ISSUES - Tupe or not Tupe?
Protection of employees' rights when a business is sold or merged is shrouded in uncertainty. The government is pushing to change this with new proposals.
London-based Business Systems Group, which has recently sold off its shrouded in uncertainty. The government is pushing to change this with new proposals. legal software and services arm, BSG Legal Solutions, in a management buyout (PC Dealer, 25 February), probably went through transfer of undertakings - the legalities surrounding what happens to staff when a company is sold or merged.
Such legislation is shrouded in uncertainty. Businesses caught up in mergers, disposals, management buyouts (MBOs) and outsourcing are experiencing at first hand the difficulties of current transfer of undertakings legislation.
In April, the government published its long-awaited consultation papers on the Transfer of Undertakings (Protection of Employment) Regulations 1981 (Tupe) legislation. This implements the Acquired Rights Directive, which governs issues for both business transfers and outsourcing.
Recent judgments of the European Court of Justice have created a grey area and made it unclear when the law applies. The government considers that the Tupe regulations 'still do not provide a clear and satisfactory framework for the necessary information and consultation' and has published further proposals on employees' information and consultation rights.
The government also says it aims to use its presidency of the EU Council to advance negotiations and have the Directive amended.
The principal effect of Tupe is that when employees move across to a 'receiving' company following a change in the status of the company they work for, they do so under the prevailing terms and conditions, although not in the case of occupational pensions.
Key aspects remain unresolved. In transfers where Tupe applies, can terms and conditions be changed, and are there redundancy risks at the end of the contract? Purchasers and vendors face considerable risks when pricing a bid in accepting employees' transfer, with possible exposure to redundancy costs and litigation.
The government is inviting views on whether all contracting-out situations should be brought within the Directive. The question of whether Tupe applies can be a minefield. Factors such as the transfer of assets or the taking over of staff in a labour-intensive undertaking trigger the legislation's protection for employees, but legal loopholes can arise in assessing whether these factors exist.
Where there are no assets - either tangible or intangible, for example, premises, customer contracts, intellectual property rights - the case law creates difficulties for an outgoing contractor. If there is no obligation to take staff back, then there may be no transfer.
One option for levelling the playing field would be to make the Tupe or Directive apply in every contracting-out situation. This would mean certainty for those involved, but a disadvantage for employers would be the considerable cost of collective consultation and the necessity of taking over staff.
This would have to be weighed against the current disadvantages of uncertainty and litigation.
The government opposes including share takeovers in the Directive. If there is a share sale, then it is simply a question of the shares changing hands. The business remains the same and there is no actual transfer of the business itself. The government says a share takeover does not affect the employer's contractual relationship with its employees, so there is little ground for special protection.
It also opposes extending the requirements so that employee representatives should be consulted in the run up to a takeover, since this could have an adverse impact on a proposed bid. Purchasers and vendors of businesses, therefore, will have to assess the impact of Tupe's application when deciding whether to go for a straight sale of a business, or look for a share sale or corporate hive-down - the disposal of part of the business. Broadly speaking, the difference of focus will be between integration issues or a mere passing of ownership.
The government is inviting comment on whether to apply the Directive or Tupe to all insolvency cases. The idea behind this suggestion is that the transferring employer's outstanding debt might not necessarily transfer with employees.
The rule under Tupe is that all existing liabilities and obligations owed by the employer to the employees transfers to the new incoming employer.
For example, if they were owed holidays or deductions from wages which should be repaid, the incoming employer would pick up that liability.
There is an argument that this is a disincentive to take over staff in insolvency situations, which is, therefore, a disincentive itself to the rescue of failing companies. If, however, this proposal was pushed through, then the difficulty is that an employee would lose the protection in circumstances of insolvency that the legislation was designed to achieve. In other words, it would be a case of suing an insolvent shell with no assets for back payment.
The aim is to achieve greater flexibility where there are attempts to sell insolvent businesses as going concerns and improve the rescue prospects for ailing companies. Some IT-related companies may have a short lifespan due to management failure, but their product and business might possess real long-term potential.
One major difficulty will be any attempt to apply the Directive as blanket legislation across Europe, and it is possible that changes to the law could result in reduced protection for employees. Instead, as a compromise, the government thinks it would be sensible to allow changes to terms and conditions to be agreed between employers and employees' representatives.
The aim is to enable employees to be invited to agree changes to their terms and conditions, which might at least preserve their employment even if the terms and conditions were less favourable. This raises the question of how such agreements can be policed.
The government opposes any amendment to ban so-called 'fraudulent' insolvency proceedings designed to deprive employees of their rights. The government says it fails to see how legislation could adequately distinguish between 'genuine' insolvency proceedings and 'fraudulent' ones designed to deprive employees of their rights.
The government is keen to draw up legislation which enables transfer-connected variations to be made to terms and conditions of employment where these have been agreed by employee representatives.
A spate of recent cases has seen employees transferred under Tupe unable to have their terms and conditions varied, regardless of whether there is agreement by the employees or of how long after the transfer the changes are made.
This legal hurdle can create real difficulties in pricing a bid. The problem is that an incoming employer will be faced with perhaps having to run two sets of terms and conditions, for their own employees and for the incoming ones. That clearly has an administrative difficulty.
It is also problematic where terms and conditions cannot be exactly replicated.
These uncertainties will need to be reflected in the bid price, making allowances for the possible chance of claims.
Clearly, however, defining a change 'connected to the transfer' is problematic.
There may be some exceptional cases where an economic, technical or organisational change to the workforce justifies a variation, but quantifying the risk is extremely difficult. It also poses real post-transfer operational difficulties.
Most employers will want integration, not leaving in place two sets of conditions between existing and joining staff, with all the management and costs issues that would then result.
The government proposes to allow an exception against the general unlawfulness of such changes, if there is an agreement between employers and employee representatives. It seems a pity there is no proposal to allow employees individually to agree, provided they know they are foregoing protection by allowing their terms and conditions to be changed.
The government opposes making it compulsory to introduce joint and several liability between the transfer or and transferee for each other's defaults.
The primary objection to allowing pre-transfer liabilities to return to the transfer or on the ground of joint liability is the concern that this would adversely affect attempts to rescue insolvent businesses.
An insolvency practitioner may well be reluctant to sell a business if there is a risk of a default by the purchaser so that the liability is returned on a joint liability basis to the practitioner. Buyers of business from insolvency practitioners are used to the concept of 'buyer beware' without real comfort as to the business, but if such liabilities re-transfer they are almost certain to be asked to provide sufficient financial comfort to a seller.
The government is inviting discussion on the occupational pension rights issue. To date, occupational pension rights are excluded from Tupe.
This makes it difficult to ensure employee satisfaction, bearing in mind that a substitute pension has to be found by employees or offered voluntarily by the transferee.
Discussion is invited on creating an obligation to make a transferee provide comparable pensions - although the definition of what is comparable leaves open the prospect of costly and contentious debate on the values of accrued and future pensions rights.
The government opposes the European Commission's suggestion of implementing legislation which would pave the way for collective consultation with employee representatives at a point earlier in sell-off negotiations, when a transfer is 'envisaged'. It is anxious to avoid drawn-out debate on the definition of when that point occurs.
Instead, the government proposes tightening the enforcement angle of consultation by introducing a provision preventing employers from seeking to excuse their failure to inform and consult with representatives by blaming another 'controlling undertaking'. In other words, if a parent company withholds information, or if a subsidiary tries to hide behind the fact that head office failed to give all the information to enable consultation to go ahead, that will be no excuse.
The government is in favour of continued improvement in equal opportunities provision and supports a prohibition of discrimination on the basis of race, sex, age, handicap, sexual orientation, skin colour, religion or nationality. This will not be controversial, as it is difficult to see how adverse treatment on those grounds would not give rise to claims anyway.
Last, but not least, the government is inviting comment on the suggestion that employers in contracting-out situations give bidders for contracts comprehensive and accurate information about the workforce.
All too often, there is a lack of transparency where an existing contractor faces a rival bid. There is no real incentive for a contractor to provide information to the rival making bid assumptions. This can give rise to a considerable lack of market equality. The existing contractor will have an inherent advantage in possessing all the relevant information about the existing staff
and payroll costs. An outside bidder will face the difficulty of having to make assumptions on the basis of information which may or may not be incorrect. That risk will either have to be accepted or priced into any bid to make allowances for possible claims. That clearly places an outside contractor at a disadvantage.
The government has attempted to tackle the main areas causing commercial difficulties in the application of Tupe under the Directive, but has favoured consultation rather than firm proposals. This means the Directive and its implementation under Tupe will remain a contentious area, in which parties will require legal protection in their contractual agreements.
A second consultative document was published last month by the government.
It could affect UK businesses earlier as it concerns amending just the UK Tupe legislation, not the Directive, which requires European consensus.
The government is considering making trade unions the first port of call when employers have to consult employee representatives to comply with the Tupe Regulations. Only if there is no trade union will the employer be able to go to other types of representatives. At the moment, the employer has the choice of consulting either union representatives or some other type of representatives.
These must be 'capable' and 'independent'. If challenged, the employer must be able to prove they meet these criteria. There is the suggestion that it would be necessary to show they were sufficiently trained in their obligations and rights to carry out their duties effectively. Even ad hoc arrangements, therefore, may require the investment of more time and money.
For a failure to consult employees about a takeover, the government proposes aligning an award with redundancy situations - in other words, the penalty for a failure to consult will be the same amount in redundancy situations as in the case of a transfer. At the moment, the penalty for a failure to consult under Tupe is four weeks' uncapped pay, whereas in redundancy it is dependent upon the number of people made redundant.
In other words, up to 90 days pay is potential penalty for a failure to consult under redundancy and the intention is to align the two types of protective award, increasing the possible penalty under Tupe to up to 90 days' pay rather than four weeks' pay.
Jonathan Exten-Wright is a partner in the Employment Law Department of national law firm Dibb Lupton Alsop
KEY POINTS OF THE CURRENT REGULATIONS
Employers must consult with employee representatives about a proposed transfer.
Where a transfer is subject to Tupe, employees will transfer with the business.
Transferring employees transfer with all their existing rights to the new employer, except for occupational pensions.
A transfer-connected dismissal is automatically unfair unless for an 'economic, technical or occupational' (ETO) reason.
Transfer-connected changes to terms and conditions will be ineffective unless for an ETO reason.