Transfer of Undertaking Regulations

Common law defined a contract of employment as “a personal contract between the employer and employee; when that relationship ceased, the contract of employment came to an end.” (Selwyn, 2011). This had the implications that when an employer sold his business all the employee’s contracts came to an end, as they were no longer employed by the original employer. Common law also stated that an employer did not have to accept honour the employee’s previous contracts of employment as an “employees contact of employment cannot be transferred to another employer without his consent (Bolwell v Redcliffe Homes Ltd) (1999)” (Selwyn, 2011).

In order to protect the employees the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) was created to protect the rights of an employee in a situation when their employer is taken over by, or transferred to by another employer. This is to prevent new business owners from taking over a business and dismissing all of the employees shortly before or after the transfer of business has taken place. Then to offer either the same or new employees new contracts with terms and conditions of employment that were worse than what they had previously enjoyed. This can be seen in (Lister v Forth Dry Dock and Engineering Co Ltd) (1990). In this case a dock worker Lister, raised an action in relation to the termination of his employment. The company Lister worked for was to be transferred to new owners at 4:30pm on 6th February 1984, but at 3:30 that day Forth Dry Dock the company that was taking over the business dismissed the entire workforce. The company then began within 48 hours to start recruiting a new work force, but with worse contractual terms. Lister was unsuccessful in gaining employment with Forth Dry Dock and so lodged a claim for unfair dismissal.

Lister was successful with his claim in an Industrial Tribunal which found that Lister had been unfairly dismissed and Transfer of Undertakings (Protection of Employment) (1981) applied in his case. However this was overturned by the Court of Session as they stated that even one hour before the transfer is long enough to claim that the employee was not employed immediately before the transfer. Lister’s next course of action was to appeal the case to the House of Lords, who overturned the Court of Session’s decision, stating that “The TUPE Regulations 1981 had to be interpreted on such a way as to give effect to the United Kingdom’s duties under the Acquired Rights Directive 1977.” (Crossan, Wylie, 2004).

Purpose of the Legislation

The regulations come from The European Community Acquired Rights Directive (Council Directive 77/187/EEC) which “ensures that when employees have been transferred to a new employer they will continue to enjoy the same contractual conditions that they had with their previous employer.” (Crossan, Wylie, 2004). However in order for it to be entered into UK law further European legislation was needed in the form of (the Amended Acquired Rights Directive (ARD) (Council Directive 01/23/EC)) These were created to address and clarify some of the existing problems with the regulations, as well as to include the many amendments that had arisen over the years, and were brought into force in the UK in the form of the Transfer of Undertakings (Protection of Employment) Regulations 2006.

What this means in more detail is the reasons for TUPE and ARD regulations being in place are that; it protects an employee’s contact of employment and contractual terms by ensuring that the person taking over the business has to honour the employees present contractual terms that were in force before the transfer. As well as protecting the employee from being dismissed by the organisation as part of transfer of undertakings, as dismissal for transfer of undertakings will constitute automatic unfair dismissal. However Regulation 7(2) provides that if the employee was dismissed for an economic, technical or organisational reason which entailed a change in the workforce of either the transferor or transferee, the reason for the dismissal will be treated as either being for redundancy or otherwise of a substantial reason of a kind such as to justify the dismissal of the employee holding that position.

It also ensures that the company or person taking possession of the organisation has to recognise any established trade unions and established employee representatives, as well as stick to any collective agreements negotiated by the unions on behalf of the work force, that are in place still have to be adhered to until either they expire or are replaced by new agreements.

Concept of Transfer of Undertakings

The TUPE (2006) regulations have addressed some of the anomalies from the original TUPE (1981) regulations and as such now defines two types of “relevant transfer” these two different types of relevant transfer are not mutually exclusive and as such some situations can arise that cover both the criteria. A relevant transfer can occur where the following criteria are satisfied:

A business or undertaking (or part of a business) that is situated in the United Kingdom immediately before the transfer, transfers to one employer to another, this can also include where two companies cease to exist and combine together to form a third, as well as the transfer of an economic entity that retains its identity.

A change of service provision, this is when a client engages a contractor to do work on its behalf (contracting out), or resigns such a contract including bringing the work “in-house”(contracting in), or the services that are currently carried out by a contractor are carried out by another contractor on the same clients behalf (change over).

The areas of transfers that are not covered by the TUPE (2006) regulations which are; transfers by mergers and acquisitions by share take over’s, this is because when a company sells its shares to new share holders there is no transfer of business or undertaking and as such the same company continues to be the employer with no affect the contractual relationship of the employees. Also the transfer of assets are expressly said not to be a part of the TUPE (2006) regulations, so the sale of equipment alone would not be covered.

Another area that is not covered by the TUPE (2006) regulations is if the transfer of the organisation taking place is transferred from the UK to a non EU entity, However contrary to this in the case of Holis Metal Industries Ltd v (1) GMB (2) Newell Ltd [2007] UKEAT/0171/07 the Employment Appeals Tribunal ruled that in case where part of a business was transferred from the UK to Israel that the TUPE (2006) regulations had the potential to apply to a non EU entity.

Economic Entity

In order for employees to be covered by the protection of the regulations when a business transfer takes place the transfer must involve an economic entity which retains its identity after the transfer. An economic entity is defined in Standard transfers: Reg 3(1)(a). Regulation 3(2)) as an organised grouping of resources which has the objective of pursuing an economic activity whether this is central to the business or ancillary to it.

Law Society England and Wales v Secretary of State [2010] EWHC 352 (QB) illustrates a case in which it was held that there was a stable economic entity (in the form of the Legal Complaints Service) but that it had lost its identity (when its function was taken over by the Office for Legal Complaints).

The Department for Innovation and Skills guidance titled ‘The TUPE Handbook’ (June 2009) states: ‘Too decide if there is a stable economic entity that is capable of being transferred, the factors to consider include:

Has there been a transfer of tangible assets such as building and moveable property (although this is not essential)?

Is the type of business being conducted by the transferee (incoming business) the same as the transferor’s (outgoing business)?

What is the value of the intangible assets at the time of the transfer?

Have the majority of employees been taken over by the new employer?

Have the customers been transferred?

What is the degree of similarity of the activities carried on before and after?

In considering whether the conditions for a transfer are met, it is necessary to consider all the factors characterising the transfer in question. Also it is important to take account of the type of undertaking or business in issue, and the degree of importance to be attached to the criteria will necessarily vary according to the activity carried out within the organisation. If a TUPE transfer applies, then all terms and conditions of work and continuity of employment should be preserved. This applies to all employees who were employed in the entity immediately before the transfer; and those who would have been so employed if they had not been unfairly dismissed for a reason connected with the transfer.

Obligations Transferred

Within a transfer there are specific obligations and duties which arise from Regulations 5(2) Art 3(1) and are as follows;

Where there is a transfer, those employees employed by the seller will transfer to the buyer under their existing terms and conditions of employment and with their continuity of employment preserved. This is known as the automatic transfer principle and applies at the moment of the transfer, which is generally on completion rather than on exchange of contracts.

Another obligation that will take place is that “There will be a statutory novation of employment contracts and the buyer will step into the seller’s shoes in respect of all employees assigned to the undertaking (under a standard transfer) or the organised group (under a service provision change).”(Mishcon de Reya Solicitors, 2010) This will mean that the buyer will inherit all of the seller’s rights, duties and liabilities under or in connection with the transferring employees’ contracts. This will cover both contractual and statutory rights such as holiday pay, bonus and other entitlements such as maternity/redundancy schemes as well as any potential claims which may have arisen prior to the transfer due to acts or omissions by the seller.

Regulation 13 of TUPE requires the transferor and transferee to inform and (in some circumstances) consult with appropriate representatives of employees prior to completion. The obligation to consult will apply if it is thought that in connection with the transfer, measures will be taken in relation to any effected employees. For example in the case of Royal Mail Group Limited v Communication Workers Union [2009] the Royal Mail believed that no employees would transfer when a number of post offices were taken over by WH Smith. The Royal Mail provided the information required under TUPE on this basis. The Royal Mail’s belief was found to be wrong and some employees did in fact transfer.

The Court of Appeal held that the Royal Mail had not failed in their obligations to provide the required information as they had given information which they genuinely believed to be correct.

Any variation in terms must be agreed by the parties involved in the transfer by mutual agreement, as any unfavourable changes in the terms of employment by the transferee will be seen as grounds for automatically unfair dismissal. “However, where the reason for the changes was something other than merely the transfer, an agreed change will be effective. Where there was an economic, technical or organisational reason for the change, a Tribunal may conclude that the transfer was not the reason for the change and that the change is valid.” (Thompson Solicitors, 1998)

Though the same does not apply if the change in terms is in advantage to the employee In Power v Regent Security Services Ltd (UKEAT 0499/06), the EAT held that in a transfer situation, the TUPE Regulations do not prevent the employee relying upon an agreement reached with the new employer (the transferee) to vary their contract where the variation is to their advantage. The Regulations only render a variation void if the transferee seeks to change the contract by reason of the transfer where the variation is to the employee’s detriment.

Conclusion

In conclusion the Transfer of Undertaking (Protection of Employment) Regulations (2006) are in place in order to protect the employees statutory rights in the event of a business take over, by ensuring continued employment at the same, or more favourable contractual terms. It also gives the employees guidelines of a course of action to take if there is a breach of these contractual terms.