The decision to outsource is often dictated by financial considerations, with cost saving usually a major incentive. Other important factors might include innovation in service delivery and improvements in service quality. While employment issues are rarely the primary driver in the decision, they can be of vital importance to the success of the project and should be addressed when the transaction is at an early stage. In this article, we set out the circumstances in which the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") will apply to an outsourcing and the legal implications if it does.
The protection of employees on the transfer of a business has its origins in the Acquired Rights Directive (Directive 77/187/EEC), initially implemented in the UK by the "old" Transfer of Undertakings (Protection of Employment) Regulations 1981 (the "1981 Regulations"). The 1981 Regulations applied whenever there was a transfer of the whole or part of a business in the UK, so long as the business (or part) constituted an economic entity and retained its identity after the transfer. When the 1981 Regulations took effect, outsourcing was still a relatively novel concept. However, by the early 1990s there had been a surge in outsourcing arrangements covering a multitude of business functions and services. Outsourcing arrangements did not sit easily with the definition of a business transfer in the 1981 Regulations, which contemplated the more traditional sale of a business or assets.
Protection for employees under the 1981 Regulations was achieved by stretching the definition of a transfer of a business or undertaking so that, generally, if broadly the same activity were carried out before and after the outsourcing or change of contractor, TUPE would apply. The decision of the ECJ in Ayse Süzen v Zehnacker Gebäudereinigung GmbH Krankenhausservice , put the cat amongst the pigeons and led to a period of uncertainty about whether TUPE would apply on a outsourcing, especially in labour intensive industries where the activity in question was effectively the labour of the employees with no other substantial assets passing to the new service provider. In Süzen the ECJ applied a restrictive interpretation to whether a particular outsourcing transaction amounted to a transfer under the meaning of the Directive, holding that a mere loss of a service contract to a competitor would not, of itself, amount to a transfer if there is no accompanying transfer of significant tangible or intangible assets or takeover by the new employer of a major part of the workforce.
The Acquired Rights Directive was subsequently revised and consolidated in Directive 2001/23 EC. The UK Government implemented the changes required by the revised Directive in TUPE 2006 and, at the same time, took the opportunity to address directly the issue of outsourcing. TUPE now expressly covers outsourcing arrangements and in doing so goes beyond what was required to implement the revised Directive. Thus, unusually, the protections enjoyed by employees in the UK are more extensive than those enjoyed by employees in most of the rest of the EU.
This means that TUPE "gold-plates" the EU Directive (a practice the Coalition Government has stated it will end when implementing future Directives in the UK). Although in November 2010 the Coalition Government confirmed it did not intend to review TUPE, in a subsequent announcement on 11 May 2011, the Employment Relations Minister, Ed Davey, indicated that TUPE would be included in its ongoing review of employment law.
When TUPE applies to an outsourcing
One of the primary changes made by TUPE 2006 was to extend its scope so that it is more likely that an outsourcing would be a "relevant transfer". It does this by providing for two categories of relevant transfer:
- transfers of an undertaking or business (or part of one) (Regulation 3(1)(a)); and
- transfers by way of service provision changes (Regulation 3(1)(b)).
A service provision change occurs when a party transfers the carrying out of certain activities to another party; takes those activities back in-house; or transfers them to a new provider. TUPE will not apply if the transfer is in connection with a single specific event or a task of short-term duration.
Typical examples of a service provision change are:
- a hospital outsourcing its cleaning service;
- a company outsourcing its accounts function;
- a local council re-tendering its waste management contract and awarding it to a new provider.
There are two key requirements for a service provision change to be a relevant transfer under TUPE:
- There must be an organised grouping of employees situated in Great Britain before the service provision change whose principal purpose is carrying out the relevant services on behalf of the client (Regulation 3(3)(a)(i)).
An "organised grouping" indicates that it must be possible to identify a particular group of employees who carry out the services (and a "grouping" could consist of just one employee). If the service provider regularly varies the employees who carry out the services (e.g. if cleaning services for a particular client are carried out by different employees each day) it may not be possible to identify an "organised grouping".
- Unlike a business transfer there is no requirement for a "service provision change" to be a transfer of an economic entity that retains its identity. Instead, it is sufficient if one person ceases to provide the services and another takes them over. It is implicit that the post-transfer activities must be identifiable as the pre-transfer activities for a service provision change to occur, although those activities may be carried out in a different way. In Metropolitan Resources Ltd v (1) Churchill Dulwich Ltd (in liquidation) and (2) Cambridge and others  the EAT confirmed that the activities after the transfer do not have to be identical to those provided prior to the transfer provided that they are "fundamentally or essentially the same".
In drafting appropriate outsourcing documentation, particularly in relation to exit indemnities, it is important to bear in mind that TUPE is likely to apply again if the services are brought back in-house; if the services are re-tendered; or in situations where the transferee service provider itself outsources to another contractor.
Identifying the group of employees who are likely to transfer can be difficult in practice. As discussed, in the context of a service provision change, the potentially transferring employees are those who are assigned to the organised grouping.
Typically, the parties will agree which employees are "in-scope" to transfer, but issues may arise if some employees divide their time between activities or services.
In such cases, the test of who is "assigned" for the purposes of TUPE can prove awkward to apply neatly. Whilst it is true that the more time that an employee spends working on the services to be transferred the more likely it is that they will be found to be assigned to those services, other factors must be taken into account before concluding that the employee is assigned. The ECJ has held that the test of "assignment" is essentially a factual question, and there is no specific percentage of time that an employee must devote to the organised grouping before being regarded as "assigned" (Botzen v Rotterdamsche Droogdok Maatschappij BV 1986). Whilst refusing to give a definitive list, the EAT in Duncan Web Offset (Maidstone) Limited v Cooper  identified possible factors that a tribunal might take into account as including:
- how much time was spent on different parts of the business or services;
- the value that was given to each part of the business or service by the employee;
- what the contract of employment had to say about the employee's duties;
- and how the cost of employing the employee was allocated between different parts or services.
Identifying whether or not employees are assigned to the relevant services may also be more difficult when there is more than one transferee. In Kimberley Group Housing v Hambley, Leena Homes and Angel Services (UKEAT 0488/07) Leena Homes had provided accommodation services for asylum seekers under a contract with the Home Office. Leena lost the contract and Kimberley and Angel were awarded the right to succeed Leena under a new contract. Kimberley provided the majority of the services under the new contract with Angel only providing a small proportion. Neither organisation accepted that TUPE applied and the employees of Leena who had previously provided the services did not transfer to the new service providers and were made redundant. The EAT held that where the allocation of the transferred services can be readily identified, and provided that there is a link between the assigned employees and the work or activities performed post transfer, the employees will transfer. In this case the EAT held that the transferee who performed the greater proportion of the services post transfer (i.e. Kimberley) would inherit all liabilities for employees who should have transferred.
However, where it is difficult to determine which transferees have taken on the relevant services or parts of the undertaking, because there has not been a clear-cut distribution of services, it may be more challenging to establish a sufficient "nexus" between the employees and the services carried out post-transfer.
In Thomas-James v Cornwall CC (4 April 2008) the Legal Services Commission (LSC) had contracted with 17 service providers, including the council, to provide a free legal helpline. Following a re-tender of the services, an Employment Tribunal found that the work previously assigned to the council had been randomly allocated between a reduced number of providers, and as such it was not possible to identify the specific contractors that had taken over the council's previously allocated hours. Therefore, where no transferee can be easily identified, it cannot be said that the employees were assigned to the relevant transferring services.
Effect of TUPE applying to outsourcing
The effect of TUPE is that, upon the relevant transfer, the employees assigned to the services will automatically become employed by the new supplier (transferee). The transferee effectively steps into the shoes of the transferor and acquires nearly all of the transferor's employment obligations and liabilities (with the exception of criminal liabilities and some pension liabilities). The employees' terms and conditions remain substantially unchanged and their continuity of employment is preserved.
An employee is entitled to object to the transfer. However, if an employee objects their employment ends automatically on the date of the transfer and they have no right to a statutory redundancy payment or other compensation.
However, if the employee has objected because of an alleged fundamental breach of contract or anticipated breach by the transferee service provider, the employee may claim constructive dismissal. Similarly, if the transfer would involve a substantial and detrimental change in working conditions, the employee may resign and seek compensation.
Dismissals in connection with the transfer
The dismissal of an employee will be automatically unfair if the sole or principal reason for the dismissal is the transfer itself or is for a reason connected with the transfer that is not an economic, technical or organisation reason entailing changes in the workforce (an "ETO reason") (Regulation 7(1)).
A relatively common problem arises where the transferee service provider already has employees in place to carry out services and inherits more employees as a result of a TUPE transfer, leading to a surplus of personnel.
The protection against dismissal means that, in the event that a reduction in employee numbers is required as a result of a service provision transfer, the transferee service provider must have a valid ETO reason for redundancies. Otherwise they risk each redundancy being found to be an automatically unfair dismissal.
In practice, the transferor and transferee service providers may decide between themselves that employees will be dismissed prior to the transfer. However, on the transfer, the transferee service provider will inherit all the employees, together with any liabilities the employees may carry with them. This includes any liability associated with dismissals carried out pre-transfer if the reason for dismissal is connected with the transfer. Even if the transferee service provider has a valid ETO reason for dismissal (e.g. a genuine redundancy situation arising due to a surplus of stuff following the transfer), the EAT has held that the transferor cannot rely on the ETO reason of the transferee (Hynd v Armstrong and others ). Therefore if the dismissals are carried out pre-transfer because of anticipated post-transfer issues they would be automatically unfair and liability for the dismissals would transfer to the transferee service provider.
Information and consultation
Information and consultation is a key part of TUPE. There is no set timetable, but an overriding obligation to carry it out in good time before the transfer.
If an employer envisages that a service provision change under TUPE may take place, it is obliged to inform and consult with representatives of the employees affected by the transfer. Employees who are affected by the transfer can include not only those individuals who are likely to transfer but also those who may be left in the transferor's business and whose employment situation may alter as a result of the transfer. For example, remaining employees may be affected by having to take on new duties or by relocating even though they remain in the transferor's business. Likewise, the existing workforce of a transferee service provider may also be affected and therefore may also be caught by the obligations to inform and consult under TUPE.
The Employer should inform/consult with trade union representatives if a union is recognised. If no union is recognised, the employer may consult with specially elected employee representatives or existing employee representatives with the appropriate authority (Regulation 13(3)).
The transferor must provide representatives with the following information (Regulation 13(2)):
- the fact that a relevant transfer is to take place;
- when it is to take place;
- the reasons for it;
- the legal, economic and social implications which the vendor envisages will take place; and
- any measures it envisages it will take in relation to affected employees in connection with the transfer; and
- the transferor must also give representatives information about any "measures" that the transferee informs the transferor that it envisages taking in relation to the transferring staff.
The transferee must provide:
- information to the transferor about any measures it envisages taking that will affect transferring employees; and
- information to representatives of any of its existing employees (as per the transferor information requirements set out above) who are affected by the transfer.
Legally, the obligation to consult with the recognised trade union and/or employee representatives is triggered if the relevant employer envisages that, in connection with the transfer, it will be taking measures in relation to any affected employees. Measures are very wide ranging and will include any change in the status quo, even where they do not entail a change to contractual terms and conditions.
If the transferor fails to inform and consult, the transferee can be jointly and severally liable for that failure. If the transferee fails to inform and consult, it remains solely liable for that failure. In either case, the penalty for failure is a protective award of up to 13 weeks' pay per employee.
- At the outset of planning an outsourcing project, consider the nature of the changes planned and whether they are likely to lead to a relevant service provision change under TUPE. Potential employment issues should be considered at an early stage in order to ensure they do not become an obstacle to the successful completion of the project, and to allow sufficient time to deal with the practical aspects of a transfer of employees.
- If TUPE is likely to apply, ensure that the outsourcing documentation deals with the employment issues and accurately reflects the agreed position between the parties on employment liabilities. Under TUPE the transferee will inherit all employment liabilities and obligations associated with the transferring employees on the date of the transfer. Therefore it is common for a transferee service provider to request some form of indemnity from the transferor in relation to employment liabilities. Of course, whether the transferor is willing to grant any such indemnity will depend on the respective bargaining power of the parties and the importance of the employment issues in the wider commercial deal.
- Employees will transfer on their current terms and conditions and most attempts to vary their terms and conditions post-transfer will be void. Dismissals because of the transfer or for a reason connected with it will be automatically unfair. Therefore, if the transferee intends to make significant changes following the transfer it must ensure that it has a valid ETO reason.
- Allow sufficient time to carry out a fair information and consultation process. Protective awards for failure to inform and consult can be costly (particularly if there are a large number of employees involved) and claims for failure to inform and consult under TUPE cannot be validly waived under a compromise agreement. Therefore, it is important to factor in the information and consultation process when planning project timescales.