TUPE or not to TUPE: service provision changes

The purpose of the Transfer of Undertaking (Protection of Employees) Regulations 2006 (TUPE) is to provide protection to employees who are transferring from one employer to another employer as a result of a business transfer or service provision change.

Service provision change (SPC) are three little words that have a big meaning under TUPE. This article aims to provide a simplified explanation as to what a SPC is and when it triggers the application of TUPE.

What is a service provision change?

If the business transfer test under TUPE does not apply, there may nonetheless be a SPC. A SPC can occur in three ways:

1. Activities currently provided by a client are to be provided by a third-party supplier (a contractor), known as ‘outsourcing’.
2. Activities currently provided by a contractor to a client are to be provided by a different third-party supplier to the same client, known as a ‘contractor-to-contractor SPC’ (or ‘second-generation contracting out’).
3. Activities currently provided by a contractor are to be provided in-house by a client, known as ‘insourcing’.

When does TUPE apply to a SPC?

Whether TUPE applies to any of these scenarios is a matter of fact and will depend upon the specific circumstances. The courts and tribunals have adopted a relatively narrow interpretation of TUPE for a SPC to apply.

In summary, the following conditions must be met:

• The activities being carried out by the existing provider (the transferor) must be activities which are fundamentally the same as the activities to be carried out by the new provider (the transferee).
• Immediately before the SPC:
  • there must be an organised grouping of employees (which are situated in Great Britain) that have, as its principal purpose, the carrying out of the relevant activities on behalf of the client. (An organised grouping of employees could be a single employee).
  • the client intends that the activities will be carried out by the transferee and these activities will not be for a single specific event or a task of short-term duration.
• The client for whom the activities are carried out must remain the same.
• The activities do not consist wholly or mainly of the supply of goods for the client’s use.

The automatic transfer principle – where TUPE applies

Where there is a SPC, those employees assigned to the organised grouping of employees have a legal right to (and will automatically) transfer from the transferor to the transferee on their existing terms and conditions of employment and with all their existing employment rights and liabilities intact (although there are special provisions dealing with occupational pension schemes). These rights include any collective terms negotiated and agreed by the national/ local trade unions before the transfer date. This is known as the automatic transfer principle.

Employees who are only temporarily assigned to that group are not, however, included and will not transfer.

Practical issues

As TUPE is a complex area of law, it is often the case that the facts are not straightforward and practical issues will arise in trying to determine whether TUPE applies to the change that is taking place and if so who is caught by the transfer. Whether or not TUPE applies will be fact specific.

Two of the most common issues relate to gaps in the service being provided and something known as ‘fragmentation’ which we outline below.

Gaps in the provision of service

In some cases, there may be a SPC but a gap in service between the transferor having carried out the activity and the transferee starting to carry out that activity.

A temporary cessation of activities does not itself preclude the application of TUPE. However, the purpose, nature and length of the cessation are relevant in determining whether or not the organised grouping continued in existence and whether TUPE does apply.

Fragmentation

An activity could transfer from a single contractor to more than one contractor. In this situation, if it is not possible to identify what activities are transferring or activities which are fundamentally the same as before or an organised grouping of employees in respect of each transfer, then TUPE may not apply. In such cases, the affected employees are left without TUPE protection.

However, if these elements can be identified, case law confirms that a SPC can still occur provided that the other requirements under TUPE are met.

The likelihood of fragmentation meaning TUPE does not apply has been reduced in recent years through case law which has confirmed that employees can have their contracts of employment split between a number of transferees; for example a full-time employee’s contract could be split into two part-time contracts which transfer to two new transferees.

In many cases, dividing a contract between multiple transferees will not be practical and will likely have an adverse impact on an employees’ rights or working conditions. It also poses commercial challenges for the transferees; for example, how to organise working hours and how to protect the slippage of confidential information between their organisations.

A potential practical solution in this situation could be for the transferees to agree which employees will transfer to them. However, as these employees will have protection under TUPE, it is important to remember that TUPE applies automatically by law (it isn’t something that the parties can carve up as they see suitable). Therefore a decision not to take an employee on may amount to a dismissal which could be automatically unfair under TUPE (if they have the requisite length of service) unless it can be argued there is an economic, technical or organisation reason for it that entails changes to the workforce. Therefore, decisions made in haste or without specialist legal advice could prove costly.