The ten biggest TUPE pitfalls

With the number of TUPE-related tribunal claims on the rise, employers need to be aware of all the various implications of a TUPE transfer. John Charlton reports.

Ten TUPE pitfalls
Other TUPE dangers
Key TUPE cases

Employers buying or selling a business should be well aware of the importance of abiding by the TUPE (Transfer of Undertakings Protection of Employment) regulations yet too often they fall into traps that await the unwary.

“I was involved in a second generation outsourcing deal in the transport logistics sector, “ says Guy Lamb, employment partner at DLA Piper. “The outgoing contractor (my client) insisted TUPE did apply, the incoming contractor argued the complete opposite, a classic TUPE stand-off.

“The stand-off continued right up to the point of transfer resulting in 70 angry drivers descending on the new contractor on the first day of the new contract. The new contractor ended up having to bar the gates. Tempers were frayed, fires were lit and the police were called. I was summoned to try and mediate a truce working alongside the local trade union representative. A compromise was eventually reached.”

Fortunately this kind of TUPE in extremis is rare. Nevertheless there is little doubt that TUPE-related cases are furrowing more Employment Tribunal (ET) judges’ brows.

Although detailed ET statistics for 2009-10 will not be out until later this month [check] it is likely they will show a rise in TUPE-related cases. The headline figures for all claims showed a 56% rise in claims over 2008-09, to 236,100.

In 2008-09 Tribunal Service figures showed there 1,262 cases related to a failure to consult under TUPE. Some other TUPE-related cases will come under unfair dismissal and breach of contract so the number of cases with a TUPE element could be far higher.

How can employers avoid TUPE pitfalls? Apart from using an appropriate employment lawyer and having a diligent HR team, there are some common traps that can be avoided as much by the application of common sense as by an in-depth knowledge of TUPE.

Bear in mind that under the 2006 Act employees can claim constructive dismissal where there has been a substantial change to the employee’s working conditions to his material detriment. The claimant can pursue this without having to show that the change in terms and conditions amount to a breach of contract.

Ten TUPE pitfalls

(1) First and foremost, the employer not addressing whether Tupe applies soon enough. Too often it is an afterthought. It may be that TUPE does not apply, for example if a takeover is by way of the acquisition of share capital. The key point is that TUPE requires the transfer of undertakings from one person to another – the legal identity of the employer has to change.

(2) The transferring employer (transferor) believing, wrongly, that it is the new (transferee) employer’s responsibility to consult with employees prior to transfer.

(3) Transferee employers failing to have any involvement in the transferor’s information and consultation process. “A tailored communication exercise, whether formally through the transferor’s information and consultation process or parallel with it, is an important way for the transferee to develop good relations from the outset,” comments Mark Walker, senior associate, Dundas & Wilson’s employment team.

(4) Failure by the transferor to compile the comprehensive information about transferring employees in good time before passing on that information to the transferee. Doing this promptly will help give adequate time to consider TUPE-related issues. Transferees should watch out for enhanced redundancy terms and pensions’ obligations as these could prove very expensive.

(5) Transferees failing to re-establish/check an employee’s immigration status and right to work in the UK.

(6) Failure on the part of the transferor to provide employee liability information which includes employees’ contractual entitlements. “Even if the buyer has not asked for certain information, under Regulation 11 the seller is obliged to provide it and can be sued by the buyer at a later stage if the buyer suffers a loss as a result,” says Jessica Baden-Daintree, an associate at Weightmans’ employment team.

(7) Failure to give employees the option to elect representatives when there is no recognised trade union before consulting directly with affected employees.

(8) Transferee employers may have tendered on the client’s standard terms and conditions and thus have little bargaining power to change them. This may mean they pick up responsibilities for the previous employer’s actions including unforeseen pay rises and dismissals.

(9) Asking a transferred employee to do something that breaches their contract, such as demanding they move location, which could amount to a detriment as was the case in Tapere v South London and Maudsley NHS. Transferees failing to address the challenges posed by seeking to rationalise and harmonise terms and conditions of employment. Terms and conditions will transfer, including ones established by custom and practice and collective bargaining.

(10) Transferees failing to address the challenges posed by seeking to rationalise and harmonise terms and conditions of employment. Terms and conditions will transfer, including ones established by custom and practice and collective bargaining.

Other TUPE dangers

There are other TUPE dangers. Gagandeep Prasad, associate at Charles Russell, warns that pace the Beckman and Martin rulings “TUPE acquiring employers should be careful about redundancy policies and enhanced pension benefits. If large scale restructuring is anticipated that will involve redundancies, the new employers need to take care that they are not acquiring a more expensive workforce than they realised. The costs of enhanced pension benefits can be enormous.”

Finally, it may seem obvious but transferee employers should check thoroughly the contracts of the employees they have acquired through a TUPE deal.

“In particular,” says Alan Julyan, senior partner, Speechly Bircham, “it is for the new employer to ensure it has fully evaluated the terms that have been inherited before taking any action that may constitute a change that could then give rise to a constructive dismissal claim. A constructive dismissal claim in such a situation is likely to be considered to be due to the transfer itself and therefore the dismissal will be automatically unfair.”

This stresses one of the keys to TUPE success – close attention to detail and process at every stage.

Key TUPE cases

Employers’ Law asked employment lawyers to nominate what they see as the most significant TUPE ruling in recent years:

Jessica Baden-Daintree, associate, Weightmans: Tapere v South London & Maudsley NHS Trust (2009)
“This is the authority for the correct test on whether a substantial change to working conditions is to the detriment of a transferred employee under TUPE 2006, which enables the employee to resign and claim constructive dismissal. The test looked at the impact of the change from the employee’s reasonable viewpoint, not by balancing the views of the employee and employer.”

Guy Lamb, employment partner, DLA Piper: Gutridge v Sodexho
“This decided that employees who transfer can, for equal pay purposes, continue to compare themselves to employees or their original employer for the purposes of making an equal pay claim - a nightmare for anyone in the outsourcing business, particularly when dealing with the public sector.”

Mark Walker, senior associate, Dundas & Wilson: Clearsprings Management v Ankers
“This case has developed more thoroughly the concept of fragmentation in relation to service provision change, which can occur when services are split among a number of new providers and they become so fragmented that TUPE does not apply. This has become the ‘go to’ argument whenever a prospective transferee wishes to argue that TUPE does not apply.”

Gagandeep Prasad, associate, Charles Russell: Regent Security Services v Power (2007)
The Court of Appeal upheld the decision of the Employment Appeal Tribunal that employees who transfer under TUPE cannot be deprived of their existing rights that transfer with them, “but this does not mean that the transferee can rely on TUPE to avoid being bound by any new terms it has agreed with the employee. The Court of Appeal confirmed that this meant that transferred employees can choose between enforcing the rights that transferred with them or rely on any new rights granted by the transferee.”

Alan Julyan, senior partner, Speechly Bircham: “There is no single decision that stands out.” But among “key cases” was Metropolitan Resources v Churchill Dulwich (2009)
“It clarified the confusion concerning outsourcing, in-sourcing and changes of contractors. It confirmed that TUPE applies to a ‘service provision change’. A pragmatic approach to the definition, confirmed that minor differences in the way activities are performed, or their nature, after the transfer, will not prevent TUPE applying. What is important is that the activities post-transfer are fundamentally or essentially the same as those carried out by the alleged transferor.”