Watch out for hidden holidays

A question which is commonly asked by clients providing security, cleaning or facility management services is whether in a TUPE transfer situation it is the transferee company or the transferor company which is liable for any accrued holiday pay entitlement of affected employees.

An example of what can happen:

Company A’s standard contract of employment for employees stipulates that the holiday year will run from 1 April to 31 March in each year.

At the beginning of February 2000, Company. A was informed that a large manned guarding contract would be put out to tender. It was also instructed to provide the standard TUPE information to all other tendering companies, although this information was not actually provided until after the tenders had been submitted.

The contract was ultimately awarded to Company B, whose hourly charge out rate was marginally lower than Company A’s. As this was a relevant transfer for the purposes of TUPE, all nine security officers previously employed by Company A continued their employment with Company B. The contract commenced on 1 March 2000.

Shortly after commencement, Company B discovered that eight of these nine security officers had accrued holiday and holiday pay entitlement of three weeks. The effect of paying this accrued holiday pay would render the contract unprofitable for Company B.

Company B could not approach the client for such holiday pay as this was incorporated within Company A’s hourly charge out rate. Accordingly, Company B approached Company A requesting reimbursement but Company A denied responsibility.

Whilst exaggerated, the above scenario occurs all too frequently. Increase the number of security officers in the above example and the consequences for the company winning the tender can be colossal, potentially turning a profitable contract into a serious liability.

Position at Law

Regulation 5(1) of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (“TUPE Regs”) clearly states, inter alia, that any contract “which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee” (emphasis added). Regulation 5(2)(a) goes on to specify that all the transferor’s (Company A in our example) rights, powers, duties and liabilities in connection with any such contract are also transferred to the transferee (Company B in our example). Such transfer of rights, powers, duties and liabilities will not occur in those limited circumstances set out in Regulation 5, including circumstances in which the employee objects to becoming employed by the transferee and liability for any offence.

What Regulation 5 (1) of the TUPE Regs means in practice is that any transferee company in a TUPE transfer situation will be placed in exactly the same contractual position vis-a-vis any ‘inherited’ employees as was the outgoing transferor company. In the eyes of the law, the relevant employees’ contracts of employment with the transferor company will be treated as if they had originally been entered into with the transferee company.

The transferee company will therefore be liable for any accrued holiday and holiday pay entitlement, any subsisting harassment and/or discrimination claims, any and all debts owed to the inherited employees by the outgoing transferor company arising from their contracts of employment or from the employment relationship, any liability in respect of pre-transfer industrial accidents, any pre-transfer pay increase agreement between the inherited employees and the outgoing transferor company, and so on.

If we go back to our example, Company B will therefore be liable for the accrued holiday pay entitlement of the eight security officers, even though Company A had been paid by the client in respect of holiday pay. Furthermore, had Company A agreed a pay increase with the security officers before being notified of the tender, Company B would be liable to honour that agreement. As far as the transferred staff are concerned, the effect of Regulation 5 of the TUPE Regs is that any rights they may have had to sue Company A for any reason connected with their employment are lost, their sole recourse lying against Company B.

Conclusion

It is quite obvious to see how a company’s initial exaltation at winning a tender for a large contract can very quickly turn into a nightmare so it is imperative that any such contracts are preceded by a comprehensive TUPE audit, and that the tender is based on the results of that audit.

Of course, there is very little incentive on the outgoing company to produce comprehensive and accurate TUPE information, unless it feels it has a realistic chance of retaining the contract. In circumstances in which the information is inaccurate (intentionally or unintentionally) the outgoing company may well be potentially liable to the incoming company if that company suffers loss as a result.

If the client does not call on the outgoing company to produce TUPE information, then those companies tendering for the contract should demand such information directly from the outgoing company.fc

By way of conclusion, as an incoming company’s exposure in a TUPE transfer situation is immense, it is far better to forego a contract in circumstances in which TUPE information is not forthcoming, and a comprehensive TUPE audit cannot therefore be conducted, than enter such a contract blindly, inheriting problems and potential liabilities which in extreme cases could put the incoming company out of business.