Application of the law on transfer of undertakings (TUPE) 

Under legislation, commonly known as TUPE, employees' rights are safeguarded when there is a ‘relevant transfer’ of a business or undertaking, or part of it, to a new employer.  A ‘relevant transfer’ is either:

◉ the transfer (not necessarily by sale) of all or part of a business or undertaking if that ‘economic entity retains its identity’ and/or

◉ a ‘service provision change’ (covering contracting-out by a ‘client’, change of contractors after retendering, and contracting-in by a ‘client’), where the service is provided by an ‘organised grouping of employees’.

Transfers by acquisition of shares are excluded, because there is no change in the legal personality of the employer.  However, actions by the new owner of the shareholding might result in a TUPE transfer, either conscious (where the business and employees of the newly-acquired company are then moved over to one of the owner's associated companies – see below) or otherwise (where the new shareholder intervenes in the day-to-day operations of the new acquisition to an extent that means its business has been transferred to a new controlling entity in reality).   

An 'intra-group transfer' - the passing of an ‘economic entity’ (for example, a discrete division, department or function) between two subsidiaries in the same ‘group’ - will generally come within TUPE because the corporate identity of the employer does change.

Normal automatic continuation of employment contracts

In the absence of an employee’s objection to transfer (see below), the contract of employment of someone employed at the time of a transfer does not terminate on the change of employer.  It automatically continues as if it had been made with the new employer (‘transferee’).  

The transferee takes over the employment/contractual liabilities of the old employer (‘transferor’), with the exception of: 

◉ where the contract has an express incorporation clause, the obligation to give effect to any post-transfer pay increases collectively agreed by the transferor; and 

◉ rights under an occupational pension scheme where they relate to benefits for old age, invalidity, or survivors; and

◉ criminal liabilities.

This ‘automatic continuation’ effect applies to an employee who was dismissed before the transfer but for a transfer-related reason that is unfair.  In that case the liability for the unfair dismissal passes to the new employer.

However, the ‘automatic continuation’ effect is excluded, along with the specific provisions on dismissal, if the transferor is the subject of bankruptcy or similar insolvency proceedings that have commenced with a view to the liquidation of assets (therefore, not all insolvency situations – in particular, transferors in administration do not come within the exception).

Informing and consulting employee representatives

Before a transfer, the transferor and transferee should, under TUPE itself, each inform (and, only if measures are envisaged for their own employees, consult) representatives of its own employees affected by the forthcoming transfer.

There is also the option for the transferee, before it becomes the employer of the affected employees, undertaking pre-transfer ‘collective consultation’ on 20+ proposed post-transfer redundancies.

Employee liability information for the new employer

Also, the transferor must supply the transferee with ‘employee liability information’ in writing at least 28 days before the transfer or, otherwise, as soon as reasonably practicable.  

The employee liability information must cover:

◉ the identity and age of transferring employees

◉ information covered by their statements of employment particulars

◉ details of any applicable collective agreements

◉ disciplinary and grievance cases in the preceding two years

◉ legal actions in the preceding two years and ones that are reasonably expected.

The information must be accurate to a specified date no more than 14 days before it is communicated.  Subsequent changes must be notified by the transferor.  The information may be provided in instalments and/or through a third party.

Note: as it is required by law, the disclosure of these details under TUPE does not, in itself, result in a breach of the laws on data protection.

A transferee’s remedy for the transferor’s failure to comply with the obligation is a complaint to the employment tribunal, which can award compensation (normally a minimum of £500 for each employee in respect of whom relevant information was not given or was deficient).

The effect of objecting to a transfer

In a TUPE situation, if an employee objects to transferring to the new employer, the contract of employment does not transfer and, unless the transferor chooses to continue employment through redeployment, the effect is to terminate the contract.  

Generally, that termination of employment will not amount to a dismissal and the employee will not be entitled to any notice, severance pay or compensation.  However, there could be legal liability if the employee’s objection to transferring was caused by the transferee’s proposal or intention to make detrimental changes to terms and conditions.

Pension scheme arrangements

Although liability for occupational pension scheme provisions so far as they relate to benefits for old age, invalidity or survivorship do not transfer under TUPE, under pension legislation transferring employees who were offered an occupational pension scheme by the old employer must be offered any one of the following types of scheme by the new employer:

◉ defined benefit (if the transferee chooses this option, the scheme must comply with minimum standards)

◉ defined contribution (‘money purchase’) or

◉ stakeholder.

Transferee employers choosing to offer a defined contribution or stakeholder scheme must match the employees’ contributions to a maximum of 6% of earnings.

Rights under an occupational pension scheme where they do not relate to benefits for old age, invalidity, or survivors (often known as 'Beckmann liabilities') do transfer. 

Note: arrangements under a Group Personal Pension Plan are not covered by these rules.  A transferee will be obliged contractually to continue with the pre-transfer level of contribution, even if that exceeds 6%.  Contractual obligations on an employer to contribute to a personal pension are also not covered by these rules and that obligation will transfer along with other contractual terms.

Changes to terms and conditions of transferred employees

Changes made for the sole or principal reason of a transfer are void unless they are:

◉ by agreement and for an ‘economic, technical or organisational reason entailing changes in the workforce’ (change in number of jobs, content of jobs or location of jobs);or

◉ permitted for the employer to make by a term of the contract; or

◉ to terms incorporated from a collective agreement, put into effect more than one year after the transfer and, following that, the employee’s ‘package’ is no less favourable to them overall. 

Changing terms on transfer – even money is not necessarily the answer

A change in a contractual term that is strongly ‘transfer-related’ will often be void.  In one case, after a TUPE transfer and as part of a deal to retain the employee, the new employer inserted a non-compete clause into the contract.  The employee later challenged the clause, which was held to be ‘transfer-related’ and so void, even though the employer had given the employee a ‘consideration’ of £65,000 for its inclusion in the contract.

Less stringent requirements apply on changing the terms of the employees of an insolvent undertaking, if the changes have the purpose of ensuring survival and safeguarding opportunities for employment.

Changing the content of the contract: terms and conditions

How a change can be made

Broadly, there are three possible approaches in practice.  They are:

◉ Mutual agreement between employer and employee:
○  on an ad hoc basis, when the need arises; or
○  through a ‘standing’ clause in the contract, allowing a party (generally, the employer) to amend content.

This is based on the principle that, just as the contract is established by agreement, so it can be varied in the same way (subject to limitation under TUPE – see above) without there being a breach of contract.

◉ Unilateral implementation:
○  under contractual authority (effectively, the same as above – therefore, there would be no breach of contract); or
○  without contractual authority – a clear breach of contract.

◉ Termination of the current contract with due notice and the offer of its immediate replacement with a new contract containing the revised term(s).  Here, although the specific change might not have been agreed, there will be no breach of contract because the first contract is brought to an end in accordance with its own terms (the notice clause).  But, technically, the ending of the first contract does amount to a dismissal, which could have certain consequences (see below).

Other legal consequences 

If the change involves both a breach of contract and the loss of a financial amount (for example, a reduction in pay), the employee will have the right to sue for any lost amount(s) falling due for payment while the contract continues in being.  The employee’s action might be either for damages in the County or High Courts or for one or more unlawful deductions from ‘wages’ in the employment tribunal.

A breach of contract will, if sufficiently serious, also entitle the employee to resign and to treat himself or herself as ‘constructively’ dismissed.  

Dismissals resulting from a change – statutory implications 

Any dismissal involved in the change, whether ‘constructive’ (see above) or by termination effected directly by the employer, whether in breach of contract or not (see above), may still not be 'unfair' if the reason for the change is sufficiently important for the business (‘some other substantial reason’) and there has been prior consultation with the employee in an attempt to obtain agreement to the change.  However, in the absence of either of these elements, it will be unfair and will allow the employee to receive compensation for financial loss, even if the employee accepted an offer of continued employment under a new contract.

Where the underlying reason for the change resulting in a dismissal is a decline in the employer's need for a particular type of work, the employee may also receive a redundancy payment.

Changes that might affect 20 or more employees

If the change is intended to affect 20 or more employees (currently, only if they are at a single 'establishment'), there will also be the requirement for the employer to consult with employee representatives about proposed dismissals for redundancy.  The definitions of ‘redundancy’ and ‘proposed dismissal’ under this particular law are sufficiently wide to include almost any wide-scale change to contracts of employment, regardless of its underlying reason.