TUPE & redundancy

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Fail to spot a TUPE situation or fail to deal with employees according to TUPE legislation, and the employer can face employment law costs and claims.  If a business transfers from one legal entity to another, then the TUPE regulations apply. These regulations protect the employees’ employment law rights.

To help employers, we review below:

Employer obligations

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

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.  The defence for an employer is the reason for dismissal was an economic, technical or organisational reason.

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

Inform and consult employees

The old and new employers must consult about the consequences of the TUPE transfer including any redundancies which may arise.  The obligations apply regardless of the size of the employer. If the employer fails to abide by the regulations, it faces a 13 week gross pay penalty for each affected employee. Depending on circumstances, liability is joint and several between the old and new employers.

Special problems to consider which can arise under TUPE

Problem areas often arising which should be thought through include:

Share incentives

The 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 TUPE transfer means that the potential for employees to earn a bonus is hampered or reduced post transfer there can be claims brought by employees.

Impact on trade secrets and post termination restrictions

Changing restrictive covenants imposed on any employee comes with issues.  Trade secrets are another area to consider. Delicacy is required to avoid the risk of unenforceability.

Managing redundancies and TUPE

Often there are redundancies before and after a TUPE transfer.  Redundancies 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.

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 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 “ecomonic, technical or organisational” defence;
  • The dismissals are automatically unfair.

Redundancies before the TUPE transfer can be an economic necessity and a valid defence – for example needed to  keep the business trading.

Post TUPE transfer redundancies

Old and new employers can have obligations after the TUPE transfer has been completed.

Old employers making redundancies

Upon the transfer of part of a business, the old employer 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. It will be necessary to include the old employer’s staff proposed for redundancy within a redundancy consultation process.

New employers making redundancies or changes

The new employer must inform the old employer 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 employers, in such instances, the Employment Tribunal can make the award entirely against the new employer.

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

Practical steps

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

It is possible for both the old and new employers to enter into settlement agreements which include amongst other matters a waiver of the requirement to consult.

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.