Transfer of Undertakings (TUPE)

What is TUPE?

TUPE’ means the Transfer of Undertakings (Protection of Employment) Regulations 2006.

The purpose of TUPE is to protect the rights of all employees when the whole or part of the business of an employer is taken over by another employer.  If TUPE does apply, the incoming employer (referred to under TUPE as the transferee) takes on all the rights and liabilities associated with the employees who were employed by the out-going employer (referred to under TUPE as the transferor) immediately before the transfer took place.

When will TUPE apply?

TUPE will apply if there is a relevant transfer.  This is where an undertaking that is situated in whole or in part in the United Kingdom is transferred from one person to another.  A person can be a company, a firm or an individual.

There are two types of relevant transfer:

  • business transfers (regulation 3(1)(a) of TUPE)
  • service provision change (regulation 3(1)(b) of TUPE).

Some transfers will be both a business transfer and a service provision change.

Business transfer

A business transfer includes the transfer of a business, undertaking or part of a business or undertaking, which involves three elements:

  • an economic entity
  • a transfer of that economic entity
  • the economic entity retaining its identity following the transfer.

Service provision change

A service provision change occurs when a company engages a contractor to do work on its behalf and either:

  • reassigns such a contract (whether by contracting out, outsourcing or re-tendering)
  • brings the work ‘in-house’ (where a contract ends with the service being performed in-house by the company itself).

Where a contract is awarded to a contractor for the first time this is known as first generation contracting out and subsequently to another contractor as second generation contracting out and bringing the contract in-house in known as in-sourcing.

It will not be a service provision change if:

  • the contract is wholly or mainly for the supply of goods for the client’s use
  • the activities are carried out in connection with a single specific event or a task of short-term duration.

In deciding whether there is a relevant transfer when there is a service provision change what needs to be established is that:

  • there is an organised grouping of employees which had as its principal purpose the carrying out of the activities in question
  • the company intends that those activities will be carried out by the transferee
  • the activities cease to be carried out by the transferor and are carried out instead by the transferee
  • the activities before and after the transfer are fundamentally the same.

Inter-group transfers

Where an activity is transferred between subsidiaries of a group, TUPE will apply if there is a transfer of an economic entity. Therefore, where subsidiaries are separate legal entities employers cannot hide behind the group to avoid their TUPE obligations.

Cross border transfers

TUPE applies to:

  • a business transfer, where the undertaking is situated in the UK immediately before the transfer
  • a service provision change, where there is an organised grouping of employees situated in Great Britain immediately before the service provision change
  • the transfer is governed or effected by the law of a country or territory outside the UK
  • the service provision change is governed or effected by the law of a country or territory outside Great Britain
  • the transfer of a business (which may also be a service provision change) involves employees who ordinarily work outside the UK.

In what situations does TUPE apply?

By way of broad guidance TUPE has been found to apply to:

  • mergers
  • sales of a businesses by sale of assets
  • a change of licensee or franchise
  • the gift of a business through the execution of a will
  • contracting out of services
  • changing contractors
  • where all or part of a sole trader’s business or partnership is sold or otherwise transferred.

When will TUPE not apply?

TUPE will not apply in the following circumstances:

  • transfer of shares (unless it applied to an asset transfer carried out as a precursor to a share sale or a transfer of the business or part of the business to the holding company following a share transfer)
  • transfers of assets only (eg the sale of equipment alone would not be covered, but the sale of a going concern including equipment would be covered
  • transfers of a contract to provide goods or services where this does not involve the transfer of a business or part of a business
  • the supply of goods (eg supplying food to a client to sell in its staff canteen, rather than a situation where the contractor runs the canteen for the client).

What transfers under TUPE?

Where there is a relevant transfer the effect of TUPE is that an employee’s contract of employment automatically transfers from the transferor (current employer) to the transferee (new employer). TUPE deems the contract to have been made originally between the employee and the transferee.

The rights that transfer are:

  • continuity of employment
  • all existing terms and conditions of employment
  • enhanced redundancy payments
  • some occupation pensions (ie money purchase and stakeholder schemes with a cap on pension contributions of 6%
  • early retirement benefits under an occupational pension scheme
  • share options (which will be lost) should at least be compensated by an equivalent provision or payment, unless (which is unlikely) the share options are genuinely separate from the employment contract
  • comparable private medical insurance and/or permanent health insurance
  • an indemnity under employer’s liability insurance.

The transferee also takes over all existing liabilities relating to those transferred employees in tort (eg for personal injury) and anything done by the transferor which might result in a dismissal or discrimination based claim.

What must employers do prior to the transfer?

Before the transfer takes effect, an employer must inform and consult with all employees likely to be affected by the transfer in good time. This should be via appropriate representatives rather than direct.

Appropriate representatives are:

  • a recognised independent trade union
  • employee representatives elected by the employees affected by the transfer.

Certain information must be provided to the representatives relating to the affected employees long enough before the transfer to enable your employer to consult with them about:

  • the fact that the transfer is to take place
  • the date or proposed date of the transfer and the reasons for it
  • the legal, economic and social implications of the transfer
  • the measures which your employer envisages will be taken in relation to any affected employees after the transfer or, if there are no measures to be taken, that fact.

Measures are not defined in TUPE but are likely to include changes to existing work practices such as pay rates, job descriptions, hours of work, recognition and collective bargaining and can be minor changes (eg a change in the day of the month when salary is paid).

Micro businesses (ie with fewer than 10 employees) are excluded from the requirement to invite the election of representatives for collective consultation purposes for their part of the process. They must still inform and consult directly with the employees about the transfer.  Where a recognised union or existing group of employee representatives already exist, the micro business will still need to collectively and/or individually consult as usual.

Failure to comply with the statutory obligation to consult will give rise to an employment tribunal claim and compensation of up to 13 weeks’ pay (uncapped) for which both the transferor and transferee may be jointly or severally liable.

What if you do not want to transfer?

Employees have the right to object to the transfer of their contracts of employment to the transferee. If they make a clear objection concerning this, their contracts of employment will terminate on the transfer date.  If the only objection to the transfer is the change in identity of the employer then no dismissal occurs and, consequently, no employment tribunal claim can be brought.

If the objection relates to a repudiatory breach of contract (ie that the change is both significant and detrimental), an employee may resign and claim constructive unfair dismissal.

What if you are dismissed for a transfer related reason?

If an employee of the transferor or the transferee is dismissed before or after a relevant transfer for a transfer related reason, the dismissal will be automatically unfair, although the employee must still have 2 years’ continuous service to make an employment tribunal claim for unfair dismissal.

The only defence available to either transferor and/or a transferee against a claim of unfair dismissal, will be if the employee has been dismissed for a transfer related reason and either transferor and/or a transferee can show that the dismissal was for an economic, technical or organisational (ETO) reason entailing a change in the workforce.  This is known as the ETO defence.

To be an ETO defence, the reason must entail a change in the workforce and relate to the conduct of the business (as opposed to being designed to affect a sale or enhance the value of the business). This means that there has to be a change in the composition of the workforce or possibly a substantial change in job descriptions. In most cases this will apply only to genuine redundancy situations, where there is significant restructuring or a change in the workplace.

Where an ETO defence can be demonstrated, an employee will be treated as having been dismissed for some other substantial reason, which is a potentially fair reason for dismissal.  However, the transferor and/or a transferee must still demonstrate that it has acted fairly and reasonably.

If an employee is dismissed before the transfer takes place for a transfer-related reason, liability will pass to the transferee, unless there is an ETO defence, in which case liability remains with the transferor.

The transferee will be liable for any dismissals of its existing employees, whether before or after the transfer.

Can your terms and conditions be varied after a transfer?

TUPE has the effect of transferring a contract of employment from the transferor to the transferee in its original form.  After the transfer has taken place the pre-existing contract is treated as having been made between you and the transferee.

A transferor will not be able to change your terms and conditions after a transfer unless it entails a change in the workforce.  If so, this will give rise to a claim for constructive dismissal and will be automatically unfair.

A variation of terms and conditions is possible if the transferee can demonstrate that the variation is:

  • unconnected with the transfer
  • there is an ETO defence
  • the terms of the contract would have allowed the employer to make the change anyway, or a new development arises (eg the employer wins an order from a new client and has to bring in change to meet the needs of the new client)
  • in a case of insolvency.

However, even if an employee agrees to a variation of their terms and conditions it will not be valid if the reason for it relates to the transfer and the employer cannot show an ETO defence.  In such a situation the change is legally ineffective, even if it is on more favourable terms or is accompanied by some other benefit

The material contained in this web page is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.

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