Protecting your business – when there is a business transfer

In this article, in our series of “Protecting Your Business”, we look at what you need to consider from an employment law perspective when buying a business or if your business is involved in the transfer of a business by taking on a new contract.

The reason this is important is due to the Transfer of Undertakings (Protection of Employment) Regulations 2006, otherwise known as TUPE. The aim of TUPE is to protect employees when a business transfers to a new owner. If you fail to follow rules under TUPE when dealing with a relevant transfer, you will expose your business to possible claims and compensation.

Step 1 – Does TUPE apply?

The first step is to identify whether TUPE applies to the relevant transaction. With some areas of employment law, it can be relatively straightforward to identify whether a particular piece of legislation applies. Where TUPE is concerned, this first question is not always clear cut.

Whether TUPE applies depends on whether the relevant transaction falls within a certain type of transfer and these two types of transfers are:

• A standard business transfer – where a business/undertaking, or part of a business /undertaking, transfers where there is an economic activity that keeps its identity.
• A service provision change (SPC) – where a client engages a contractor to do work on its behalf (e.g. outsourcing a service such as catering services), or brings the work back in-house, or such a contract is reassigned to another provider.

There are certain exceptions for when TUPE does not apply such as where there is a share sale and there is no change in the identity of the employer. However, depending on the facts, TUPE may sometimes apply to a share sale so it is worth seeking advice.

It is crucial to get the answer to Step 1 correct as the consequences can be very costly and, because of the possibility that long consultation periods may be required, this should be done as early as possible.

Step 2 – Automatic transfer principle and who transfers?

Once you have identified that the transaction is a relevant transfer for the purposes of TUPE, you need to be aware of the “automatic transfer principle”.

When an employee normally starts a new job with a new employer, their previous employment terminates and continuity of employment is broken. This is not the case where it is a relevant transfer under TUPE.

Those employees caught by the automatic transfer principle will transfer to the buyer (otherwise known as the transferee) on their existing terms of employment with their continuity of service still intact. Further, the transferee is now in the place of the seller (the transferor) and so broadly takes on all contractual obligations, and acts and omissions, that would previously have been the responsibility of the transferor. This is incredibly onerous and can be quite a shock for some buyers who are not aware of how TUPE operates.

It is therefore important as part of this step to identify who will transfer under TUPE. It is those who are employed by the transferor immediately before the transfer and “assigned to the organised grouping or resource of employees that is subject to the relevant transfer”. It does not cover those who have objected to the transfer.

Since the area of employment status (whether someone is an employee, worker or self-employed) on its own is a complex area of employment law, it is perhaps not surprising that who is covered under TUPE can be difficult to identify. It is, however, a good starting point to bear in mind that the definition under TUPE is slightly wider than is normally used for employment law purposes and it is worth seeking advice if you are at all unsure.

As to the question of whether the employees are “assigned to the organised grouping”, this is a factual assessment considering factors such as percentage of their time spent working in the assigned group, whether it is a temporary assignment, and will take into account the details of the particular transaction or service provision change that is taking place.

Step 3 – What transfers?

Under TUPE, once the transfer has occurred all of the transferor’s rights, powers, duties and liabilities under or in connection with the transferring employee’s contracts pass to the transferee. Special rules apply in respect to pensions, collective agreements and union recognition.

It is worth remembering from the automatic transfer principle that any acts or omissions that the transferor carried out before the transfer in respect of the employment contracts of the employees are treated as having been done by the transferee. Before a transfer takes place, there is usually due diligence that takes place to help identify the risks the buyer may be taking on. During this time the transferor must provide the transferee with certain information about the transferring employees. Any identified risks are then often dealt with commercially in transfer documentation via warranties and appropriate indemnities, with much depending on the bargaining position of the parties.

Step 4 – Obligation to inform and consult.

As the business taking on the new business or contract (the transferee), you would have a duty to inform and, where appropriate, consult with representatives of the affected employees. The transferor is also under this obligation and so, when this obligation arises, both parties usually cooperate to ensure this runs smoothly up to transfer. Regulation 13(2) sets out what information must be given, and if the employer envisages that it will be taking measures in connection with the transfer in relation to any affected employees, this triggers the obligation to consult. Note that businesses with fewer than 10 employees may be able to inform and consult with their employees directly in some circumstances.

It is important to note that a failure to inform and consult correctly can result in compensation being awarded of up to 13 weeks’ pay for each employee, together with any other claims the employees may have.

Finally, do bear in mind these two points:

• Harmonising terms and conditions and the protection against changing terms of employment – the starting point is that harmonising terms because of a transfer is not permitted and any change will be void. Changes to terms and conditions will only be allowed if they are unrelated to the transfer and are then subject to normal restrictions around changing an employee’s terms and conditions. Broadly, buyer beware! And seek advice if you want to change terms around the time of a transfer.
• Protection against dismissal – dismissals will be automatically unfair if the sole or principal reason is the transfer. If, however, it can be shown the dismissal is for an Economic, Technical or Organisational (ETO) reason entailing changes in the workforce, it may mean the dismissal could be shown to be fair.

Overall, due to the complexities of TUPE and the significant liabilities that can be incurred if TUPE is not complied with, it is recommended that your business seeks advice if it is going to be involved in a transfer. We can provide advice on such employment law matters, so please do contact us if you feel we can assist your business.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.