Buying or selling a business: can TUPE be avoided?

Our employment experts answer some commonly-asked questions regarding the application of TUPE to business transfers. 

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (known as TUPE) provides for employees’ employment contracts (and continuous service) to continue when an ‘economic entity’ (typically meaning a business) is transferred to another party and certain conditions are met (business transfer). For more information see our earlier insight TUPE: what is it?

TUPE also applies where a service provided by one party is carried out by a new provider instead (service provision change). For more information see our earlier insight TUPE or not to TUPE: service provision changes.

In this guidance we will focus on how TUPE applies to business transfers. It should always be remembered that whether TUPE applies is a matter of law; if it applies to the transfer by law, it cannot be avoided.

1. What if we purchased the company’s shares instead?

If the company’s shares are purchased, TUPE would not apply to the share sale itself on the basis that there is no transfer of a business from one party to another; the business remains housed in the original entity, but the owner of that entity has changed.

In this scenario employees will continue to be employed on their original terms. Employees do not have special rights protecting their contractual terms or from being dismissed because of, or in connection with, the transfer. They will still have ‘normal’ protection against changes including the right to pursue claims for unfair dismissal, deduction from wages or breach of contract.

However, where following a share sale there is integration into, for example, a parent company, there is a risk that TUPE could be found to have occurred. TUPE should always be a consideration in post-acquisition integration plans as it cannot automatically be assumed that it will not apply.

2. What if the business is broken up? Does that affect TUPE applying?

A business may be broken up and sold to a number of different purchasers who each take a part of the business. The question then arises whether staff have transferred under TUPE and if so, where?

The courts have held that if what emerges is not recognisably the same business or entity TUPE might not apply. This is because the economic entity must retain its identity after the transfer – see below. Such situations must be approached with caution and are fact sensitive.

3. What if we look to do things differently?

As above, a standard transfer requires the economic entity to retain its identity after the transfer.

While not as common in business purchases, it is feasible that if, for example, a buyer was to purchase a restaurant and the restaurant’s name but use it as a grocery store, or something recognisably different, TUPE would not therefore apply.

That being said, it’s unlikely that a buyer purchasing a business’ assets and goodwill (their name and reputation) would want to start something new or different. The true difficulty arises where, for example, a restaurant closes, and a new restaurant purchases a lease of the premises and perhaps certain fixtures and fittings but reopens as a restaurant but a different brand or food type. Does TUPE apply? This is more likely to trigger TUPE as it is more likely that an economic entity has changed hands and retained its identity. However, each case will need to be treated on its own facts.

In the scenario above, there could also be issues if the restaurant closed for a period of time due to refurbishment. However, it should be noted that a temporary cessation of activities does not always mean TUPE will not apply.

4. We’ve seen somewhere that employees can object to TUPE, is that true? If so, what’s the effect?

Technically, yes. Employees can object transferring under TUPE. Employees wishing to object must do so freely without pressure from seller, buyer or both.

If only part of a business is being sold, it may be that employees do not want to leave their employer and the seller. Equally, they may wish to retain good employees. If employees object to a transfer, the previous employer is able to offer work within the remaining parts of the business.

However, if employees who object are not staying, buyers then have the opportunity to employ the non-transferring employees on their own terms.

While this may be a positive solution in relation to some employees, buyers should be aware that employees who object to TUPE are no longer bound by any previous restrictive covenants in respect of the buyer because their contract will not have transferred over. There is, therefore, a risk that employees with particular knowledge of the product/ service or clients set up in competition. Objections should therefore be carefully managed to the extent possible.

Furthermore, it should be remembered that section 218(2) of the Employment Rights Act 1996 contains continuity of service provisions which operate in addition to TUPE. This states that when “a trade or business, or an undertaking… is transferred from one person to another”, “the transfer does not break the continuity of the period of employment” of an employee who was employed in the trade, business or undertaking “at the time of the transfer”. Accordingly, if a buyer employs a non-transferring employee, the employee may retain their continuity of service by virtue of this provision and care should be taken before assuming that the parties are starting with a clean slate.

5. Can we come to some agreement with the sellers as to the cost of TUPE?

While an agreement as to whether TUPE applies or not between seller and buyer will not forego an employee’s rights to transfer, parties can, and sometimes do, agree that in the event TUPE does apply, the employee’s employment will be terminated. Parties will then agree who pays the cost of those dismissals (which may well be automatically unfair). Depending on whether the sale/ purchase is geared by the seller’s eagerness to sell, the buyer’s eagerness to purchase or a mixture of the two, one party may indemnify the other against all costs/ liabilities that arise as a consequence of TUPE-related dismissals.

If dismissal is not contemplated in relation to transferring staff, it is nonetheless common to see a commercial agreement containing provisions which allow a buyer to dismiss (at the seller’s cost) employees not on the seller’s list of transferring staff. This avoids costly surprises on the part of the buyer.