TUPE Update: Keeping Yourself Safe When Acquiring Another Business

April 20, 2012

This article was first written for and featured in Fresh Business Thinking.

There is an exception to the normal TUPE (Transfer of Undertakings (Protection of Employment)) position that employees automatically transfer with the business and that dismissing them because of the transfer is automatically unfair. The exception applies where there are “bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor”. There has been uncertainty whether this includes pre-pack administrations – where a buyer is found for the business before the company is put into administration and the business is sold immediately it is in administration.

The Employment Appeal Tribunal’s (EAT) decision in OTG v Barke was countered by another EAT decision to the contrary. Confusion ensued.

The position is now finally clear as the Court of Appeal has decided (in Keylaw v Gaynor De’Antiquis) that the EAT was correct in OTG v Barke: TUPE will always apply where a company in administration disposes of its business. Buyers of businesses from companies in administration should therefore be aware of the potentially significant liabilities they are taking on.

Pre-transfer dismissals

The EAT’s decision in Spaceright v Baillavoine, highlighted the risks of dismissing employees before a transfer. In that case the Chief Executive of a company called Ultralon was dismissed by reason of redundancy on the same day that the company was put into administration. Just over a month later the assets and business of Ultralon were sold to Spaceright. The EAT found that the dismissal was “connected with” the transfer, and in the circumstances automatically unfair, even though Spaceright had not been identified as the buyer at the time of dismissal.

The Court of Appeal has now confirmed the EAT’s decision. A pre-transfer dismissal can be “connected with” a transfer that takes place at a later date, regardless of whether the particular transfer or transferee was known, identified or even contemplated at the date of dismissal.

Different activities post-transfer – does TUPE apply?

Does TUPE still apply where the activities carried out by the incoming service provider/transferee differ from those carried out by the outgoing service provider/transferor?

For TUPE to apply the activities carried out after a transfer must be identifiable as the activities carried out before the transfer. Case law has shown that the activities need not be identical; it is sufficient if the new activities are “fundamentally or essentially the same”.

In Enterprise Management v Connect-Up and Nottinghamshire Healthcare v Hamshaw the EAT has confirmed that where there are significant differences between the activities carried out by the old and new service providers, there will be no TUPE transfer. In Enterprise Management, the exclusion of certain work from the new contract represented around 15 per cent of the work previously done by the old service provider’s employees. In addition, around 40 per cent of the relevant sites were taken on by five other service providers resulted in the “fragmentation” of the old service. In Hamshaw, a care home was closed and residents re-housed into their own flats, with their care being transferred to two new providers. These took on some but not all of the employees who previously worked in the care home. The care provided was not that of a fully-staffed, all singing, all dancing care home, but instead was assistance so that the former residents could autonomously carry out domestic tasks.

Neither of the new activities was fundamentally or essentially the same as that carried out before the change. TUPE did not therefore apply.

In suitable cases, entities outsourcing activities or changing service providers might profitably consider changing the way in which the activity is to be carried out, as this might enable the incoming provider to avoid the impact of TUPE.

Equal pay and TUPE

What is the extent of an employer’s obligation when it has inherited gender-related pay inequalities as a result of a TUPE transfer? Skills Development Scotland v Buchanan provides some answers.

In Buchanan the jobs of two female and one male worker were of equal value, yet the man was paid substantially more, something that was due entirely and justifiably to his greater skills and experience at the time of his recruitment. After a series of TUPE transfers, the female workers, who by then had the same level of skill and experience, brought equal pay claims. These were dismissed by the EAT on the basis that the TUPE transfer protected the male employee’s contractual rights (which gave him the right to contractual salary increases) and that this constituted a non-gender related genuine material factor defence to the claims. The fact that the employer had not ring-fenced the male employee’s salary nor actively considered the impact of the TUPE transfer at each pay review did not break the causal link between the transfer and the justified pay differential. Effluxion of time was similarly dismissed by the EAT: it did not break the causal link between the original justified differential and the employees' current pay.

Does this mean that employers can ignore pay differentials after a TUPE transfer with impunity? The answer to that question is a cautious yes. Employers will still have the burden of showing that the disparity is still caused by the TUPE transfer. That may not always be an easy task. However, this decision does provide considerable comfort to transferees.

Restrictive covenants and TUPE – a reminder

One question that can provide transferees with sleepless nights is how restrictive covenants apply post-transfer. A business is bought. The employees transfer across and they and the acquired business are assimilated into the transferee’s existing business. They get to know the transferee’s clients and fellow employees, and then some leave to join a competitor. The transferee looks at the employment contracts he received as part of his due diligence on the purchase, and breathes a sigh of relief when he sees well-drafted restrictive covenants preventing the employees from soliciting and dealing with clients, and soliciting fellow employees.

Unfortunately all is not as it may seem. The effect of the 1993 Court of Appeal decision in Morris Angel v Hollande is that covenants will only bite on the acquired business, and not on the wider business of the transferee into which it may have been assimilated.

The reason for this is that TUPE operates to preserve the contractual position of transferring employees, not to increase the obligations they owe to their new employer. If the covenants were to be interpreted as applying to the expanded business, that would be a quite different and much wider obligation than that originally entered into.

A transferee can as a result only enforce existing restrictive covenants against transferring employees in respect of the clients and other employees of the acquired business, and not in respect of the clients and employees of the wider business.

As even agreed changes to terms and conditions of employment made for a reason connected with the transfer cannot be relied upon, a transferee will need to have a non-transfer-related reason for such a change if he is to avoid insomnia.


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