Employees are protected under the Transfer of Undertakings (Protection of Employment) regulations 2006 (TUPE) in the case of a company takeover or merger.
The regulations apply when an employer's entire or a portion of their business or undertaking is transferred to another employer as a going concern.
Failure to inform and communicate with representatives of employees may result in a fine. The amount will be determined by the severity of the breach. Minor breaches are subject to a slew of specified fines of up to 13 weeks of gross pay.
In this guide, we'll look at what TUPE is, UK laws and regulations on TUPE, penalties, and various conditions in which you need to manage TUPE.
What is TUPE?
The Transfer of Undertakings (Protection of Employment) regulations, or TUPE, are designed to protect employees when the company in which they work changes ownership.
It has the effect of transferring employees and any responsibilities linked with them from the old employer (outgoing employer) to the new employer (incoming employer) by operation of law.
The Transfer of Undertakings (Protection of Employment) laws were first enacted in 1981, revised in 2006, and amended again in 2014.
TUPE is a very tightly drawn-up piece of legislation adopted by the UK government in order to implement the Acquired Rights Directive of the European Union.
How TUPE regulations affect you and your employees
TUPE can seem intimidating as the provisions are complex, and the HR processes involved in a TUPE transfer can be detailed and time-consuming for everyone involved.
The ways in which the transfer will affect employees is moving them and any liabilities associated with them from the old employer to the new employer by operation of law.
TUPE applies every day to a vast array of business transactions and it is essential that all employers recognise the potential for employment liabilities.
If an employer fails to meet any aspect of TUPE law, then they risk staff taking them to an employment tribunal.
UK laws on TUPE
The term TUPE is an abbreviation coined from the Transfer of Undertakings (Protection of Employment) Regulations 2006.
Employees who work for the company that is being transferred have their jobs transferred to the new company.
Employees can reject to transfer (or "object"), but depending on the circumstances of the case, they may lose valuable legal rights if they do so.
TUPE clearly states that "all the transferor's rights, powers, duties and liabilities under or in connection with the transferring employees' contracts of employment are transferred to the transferee".
The role of employee representatives
An employee representative, a trade union representative, or an affected employee can make a complaint to an employment tribunal for a protective award.
Employee representatives' role in a TUPE transfer is to obtain information from you as the employer, communicate it to their constituent employees, and represent the affected employees' ideas and opinions in any consultation process.
When an employer accepts that their employees can be collectively represented by the union, this is called trade union recognition.
Where an independent trade union has been recognised by the outgoing employer for transferring staff, the union will be transferred to the new employer to the same extent.
They must represent the interests of all affected employees, not just their own, and should take reasonable steps to ensure that you take into consideration the affected employees' opinions during the consultation process.
You, as the employer, have to inform and consult employee representatives about any part of the TUPE transfer that is likely to affect employees and then seek to reach an agreement.
Consultation must be conducted in order to obtain collective agreements from employee representatives or a trade union on the proposed measures. You must consider and reply to any representations made by the representatives.
The employees have a statutory right to reasonable paid time off to carry out their duties.
Penalties for failing to comply with TUPE
If you fail to properly inform and communicate with your staff about a TUPE transfer, you may be required to pay up to 13 weeks' pay in compensation to all employees affected.
Any compensation is calculated based on the employee's gross pay, and liability can be apportioned between the outgoing employer and the incoming employer. Depending on the severity of the failure, an employee could also resign and claim constructive unfair dismissal.
Failure by the outgoing employer to provide the Employee Liability Information (ELI) 28 days before the date of the transfer of the business could result in an award being sought by the incoming employer.
The amount is just and equitable, with a minimum amount of £500 per employee, in respect of employees for whom the information was not provided.
It is important to note that dismissing an employee because of a TUPE transfer is deemed to be automatically unfair.
If it can be shown that the reason for the dismissal was not the transfer itself but an ETO reason (economic, technical or organisational reason), a fair and proper redundancy process must still be followed, or it could still be deemed unfair.
Whilst liability for claims ordinarily follows the incoming employer, there may be contractual terms between the parties that provide for the liability to be apportioned. Therefore, it is always important to comply with the TUPE regulations and seek appropriate advice.
When does TUPE apply?
TUPE applies in the following two situations:
- Business transfers.
- Service provision changes.
Each of the two situations indicated above will be discussed further below.
If "an economic entity which retains its identity" is transferred, TUPE will apply to the business transfer. This term denotes a well-organised group engaged in economic activity.
There are two parts to determining if TUPE applies:
- Is there a stable business that can be transferred?
- Will the business preserve its identity following the transfer in question?
Examples of a business transfer include the following:
- Sales of a business by the sale of assets.
- A change of a franchisee.
- A sole trader's business or partnership is sold or transferred.
In service supplier changes where the activities carried out by the original contractor are fragmented following a retendering, TUPE may not apply.
The courts also consider whether any intangible assets are transferred, as well as the value of such assets.
A lease transfer, a management takeover, or an intra-group transfer are some further examples of a business transfer.
Service provision changes
When service provision change happens, employees of the business (or relevant part of the business) automatically transfer to the new employer just before the transfer.
TUPE protects employees by ensuring that they continue to be employed under the same terms and conditions as before the transfer.
Service provision change can occur when contracts are reassigned. For example:
- When a contractor takes over activities from a client (contracting out or outsourcing).
- When a new contractor takes over activities from the old contractor (retendering).
- When a client takes over activities from a contractor and the work is transferred in-house to be done on their own behalf (insourcing or service provided in-house).
TUPE also covers service provision changes in the provision of the following services:
- Office cleaning.
- Labour-intensive services.
TUPE applies to professional business services roles too, such as a legal or accounting service provider or a PR account manager, which are also roles that can be counted in a service provision change.
TUPE may apply if a company, such as an advertising agency or a law firm, acquires a client from another company through a tender process. It only applies to employees on permanent or fixed-term contracts, so agency workers are not covered.
Public sector transfers
TUPE covers public sector transfers if the transfer is made from the public sector organisation into the private sector or from one public authority to another.
Transfers within the public sector where the employer doesn't change is not covered by TUPE. However, employees will still be protected in the same way.
There are two types of deemed dismissals under TUPE:
It will be automatically unfair if the reason for the dismissal is the transfer.
If the sole or principal reason is an ETO reason, it's potentially unfair and the normal rules will apply.
If the transfer involves a substantial change to the working conditions, which is to the employee's material detriment, they can resign.
People who resign in these circumstances are treated as having been dismissed and they benefit from the enhanced protection TUPE provides for dismissals which are due to a transfer.
When TUPE does not apply
TUPE may not apply in certain situations involving business transfers and changes in the provision of services:
TUPE will not apply in a business transfer in the following situations:
Sales of a company's shares in which the identity of the current employer remains the same.
Assets and equipment are being sold and transferred to the new owner on a limited basis.
The old and new employer can agree on bearing non-compliant TUPE expenses and who will be responsible for any consequences of one party's failure to meet their duties.
Service provision changes
TUPE will not apply in a service provision change in the following situations:
The activities are only focused on supplying goods for the client's use.
The service provided is a single event or task of short-term duration such as an exhibition or a conference.
Apart from the situations described above, you must be aware that, whether you are a commercial company or a nonprofit organisation, you must follow TUPE in the same way because it is not an optional piece of legislation.
How to manage redundancies in a TUPE transfer
Even if there is an ETO justification for dismissal, you as the employer must follow all required redundancy and dismissal procedures. You must behave reasonably, which may include looking for other roles within the organisation.
In this section, we will go over redundancy before and after a TUPE transfer.
Before a TUPE transfer
The new employer and the previous employer cannot make any redundancies before a TUPE transfer if the reasons relate to the transfer.
Your employees can be made redundant prior to a TUPE transfer if the redundancies are unrelated to the transfer, using the standard redundancy procedure. The issue with pre-transfer dismissals is that, in order to be fair, there must be an ETO reason requiring workforce changes.
In many situations, the best course of action is for the new employer to take on the transferring employees and then handle the redundancies on their own.
- The existing employer cannot try to find a buyer for the company by reducing the workforce to make the organisation or service more cost-effective.
- The new employer cannot ask the original employer to make redundancies before the TUPE transfer. This would be considered an unfair dismissal.
- If the new employer is planning to make 20 or more redundancies at the same place within the same 90-day period after the transfer, they might be able to start a collective consultation with the staff before the transfer. If the outgoing employer agrees, it must start at least 30 days before anyone is made redundant.
After the relevant transfer
Once staff have transferred, both the new employer and the incoming employers can only make redundancies related to the transfer if both of the following conditions are met:
- There is an ETO reason involving a change in the workforce.
- There is a genuine redundancy situation.
A genuine redundancy situation is one in which a part of the entire organisation is:
- Closing, or has already closed.
- Changing the types or number of roles required to do certain work.
- Changing location.
A change in the workforce could indicate:
- A significant restructure.
- A change in the location of the workplace.
If you need to make redundancies in particular roles or teams, you must:
- Treat transferred employees in the same manner as staff who've worked there longer.
- Select staff in a fair way and do not disadvantage the employees transferred.
- Inform and consult fully with employees or their representatives regarding the proposed selection methods and criteria.
If the justification for redundancies is not related to the employee's transfer, you could make redundancies following the usual redundancy process. You won't need an ETO reason involving a change in the workforce.
How to handle insolvency in a TUPE transfer
TUPE regulations protect the employees’ rights when they transfer to a new employer, including transfers when the old employer is insolvent.
In a TUPE transfer, the type of insolvency and when it occurred will have an impact on:
- Who pays any money owed to employees.
- What protections employees have under TUPE.
To deal with insolvency, you, as the employer, would need to appoint an insolvency practitioner (IP).
TUPE will be protecting employees if your company or a portion of it is rescued and transferred or taken over by a new owner.
If you sell your insolvent organisation and it stays in business, your employees will automatically transfer to the new employer on the existing terms and conditions such as:
- Their original start date.
- Holiday pay.
- Pension contributions.
Usually, in a TUPE transfer, there must be ETO reasons requiring a change in the workforce for the new company and employees or their appropriate representatives to agree on any changes to contracts after the transfer. The change would have to be relevant to the transfer.
If you, the previous employer, are insolvent, the new employer or insolvency practitioner may make adjustments to the employees' employment terms and conditions if doing so helps to keep the business running.
They would need to do this in consultation with the appropriate representatives and get their approval.
Money owed to staff who transfer after an insolvency
If your staff have their employment transferred to a new employer after you become insolvent, the new employer would not be liable for some of the money owed to the staff by you.
The employees who have been transferred could claim some or all of the money they are owed from the Redundancy Payment Service.
They would need to get a case reference number from your insolvency practitioner before applying.
If your business is closing, your employees will not be covered under TUPE because there will be no transfer. In this case, the following will apply:
- No automatic transfer of employment contracts and their existing employment rights.
- Dismissals by the new owner aren't automatically unfair.
- Wider changes can be made to employment contracts.
In this instance, the old employer should make their staff redundant.
Money owed to staff
If you as the former employer become insolvent and go out of business, your former employees may be able to recover some of the money owed to them via the Redundancy Payment Service.
They would need to get a case reference number from your insolvency practitioner before applying.
TUPE and pension rights
In terms of pensions, the effect of TUPE is based on the type of pension arrangements you had with your former employer and whether you worked in the public or the private sector.
In the private sector, TUPE does not force the new employer to replicate the occupational pension schemes you had with your previous company, but what they must give is dependent on the pension plans of your former employer.
In the public sector, the situation is different. In most situations, your employer should offer you ongoing membership in your existing public sector scheme under a Fair Deal for Pensions arrangement.
Get expert advice on TUPE transfer With Peninsula
Transfer of Undertakings (Protection of Employment) regulations 2006 (TUPE) were set out to protect employees' rights in the case of a company takeover or merger.
Under TUPE, unless you have a clear ETO justification, you can't change an employee's terms and conditions to anything worse than before.
If you fail to inform and consult employees in connection with a TUPE transfer, you may have to pay a penalty of 13 weeks' gross pay to all those affected.
If you are dealing with TUPE transfers or struggling with such a contract, our 24/7 HR advice is available 365 days a year; with multi-lingual support and fully trained counsellors ready to help.
Want to find out more? Book a free consultation with one of our HR consultants. Call 0800 028 2420