The Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246)1 (referred to below as TUPE 2006) is the main piece of legislation governing the transfer of an undertaking, or part of one, to another. The regulations are designed to protect the rights of employees in a transfer situation enabling them to enjoy the same terms and conditions, with continuity of employment, as formerly. TUPE 2006 entirely replaces the Transfer of Undertakings (Protection of Employment) Regulations 1981 (SI 1981/1794) which have often been referred to as the TUPE regulations.

What is a relevant transfer of an undertaking?

TUPE will apply to what are known as ‘relevant transfers’ which may occur in a wide range of situations. The two broad categories are business transfers and service provision changes. Some transfers will be both a business transfer and a service provision change.

Business transfers

The question here is whether there is a transfer of an economic entity that retains its identity. This can be broken into two parts:

• Is there a ‘stable economic entity’ that is capable of being transferred?
• Will the economic entity retain its identity after the transfer in question?

To decide if there is a stable economic entity that is capable of being transferred, the factors to consider include:

• Is the type of business being conducted by the transferee (incoming business) the same as the transferor's (outgoing business)?
• Has there been a transfer of tangible assets such as building and moveable property (although this is not essential)?
• What is the value of the intangible assets at the time of the transfer?
• Have the majority of employees been taken over by the new employer?
• Have the customers been transferred?
• What is the degree of similarity of the activities carried on before and after?

If the answer to all (or in some cases several of) the above questions is 'yes', it is safe to assume that there has been a transfer of a stable economic entity. The absence of a profit-motive is not a determinative factor.

Service provision changes

A 'service provision change' occurs when a client who engages a contractor to do work on its behalf is either:

• reassigning such a contract (whether by contracting out, outsourcing or re-tendering), or
• bringing the work ‘in-house’ (where a contract ends with the service being performed in-house by the client themselves)

It will not be a service provision change if:

• the contract is wholly or mainly for the supply of goods for the client’s use, or
• the activities are carried out in connection with a single specific event or a task of short-term duration.

In what situations does TUPE apply?

By way of broad guidance TUPE has been found to apply to:

• mergers
• sales of businesses by sale of assets
• a change of licensee or franchisee
• the gift of a business through the execution of a will
• contracting out of services
• changing contractors
• where all or part of a sole trader's business or partnership is sold or otherwise transferred.

However, TUPE does not apply to:

• transfers by share take-over
• transfers of assets only (for example, the sale of equipment alone would not be covered, but the sale of a going concern including equipment would be covered)
• transfers of a contract to provide goods or services where this does not involve the transfer of a business or part of a business
• the supply of goods for the client's use, for example, supplying food to a client to sell in its staff canteen, rather than a situation where the contractor runs the canteen for the client.
• transfers of undertakings situated outside the United Kingdom (although these may be covered by the regulations of other member states).

The law on relevant transfers in the case of contracting out and changes of contractors for labour intensive activities, such as security, catering, refuse collection and cleaning, has given rise to confusion in the past. Many of these difficulties have been resolved by TUPE 2006. However, it appears that TUPE 2006 will apply if an organisation such as an advertising agency or a law firm takes over a client from another firm following a tender process. The new firm may be under an obligation to also take on the staff who were working on the client account for the previous firm.

Impact of a breach of the TUPE regulations

If a TUPE transfer applies, all terms and conditions of work and continuity of employment should be preserved. This principle applies to all employees who were employed in the entity transferred immediately before the transfer; and those who would have been so employed if they had not been unfairly dismissed for a reason connected with the transfer.

Subject to a one year qualifying period, such a dismissal will be automatically unfair for a reason connected with the transfer unless it is for an 'economic, technical or organisational' (ETO) reason (see below).

The table below sets out three different categories of dismissal and whether they are fair or unfair.

Information

From 6 April 2006, transferors became obliged to give the transferee written information about the employees who are to transfer and all the associated rights and obligations towards them. This information includes, for example, the identity and age of the employees who will transfer, information contained in the employees’ written particulars of employment under section 1 of the Employment Rights Act 1996 and details of any claims that the transferor reasonably believes might be brought.

If the transferor does not provide this information, the transferee may apply to an employment tribunal for such amount as it considers just and equitable. Compensation starts at a minimum of £500 for each employee in respect of whom the information was not provided or was defective.

Consultation and notification

The transferor has a responsibility to conduct a full and meaningful consultation with employees at the earliest practicable time. Failure to conduct consultation results in liability for the payment of compensation which may be up to 13 weeks' pay. The transferor and transferee are both liable for any award of compensation made by an employment tribunal for failure to inform and consult.

Liability passing on to the incoming contractor

The transferee takes over the liability for all statutory rights, claims and liabilities arising from the contract of employment, for example, liabilities in tort, unfair dismissal and discrimination claims. The exception to this rule applies to criminal liabilities.

Pensions

Strictly speaking, obligations relating to provisions about benefits for old age, invalidity or survivors in employees' occupational pension schemes do not transfer under TUPE. However, the provisions of the Pensions Act 2004 sections 257 and 258 do apply to transfers taking place after 6 April 2005. In effect, this means that provisions equivalent to the TUPE regulations apply to pension rights from that date. In essence, if the previous employer provided a pension scheme then the new employer has to provide some form of pension arrangement for employees who were eligible for, or members of the old employer's scheme. It will not have to be the same as the arrangement provided by the previous employer but will have to be of a certain minimum standard specified under the Pensions Act.

Are there any ‘defences’ to prevent the TUPE regulations applying?

The economic, technical or organisational (ETO) reason relating to the entity which is being transferred is one of the few legitimate factors for the basis of a refusal to take on the transferor's workforce by the prospective transferee. The reason has to be the main cause of the dismissal, thus making the dismissal justifiable provided an employment tribunal decides that the employer acted reasonably in all circumstances. If it can be shown that the economic reasons were a 'sham' and that the workforce were not taken on in order to avoid the application of the TUPE regulations, then the transferee could be liable for potential claims.

Employees with less than one year's service cannot usually present claims under TUPE as employment protection rights have not been accrued.