Adam Turner
In this episode, what happens to employees when a business is sold to several buyers or if a service is re-tendered to multiple providers? Will the employees be subject to TUPE and transfer to one or more businesses? And what should employers do to prepare for this type of so-called fragmentation in the future. Hello, and welcome to the Mishcon Academy Digital Sessions podcast. I’m Adam Turner, a legal director in the Employment Team at Mishcon de Reya and I’m joined remotely by my colleague, Will Winch, also a director in the Employment Team. Will, let’s start by going back to the basics. How does TUPE apply in circumstances where a client decides to change the basis on which a service is being provided?
Will Winch
I’m going to take you back a bit further than the concept of the service provision change, which came into being in 2006, because it becomes relevant a bit later on. Now, TUPE started life as the UK’s version of a bit of EU law called the Acquired Rights Directive or ARD. Old TUPE – that’s the 1981 regulations – they were faithful to the ARD and it applied when a business was transferred from one entity to another and that was fairly straightforward in cases where an asset-heavy business went across. So, for instance, if someone sold a factory selling widgets, classic widgets to a company because the company wanted a ready-made widget business complete with goodwill, IP, branding, customer lists and of course, widgets, then TUPE was likely to apply and this would mean that all the employees who were wholly or mainly assigned to the business that transferred, would go across to the buyer and their employment would be protected. And as I said, that’s fine when you’re dealing with a business with lots of plant, machinery and other tangible assets but questions started to arise when trying to work out whether a business that was mainly made up of people transferred. So, businesses involved in cleaning or the provision of security guards for instance, they created a bit of a headache when trying to work out whether TUPE applied. The whole process was fairly self-reflexive in the analysis. The employees transfer under TUPE if the transferee takes the employees. But what if they didn’t? And I remember in the early 2000s that this became quite a sticking point in corporate transactions. You’d get situations where the transferor or potential transferor would say that TUPE applied as it meant that it could avoid having to make a load of people redundant. The transferee on the other hand, would say that TUPE didn’t apply, as otherwise they would inherit potential liability when the employees transferred and in order to resolve this issue, Parliament invented a new type of TUPE. Now, this sits alongside the business transfer called the Service Provision Change. And this came into effect under the 2006 regulations. But it’s important to note though that these regs don’t come from the European ARD, they are entirely domestic.
Adam Turner
So, when do you actually have a Service Provision Change?
Will Winch
Well, a Service Provision Change takes effect if a client, and that’s important, a client, outsources a service or re-tenders it or brings it back in-house and this may trigger TUPE if there’s an organised grouping of employees whose principal purpose is the provision of the service and, following the transfer, the services remain fundamentally the same as they were prior to the transfer. If so, then the employees who were assigned to that organised grouping are protected, in the same way that they would have been if their business had transferred and you don’t have to go through the process of establishing that they were a business in their own right.
Adam Turner
So, what happens if you decide to split the services? You can split them perhaps geographically or functionally and you split them between multiple providers?
Will Winch
Well, that’s a really good question and one that’s given rise to a load of head scratching. Now until recently, the position had been that if the activities no longer remained the same, or if there were multiple replacement providers such that it became hard to see who was the transferee of any of the services, then TUPE wouldn’t apply. So, for instance, if you’ve got a situation where you’ve got 10 firms engaged to maintain properties for a Council and the Council decides to only have three firms providing the service, with one doing painting, one doing electrics, one doing plumbing or whatever, then the services will be so fragmented that it may be difficult to see where someone who’d been employed by one of the unsuccessful firms might go.
Adam Turner
Right, Will. I noticed you said, ‘until recently’, just then. So, what’s happened to change things?
Will Winch
Well, ah ha, just over a year ago, the European Court of Justice looked at this issue and a case called ISS and Goverts. Now in this case, Ms Goverts had been employed by ISS Facilities and she was project-managing their cleaning maintenance work in Gent, Belgium. Now, that work was split into three lots. Lot 1, was museums and historical buildings. Lot 2, was libraries and community centres and Lot 3, was the administrative buildings of the city Council. Now, the Council then decided to re-tender the work and Lots 1 and 3 – that’s the museums and administrative buildings – went to one company, Atalian and Lot 2, the libraries and community centres, that went to a different place. Now, Ms Goverts was told by ISS that she would be transferring to Atalian as Lots 1 and 3 comprised about 85% of the work that she previously did. Now, unfortunately Atalian had other ideas and said that they didn’t think that the Belgian equivalent of TUPE applied in this instance. So, the case made its way to the ECJ and the question for the Court was how the directive should be interpreted. Now three options were identified. One, should she not transfer to anyone? Two, should she transfer to the company that took over the majority of her work, or in the language of her caser, ‘Principal Tasks’. Or three, should her employment be split between the two transferees? Now, the Court noted that the purpose of the directive was to safeguard the rights of the employee when a business was transferred. But at the same time, the rights of the transferee should not be ignored. As such, it rejected the first option, the one that said that she shouldn’t transfer at all, as it would have the effect of rendering the directive pointless. And it then looked at the idea that the employee should go to the transferee who took over the majority of the work and rejected this on the basis that while it safeguarded the rights of the employee, it did nothing to recognise the burden that would be placed on the transferee. So, it was therefore left with option number three, the employee should transfer to more than one employer and essentially pro-rate their employment according to the amount of work that was transferring to each. Now, the Court helpfully went on to remind domestic Courts that when deciding what to do with an employee in this sort of situation, they can’t cause the employee to be worse off in terms of their working conditions. However, it did note that if it really didn’t work for employers to take on someone on a part-time basis, they could argue that they had an economic, technical or organisational reason for dismissing them. And if an employee felt that they couldn’t operate in circumstances, for instance where they’d been dismissed from one employer but not the other, they could resign and they would be treated as dismissed in those circumstances. In each case though, it would be for the transferee or transferees who’d be held responsible for any compensation due to the employee and not the transferor which is currently the situation in the UK.
Adam Turner
Okay. Now, I’ve got some questions.
Will Winch
Yeah. Thought you might.
Adam Turner
So, first things first. Do we still need to worry about the Goverts case? I mean, we’ve left the EU.
Will Winch
Well, yes we do because it was decided before we Brexited. So, before we completely left and before the transition period ended and therefore forms part of the retained law and as such, we’re bound by it until either the Court of Appeal or Supreme Court decides to overturn it. But the employment tribunal and employment appeals tribunal are bound to follow it.
Adam Turner
Okay, so the next question is, how does an employer decide who is assigned to what bit of the business and in what proportions they’re assigned?
Will Winch
Ooh another excellent question, Adam. Unfortunately though, although assignment is quite a key bit of TUPE, the ECJ has been particularly rubbish about defining it. However, the least worse way of defining it is by applying a few factors such as: one, the amount of time someone spends on that bit of the business; two, how much value they give to the business; three, what their contract of employment says about what their duties are and four, whose budget paid for the employee within the business. Now, a combination of these factors may give you some idea but it won’t be an exact science by any means and the problem will be that if you have a dispute amongst the transferees as to who’s going to take the responsibility for an employee post-transfer, this could give rise to a lot of discussion.
Adam Turner
Yeah, I can see that. So, it’s a good thing then that this only applies to business transfers?
Will Winch
Ah ha I’m afraid I have some bad news.
Adam Turner
But I thought you said that Service Provision Changes were a purely domestic piece of legislation? So, surely the Goverts case doesn’t have any bearing on it?
Will Winch
Well, that was exactly the question that was raised in the recent case of McTear and Bennett. Now, this involved some kitchen fitters working in North Lanarkshire. Amie Company originally provided services for the Local Authority, but after a while North Lanarkshire decided to re-tender the work and it awarded contracts to two other providers, McTear and Mitie and essentially split the Authority across the middle so that one provider would cover the north and the other would cover the south. Now, Amie looked at the patterns of work of its employees and informed around half that they’d be transferring to the business that took over the northern contract, because they’d been predominantly working in the north and half that they’d be going to the business that took over the southern contract. Now, there were a couple of employees who sort of floated between the north and south and Amie just slightly arbitrarily as far as I can tell, sent one north and the other south. However, unfortunately both McTear and Mitie said that they didn’t think that they should have to take on anyone as TUPE didn’t apply due to the fragmentation of the work. Now, there appears to be a bit of discussion as to whether the employees were as neatly split along geographical lines as Amie tried to make it out. Now, Amie was essentially at the time relying on an earlier EAT decision called Kimberley and Hambley. And in this case, work had been re-tendered and the work went to new providers. One provider took on 84% of the work; the other took on the remaining 16%. And the tribunal had originally suggested that the employees should go to both of the new providers and be employed by both of them. But the EAT was appalled by this suggestion and said that it was surprised that the tribunal had even entertained the idea and instead, the employees transferred to the majority provider. Amie was trying to establish that the same analysis should happen in North Lanarkshire. It argued that if the employees could be split into two teams, there was no reason for the teams not to go to the new provider that took on the majority of the work and the tribunal agreed. Now, both Mitie and McTear appealed and the case had gone as far as the EAT when the Goverts decision came out from the ECJ. And rather than continuing to argue that there shouldn’t be any transfer, both McTear and Mitie suddenly asked the EAT to apply the principle in Goverts and depart from the rule in Kimberley that said that you couldn’t have two masters. But interestingly, Goverts only really had relevance in relation to business transfers and not Service Provision Changes but the parties had decided amongst themselves not to take the point. So, as such, the EAT decided that Kimberley was no longer good law in this situation and the kitchen fitters accordingly could transfer to both Mitie and McTear, according to the amount of work that they previously did in each area. Now, the case has been sent back to the employment tribunal to work out the detail of how this should take place.
Adam Turner
Now, I can see quite a few problems with this because presumably, kitchen fitters will need to spend a few days working on one site, before they move on to work on another and although their split may have been say, 80:20 between the two sites over the course of a couple of months, this doesn’t mean they were working one day in the north of the Authority and four days in the south. Aren’t they more likely to have been working I don’t know, one week in the north and four weeks in the south?
Will Winch
Yeah, I’d have thought so, or even two days in the north, seven days in the south; five days in the north it’s, you know, it could be really fluid which makes it really quite difficult to work out how employers should react to this because if the work doesn’t neatly fall into what would essentially be a sort of job share, I can see that employees may be at risk of dismissal.
Adam Turner
And all this only assumes on the transfer that they have just two employers. So, I suppose the principle means that you could conceivably be transferred to well, lots of employers, where you might only work a fraction of a day for some of them.
Will Winch
Yeah, I think that’s probably right. I suppose at that point, you’re more likely to find that dismissals is going to follow then.
Adam Turner
Right okay, and what about if there’s a failure to inform and consult about their transfers? Does this mean that employees will be in line for multiple protective awards?
Will Winch
Well, I don’t think so. I mean, I suspect it’s probably going to be more a case of there being one protective award but then split up across the different transferees and transferor potentially as well.
Adam Turner
Right okay. Well, another question. If the employees are dismissed, will they be entitled to multiple redundancy payments or basic awards if they’re successful in bringing claims around their dismissal?
Will Winch
Well, I don’t see why not. I mean, so I suppose one thing is that when you’re calculating a week’s pay, it’ll be according to the lower sort of part-time salary for each role so it might kind of depress it a bit but I don’t see any reason why not in principle.
Adam Turner
Okay. And well, actually a very important issue, what about obligations of confidentiality?
Will Winch
Well, that’s a really interesting point because in a Service Provision Change the chances are that the various providers are going to be competitors. So, you’re going to find that people will be employed by two employers who are direct competitors and they’re going to have all sorts of other duties as well as just confidentiality and I think it’s more likely that you’re going to be finding people facing dismissal in these kind of situations.
Adam Turner
Wow okay. So, there are a number of unintended consequences of the case law trying to help the employees on the TUPE transfer. What also occurs to me, is that you could face a situation where an employer outsources only part of its work or part of the services that it’s providing are re-tendered or it sells just part of its business and in those circumstances, what will happen to an employee who does a significant part of their work both in the bit of the business that’s transferring and in the bit of the business that stays behind? You know, would that employee end up with two part-time jobs? One with the original employer and one with the employer who takes on the transfer business. Or is it the case that this principle only applies where employees are 100% TUPE transferred out from the current employer to two or more new employers?
Will Winch
I’m afraid I can’t answer that. I mean I think you know, Goverts was very much a case of where things went out 100% and same has happened in McTear. But I mean, I think there’s certainly a strong argument to say that in the example you’ve given, the employee’s job would be split into two bits, with one bit transferring with the business that’s sold on.
Adam Turner
Crikey. So, is this very complex situation going to be the case for all outsourcing situations from now on?
Will Winch
Well, good news is that no, I don’t think so. I mean, I strongly suspect that the tribunal is going to look to limit the effect of this to situations where someone’s work was neatly compartmentalised and the compartments go in different directions. In other words, if fragmentation occurs along sort of fault lines that already existed, and employees had already been divided into each of the, you know, pieces of those fault lines. However, if they work on one project and that project is then split into two or more pieces, I think there’s a chance that the pre-McTear rules about fragmentation will apply, as it’s hard to see who should take them on and in what proportion. So, going back to my example earlier on where you have 10 providers who are then reduced to three and they’re all doing the same thing, I think it would be hard to say that one of the three should inherit the liability. Now, if you have any fundamental change, the services that are being provided, I think this will be something that the tribunal will see as meaning that TUPE couldn’t apply as well and also, you still need the employee to be part of an organised grouping of employees for TUPE to apply in the first place. Now, if they’d been working throughout the service area in this McTear example and that was split in two, I’d say that this could cause the activity to be fundamentally different because essentially you know, beforehand the activity was provision of services to the whole of North Lanarkshire, post-transfer, you’re only providing services to a bit of North Lanarkshire and that might be a different activity.
Adam Turner
Which I think would be a very good thing. Now, I can also see another problem when it comes to negotiating indemnities. At the moment, we’re going to have contracts which are out there that envisage a binary situation where people are either in-scope for the transfer, or they’re not in-scope and it’s going to be difficult for all the parties if questions like the extent to which someone is assigned to a fragmented business are going to be subjective. I can see real difficulties if an outgoing employer gives a list with a bunch of names on it, to the transferee and not only is there a list of the names but there are percentages next to each name to indicate the extent to which they people are assigned.
Will Winch
Yeah, I mean I agree. I think this is going to cause real difficulties and the problem is that there are contracts out there at present that haven’t even envisaged this as an issue.
Adam Turner
Right. Okay. So, I think we’re going to have to hope that we get more guidance very soon from the tribunals as to what to do about all of this. Okay, well for now, let’s wrap up there. I’d like to say thank you very much indeed to Will Winch for joining me for this Mishcon Academy Digital Sessions podcast and for clarifying a particularly tricky area of employment law. I’m Adam Turner, do come back for our next episode which will be available on the Mishcon website in the coming weeks.
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