H-HR-C: Transfer of Undertakings (Protection of Employment) Regulations [TUPE] 2006

TUPE refers to the UK's implementation of the European Union Business Transfers Directive¹. The implementation was as of 2006 completely replaced the 1981 TUPE Regulations governing transfer of employment from one employer to another when a company/organisation is merged/sold with or to another. A Directive is a legislative act which requires member states to achieve a particular result without dictating the means by which this particular result is to be achieved. This means that the national authorities have to adapt their laws to meet these results with the freedom to decide how to do so.

The main aims of TUPE are to protect the rights of the employees whose business is being transferred to another business. It ensures that employees are not dismissed before or after the transfer just because of the transfer itself. Also, it ensures that the terms and conditions of the employees' contracts of employment are not worsened. However, these two conditions can be overruled if there are economic, technical or organisational reasons for the changes. Also, another obligation that is ensured upon by the regulations is that the affected employees have to be informed and consulted through representatives.

In the current economic climates where productivity is reduced mainly by the high labour costs, some employers find it more profitable to lay off employees before a sale so that the new owner will be willing to pay for a business with a lower labour cost. This also helps to prevent office politics from negatively affecting the employment status of the employees who are involved in them when there is an imminent change in company ownership. Employees would most likely suffer more because they would not have been fully represented during the takeover negotiations.

TUPE affects a wide variety of businesses and business functions and fundamentally, they are defined to apply where a relevant transfer occurs. A relevant transfer is defined as a transfer of an economic entity which retains its identity. Thus it applies when employers:

buy or sell part or all of an organisation
grant or take over a lease or licence of premises and operate the same business from those premises
outsource or make a service provision change involving:

an initial outsourcing of a service (customer to external contractor)
a subsequent transfer (from one external contractor to another external contractor)
bring the service back-in house (from an external contractor to a customer)²

The second bullet point on the continuing of business on a different premises might pose complications if it leads to employees being made to incur travel costs that are not catered for in their initial contracts of employment. If employees have to relocate or face longer travel times and higher travel charges because of this move then the employer might have to discuss this with the employees and make changes to the contract of employment before they make the move to make the transfer less strenuous for the employees or make it equally rewarding to the previous premises. This is because if the employees object to this transfer they might be entitled to some legal action on the employer.

The third bullet point is quite significant for lawyers and law firms because it affects how employees will be covered in the event of a client leaving the business for services from another law firm due to the change in identity of the owner. If this happens, the legal team from the previous would be entitled to transfer to the new provide under the same terms and conditions as before, if the new provider were to object, the new employees would be entitled to sue for unfair dismissal³. This appears to be unfair for the new provider because they are incurring the cost of additional stuff who were not planned for and also it seems to give too much control on an individual client which can only understandable if the previous provider only focussed on this individual client. Law firms are affected in like-manner to firms that are involved in subcontracting services, and the external contractors themselves.

Where an employee objects to the change in the identity of the employer he/she will not be considered an employee of that business any more. He/she is treated as if his/her contract terminated when the transfer takes place. This however, does not mean that they are dismissed unless they are in-fact dismissed by the employer. Also, an employee who resigns on or before a TUPE transfer because of well-founded fears that the new owner intends to impose worse terms and conditions of employment than those provided by the previous employer can claim constructive wrongful dismissal against the original owner. The employer will have to show economic, technical or organisational reasons for dismissal or else it will be considered unfair. And employees made redundant in this way are entitled to a compensation if the had been working with the organisation for two consecutive years.

This last point allows the new owners of the business who wish to rebuild the labour and organisational structure of the business to make these necessary adjustments. They have to face the financial costs of compensations but at least in the long term they will not incur the costs that come with employing and retaining unwanted workers. This can be seen in several businesses that go into administration because they will need to lay off the highest earning employees and replace them with cheaper labour in an effort to downsize and cut operational costs.

Because TUPE requires the new owners of the business have to take up employees without changing their contracts of employment, the former employers have to provide full written information about the employees inherited. This helps the new owner to plan any organisational or structural changes to the labour-force of the business. It also allows the business to device ways to monitor the employees in the best way in accordance to their character, level of skill as well as level of competence. And finally it allows the new owner to iron out any disciplinary issues that were not settled before the transfer occurred. That way the employee will not feel like they are being treated unfairly because the action will be based on the same information that the previous owners were going to use.

The new owner will not have to take liability when they buy a business from an insolvent employer, and if agreed with representative trade unions, contracts of employment can be changed if the change is designed to save an ailing business. This is one of the main exceptions to the main regulations under TUPE. The other one involves Occupational Pension Schemes [OPS]. TUPE used to have an exception to transfer of contract relating to “old age, invalidity and survivor”. These days an employer can either:

seek indemnity protection from the old employer, or
provide the same level of early retirement benefits post-transfer: a mirror image scheme may be required.

This is a result of the Pensions Act of 2004. The act also means that employees who were members of an OPS prior to the transfer are entitled to either:
membership of a defined benefit OPS which satisfies certain minimum standards, or
matching contributions of up to 6% of a basic pay to a certain shareholder pension scheme or defined contribution OPS⁴.

However, the Pensions Act of 2004 allows for the new employer and its employees to agree to something different going forward⁵. This makes the decision making more democratic and less centralised on a fixed policy. This might bring an agreed and satisfactory human resources plan for the future.

From a Human Resources point of view, TUPE is essential in preventing unfair dismissals when there is no economic, technical or organisational reason. This also helps to maintain continuity in business operations. Also, it maintains job security in employees and when the new owner is perceived to value the rights of the employees, their productivity is likely to rise as they will be willing to take up working conditions which would have been unfavourable under the previous employer, such as longer working hours, overtime and reduced financial remuneration.