Overview
These regulations are particularly important if you work on acquisitions in the corporate department of a law firm.
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (as amended) (‘TUPE’) protect employees upon the occurrence of a ‘relevant transfer’. There are two types of relevant transfer under TUPE:
- a business transfer – where an ‘undertaking’ (or part of an undertaking) is transferred from one person or company to another. Very generally, an ‘undertaking’ means a business or part of a business referred to as amounting to an ‘economic entity’; and
- where there is a ‘service provision change’ as defined in the TUPE. An example of a service provision change could be where a company outsources its cleaning function to a third party contractor or where it subsequently changes the contractor who provides its office cleaning.
Before TUPE was brought into force, the new owner of a business could either decide not to employ any of the employees, or to employ only some of them on his own terms. This left employees in a very vulnerable position and likely to be made redundant when the business in which they worked changed hands.
Common Law position
It is important to understand the distinction between the sale of a company (involving a share sale) and the sale of a business (i.e. a sale of the assets). The sale of a company involves a sale of shares and a sale of a business generally involves the sale of the assets of the business which allows the new owner to continue to operate the business as a going concern after the transfer of those assets.
Share sale
TUPE does not apply to share sales.
On a share sale, only the shares of the company change hands. The new owner of the shares steps into the shoes of the old shareholder as the new owner of the company. All contracts between the company and the employees remain in place because the identity of the employer and the terms and conditions contained in the contracts of employment remain exactly the same.
Business sale
TUPE applies to business sales.
If a company sells its business, it is likely to sell everything needed to operate its business including e.g. the freehold property, the equipment, stock, computers, work-in–progress, customer lists etc. to a third party.
At common law, the employees’ contracts are with the company and not with the new owner of the business. Under the law of privity, their contracts would not be transferred to the new owner automatically, nor could they be transferred unilaterally by the company. It would require all three parties (the company, the employee and the new owner) to agree to novate the contracts from the company to the new owner.
This position was very unsatisfactory for employees of a business which was being sold (as they could easily lose their jobs) and TUPE was brought into force to reverse the common law rule.
Effect of TUPE
On the sale of a business, the contracts of employment are now, in effect, automatically transferred to the transferee (the new owner) of the business by operation of law, provided that:
- there is a transfer from one person to another of an undertaking (or part of an undertaking) situated in the UK immediately before the transfer;
- the transfer is of an economic entity which retains its identity after the transfer; and
- the relevant employees are employed in the undertaking immediately before the transfer or would have been so employed had they not been unfairly dismissed in the circumstances described below.
TUPE states that those employees employed immediately before the transfer automatically transfer to the transferee. This expressly includes employees dismissed prior to the transfer and because of the transfer where there is no ETO reason entailing a change in the workforce for the dismissal.
Similar protection is afforded to employees in respect of a service provision change
Employees who object to being employed by the transferee will not transfer. The transfer will instead operate to terminate their employment but it will not generally constitute a dismissal.
Any variations to employment terms, where the sole or principal reason for the variation is the transfer itself, will be void, unless the variation is for an ETO reason entailing a change in the workforce and the employer and employee agree to the variation, or the terms of the employment contract permit the variation. This means that the transferee cannot use the transfer as an opportunity to harmonise terms and conditions of employment.
What the transferee acquires
The transferee inherits all accrued rights and liabilities connected with the contracts of employment of the transferred employees, together with all the statutory rights and liabilities connected to that employment with the exception of:
- criminal liabilities; and
- certain rights and liabilities relating to provisions of occupational pension schemes (subject to the requirements of the Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005.
It is also worth noting that there is an obligation to ensure that a proper consultation is held with employees as to the fact of, reasons for and consequences of the transaction. A failure to inform or consult can result in large financial penalties for both the transferor and the transferee pursuant to TUPE of up to 13 weeks’ actual pay per employee.