Basic guide to TUPE

Its effect is to move employees and any liabilities associated with them from the old employer to the new employer by operation of law.

What is TUPE?

TUPE stands for the Transfer of Undertakings (Protection of Employment) Regulations and its purpose is to protect employees if the business in which they are employed changes hands. Its effect is to move employees and any liabilities associated with them from the old employer to the new employer by operation of law.

The Regulations were first passed in 1981, overhauled in 2006, and further amendments were made in 2014. TUPE is a significant and often tricky piece of legislation adopted by the UK in order to implement the EU's Acquired Rights Directive.

Why do you need to know anything about TUPE?

TUPE applies every day to an enormous number of different business transactions and it is essential that employers of all sizes understand what employment liabilities can arise. TUPE can apply when employers:

• sell or buy part or all of a business as a going concern;
• outsource or make a "service provision change" involving either (a) an initial outsourcing of a service (e.g. where services transfer from the customer to an external contractor); (b) a subsequent transfer (e.g. where services transfer from the first external contractor to a different external contractor; and (c) bringing the service back in-house (e.g. where services transfer from an external contractor back to the customer)
• grant or take over a lease or licence of premises and operate the same business from those premises.

What do you need to know about TUPE?

To protect your business from claims, you need to understand:

• when TUPE is likely to apply;
• what TUPE means legally;
• what you have to do to comply with TUPE and the penalties for failing to do so;
• what the implications are if TUPE doesn't apply, and
• what other steps you can take to protect your business from the effects of TUPE.

When is TUPE likely to apply?

In essence, TUPE applies where there is a "relevant transfer". The 2006 Regulations clarified complicated case law to determine that a relevant transfer means the "transfer of an economic entity which retains its identity". In determining whether this has happened, the courts take into account factors such as:

• the type of undertaking being transferred;
• whether any tangible assets (buildings, moveable property etc) are transferred;
• whether any intangible assets are transferred and the extent of their value;
• whether the majority of the employees are taken on by the new employer;
• whether any customers are transferred;
• the degree of similarity between the activities carried on before and after the transfer;
• the period for which the activities were suspended, if any.

The question of exactly when TUPE does and does not apply can be very complex. If you think a transaction you are involved in might be covered by TUPE you should always take specialist legal advice. TUPE will be a consideration in virtually all service provision changes such as outsourcing and insourcing. It can't always be assumed that TUPE will apply, as it is dependent on a number of issues, including whether:

• the activities undertaken before and after the transfer remain fundamentally the same, and
• staff providing the activities are organised appropriately into groupings which provide the activities to the client.

Because of the uncertainty surrounding when TUPE applies, it is common for this issue to be regulated by contract. 

What does TUPE mean legally?

Employees who are employed in the undertaking which is being transferred have their employment transferred to the new employer.

Employees can refuse to transfer (or "object") but, depending on the circumstances of the case, they can lose valuable legal rights if they do. TUPE 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". This all-embracing concept encompasses rights under the contract of employment, statutory rights and continuity of employment and includes employees' rights to bring a claim against their employer for unfair dismissal, redundancy or discrimination, unpaid wages, bonuses or holidays and personal injury claims.

Employees therefore have the legal right to transfer to the new employer on their existing terms and conditions of employment and with all their existing employment rights and liabilities intact, although there are special provisions dealing with old age pensions under occupational pension schemes.

Effectively, the new employer steps into the shoes of the old employer and it is as though the employee's contract of employment was always made with the new employer. For this reason it is essential that employers know all about the employees they might inherit if they are planning to take over a contract or buy a business and that they make sure that the contract protects them from any employment liabilities which arose before they became the employer. This is helped by the fact that the old employer is required to provide to the new employer written details of all employee rights and liabilities that will transfer.

For example, if Armadillo plc has been carrying out a contract to supply an insurance company with IT services and then loses the contract to Bear Ltd, Bear Ltd will not only take over the contract to supply IT services but will also inherit all the employees of Armadillo plc who undertook the work of supplying the IT services to the insurance company. If Armadillo plc has failed to pay its employees their wages for the past few weeks, Bear Ltd will inherit the liability to the employees for the unpaid wages under TUPE.

Any dismissals will be automatically unfair where the sole or principal reason for the dismissal is the transfer. Dismissals may not be automatically unfair where the dismissal is for an economical, technical or organisational reason (an "ETO" reason) requiring a change in the workforce. This ETO defence is narrow in scope and must entail changes in the workforce, e.g. workforce numbers or job functions. ETO reasons can be difficult to establish. Even if the employer can rely upon an ETO defence and the dismissal is not automatically unfair, it may still be unfair for other reasons, such as a failure to consult properly in a redundancy situation, or using it to reduce costs, or harmonise terms and conditions.

As the new employer is required to take on the employees on their existing terms and conditions of employment, it is prohibited from making any changes to the terms and conditions of employment of the transferred employees if the sole or principal reason for the variation is the transfer. However, TUPE 2014 brought in some changes which potentially make it easier for employers to effect changes to terms and conditions where: the contract allows for a change to be made, such as an application of a mobility provision in the contract; or where employer and employee agree the change in circumstances where the sole or principal reason for the variation is an ETO reason for the change.  Because ETO reasons require a change in number or functions of the workforce or, since 2014, a change in location of workplace, this often makes it difficult, if not impossible, for incoming employers to harmonise terms and conditions of employment of staff after a TUPE transfer.

Where an independent trade union has been recognised by the outgoing employer in respect of transferring employees, recognition will transfer to the incoming employer to the same extent. Since 2014, terms and conditions from collective agreements may be renegotiated after one year providing that overall they are no less favourable to the employee.

Which employees transfer to the new employer?

Case law has developed an assignment test, with several factors being used to identify which employees should transfer. It has become known as a "wholly or mainly assigned" test. It looks for a substantial degree of assignment by assessing time spent on the transferring undertaking or activities and the kind of duties carried out. It is usually fairly obvious if an employee is "wholly or mainly assigned" to a transferring undertaking or service. However, uncertainty has followed a European case in 2020 and a UK decision in 2021 which confirmed that it may be possible to transfer only part of an employee's employment to a transferee when their working time is split.

Another important consideration when identifying who will transfer is that TUPE applies to "employees", but this is not the same test of employment as we would apply in an employment status test. A 2019 British employment tribunal decided that those with worker status are protected under TUPE. Consideration should now be given to risks around TUPE applying to workers.

What do you need to do to comply with TUPE?

Inform and consult with staff

Employers involved in a business transfer must inform appropriate representatives of the affected employees of the transfer and any measures proposed, and must consult on any proposed measures. Certain specified information must be provided to the representatives long enough before the transfer to enable the outgoing employer to consult with them about it.

If there are any changes or proposals for changes following the transfer, these "measures" will have to be discussed with the representatives of the affected employees. The incoming employer is required to provide the outgoing employer with information on proposed measures to allow the outgoing employer to comply with its duty to inform and consult. There is no set timetable for consultation, but it must be in "good time" before the transfer, and the larger the transaction and the more staff affected, the longer the timetable will need to be.

If there is a failure to inform and consult, a complaint can be made to the Employment Tribunal. If successful, the Tribunal can award whatever compensation it considers just and equitable having regard to the seriousness of the employer's failure up to a maximum of 13 weeks' pay per affected employee. Information and consultation failures can result in joint and several liability between the outgoing and incoming employers, although the contract governing the transfer can cater for apportionment of liability here.

A failure to comply with TUPE could therefore expose employers to claims potentially large enough to undermine the entire transaction.

Since 2014, there are potential exemptions from consultation provisions for micro-businesses with fewer than 10 employees.

Outgoing employer must provide employee liability information to incoming employer

The outgoing employer has a duty to provide the incoming employer with written details of the transferring employees including identity, age, particulars of employment, disciplinary and grievance records, employee claims and collective agreements, together with all associated rights and liabilities that will transfer. This information must be given not less than 28 days before the transfer, although in practice the incoming employer will aim to attain this information much earlier.

If there is a failure to comply with this duty by the outgoing employer, the incoming employer can apply to the Tribunal for compensation which will be assessed with regard to the losses suffered with a minimum award of £500 per employee.

What other practical steps can you take to protect your business from the effects of TUPE?

Although it is not possible to contract out of TUPE, there are steps which both the outgoing and incoming employers can take to divide up TUPE liabilities contractually between them. Whilst under TUPE employment liabilities connected to the transferring employees will always transfer to the incoming employer, so employee claims should always be made against the new employer, the parties can still agree contractually to divide up the liabilities between them in a different way. This ought to be done by means of contractual indemnities. If this is something you think would be useful for your business, you should always take specialist legal advice.

In addition it may be possible to structure work and teams to either make TUPE more certain or reduce the likelihood that TUPE will apply in a service provision change situation.

TUPE in insolvency

Finally, TUPE is relaxed to protect incoming employers where the exiting employer is insolvent. The liability for redundancy, notice and some other payments to employees will not transfer to the incoming employer. Also, if it is agreed with the trade union or employee representatives, terms and conditions of employment can be changed (without an ETO) if the change is designed to save a failing business. The idea is that companies will be more inclined to "rescue" insolvent businesses, thereby safeguarding employment, where the inherited liabilities are not so onerous.

If you are an employee in need of advice: please note that our law firm does not tend to act for individual employees. We generally act for organisations only. You can contact the Law Society if you need help finding a solicitor or if you want additional guidance on your rights, you could try ACAS, which runs a helpline to answer employment questions in confidence.