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In this edition of Employment Write we examine recent developments in relation to TUPE (the Transfer of Undertakings (Protection of Employment) Regulations 2006.
Service Provision Change
One specific purpose of the 2006 Regulations was to provide certainty in relation to cases of service provision change. Service provision change occurs where an employer contracts out (or outsources) activities or functions, for example, catering or cleaning. A service provision change may also occur on transfer of such activities to a new contractor or on the employer taking such activities back in house.
Far from providing certainty, the provisions of the 2006 Regulations have generated a significant amount of litigation. The crucial question is whether the activity is fundamentally or essentially the same following the service provision change. Some recent cases have illustrated the difficulties in deciding that question.
Enterprise Management Services Ltd v Connect-Up Ltd
In Enterprise, IT services were provided to Leeds City Council schools by Enterprise Management Services Ltd as a preferred bidder. Enterprise offered two service levels:
- Level A – a complete managed service applying to curriculum and administrative matters, or
- Level B – software support and maintenance.
The majority of the schools had signed up to service level B, with a minority signing up to service level A (representing 15% of the work carried out by Enterprise staff).
The contract was put out to tender again in 2009 and awarded to Connect-Up Ltd. There were significant differences between the two contracts; notably the new contract excluded service cover in relation to curriculum matters. After being awarded the contract, Connect-Up Ltd lost around 40% of the schools previously serviced by Enterprise to other contractors.
Enterprise, after losing the contract, dismissed employees (the Claimants) who had been working under the LCC agreement. The Claimants brought claims for unfair dismissal against Connect-Up, believing that their
employment should have transferred to Connect-Up as there had been a service provision change.
Following an appeal against the Tribunal’s decision that there was no service provision change, the EAT confirmed that Tribunals must take the following approach when considering such cases:
- Firstly, Tribunals should identify the activity or activities being carried out by the original contractor;
- Secondly, the Tribunal should determine whether the activity or activities carried out by the new contractor are “essentially the same” as those carried out by the original contractor (this is a question of degree and fact); and
- Thirdly, the Tribunal should consider whether there has been a division or fragmentation of services after the change in contractor has taken place, which has the effect of taking the change outside of a service provision change as governed by the Regulations.
In this case, the EAT held that there was no service provision change as the activities carried out by the new contractor were not essentially the same as those carried out by the old contractor. The EAT explained that there were significant differences between the activities carried out by the new contractor, Connect-Up, and those carried out by Enterprise. The omission of curriculum work from the new contract was one such difference, even though it represented only around 15% of the work done by the relevant Enterprise employees. Furthermore, the loss of a significant number of schools (40% of the Enterprise client base) by the new provider to five separate contractors also meant that the activities were not essentially the same.
Johnson Controls v UK Atomic Energy Authority
In Johnson, the UKAEA was provided with a taxi administration service by Johnson Controls. UKAEA ended this arrangement and took the activity of booking taxis in-house. The UKAEA also decided that instead of using a centralised system, its secretaries would book taxis directly with taxi firms. The Claimant, who had been employed by Johnson Controls as a taxi administrator argued that there had been a service provision change.
The EAT, however, applied the approach set out in Enterprise and held that, after the change, the services were essentially different from those carried out previously by Johnson Controls, and therefore there was no TUPE transfer.
These cases demonstrate that whether or not there is a service provision change is very much a question of fact and degree in each particular case. This will inevitably continue give rise to uncertainty for businesses concerned with these issues.
Given that the legal position is unpredictable, employers concerned with service provision change should:
- not make assumptions that TUPE will effect the automatic transfer of employees from one service provider to the next;
- at the outset, carefully consider the contractual arrangements which will apply on termination of the services;
- so far as possible, on termination of the services, engage in communication and consultation with other parties and employees with a view to agreeing practical and commercial arrangements in relation to employees.
Transfer Related Dismissals
If an employee is dismissed before or after a TUPE transfer by reason of the transfer itself or for a reason connected with it, the dismissal will be automatically unfair unless it is for an ETO reason (“an economic, technical or organisational reason entailing changes in the workforce”). If an employer can establish an ETO reason then the dismissal will be potentially fair. An ETO reason can only be established where changes in the workforce are entailed; this requires either a change in the number of employees or a change in the functions performed by employees.
Meter U Ltd v Hardy & Others
In Meter U Ltd, the EAT considered, in the context of a service provision change, whether the replacement of employees with limited company franchisees after a TUPE transfer “entailed changes in the workforce”. The Claimants had been employed as meter readers by two different meter reading companies. Their employers’ contracts with a power company came to an end and a new contract for the power company’s meter reading was granted to Meter U Ltd. The Claimants transferred to Meter U Ltd by reason of a service provision change.
Meter U Ltd did not employ any meter readers but instead operated through franchises with independent limited companies, many of which were owned by individual meter readers. Meter U Ltd subsequently consulted with the Claimants and asked them whether they would like to form franchise companies. The Claimants refused, were dismissed by Meter U Ltd, and then brought claims for automatic unfair dismissal (on the grounds that the dismissals were for a reason related to the transfer). An Employment Tribunal upheld these claims.
Meter U Ltd appealed against the Tribunal’s decision, arguing that:
- the reason for the dismissals was Meter U Ltd’s franchise model (which enabled it to tender contracts at competitive rates);
- the dismissals were for an economic reason ”entailing changes in the workforce” because there was a reduction in the number of employees required to carry out the meter-reading contracts (to nil);
- the employees were dismissed for redundancy as Meter U Ltd no longer required employees to carry out meterreading and instead had a requirement for company franchisees to do so.
The Claimants, on the other hand, argued that dismissal was in order to change terms and conditions under which work was performed, and was not because of “changes in the workforce”. The EAT upheld the appeal and overturned the Tribunal’s findings. The EAT said that the Tribunal had erred in law in holding that Meter U Ltd’s workforce included the corporate franchisees. The dismissals, therefore, were potentially fair on grounds of redundancy. The EAT noted in its judgment that neither UK nor EC legislation defined the term “workforce”. In applying a dictionary definition, the EAT found that the term “workforce” is restricted to people, workers and employees, and did not extend to corporate franchisees.
This is a potentially useful case for transferees but caution should be exercised when seeking to rely on an argument similar to Meter U Ltd. The facts and in particular the franchise model were peculiar to the case and the courts may not come to the same conclusion in other cases, for example, if individuals provide their services though personal service companies.
Terms and Conditions
Regulation 4(9) of TUPE provides that “where a relevant transfer involves or would involve a substantial change in working conditions to the material detriment of a person whose contract of employment is or would be transferred”, the employee may treat their contract as having been terminated by the employer. In such cases, the employee will be able to claim that they have been dismissed for an automatically unfair reason.
The issue in such cases is firstly whether there has been a substantial change in working conditions and, secondly, whether this constitutes a material detriment. In a previous case, Tapere v South London and Maudsley NHS Trust, it was held that whether there has been a substantial change in working conditions is a question of fact to be determined by reference to the nature (or character), as well as the degree, of change.
When considering whether the change was to the employee’s material detriment, the EAT said that a Tribunal must consider the impact of the proposed change from the employee’s point of view and, if the employee considered the change to be detrimental, whether that was a reasonable view for the employee to take. The EAT also said that a detriment is material if it is more than trivial or fanciful. In Ms Tapere’s case the change of workplace meant potential disruption to child care arrangements and a longer or altered journey which she did not wish to undertake.
Abellio London Ltd v Muse
This recent case has now further entrenched the precedent in Tapere. In Abellio, the EAT held that a six mile move was substantial as it involved a move from north to south of the river Thames and so an increase on the
working day for the Claimant (who was a bus driver) of between one and two hours.
The EAT held that, from the employee’s point of view, the proposed change was to his material detriment, and that this was a reasonable position to adopt. Tapere and Abellio cause difficulties for transferees because they establish that a material detriment is to be considered from the employee’s perspective. This means that when a change of location accompanies a TUPE transfer, even if only a small distance, transferees will have to bear an increased risk of automatic unfair dismissal claims. This is an issue which transferees should be alive to and seek to manage on a commercial or individual basis well in advance of the transfer taking place.
Harmonisation of Terms of Employment
The 2006 TUPE Regulations state that any variation of contractual terms for employees who have been, or will be, subject of a TUPE transfer is void if the sole or principal reason for the variation is the transfer itself, or a reason connected with the transfer (which is not an ETO entailing changes in the workforce).
Previously, in London Metropolitan University v Sackur, the EAT confirmed that the decision to harmonise a transferred employee’s (more generous) terms and conditions with those of existing employees following a TUPE transfer cannot be a valid ETO, as such a variation would be by reason of the transfer itself.
Smith v Trustees of Brooklands College
However, in this recent case the EAT decided that a consensual variation of contractual rates of pay, following a TUPE transfer of employment, was not void. The Claimants had worked on a part-time basis, but their salary had been calculated on a full time basis (a difference of upto 14 additional hours). The Trustees argued that this calculation was a “mistake”, and did not reflect national practice or the Claimants’ trade union pay guidance. The variation was therefore not by reason of the transfer or for a reason connected with the transfer. The EAT accepted this argument, and rejected the Claimants’ claim that the change would not have happened “but for” the transfer.
This is a potentially helpful case for employers. It seems that occasionally common sense will prevail!
The Effect of Insolvency
The past few months have seen various household names enter into administration, most recently the retailers Clinton Cards, Game, Past Times, Blacks and La Senza. At the same time, the Court of Appeal has provided much welcomed clarification on the law relating to business transfers under the TUPE Regulations involving businesses in administration.
The effect of the TUPE Regulations is, generally, that employees who are part of a business entity which transfers to another owner have the right to transfer with that business together with their current terms and conditions. They are also afforded protection from being dismissed for a reason connected with that transfer (unless the ETO exception discussed above applies).
However, an exception to the general rule is that most of the TUPE provisions do not apply when the business being transferred is in the process of insolvency with “a view to the liquidation of the assets” of the business
In such situations the employees will not transfer with the elements of the business being transferred.
Key2Law (Surrey) LLP v De’Antiquis
Confusion was caused in November 2009 when the Employment Appeal Tribunal ruled in the case Oakland v Wellswood that some administration proceedings, including prepack administrations (i.e. where a business is put into administration before being sold under a sale arranged before the administrator is appointed), could be covered by that exception. This ruling created considerable uncertainty as it implied that the purpose of the administration had to be considered to see whether the intention of the administrators was the liquidation of the company’s assets. Therefore, it became a question of fact in each case.
However, at the end of last year, the Court of Appeal restored clarity by overruling Oakland in Key2Law, confirming that administration cannot be deemed to be insolvency proceedings with a view to liquidating assets for the purposes of TUPE. TUPE will therefore apply to businesses in administration and employees and/or liabilities in connection with them will transfer to the transferee in accordance with TUPE. We wait to hear if there will be a further appeal in relation to these issues.
Spaceright Europe Ltd v Baillavoine
Also, in the area of insolvency in the case of Spaceright, the Court of Appeal has clarified the law by resolving two previous conflicting cases. The Court of Appeal has confirmed that a pre-transfer dismissal by an administrator can be connected with the transfer, and therefore automatically unfair, regardless of whether the identity of the transferee was known when the dismissal was carried out. In this case the administrators did not have a potential purchaser in mind but decided that, in order to make the business more attractive for
sale, they should terminate the employment of a member of the senior management team. The Court of Appeal held that the administrator’s desire to make the business more attractive for sale was connected with the transfer and did not amount to an ETO, meaning the dismissal was automatically unfair.
Key2Law and Spaceright make it even more difficult for purchasers of assets out of administration to avoid the operation of TUPE. Attempts by purchasers or administrators to reduce employee numbers in order to make businesses more saleable will either be difficult or leave purchasers with potentially expensive tribunal claims.
The sensible approach is to assume that TUPE will operate in the usual way. Where an employer is the transferee in the context of a business in administration, a cautious approach is required as there is little or no scope for contractual comfort from the insolvent company. Appropriate due diligence is therefore essential.
Other News In Brief
Unfair Dismissal Qualification Period
The qualifying period for bringing an unfair dismissal claim has now changed from one to two years. However, this change only applies to employees with a start date on or after 6 April 2012. Therefore, employees with an earlier start date will continue to qualify for unfair dismissal protection after one years’ service. Employers need to check carefully before dismissing an employee which qualifying period is relevant.
In February 2012, the maximum compensatory award available for unfair dismissal claims increased to £72,300, and the cap on a week’s pay (used for calculating statutory redundancy pay and the basic award in unfair dismissal cases) increased to £430.
Costs awards in Employment Tribunal proceedings are unusual but the possibility of costs being awarded to or against a party to proceedings should not be ignored. This is especially so as the maximum costs that a Tribunal can order (if it thinks, for example, that a party has conducted proceedings in a vexatious or unreasonable manner) has doubled, from £10,000 to £20,000.
Employment Law Workshops
We are running the latest of our popular Breakfast Workshops – “Getting Fit for the Olympics – an update on what employers need to know this Summer” – on 12th and 17th July. As always, we’re intending to serve up breakfast and some invaluable advice for employers. If you would like to receive further details on this seminar, please email email@example.com.