A raft of recent cases has significantly narrowed the circumstances in which The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) will apply to “service provision changes”, creating uncertainty and potentially unforeseen financial consequences for parties involved in the contracting-out, contracting-in or re-tendering of services.  This blog summarises the key issues arising from the cases.

In a nutshell…

It has now become much more difficult to satisfy the service provision change requirements of TUPE. Where TUPE does not apply or its application is disputed, employees will not transfer and the existing employer will remain responsible for their future employment or alternatively making them redundant, with all the financial implications of that.  This shift in approach will be particularly significant for contractors in relation to the termination of existing service contracts. It will now be much harder to establish that TUPE should apply so as to transfer employees to any new provider appointed.

In more detail…

It has long been accepted that TUPE, subject to a few limited exceptions and arguments over “assignment” of employees to the services in question, will apply to the contracting-out, contracting-in or re-tendering of services, commonly referred to as “service provision changes”.

Strictly speaking though, in order for there to be a service provision change within the meaning of TUPE, there must be “an organised grouping of employees” whose “principal purpose” is carrying out the relevant activities and the employees in question must be “assigned” to the organised grouping of employees. Recent cases have significantly narrowed the circumstances in which these requirements will be met, throwing into some doubt the scope of their application.

We’ve read the cases so you don’t have to. The following key points can be distilled from them:

  • There will be no “organised grouping of employees” where there is no identifiable grouping of employees which would make it difficult to identify who transfers on a change of service provider. This could be the case, for example, if a contractor provides services to a particular client using different employees, rather than an identifiable team.
  • It is not enough to establish an “organised grouping of employees” that employees mostly work for a particular client without any deliberate planning or intent.  Rather, the carrying out of the relevant activities must be the principal purpose of the “organised grouping” to which the employees belong.  In other words, employees must be organised by reference to the requirements of the particular client. So, for example, the employees in one case spent the majority of their time working for a particular client but were organised according to their shifts not according to the requirements of that client. They were held not therefore to have comprised an organised grouping for the purposes of TUPE.
  • It is suggested that the classic example of an “organised grouping” is the case where employees are organised as, for example, “Client [A] Team”, “Client [B] Team” etc.
  • Where a service is provided by a team, it does not necessarily follow that a particular member who is dedicated to providing the services will be eligible to transfer with the services. Rather, the team has to be considered as a whole. If the team does not amount to an organised grouping that has as its principal purpose the carrying out of the activities for a particular client, any individual employee’s dedication to those activities, even if they are exclusively working on the services, is irrelevant.
  • The question of “assignment” of employees is a secondary question, to be considered once it is established that an “organised grouping” exists. It is a factual question, taking into account a number of factors, including time spent on the relevant activities.  What is clear is that the employees in question must be involved and essentially dedicated to the actual provision of the services to the client.  So, not every employee who can be linked in some way to the services is to be regarded as “assigned”. For example, if an employee’s role is strategic and principally directed to the survival and maintenance of a service provider as an entity that will not be sufficient to establish that the employee is “assigned” to the organised grouping. This may be most relevant in respect of employees, for example, in senior management or central support functions such as HR, finance, IT etc. who are not involved, or only involved to a limited extent, in the front line delivery of actual services.

All of the above means it will now be much harder to establish that TUPE applies in the context of a service provision change.

Implications for contractors

This development is most likely to affect contractors on termination of their existing service contracts when, if TUPE does not apply or its application is disputed, they will remain responsible for future employment of the relevant employees or alternatively making them redundant, with all the financial implications of that…

Contractors looking to increase the likelihood of TUPE applying on termination of their existing contracts should take immediate steps to review the resourcing of existing services and, where that does not meet the requirements of the organised grouping and assignment tests referred to above, take whatever steps they can to address that.

They should also review the terms of any contractual documentation governing the delivery of existing service contracts to identify any protections in their favour as regards the employment consequences of termination of the contracts.  For example, are there any indemnities in relation to redundancy and other termination costs in the event that TUPE does not apply on termination?

The cherry on the cake

As if to add insult to injury, earlier this year the Government launched a consultation exercise on a number of proposed changes to TUPE. The most significant of these is the repeal of the regulations insofar as they relate to service provision changes. This would mean that the definition of a relevant transfer for the purposes of TUPE would revert to the traditional “transfer of undertaking” concept, a move which will create even more uncertainty in what had become a reasonably settled area of law.

Is there any good news?

Recognising the implications for contractors with existing service contracts of its proposal to repeal the regulations relating to service provision changes, the Government has indicated that there would a long lead-in time before any such change takes effect.  The flip side of that though is that we can expect the cases referred to above on service provision changes to be relevant for some time.

Separately, there has been some good news for employers grappling with collective agreements inherited through TUPE transfers. There has been some to’ing and fro’ing by the Courts in recent years in relation to whether transferred employees are entitled to the benefit of pay rises set by collective agreements which are incorporated into their contracts of employment but negotiated after the relevant transfer, even though the new employer is not party to them.  The European Court of Justice has now ruled, helpfully for employers, that the new employer in any TUPE transfer is only bound by any collectively agreed terms in force at the date of transfer and not by subsequent collectively agreed terms which it had no part in negotiating.  This is a particularly positive decision for private sector employers involved in TUPE transfers from public sector bodies.