The Transfer of Undertakings (Protection of Employment) Regulations (known as TUPE) were introduced into the UK in 2006 in response to the European Union Business Transfers Directive of 2001. Their aim was (and remains) to protect employees’ jobs and rights when there is a major change in the structure or contracts under which they are employed.

But after a lukewarm reception by employers, the rules are changing.

Under TUPE, if their employer is acquired by or merges with another company, employees retain the contracts and conditions that they had before the change, and the old owner is obliged to inform the new one of employees’ contractual obligations.

This means that:

  • Salary must stay the same
  • Hours must stay the same
  • Holiday entitlements remain (although used holidays are taken into account)
  • Any disputes that have been raised with the old employer must be followed up
  • Employees’ disciplinary records remain
  • An employee’s start date remains the date he or she started working at the original company, which matters if bonuses or extra holidays kick in after five years of employment, for example.

The rules don’t only apply to takeovers and buyouts, however. Even some outsourcing contracts and contractual business relationships are covered by the rules.

The Problems with TUPE

Employers have long argued that TUPE tips the balance too far in the favour of employees at the expense of employers being able to run their companies as they wish. After all, they argue, many mergers and acquisitions are implemented to consolidate management structures and supply chains, rationalise property portfolios and wring efficiency out of flabby companies, which often means redundancies or major changes in working practices.

A particular problem has been that two companies whose staff have differing contractual obligations can face problems when merging into one. Two workers doing the same job might be paid differently or have different holiday entitlements simply because of the companies they worked for before the merger. The solution comes in the part of the regulations that says that employers are allowed to improve their employees’ contracts (in the sense that most people would understand: more pay, more holidays, more perks) but not make them worse. In other words, everyone is brought up to the same level; nobody goes down. This is hardly a way of combating inefficiency.

New owners are walking a tightrope if they make redundancies; cases of constructive dismissal have been brought against new owners (although success is not guaranteed). Some of the confusion is what constitutes an “ETO” reason.

Newly merged companies are legally justified in dismissing staff when there is an economic, technical or organisational (ETO) reason entailing changes in the workforce, just as any other company is. Of course, the rules about redundancy apply – consistency, communication, seeking volunteers and so on – so owners cannot show favouritism on the basis of which parent company at-risk employees came from.

One of the main groups to suffer under TUPE is SMEs. Because of the unpredictability of tribunal decisions, SMEs, with their typically moderate cash flows, have been reluctant to enter such volatile arrangements. They have therefore been known to step back from bidding for outsourcing work in case they are burdened with previous employers’ contracts.

Changes Afoot?

Businesses have largely welcomed changes to TUPE regulations that have recently been introduced in a bid by the government to win back rights that they see as being lost to employees in 2006. It is now arguably easier for employers to legally make staff redundant when there’s a merger or if a contract changes ownership.

The government insists it is levelling the playing field and that employees’ rights are protected; it claims that Labour went much further than even the EU recommended in implementing the regulations. The coalition’s promise to cut “red tape” in business has encouraged business owners to be more optimistic than the unions are about the changes.

But no matter how much the government makes the regulations more advantageous for employees, it will be no help if companies in general—and SMEs in particular—still cannot predict whether TUPE-based tribunals brought against them will be successful. Scenarios need to be drawn out so that businesses of all sizes will be able to make informed decisions on whether to engage in mergers or chase after outsourcing contracts. Otherwise, only those who can afford potentially large payoffs will benefit.