Tupe and Outsourcing

Transfers of undertakings are governed by TUPE. TUPE was enacted to give effect to the Acquired Rights Directive of the European Community ("ARD"). United Kingdom courts are required to construe TUPE consistently with the ARD and therefore many of the decisions of the European Court of Justice ("ECJ") that relate to the ARD are of great influence on the interpretation of TUPE.

The rights given by TUPE are extensive and include the following:

in a transfer of an undertaking those of the transferor's employees who were employed immediately before the transfer and whose contracts would otherwise have been terminated by the transfer, are automatically transferred to the transferee on their existing terms and conditions of employment;

all the rights and liabilities in respect of the transferring employees transfer to the transferee; and

any dismissal by transferor or transferee of an employee before or after the transfer of the relevant undertaking which is connected with the transfer is an automatically unfair dismissal, unless it can be shown that the dismissal was for an economic, technical or organisational reason entailing a change in the workforce. To enforce this right employees generally need 1 year's continuous employment.

THE EFFECT OF TUPE ON OUTSOURCING

Prior to March 1997 there was a general presumption by the courts that TUPE would apply to almost all forms of outsourcing. This included first generation outsourcing, that is from first customer to first contractor; second generation outsourcing, that is from first contractor to second contractor; and contracting in, that is bringing the service back in house. This presumption developed from a number of decisions by the ECJ and the UK courts.

The approach which had been adopted by the courts was challenged in the ECJ case of Suzen which was decided in March 1997. In this case the ECJ held that the ARD does not necessarily apply to an outsourcing situation unless:

there is a transfer from one undertaking to the other of significant tangible or intangible assets; or

the new employer takes over a major part of the workforce of the out going contractor in terms of numbers and skills.
It is important to note that the ECJ did not say that the change over of contractors is always outside the scope of the ARD. Further, the ECJ stated that it was not necessary for there to be any assets to transfer from one party to another for the ARD to apply and there was no need for there to be a contractual relationship between the transferor and transferee.

The question of whether or not there is a transfer is a factual issue which has to be decided in relation to each case. Factors which must be considered in that process are:

the type of undertaking in question;

the transfer or otherwise of tangible assets, for example, buildings or stock;

the value of intangible assets at the date of transfer;

whether the majority of the employees are taken over by the new employer;

the transfer or otherwise of customers; and

the degree of similarity between activities before and after the transfer and the duration of any interruption in those activities.

TRANSFER OF EMPLOYMENT RIGHTS

The employee rights transferred to the new employer under Regulation 5 of TUPE are extensive. They include all contractual rights, for example, pay, holidays and other benefits and liability in respect of personal injury claims. It follows therefore that due diligence on the part of the transferee is important in any TUPE transaction.

The transferee employer should also seek indemnities from the transferor employer where at all possible. However, in a second generation outsourcing situation this will almost certainly not be possible because there is unlikely to be any contractual relationship between the first contractor and the second contractor.

One exception to the transfer of employment rights under Regulation 5 of TUPE is occupational pension schemes. It should be noted that this exclusion is only in relation to occupational pension schemes and not, for example, to an employer's obligation to make a contribution to an employee's personal pension plan.

OUTSOURCING - PRACTICAL CONSIDERATIONS

There are a number of implications for employers involved in outsourcing.

TRANSFER OR NO TRANSFER?

The Suzen decision makes it easier for an incoming contractor to argue that there is no TUPE transfer and that the out going contractor retains responsibility for the employees. If this argument is successful, the out going contractor is responsible for any redundancy payments due to the employees if he is unable to redeploy them on other contracts.

Many current service providers assume that, if they lose a contract, they will be able to pass on the employment obligations in respect of the employees to the successor contractor. Since the decision in Suzen, this is now much less certain and they may well find themselves having to deal with unforeseen redundancies and other termination costs.

OPTIONS FOR AN INCOMING CONTRACTOR

An incoming contractor, if taking on an asset reliant undertaking, will be subject to the normal rules on transfers of undertakings set out above. But, if the undertaking is labour intensive and no assets are being transferred, the question of whether TUPE applies will depend in part on whether the majority of the employees are taken on.

In these cases, an incoming contractor does have some power to determine whether TUPE will apply. Factors which may influence UK industrial tribunals' decisions may include the requirements of the incoming contractor, whether it has its own workforce and whether it has employees available locally to perform the acquired contract.

OPTIONS FOR FIRST GENERATION CONTRACTORS

First generation contractors who are waiting for their contracts to end and who might be at risk of losing their contracts must be concerned by the Suzen decision. Unless there are assets which will move over to the new contractor, a second contractor may well be able to influence the non application of TUPE by indicating that the employees are not required. There is very little that the first contractor can do in these circumstances except to put pressure on the customer to require the retention of the same staff as a term of the outsourcing process.

If you have any queries, please contact any member of the Employment Unit.

London office :- (020) 7842 0000

Nick Hine :- nick.hine@thomaseggar.com

Paul Gaff :- paul.gaff@thomaseggar.com

Douglas Styles :- douglas.styles@thomaseggar.com

Please note that this guide is not intended to be exhaustive or be a substitute for legal advice. The application of the law in this area will often depend upon the specific facts and you are advised to seek specific advice on any given scenario.