Fail to spot a TUPE situation or fail to deal with employees according to TUPE legislation, and you face employment law costs and claims.  

If a business’ ownership transfers from one legal entity to another, then TUPE regulations apply. These regulations protect employees employment rights.

To help employers, we review below:

  • What the enhanced protection against dismissal under TUPE means;
  • What the obligation employers owe to employees is;
  • How to make an employee redundant in a TUPE situation; and
  • Issues under TUPE after the transfer.

Enhanced protection against dismissal

A business/asset sale or the transfer of a contract for the provision of services from one entity to another are both covered as “relevant transfers” by the TUPE regulations.

If TUPE applies, then the employees at the time of transfer automatically join the new organisation:

  • On their existing terms and conditions;
  • With preserved continuity of employment.

TUPE regulations state if the main or principal reason for an employee’s dismissal is a TUPE transfer then it is automatically an automatically unfair dismissal:

  • If  the employee has the requisite length of service; and
  • Unless the reason is an Economic Technical or Organisational reason,  entailing a change in the worforce.

If the dismissal occurs before the TUPE transfer, and is unfair, then liability transfers to the new business owner.

Inform and consult employees

The current managers must inform those affected by the TUPE transfer. The managers must consult about the consequences, including any redundancies which may arise.

Fail to abide by the regulations, and you face a 13 week gross pay penalty for each affected employee. Depending on circumstances, liability is joint and several between the old and new managers.

Special problems to consider which can arise under TUPE

Problem areas often arising which should be thought through include:

  • Impact of TUPE under share plans – the requirement to match benefits can be complicated because the transferor may not be able to match.  For example, if the transferee is a public company with traded shares and the transferee is a private company it is impossible to match or offer an equivalent incentive scheme.
  • Impact on bonus arrangements – if the transfer means that the potential for employees to earn a bonus is hampered or reduced post transfer there can be claims.
  • Impact on confidential information do not fit into the transferee’s requirements.  Changing restrictions imposed on any employee comes with issues and delicacy is required to avoid the risk of unenforceability.

TUPE and redundancies

Often there are redundancies before and after a TUPE transfer.  Redundances after the transfer are usually less problematic, but there are pitfalls.

Redundancies to prepare the business for sale

Redundancies to prepare a business for sale is the main problem area, especially if the current owners have not identified a buyer. It is also problematic if the new business owner makes redundancies a transfer condition.

A dismissal is unfair, in the context of a TUPE transfer, if the main reason for dismissal is the TUPE transfer.  Then any Economic Technical or Organisational reasons can be questioned.

If the business’ managers are preparing the business for sale, but haven’t identified a buyer at the time of the redundancies, TUPE might not apply. The reason is based on case law under the old regulations. The argument is that the reason for the dismissals is not the subsequent TUPE transfer.   Unhelpfully, there is no further guidance. The government states that future case law will resolve whether the main or principle reason for the dismissal is the TUPE transfer, where no new owner is identified.

So if you are contemplating dismissals to prepare your business for sale, then seek advice. At a minimum ensure the dismissals comply with normal unfair dismissal rules and consultation requirements.

Redundancies as TUPE transfer condition

Often the new owners do not want all the staff.  The new managers may make it a condition of taking over the business, either formally or informally, that the current managers dismiss employees as redundant before the transfer.

Thus, tribunals will probably deem the TUPE transfer as the sole or principal reason for such dismissals, and:

  • There is no “ETO” defence;
  • The dismissals are automatically unfair.

Clearly, the new managers would have made some individuals redundant after the transfer.  However, the current managers can’t rely on the new managers reasons or requirements to dismiss staff.

However, TUPE won’t apply even if the new managers are identified, if:

  • Redundancies before the TUPE transfer are an economic necessity; e.g.
    • To keep the business trading.

Post TUPE transfer redundancies

Post transfer redundancies may arise because the transferor does not have need all of the staff transferring to it or the transferee itself, having transferred part of its business and staff, does not need so many employees in the remaining business.

Potential liability under the employment protection provisions of TUPE remain very much limited. Whether or not, under the new rules, the sole or principal reason for the redundancies is the TUPE transfer (and it may not be) post-transfer redundancies are likely to fall under the definition of an ETO.

Most commonly, the main problem with post transfer redundancies arise with regard to consultation obligations, both under TUPE and in respect of normal individual and collective consultation requirements.

Dismissals by the transferor

Upon the transfer of part of a business, a transferor may have a reduced requirement for remaining staff after a TUPE transfer has taken place. For example, fewer payroll or human resources staff may be required. Transferees must remember to include such staff in the pre-transfer TUPE consultation process, as well as carrying out a proper individual (and where necessary) collective redundancy consultation process.

Dismissals by the transferee

The transferee must inform the transferor about redundancies that will be made. If it fails to do so, although liability for a failure to inform and consult employees is usually joint and several shared between the transferor and transferee, in such instances, the tribunal will make the award against the transferee.

Transferees also have to be mindful about the impact that the transfer of business has on its own staff.

The incoming business will in all likelihood be incorporated into the transferee’s business. This may give rise to a change in existing employee’s working practices, in respect of which the transferee must both inform and consult its staff under the TUPE regulations.  Any changes to the employment documentation is potentially caught.

In addition, transferees are not in position of simply allocating work to its own staff, dismissing the incoming staff working in the transferring business, without unfair dismissal liabilities being incurred.

Where there is a choice to be made as to who is going to do the available work, going forward, both the incoming employees and the transferee’s existing staff have to be included as part of a redundancy exercise.

Consultation exercises will be needed and how these are approached depends upon the number of employees involved.

Practical Steps

The problems set out above, and the liabilities which may be incurred, should be dealt with by the parties by way of agreement dealing with or effecting the transfer of the business.

Price the deal appropriately

The relevant parties need to negotiate warranties and indemnities and other practical provisions.  The purpose is to properly allocate the risk and costs associated with redundancies whether effected before or after the transfer.  The transaction needs to be priced accordingly.

Guidance on the conduct of information and consultation exercises may also need to be sought.

Use of settlement agreements

In addition, particularly if employees are to be dismissed before the transfer takes place or the parties would wish to avoid entering into any consultation process, effecting redundancies upon the basis of a settlement agreement should be considered.