TUPE - where does it fit in property transactions?

TUPE – the Transfer of Undertakings (Protection of Employment) Regulations 2006 – applies where a business transfers or a service provision change takes place.  This article looks at how those legal concepts apply in property transactions and examines the TUPE-related issues that buyers and sellers need to know.

26th March 2008

TUPE – the Transfer of Undertakings (Protection of Employment) Regulations 2006 – applies where a business transfers or a service provision change takes place.  This article looks at how those legal concepts apply in property transactions and examines the TUPE-related issues that buyers and sellers need to know.

How TUPE works
Where TUPE applies, employees transfer by operation of law, regardless of the desire or agreement of the parties.  All rights and liabilities connected with their employment transfer automatically (with some exceptions).  Any acts or omissions of the seller before the transfer are deemed to be those of the buyer following the transfer and any outstanding claim against the seller will therefore become the responsibility of the buyer, whether it is a claim for holidays or a discrimination claim for which compensation is unlimited.

Employees are entitled to continue on their existing terms of employment and in certain circumstances have additional protection from dismissal in the context of a TUPE transfer.  They can also bring claims if there is a failure to inform or consult them.

Transfer of an undertaking
The operation of TUPE is best explained by way of an example: an owner sells a hotel at which 200 people are employed.  This will be a transfer of an undertaking under TUPE and the employees will transfer to the purchaser.

Service provision change
In many property transactions, the only persons employed at a property are actually employed by managing agents rather than by the seller itself.  In these circumstances, TUPE will operate to transfer the employees from the managing agents to whomever the seller engages to carry out the management functions – this may be a different third party agent or a "captive" management company in the buyer's group – if there is an organised grouping of employees whose principal purpose is to carry out the activities in question.

This is known under the 2006 TUPE regulations as a service provision change.  Establishing whether the test is satisfied can be difficult in a case where employees are not assigned to a particular property.  The rule of thumb that an employee who spends more than 50% of their working time on duties relating to a particular property will transfer, is a useful but not conclusive test.  Even if a list of affected employees is agreed as part of the sale documents, a buyer will want to be protected against a claim by any other person that has transferred under TUPE.

TUPE transfers are multi-party transactions in which the underlying legal position is not always clear. As a result, employees who bring claims usually want to protect their position by suing all parties in an employment tribunal and therefore contractual indemnities are important for buyers and sellers even where they are not the direct employer. 

Dealing with unwanted employees
Planning to deal with unwanted employees and understanding the risks is important because, under TUPE, employees have additional protection from dismissal.  A dismissal will be automatically unfair if the principal reason for it is the TUPE transfer.  If it is "for a reason connected with" the transfer, it can be fair if there is an economic, technical or organisational reason entitling changes in the workforce ("ETO Reason").  The distinction is a fine one and buyers and sellers need to bear in mind that compensation for unfair dismissal can be up to approximately £70,000, with a further 50% uplift where a statutory dismissal procedure is not followed.

Changing terms of employment
Buyers should also be wary of changing terms of employment to the transferring employees' detriment.  Changes are void if the sole or principal reason for the change is the transfer itself, or a reason connected with the transfer that is not an ETO Reason, but it is usually difficult to show an ETO Reason in this context.

Informing and consulting

Practically speaking, it is a seller that bears most of the burden of informing employees about the consequences of a TUPE transfer and consulting with them about it.  Employees have a right to elect representatives to consult on their behalf if they wish.  Legally, however, the 2006 TUPE Regulations put liability onto the buyer by making the buyer jointly and severally liable for the seller's failure to inform or consult and any resulting award to employees can be up to 13 weeks pay each.  The only way to redress this is by means of an appropriate contractual indemnity from the seller.

Issues for sellers

  • identify whether any employees are employed at the property, and establish by whom they are employed;
  • understand the terms of any contract with managing agents and who is responsible if an employee is made redundant;
  • provide employee liability information as required under TUPE;
  • carry out an information and consultation process with affected employees or their representatives; and
  • obtain contractual indemnities from the buyer.

Issues for buyers

  •  obtain sufficient information to understand whether employees will transfer under TUPE and, if so, what their terms and conditions of employment are;
  • analyse whether any changes to terms and conditions will be necessary;
  • inform seller about any "measures" that will affect the employees post-transfer; and
  • obtain contractual indemnities and warranties from the seller.