Preparing for transfer

The European Union’s Acquired Rights Directive 77/187 on the approximation of the laws of the Member States on safeguarding employees’ rights on transfers of undertakings of businesses (and parts of undertakings of businesses) were first implemented in the UK with the introduction of the now well-known Transfer of Undertakings (Protection of Employment) Regulations 1981.

Over the years, a number of amendments have been made to the original TUPE Regulations, not least by the Trade Union Reform and Employment Rights Act 1993 and, subsequently, by the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 1995 and 1999. All of which were enacted to bring TUPE more into line with the original Acquired Rights Directive 1977 following litigation in the European Court in the case of the EC Commission versus the UK in 1994.

In the meantime, both the Acquired Rights Directive 1977 and TUPE 1981 have been seen to be in need of an overhaul. The Acquired Rights Directive was revised in 1998 by Directive 98/50, and then consolidated in 2001 by the Acquired Rights Directive 2001/23 (the present European instrument governing TUPE).

As early as 2001 it was decided that new TUPE Regulations would have to be issued, partly to take into account the revisions made in 1998 by Directive 98/50, and in part to clear up specific areas of uncertainty in the law (particularly in relation to outsourcing).

The Department of Trade and Industry (DTI) produced an original consultation document in 2001 and then, in February 2003, issued a press release to publicise certain aims that it wished to achieve. In March 2005, the DTI then issued a consultation paper containing the draft TUPE Regulations 2005, originally to be enforced on 1 October last year.

Much delayed, the final TUPE Regulations have now been published (and can be read and/or downloaded at: www.opsi.gov.uk/si/si2006/20060246.htm)

TUPE 2006: the key changes

TUPE 2006 was laid before Parliament on Tuesday 7 February. The legislation was published on the DTI’s web site on 15 February and came into force on 6 April. The main changes in the legislation are as follows:

• a wider definition of TUPE such that service provision changes (ie contracting out, and similar exercises involving business services) are more likely to be covered by TUPE in order to achieve greater certainty and practice for all concerned (thus reducing unnecessary disputes in litigation, and at the same time lowering transaction costs)
• clarification of the effect of the Regulations in respect of transfer-related dismissals, and when employers may change Terms and Conditions of Employment
• the introduction of a requirement on the old employer (transferor) to notify the new employer (transferee) of the identity of the employees, and also of various specified rights and liabilities that would pass upon a transfer
• greater flexibility in the Regulations’ application in certain cases where the transferor is insolvent (these provisions being in line with the current Government’s policy to promote the so-called ‘rescue culture’).

After 25 years of working with the original TUPE Regulations it will no doubt take us all time to come to terms with the new version – which applies to Great Britain and Northern Ireland, and makes certain consequential amendments to existing legislation which once referred to the TUPE Regulations 1981.

One significant aspect of the 2006 Regulations is the new definition of a relevant transfer which, for most transfers of an undertaking, consolidates European Court case law and its requirement for the transfer of an economic entity which retains its identity. However, for service provision changes there is a special, supplementary definition which means that – subject to a couple of exceptions – TUPE will apply on the service provision change without resort to the test under European Court case law.

Thus, subject to a couple of exceptions, it will no longer be necessary – in deciding whether a service provision changeover is covered by TUPE – to apply European Court case law (ie find the transfer of an economic entity, and take into account whether assets or staff are transferred). This will depend upon whether the function is asset-reliant or labour intensive. Unlike the European Court case law position under Ayse Suzen, the contract change effects the transfer (under Ayse Suzen, the mere changeover of a contractor was held not to amount to a transfer of an undertaking without more).

Service provision changeovers are treated differently in the UK than is the case in most other European Union jurisdictions, and differently again from the European Court’s interpretation of the Acquired Rights Directive. As a result, employees here are better treated than is strictly required under the Directive. It is, of course, permissible under the Directive to make provisions more favourable to employees than apply under the Directive in domestic law, which is what has happened here with the TUPE Regulations 2006.

However, it is important to stress at this point that all other types of putative transfers of undertakings which do not satisfy the definition of a service provision changeover remain covered by the test of a transfer of an economic entity retaining its identity, and the European Court case law relevant thereto. Transactions which might otherwise be caught by the service provision changeover, but which are specifically accepted (for example, where it is intended that the contract is for a single project of short duration, or is one for the procurement of goods).

Security managers should also note that there are large areas of the law on business transfers and employee rights which are not fundamentally changed by the new TUPE Regulations 2006. Experience tells us that a remedial change in the law on transfers (even one on such a giant scale as TUPE 2006) will not necessarily make life simpler, reduce activity in the Courts or obviate the need for legal advice on transfers of undertakings.

Regulation 3: Transfer definition

Any analysis of Regulation 3 may conveniently be divided into four parts – public sector and ‘not for profit’ transfers, transfers within public administration, the ‘standard’ definition of a transfer and the ‘extended’ definition of a transfer applicable only to service provision changeovers.

In terms of public sector and ‘not for profit’ transfers, Regulation 3(4) of TUPE 2006 states that the Regulations apply to “public and private undertakings engaged in economic activities whether or not they are operating for gain.” This effectively consolidates European Court of Justice (ECJ) case law, which will mean that the following types of transfer are covered by TUPE:

• outsourcing by central Government of ancillary services to the private sector
• outsourcing by local authorities and other Government agencies of ancillary services to the private sector
• privatisations
• transfers of (and by) bodies even if they are ‘not for profit’ or charitable.

However, Regulation 3(5) provides that “a reorganisation of public administrative authorities, or the transfer of administrative functions between public administrative authorities is not a relevant transfer”. Hereby, the Regulations implement the provisions of Article 1(c) of Directive 2001/23, giving effect to the ECJ ruling in Henke versus Gemeide Schierke and Verwaltuingsgemeinschaft Brocken (1996).

The meaning of an ‘administrative’ as opposed to an economic function is opaque (although, to an extent, this has been clarified in another context by the case involving the Institute of Chartered Accountants of England and Wales versus Customs and Excise Comrs) (1999). However, certain intra-public sector reorganisations will clearly not attract the protection of Regulations. In this regard, though, the Government points out that public sector workers’ rights are intended to be covered by other means (including case-specific legislation and the Cabinet Office Statement of Practice, ‘Staff Transfers in the Public Sector’). In short, the Government feels no additional provisions are necessary as far as the new Regulations are concerned.

The ‘standard’ definition of a transfer is contained in Regulation 3(1)(a), which applies the TUPE Regulations to “a transfer of an undertaking, business or part of a business situated immediately before the transfer in the UK to another employer where there is a transfer of an economic identity which retains that identity”. For the purposes of this discussion, “economic identity” is defined in Regulation 3(2) as “an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary”.

In this regard, the Regulations implement Article 1(b) of Directive 2001/23 (which is declaratory of ECJ case law on the subject). As to the interpretation of the ‘standard’ definition, it is vital to note that this will continue to be governed by the standards set through the ECJ in both existing and future case law.

One significant element to note is the retention of the requirement in the existing TUPE Regulations (and in Directive 2001/23) that there be a change of employer. Acquisitions of companies by share sales will therefore continue to be excluded from TUPE. No change of employer is involved, and the Government has not exercised its power under s38 of the ERA 1999 to bring them in.

Service provision changeovers

Many putative transfers will continue to be governed solely by the ‘standard’ transfer definition, but service provision changeovers are given preferential treatment. They are also governed by what may be described as an ‘extended’ definition of a transfer which exceeds the protection afforded to workers by Directive 2001/23.

This is a supplementary definition, in fact – if a putative transfer does not meet the test in the ‘extended’ definition, it may still pass as a TUPE transfer if it nonetheless qualifies under the ‘standard’ definition.

The Government’s rationale for the extended definition is to reduce uncertainty in the law, insulate the parties to service provision changeovers from the effects of ECJ jurisprudence and to create a level playing field such that a contractor’s bid for services is based on its own commercial merits rather than on differing views of the employment rights of members of staff.

At first, the supplementary definition of a transfer under Regulation 3(1)(b) on service provision change appears breathtakingly simple – as long as service activities cease by one person (the transferor) and are then taken up by a new individual (the transferee) then there will be a transfer. There will also be a transfer if, prior to the changeover, there was an organised grouping of employees – the principal purpose of which was to carry out those activities on behalf of the client.

This is in contrast with the requirements under the general law (and the proposed ‘standard’ definition) as laid down by the ECJ decision in the Ayse Suzen versus Zehnacker Gebaudereinigung GmbH Krankenhausservice case of 1997. In Suzen it was stressed that a mere changeover of contractors is not a transfer – what is required is a concomitant transfer of assets or the taking over of a major part of the workforce. Regulation 3(1)(b) of TUPE 2006 covers client to contractor, contractor to contractor and contractor to client changeovers.

The new extended definition of the transfer on service provision changeovers does not apply where the client intends the activities will – following the service provisions change – be carried out by the transferee in connection with a single, specific event and/or task of short term duration. Neither does it apply where the activities concerned consist wholly or mainly of the supply of goods for the client’s use.

It is also important to remember that the Government originally intended service provision changeovers of ‘professional services’ to be excluded. This has subsequently been dropped from TUPE 2006, which makes for an interesting development.

Retention of identity

Furthermore, the ‘standard’ definition requires the transfer of an economic entity which “retains its identity”. For the ‘extended’ (service provision changeover) definition it is sufficient that the activities cease to be carried out by one person and are completed by another in the future. This will support the Government’s intention that it’s no longer desired to exclude cases under the Regulations, where the incoming services provider envisages carrying out service activities in a new or otherwise ‘innovative’ manner.

The reasoning behind the abandonment of the ‘innovative bids’ exception – previously floated in the 2001 DTI Consultation Paper – is that requiring the new service provider to take on all employees may encourage retention and retraining by the transferees of certain employees lacking the new skills required as part of the contract. If innovative bids were excluded under TUPE, all employees would – in all likelihood – be made redundant by the original employer.

Let’s not forget, either, that treating all contractors (including those making ‘innovative bids’) on an equal footing will, it is said, contribute to the key policy objective of creating a level playing field for tendering exercises. That will bring increased certainty for all concerned during the transfer process.

Employment Terms and Conditions

A central plank in the Government’s reform of the TUPE Regulations is to clarify their effect in relation to the issues of transfer-related dismissals, and changes to Terms and Conditions of Employment. However, given the way that mainland European law is couched, there is little in this part of the new Regulations that will significantly change the law.

The ability of an employer to vary employment terms before or after a TUPE transfer has always been a contentious area, even in those cases where the employees themselves consent to such change. Under Community Law, an employee may not waive rights granted to him or her under Directive 2001/23.

The rule against any waiver may be found in the European Court’s decision over the case of Foreningen af Arbejdsledere I Danmark versus Daddy’s Dance Hall. Here, the European Court stated that: “[The employment] relationship may be altered with regard to the transferee to the same extent as it would have been with regard to the transferor provided that the transfer of the undertaking itself may never constitute the reason for that amendment.”

Nor is it possible to argue that a change may be permitted if, overall, the employees are no worse off. As the ECJ Presiding Judge stated in the Daddy’s Dance Hall case: “It follows that the workers concerned do not have the option to waive the rights conferred on them by the Directive, and that it is not permissible to diminish these rights even with their consent. This interpretation is notwithstanding the fact that, as in the instant case, the worker – in order to offset disadvantages arising for him from a change in his employment relationship – obtains new advantages so that he is not left in a worse position than he was before.”

Redundancy enhancement terms

In the case of Martin versus South Bank University (2004), employees transferred from a college of health studies (part of the National Health Service) to the University. They were all offered new employment contracts, but at the same time it was made clear they wouldn’t be allowed to continue as members of the NHS’ Occupational Pension Scheme. They were instead offered admission to the Teachers’ Superannuation Scheme. Although this was accepted, the new scheme did not include the redundancy enhancement terms provided for by the NHS Pension Scheme.

The ECJ decided that the new employer was precluded from offering the less-favourable pension terms where those terms were merely ‘brought into line’ with the terms offered to the transferee’s other employees at the time of the transfer. Such a ‘harmonisation’ exercise was considered to be a purported variation by reason of the transfer, and was thus invalid.