UK: Outsourcing and Employee Transfers: What UK Customers and Services Providers Need to Know

As many readers will know, "TUPE" is the set of regulations in the UK dealing with the automatic transfer of the employment contracts of employees engaged in an undertaking which is transferred. The UK government issued new draft TUPE regulations ("New TUPE") earlier this year which were due to come into force on 1 October 2005. However, implementation has now been delayed until 6 April 2006. New TUPE will introduce the following changes which will affect both customers outsourcing and service providers.

The changes are designed to update TUPE to take account of the Acquired Rights Directive (2001/23/EC) and recent European and domestic caselaw.

New TUPE will apply both to transfers of undertakings within the meaning of the existing TUPE regulations (i.e. where there is a transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in the UK to another employer where there is a transfer of an economic entity which retains its identity) and to "service provision changes" (i.e. initial outsourcings, second-generation outsourcings and in-sourcings). Regarding the latter, new TUPE will apply where there is a changeover of contractors providing services to a customer and, prior to the changeover, there are employees assigned to an organised grouping, the principal purpose of which is to carry out the service activities in question on behalf of the customer concerned. In such a case, the employees assigned to the organised grouping will be treated in the same way as in cases where the existing TUPE regulations apply and the party responsible for the carrying out of the service activities before the change will be treated as the transferor and the party responsible for the carrying out of the service activities after the change is to be treated as the transferee (draft regulations 3(1)(b) and 3(3)(a)).

The reasons for this extension of coverage are to achieve greater certainty in practice for all parties concerned, reduce unnecessary disputes and litigation and lower transaction costs. This change could be considered pro-customer/anti-supplier as it extends TUPE's coverage, although many outsourcings are in fact already covered by the existing TUPE regulations.

New TUPE clarifies the effect of the regulations in relation to the key issues of transfer-related dismissals and changes to terms and conditions of employment post-transfer. In the case of transfer-related dismissals, New TUPE confirms that:

(a) dismissals for which the sole or principal reason is the transfer itself or a reason connected with the transfer that is not an ETO reason, i.e. is not an "economic, technical or organisational reason entailing changes in the workforce", are to be automatically unfair under the unfair dismissal legislation;

(b) dismissals for which the sole or principal reason is not the transfer itself, but is a reason connected with the transfer that is an ETO reason, are to be potentially fair under the unfair dismissal legislation, i.e. fair, subject to the normal test of reasonableness in that legislation; and

(c) dismissals for which the sole or principal reason is unconnected with the transfer are unrelated to and unaffected by a relevant transfer, even though they may be made around the time of such a transfer (draft regulation 7).

In the case of changes to terms and conditions of employment post-transfer, New TUPE confirms that:

(a) changes for which the sole or principal reason is the transfer itself or a reason connected with the transfer that is not an ETO reason are to be void, i.e. ineffective;

(b) changes for which the sole or principal reason is not the transfer itself, but is a reason connected with the transfer that is an ETO reason are to be potentially effective, i.e. effective, subject to being agreed between the parties or their representatives; and

(c) changes for which the sole or principal reason is unconnected with the transfer are unrelated to and unaffected by a relevant transfer, even though they may be made around the time of such a transfer (draft regulations 4(4) and (5)).

The clarification regarding transfer-related dismissals reflects the recent case law. However, the provision regarding changes to terms and conditions is new. It is pro-supplier as it gives suppliers much greater freedom to change terms and conditions post-transfer.

New TUPE introduces a requirement on the transferor, i.e. the customer/outgoing supplier, to notify the transferee, i.e. the new supplier, of the identities of the employees, and of all the associated rights and liabilities that will pass across in the transfer ("employee liability information") (draft regulations 11 and 12). Failure to comply with this requirement can result in a fine of up to £75,000, taking into account the extent of and reason for the failure, the terms of any contract between transferor and transferee relating to transfer under which transferor may be liable to pay sum to transferee in respect of failure to notify transferee of employee liability information and the employment protection purposes of New TUPE.

Although this change could be viewed as anti-customer/outgoing supplier as it is an additional requirement with which they must comply, it may have little effect on many customers/outgoing suppliers as new suppliers would usually request, and customers/outgoing suppliers would usually provide, such information anyway.

New TUPE provides for the transferor, i.e. the customer/outgoing supplier, and the transferee, i.e. the new supplier, to be jointly and severally liable for any award of compensation for the transferor’s failure to comply with its information and consultation requirements (draft regulations 15(8) and 15(9)). The reason for this change is to provide the transferor with an incentive to comply with the relevant information and consultation requirements against a background of conflicting case law as to whether or not this liability passed from the transferor to the transferee.

This change is anti-customer/outgoing supplier as the customer/outgoing supplier will no longer be able to seek to avoid liability for failing to inform and consult by arguing that that liability transferred to the transferee on transfer.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved