Will TUPE review assist IT?

In chancellor George Osborne’s Autumn Statement, he called for “evidence” of the effectiveness of the legislation intended to protect employees on the transfer of a business or outsourcing, known as Transfer of Undertakings (Protection of Employment) 2006, or TUPE. This call for evidence is part of the government’s Red Tape Challenge, promising to cut red tape for businesses, particularly in the context of employment law.

TUPE was originally introduced in 1981 in order to implement the European Acquired Rights Directive (ARD), which safeguards employees’ rights where an economic undertaking or the assets of a business are transferred. Where TUPE applies, the contracts of employment of any employees assigned to the transferor’s business will pass to the transferee automatically by operation of law. The employees’ existing terms and length of service are preserved. The transferee in effect “steps into the shoes” of the transferor, so that all accrued employment liabilities pass to the transferee.

TUPE was revised in 2006, with the aim of providing greater certainty as to when the regulations apply. It introduced the concept of a “service provision change” (which goes beyond what is required by the ARD), which clarified that TUPE applies in the outsourcing context. This means that on a first or second-generation outsourcing, or when taking services back in-house, any employee who is assigned to the services immediately before the change of service provider will transfer under TUPE to the new service provider.

The government wants to review whether TUPE 2006 has achieved its goal of providing greater certainty – in particular, to “see if there is scope to improve [TUPE’s] implementation of the ARD and reduce burdens on businesses, while continuing to provide appropriate levels of protection for employees”.

The call for evidence process is predicated on the government’s concern that some businesses believe TUPE is gold-plated and overly bureaucratic. It is a precursor to a full consultation.

The government is also interested in understanding the interaction between TUPE and other legislation that has unintended and adverse consequences on businesses or employees. Public sector transfers are excluded from the review, as are the separate rules protecting occupational pension rights, which are dealt with in the Pensions Act 2004.

Given that TUPE implements the ARD, there is only limited scope for change, such as where TUPE currently goes beyond the scope of the directive, or by introducing new regulations that will go further than the directive.

TUPE and its impact on IT
In this feature, we have set out our views on some of the key areas affecting the IT sector; however, we should stress that these views are not shared by all concerned in the outsourcing industry.

Most employers in the IT sector value the additional “gold-plated” certainty that TUPE 2006 and the “service provision change” provides. It appears to have reduced disputes over whether TUPE applies to outsourcing and contracting arrangements, meaning that employers are less likely to incur legal expenses on determining whether TUPE applies.

If TUPE did not apply in the outsourcing context, the transferor would incur costs in redeploying staff (where possible) or redundancy costs if it could not, which may be especially difficult for smaller companies and might stifle competition in the industry. Thus, the application of TUPE to outsourcing is beneficial to IT service providers. However, there remain some issues with the concept of “service provision change”:

• When undertaking multi-jurisdictional outsourcings, UK employees will transfer automatically by operation of law under TUPE, but in other jurisdictions such as France and Germany the advice is often that local legislation implementing the ARD does not apply in the context of an outsourcing (especially one involving off-shoring) and so a different approach may be required in respect of non-UK employees, which complicates the transaction and increases cost for clients and suppliers in negotiating agreements.

• A service provision change is predicated on the transfer of “activities” from one service provider to another. There is no requirement that the activities must retain their identity after the transfer. However, in some cases the tribunals have taken a reasonably narrow interpretation of this test. In one case, a sandwich and salad bar provided by the incoming contractor was found to be a “wholly different operation” to the full catering service operated by the outgoing contractor, meaning there was no service provision change (OCS Group UK Ltd v Jones and another UKEAT/0038/09).This is likely to become increasingly important in relation to IT outsourcings as delivery models change from traditional hosting solutions to remote cloud-based solutions. We would therefore suggest that this test is clarified.

Terms and conditions
TUPE 2006 prevents the transferee from changing employees’ terms and conditions of employment, which are made “by reason of the transfer” or changes “connected with the transfer that are not for an economic, technical or organisational reason entailing changes in the workforce”.