1).

 

Provision of Workforce Information

 

21.  The 2001 consultation papers proposed that transferors should be required to provide transferees with written notification of those rights and obligations which will be transferred.  The 2003 press release confirmed the intention to introduce such a requirement.

 

22.  This policy is given effect by the draft Regulations.  Draft Regulation 11 defines “employee liability information”.  It covers all information which is or ought to be known by the transferor about the rights, duties, powers and liabilities which the transferee will inherit in relation to the transferring employees.  This specifically includes the identities of the employees concerned.  The transferor must provide the information in writing “in good time before the transfer”, subject to a special circumstances defence, but in any event before the transfer.  The notification must be updated if the information changes.  It may be given through a third party.

 

23.  In terms of scope and content, the obligation of disclosure of information that this places on transferors will therefore be considerable.  However, it may be noted that, beyond the requirements to do so “in good time” and before the transfer, there are no more specific provisions about when the information must be provided.  For example, in a tender situation, there is no specific requirement to provide the information in time for it to be reflected in the invitation to tender, or before the successful bidder commits to the contract.  Nor, although the Government indicates that this change will help reduce “sharp practice”, is there any prohibition on, for example, the changing of employees’ terms just before the transfer, so long as information on the revised position is duly provided. [19]

 

24.  Draft Regulation 12 provides for complaints of breach of this duty to be presented to the High Court (or Court of Session in Scotland), although the Government invites views as to whether this is the best forum.  If the complaint is well-founded the Court may issue a penalty notice ordering the transferor to pay the transferee such amount as the Court considers just and equitable, not exceeding £75,000.  The Court is required, in setting the penalty, to take into account the extent of and reason for the failure, the terms of any contract under which the transferor may be liable to pay any sum to the transferee in respect of the failure, and the employment protection purposes of TUPE.

 

Unfair Dismissal

 

25.  The 2001 consultation papers indicated that the Government proposed that the drafting of the new TUPE would 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.  That approach has some support in the case-law [20] , although there are conflicting dicta.

 

26.  This policy is reflected in draft Regulation 7, which is to replace the current Regulation 8.  It provides that dismissals by reason of the transfer, or for a reason connected with the transfer that is not an ETO reason (an “economic technical or organisational reason entailing changes in the workforce”), will be automatically unfair.  However, dismissals connected with the transfer but for an ETO reason will be potentially fair, dependent upon the application of ordinary principles of unfair dismissal law.  If the dismissal is not connected with the transfer at all, then TUPE will have no bearing on it, as at present. 

 

27.  The new draft Regulations also provide that potentially fair transfer-connected dismissals are to be treated as being for a substantial fair reason, or, where the usual definition of redundancy applies, as being on the fair ground of redundancy. [21]

 

28.  The existing Regulation 5(5) preserving the employee’s right to terminate the contract of employment “if a substantial change is made in his working conditions to his detriment”, is to be replaced by two provisions.  Draft Regulation 10(9) will create a right for such an employee to treat the contract as terminated, while draft Regulation 10(10) will preserve the right to accept a repudiatory breach as terminating the employment.  This would appear to restore the more generous special test of “constructive dismissal” in TUPE cases that the EAT in Rossiter v Pendragon believed was dictated by the Directive [22] , by contrast with the more orthodox approach of the Court of Appeal. [23]

 

Changes in Terms and Conditions

 

29.  The litigation in Wilson v St Helens BC [24] 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 principle would not preclude transfer-related changes to terms and conditions being agreed for an ETO reason. 

 

30.  Draft new Regulations 4(4) and 4(5) set out how the Government intends to implement this proposal.  They distinguish between three kinds of case:

(a)    Cases in which the sole or principal reason for a purported contractual variation is the transfer itself;

(b)   Cases in which the sole or principal reason is a reason connected with the transfer that is not an economic, technical or organisational reason entailing changes in the workforce; and

(c)    Other cases, i.e. where the reason is connected with the transfer but is an ETO, or is entirely unconnected with the transfer.

The draft Regulations provide that in case (a) and (b) the purported variation will be void, but that this will not prevent a valid variation being agreed in case (c). 

31.  The Government acknowledges in the consultation paper that, while the Directive contemplates that dismissals for an ETO reason may not be unlawful, it does not provide for variations for a transfer-connected ETO reason to be effective.  However, it argues strongly that the Directive should be interpreted in that way, as it would arguably be illogical, and could have deleterious practical implications, for an ETO “defence” to be available in one context, but not the other. 

 

32.  However, even if that interpretation is followed [25] , as the Government also acknowledges, the change could be fairly limited in its impact.  This is because, on current case law, a change in terms of employment of workers alone, with no accompanying change in the numbers or functions of the workers concerned, would not be viewed as being for an ETO reason. [26]

 

Collective Consultation

 

33.  Current TUPE Regulations 10, 11 and 11A require both the transferor and transferee to consult with and inform worker representatives in respect of the various implications of a proposed TUPE transfer for their affected workers who may be affected by it.  Different divisions of the EAT have taken different views in the past as to whether liability in respect of a failure by the transferor to comply with these obligations is something which passes to the transferee under Regulation 5.  The most recent authority indicates that it does. [27]  

 

34.  New TUPE Regulation 15 will, however, take up the option of providing for the transferor and transferee to be jointly and severally liable in respect of such failures.  The Claimant may identify both of them as Respondents to the claim, or, if only one is identified, the other may be joined in to the proceedings. [28]

 

Insolvency

 

35.  The Directive allows Member States to adopt two options designed to promote the so-called “rescue culture” in cases of certain types of insolvency of the transferor, namely where there are proceedings “under the supervision of a competent public authority”.  The 2001 consultation papers indicated that the Government proposed to take up both these options.  Firstly, where sums due from the transferor fell within the categories and amounts that could be claimed from the National Insolvency Fund, those debts would not pass to the transferee.  Secondly, appropriate representatives would be enabled to agree changes to terms and conditions by reason of the transfer, even though not for an ETO, if the purpose was to safeguard employment by ensuring the survival of the business. 

 

36.  The 2003 press release confirmed that approach and these policies are now pursued in the draft Regulations.  Draft Regulation 8 protects the transferee against inheriting relevant debts of a transferor which is in relevant insolvency proceedings. [29]   Instead the relevant employees will be entitled to payment from the Secretary of State in respect of the debts of the transferor that fall within the relevant statutory insolvency schemes. [30]   Other liabilities will continue to pass to the transferee.

 

37.  Draft Regulation 9 applies in relation to the same relevant insolvency proceedings.  It enables “permitted variations” to transferring employees’ terms and conditions to be agreed by “appropriate representatives” – essentially the same kinds of representatives who are designated for the purposes of collective consultation in connection with a TUPE transfer. [31]   However, where the representatives are not trade union officials additional safeguards will apply.  The agreement to the variation will have to be in writing and signed by or on behalf of the representative; and before it is made the employer will have to provide all affected employees with a copy of the draft agreement and guidance to enable them to understand it.  For these purposes a “permitted variation” is one that would normally be unlawful under the Regulations [32] and that is designed to safeguard employment opportunities by ensuring the survival of the organised grouping.

 

Pensions

 

38.  The 2001 consultation noted the Government’s policy that former public sector employees transferred to the private sector should have broadly comparable pension provision made for them.  The papers however opened a debate on what should be the minimum obligations of transferees regarding pension provision following any TUPE transfer.  The 2003 press release indicated that this issue was to be further considered as part of the Government’s overall pensions review.

 

39.  Following completion of that process, provisions relating to TUPE transfers were included in the Pensions Act 2004. [33]   In summary, these place an obligation on the transferee to make pension provision in respect of a transferring employee who was an active member of an occupational pension scheme when employed by the transferor, or was, or was potentially, eligible to be such a member. 

 

40.  Regardless of the type of scheme that the transferor operated, the transferee may choose to make provision through an occupational final salary or money purchase scheme or through a stakeholder scheme.  However, there are minimum standards that the transferee’s scheme must meet.  A final salary scheme must meet the standard laid down in the Pensions Scheme Act 1993 section 12A or an alternative standard prescribed by regulations.  The minimum standard to be met by a money purchase or stakeholder scheme was also left to be prescribed by Regulations. 

 

41.  The Transfer of Employment (Pension Protection) Regulations 2005 now set out the minimum standards.  These are the same in all cases, regardless of the level of contributions or benefits provided for under the transferor’s scheme.  If the transferee’s scheme is final salary, then either the value of benefits provided for by the transferee’s scheme must be at least 6% of pensionable pay for each year of employment; or the scheme must provide for the employer to make “relevant contributions” which match the employee’s contributions up to a maximum of 6% of basic pay.  The same contributions standard will apply if the transferee’s scheme is an occupational money purchase or a stakeholder scheme.

 

42.  These provisions came into force on 6 April 2005.  Draft TUPE Regulation 10(3) will also address another point, putting beyond doubt that a failure by the transferee after the transfer to make as generous a pension provision as the transferor will not expose the transferor to a claim for constructive dismissal. [34]

 

TUPE and Statutory Recognition

 

43.  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 was confirmed in the review of the Employment Relations Act 1999 published in February 2003. [35]  

 

44.  The Employment Relations Act 2004 section 18 accordingly introduced provisions enabling Regulations to be made whereby the transferee would “inherit” both any declaration of recognition, and any ongoing recognition application. [36]   The section has been brought into force [37] and the 2005 consultation paper says that such Regulations are to be made “in due course”. [38]

 

Employers’ Liability Insurance

 

45.  The 2001 consultation papers noted that case law now establishes that liabilities for personal injury transfer under TUPE but that the transferor’s insurance cover effectively transfers as well, so that the transferee is able to benefit from the transferor’s insurance. [39]   The Government proposed to amend TUPE to ensure that where the transferor is a public sector employer not covered by the statutory obligation to have employer’s liability insurance, the transferor and transferee are  jointly and severally liable for injury or disease arising from pre-transfer employment.  This policy is to be given effect by draft Regulation 17.

   

 

 

Simon Auerbach

Pattinson & Brewer

April 2005