What you need to know about TUPE and possible changes to it

The Transfer of Undertakings, Protection of Employment (TUPE) legislation is designed to protect workers employment conditions when their company is acquired or their role is outsourced to a third party.

Any business outsourcing IT must contend with TUPE. The law, which is often said to favour the employees, is currently under review. I am no lawyer but law firm Eversheds has given me a guest blog on the subject.

TUPE today and what about tomorrow?

By Philip Davies and Simon Gamlin, outsourcing specialists at  Eversheds.

“Anyone familiar with IT services contracts, in particular IT outsourcing arrangements, will be familiar with the Transfer of Undertakings (Protection of Employment) Regulations (“TUPE”) and will probably have a good understanding of how the law works.  They will also be aware that TUPE liabilities and costs are often fundamental enough to deals as to actually inform whether a deal will go ahead or not.

In April 2006, the 1981 TUPE regulations were repealed and replaced by new, 2006 TUPE regulations.  One of the major changes made to TUPE in 2006 was the introduction of the concept of a “service provision change” (a “SPC”) – ie the application of TUPE where services are outsourced, insourced or assigned to a new contractor.  One of the advantages of the SPC rules is that they make it reasonably clear that TUPE will, subject to certain limited exceptions, apply to a SPC. 

The introduction of the SPC rules had a number of perceived benefits:

-It created greater certainty for clients and contractors – this was a step change from the 1981 Regulations, under which IT service providers and customers alike could rarely be 100% sure whether or not employees would transfer;

-It reduced legal fees because legal analysis of whether TUPE applied became simpler; and

-It created a level playing field for tendering contractors by avoiding situations where one contractor might price its bid on the assumption that TUPE did apply whilst another priced its bid in the belief that TUPE did not apply.  It also reduced the scope for “cowboy” contractors to undercut competitors by arguing that TUPE did not apply and then cherry-picking only some of the incumbent staff and offering them new employment on lower pay.

However, following concerns from some businesses that TUPE unnecessarily “gold-plates” the underlying EU Acquired Rights Directive, in November 2011, the Government announced a “call for evidence” on the effectiveness of TUPE, including regarding whether the increased certainty from the definition of a SPC had resulted in benefits or burdens for business.  The Government published its Response to the call for evidence in September 2012. 

Approximately 40% of respondents thought that the inclusion of the SPC rules provided benefits in terms of increased transparency and reduced burdens on businesses.  However, some business representative groups expressed dissatisfaction that, under the SPC rules, more transactions were becoming subject to TUPE.

The Government will now formulate its policy views having regard to the responses to the call for evidence and further engagement with stakeholder groups.  A formal consultation will then follow, including regarding whether the SPC rules should be retained or repealed.

If the SPC rules are repealed, that will not mean that an outsourcing can never give rise to a TUPE transfer.  Rather, things will be back as they were pre-2006, when there was often extensive legal debate about whether a deal satisfied the multifactorial test (often referred to as the Spijkers test) used to determine whether the more traditional form of a TUPE transfer (ie one involving the transfer of an economic entity that has retained its identity) had occurred. 

Businesses that would welcome the SPC rules being repealed should remember that the question of whether an outsourcing satisfied the Spijkers test was one of the most litigated aspects of the 1981 TUPE regulations.  So, whilst the abolition of the SPC rules might benefit lawyers, the jury is still out on whether it will benefits participants in the market.”

Also see:

TUPE: The facts