Employment: asset purchases

Employment: asset purchases

An overview of the employment issues that arise on the transfer of assets and the impact of the Transfer of Undertakings (Protection of Employment) Regulations 2006.
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The Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (TUPE ) came into force on 6 April 2006 and replaced the previous version of the regulations, the Transfer of Undertakings (Protection of Employment) Regulations 1981 (SI 1981/1794) (TUPE 1981). TUPE applies to any relevant transfer that took place on or after 6 April 2006. (For the purposes of this note, the parties are referred to as buyer and seller, rather than transferor and transferee, even when referring to a TUPE transfer on a change of service provider.) Prior to the implementation of TUPE 1981 in the UK, on the sale of assets or a business or on a change of service provider, the parties could choose which (if any) of the employees transferred and the buyer could engage the transferring employees on whatever terms it chose. There was no obligation on either party to inform or consult with representatives of the affected employees unless there were to be collective redundancies. TUPE introduced three concepts into UK employment law: Protection against dismissal in connection with a TUPE transfer. The automatic transfer principle: the buyer inherits all rights, liabilities and obligations in relation to the transferring employees. The obligation to inform and consult with representatives of the affected employees. The main changes that TUPE made to the TUPE 1981-regime were: Widening the scope of the regulations to cover cases where services are outsourced, "insourced" or assigned by a client to a new contractor ("service provision changes"). However the supply of goods and "one-off buying-in of services" are excluded. Requiring the seller to provide the buyer with certain information about the transferring employees, including their identity. Making it easier to transfer insolvent businesses to new employers. Enabling employers and employees to agree changes to the terms of employment in certain circumstances where there is a transfer. Clarifying when it is unfair for employers to dismiss employees for reasons connected to a transfer. Making the seller and buyer jointly and severally liable for any failure to inform and consult with the transferring employees.

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TUPE applies to all of the UK, save for the provisions relating to service provision changes which do not apply in Northern Ireland. However the extension of the definition of a "relevant transfer" to include service provision changes was implemented in Northern Ireland by separate regulations, which also came into force on 6 April 2006. For further information, see PLC Employment, Practice notes, Overview of Northern Irish employment law and TUPE: overview. English courts and employment tribunals are required to give TUPE a purposive construction, that is, to give effect to the general purpose of the underlying directive, which is to safeguard employees rights on the transfer of a business

When does TUPE apply?

TUPE applies to a "relevant transfer", which means: A transfer of a business, undertaking or part of a business or undertaking where there is a transfer of an economic entity that retains its identity (a "business transfer") (regulation 3(1)(a), TUPE) (see Business transfers). A client engaging a contractor to do work on its behalf, reassigning such a contract or bringing the work "in-house" (a "service provision change") (regulation 3(1)(b), TUPE) (see Service provision changes). Some transfers will be both a business transfer and a service provision change. TUPE does not apply to a transfer of shares, although it would apply to an asset transfer carried out as a precursor to a share sale to ensure that the relevant assets are contained in, or removed from, the corporate entity whose shares are to be sold. There may also be a transfer of the business or part of the business to the holding company following a share transfer (see Millam v The Print Factory (London) 1991 Ltd [2007] EWCA Civ 322; Legal update, TUPE: subsidiarys employees transferred to holding company following share sale). For more information on the employment aspects of share purchases, see Practice note, Employment: share purchases. Business transfers A business transfer is defined in TUPE as: "A transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in the United Kingdom to another person where there is a transfer of an economic entity which retains its identity" (regulation 3(1)(a), TUPE). This involves three elements: An economic entity. A transfer of that economic entity. The economic entity retaining its identity following the transfer. An economic entity This is defined to mean "an organised grouping of resources that has the objective of pursuing an economic activity, whether or not that activity is central or ancillary" (regulation 3(2), TUPE). In many cases, it is clear whether there is an economic entity. However, in some cases, there may merely be a sale of assets. This will be a question of fact to be determined by the court or tribunal.

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TUPE can apply to the transfer of all, or part, of an undertaking or business. The case law has established that the relevant part must be a self-contained and severable economic unit. A transfer of the economic entity TUPE applies to a transfer "howsoever effected" (regulation 3(4)(b), TUPE) and so the precise mechanics of how the transfer is effected are not relevant. The courts will look through complex arrangements and determine whether there has been a transfer by looking at the substance of what has happened. A transfer can take place by one or a series of transactions (whether or not between the same parties) (regulation 3(6), TUPE). These do not need to be close to each other in time. A TUPE transfer can take place even if the employees working in the economic entity are not informed that there has been a transfer or told the identity of the buyer (Secretary of State for Trade and Industry v Cook [1997] IRLR 150). The economic entity has retained its identity following the transfer Whether the economic entity has retained its identity should be apparent from the fact that the operation is actually being continued (or has been taken over) by the buyer carrying on with the same or similar economic activities. All relevant factors should be looked at when determining whether this test has been met, including: Whether goodwill has been transferred. Who is servicing the sellers customers, stock in trade, buildings and other tangible assets. The value of the sellers intangible assets. The activities carried on before and after the transfer. The extent of any disruption of those activities. The use of employees by the buyer. The weight or importance to be attached to any of the factors will vary considerably according to the nature of the transaction. Service provision changes It has long been clear that TUPE can apply to an outsourcing (Suzen v Zehnacker Gebaudereinigung GmbH [1997] IRLR 255). However, TUPE expressly states that there is a relevant transfer where there is a service provision change. Regulation 3(1)(b) of TUPE defines a service provision change as a situation in which:

"(i) activities cease to be carried out by a person ("a client") on his own behalf and are carried out instead by another person on the clients behalf ("a contractor");(ii) activities cease to be carried out by a contractor on a clients behalf (whether or not those activities had previously been carried out by the client on his own behalf) and are carried out instead by another person ("a subsequent contractor") on the clients behalf; or(iii) activities cease to be carried out by a contractor or a subsequent contractor on a clients behalf (whether or not those activities had previously been carried out by the client on his own behalf) and are carried out instead by the client on his own behalf"

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There must be an organised grouping of employees situated in Great Britain before the change whose principal purpose is carrying on services for the client (regulation 3(3)(a)(i), TUPE). This could be a single employee (regulation 2(1), TUPE). However there will not be a service provision change where: The contract is wholly or mainly for the supply of goods for the clients use (regulation 3(3)(b), TUPE). The activities are carried out in connection with a single specific event or a task of short-term duration (regulation 3(3)(a)(ii), TUPE). It is not possible for the incoming service provider to avoid TUPE by performing the services in a different way or by not taking over the workforce. If a change in the person that provides a service does not fall within the definition of a service provision change, it may still fall within the definition of a business transfer, and so still be a relevant transfer. For further information, see PLC Employment Practice notes, TUPE (1): when does TUPE apply? and TUPE (2): service provision changes and outsourcing. Overseas issues TUPE applies to: A business transfer, where the undertaking is situated in the UK immediately before the transfer. A service provision change, where there is an organised grouping of employees situated in Great Britain immediately before the service provision change. It applies even if: The transfer is governed or effected by the law of a country or territory outside the UK. The service provision change is governed or effected by the law of a country or territory outside the Great Britain. The affected employees employment is governed by any such law. The transfer of a business (which may also be a service provision change) involves employees who ordinarily work outside the UK. (Regulation 3(4), TUPE.) TUPE may apply even if those employed in the undertaking ordinarily work outside the UK, "so long as the undertaking itself (comprising, amongst other things, premises, assets, fixtures & fittings, goodwill as well as employees) is situated in the UK" (see BIS Guidance on TUPE page 9) or the transfer is to a country outside the EU (Holis Metal Industries Ltd v (1) GMB (2) Newell Limited UKEAT 017/07, see PLC Employment, Legal update, TUPE can apply to transfers outside the UK). Public sector transfers
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A reorganisation of a public administration or the transfer of administrative functions between public administrations is not a relevant transfer (regulation 3(5), TUPE). However, TUPE does apply to transfers from the public sector to the private sector. In addition, transfers from local authorities are subject to the provisions of the Code of Practice on Workforce Matters in Public Sector Service Contracts, January 2000 (revised November 2007) and public sector authorities must have regard to the Statement of Practice on Staff Transfers in the Public Sector and annexed document A Fair Deal for Staff Pensions. For further information, see PLC Employment, Practice note, TUPE (1): when does TUPE apply?. Limiting the effect of TUPE Employment tribunals take a purposive approach to the application of TUPE and, where the parties try to circumvent its application, there is a real risk that it may still be held to apply. While it is possible to compromise claims arising out of a TUPE transfer that are not based in TUPE itself, it is unclear whether it is possible to compromise claims arising out of TUPE itself. For further information, see PLC Employment, Practice note, TUPE (1): when does TUPE apply?.

The automatic transfer principle

Employees Where there is a TUPE transfer, those employees employed by the seller and "assigned to the organised grouping of resources or employees that is subject to the relevant transfer" will transfer to the buyer under their existing terms of employment and with their continuity of employment unbroken (regulation 4(1), TUPE). This includes anyone employed in the grouping immediately before the transfer and anyone who would have been so employed if they had not been dismissed because of the transfer or a reason connected with it (regulation 4(3), TUPE). Whether the employee in question is "assigned" to the organised grouping is essentially a question of fact to be decided by the tribunal and there is no specific percentage of time which an employee must devote to a business unit before being regarded as assigned to it. TUPE does not transfer any employees who are only temporarily assigned to the organised grouping. Whether an assignment is "temporary" will depend on a number of factors, which may include the length of the assignment and whether a date has been set for the employees return or re-assignment to another part of the business or undertaking. Self-employed consultants working under a contract for services are generally not covered by TUPE, although whether their relationship amounts to a contract for services or a contract of service will be up to the courts or tribunals to decide. Those employed by a service company or holding company, but who provide their services wholly or mainly to the undertaking (or part) transferred are not automatically transferred to the buyer on the strict wording of TUPE (regulation 4, TUPE). This provides a way for employers to circumvent TUPE by ensuring that the employees working in a business are technically employed by someone other than the legal entity which actually owns the business (or part) being transferred. However the EC directive which is implemented by TUPE provides that the automatic transfer principle applies to those employees who have a "contract of employment or employment relationship" with the seller (Directive 77/187/EC). If the issue went before an employment tribunal, it would have to interpret the law purposefully.

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For further information, see PLC Employment, Practice note, TUPE (3): the automatic transfer principle. Rights in connection with the contracts All of the sellers rights, powers, duties and liabilities under or in connection with the transferring employees contracts pass to the buyer and any acts or omissions of the seller before the transfer are treated as having been done by the buyer (regulation 4(2), TUPE). In other words, there is a statutory novation of employment contracts and the buyer steps into the sellers shoes in respect of all the employees working in the organised grouping at the moment of transfer. See also Accrued liabilities. The transfer of all existing rights, duties, liabilities and obligations highlights the need for due diligence by the buyer to ascertain exactly what accrued liabilities and obligations it is acquiring. For further information, see PLC Employment, Practice note, Employee due diligence issues on transactions. Collective agreements and union recognition All collective agreements relating to the transferring employees transfer to the buyer (regulation 5, TUPE). Union recognition also transfers to the buyer, provided the organised grouping retains a distinct identity after the transfer (regulation 6, TUPE). This means that certain rights which are afforded only to recognised trade unions (such as the right to disclosure of information for collective bargaining, the right to be consulted on certain matters and the right to have paid time off for union officials to carry out duties related to collective bargaining or for union training) are treated as transferred. In some cases, this has meant that the public sector collective bargaining machinery has transferred across into the private sector on a privatisation covered by TUPE. Accrued liabilities All accrued liabilities of the seller, such as acts and omissions which can give rise to constructive dismissal claims, claims for sex and race discrimination, equal pay, accrued debts owed to the employee and other tortious liability (for example, personal injury), will pass to the buyer under TUPE. It is therefore critical that the buyer obtains appropriate indemnities from the seller in respect of all pre-transfer liabilities (see box, Warranties and indemnities). It has been held that, in addition to the transfer of liability in tort for the injury itself to the buyer, the sellers right of indemnity under its employers liability insurance policy was also transferred (Bernadone v Pall Mall Services Group Ltd and others [2000] 3 All ER 544). The seller and buyer are jointly and severally liable in relation to a failure to inform and consult under TUPE (regulation 15(9), TUPE). However, the position in relation to the liability for failure to inform and consult on collective redundancies is not so clear cut (see PLC Employment, Practice note, Collective redundancy consultation). At present, liability for failure to inform and consult on collective redundancy does transfer to the buyer (see Kerry Foods Limited v Creber [2000] IRLR 10), but there have been conflicting decisions on this point. When does the automatic transfer principle apply? The automatic transfer principle applies at the moment of the transfer, which is generally completion rather than exchange of contracts . However, this is a presumption which can be

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rebutted, for example, if there has been a de facto transfer before completion (Dabell v Vale Industrial Services (Nottingham) Limited [1988] IRLR 439). In relation to changes of service provider (see Service provision changes), the transfer is treated as taking place on the grant, assignment, surrender or termination of the relevant operating licence, that is, as soon as there is a change in the legal person responsible for running the economic unit. The parties cannot agree that the economic entity transfers at one moment in time and its employees transfer at a different time (see North Wales Training and Enterprise Council Ltd (t/a Celtec) v Astley and others [2006] IRLR 635, Legal update, TUPE: House of Lords rules on date of the transfer. Pension rights The major exceptions to the principle of automatic transfer are old age, invalidity and survivors benefits under occupational pension schemes. These do not transfer under TUPE. However: An obligation in an employment contract to pay a percentage of salary into the employees personal pension scheme will not fall within the exemption and therefore will be covered by the automatic transfer principle. The Pensions Act 2004 requires buyers to meet specified levels of pension provision for certain transferring employees. The exclusion does not apply to other benefits under an occupational pension scheme which are not old age, invalidity or survivors benefits (Beckmann v Dynamco Whicheloe Macfarlane Ltd [2002] 2 CMLR 45). This includes any early retirement benefits, including the right to retire early voluntarily. For further information, see Practice note, Pensions: asset purchases and PLC Employment, Practice notes, Pensions for employment lawyers and Pension issues on a TUPE transfer). Profit share and share option schemes Certain categories of profit share and share option schemes may, by their nature, not be transferable. For example, on a transfer, employees might cease to be entitled to participate in the sellers group employee share option scheme. Indeed, some share option schemes provide that any options become exercisable on a TUPE transfer. In practice, it is not possible for a buyer to provide that the transferred employees will remain in the sellers share option scheme after they leave the sellers group of companies. Therefore, it may be necessary for the buyer to provide an equivalent share option scheme, even if it is a "phantom" scheme. Alternatively, it may have to buy out those employees rights. Similar issues arise in relation to benefits that can only be provided by the seller (for example, staff discounts). Restrictive covenants Restrictive covenants also transfer across with the rest of the contract, but the restrictive covenants will be interpreted and construed as identifying, say, "the Company" at the time the contract was entered into (Morris Angel v Hollande [1993] IRLR 169). Therefore when, for example, identifying the range of activities or customers to which the post-termination restrictions apply, these will relate to those of the sellers business, not the buyers. Depending on the particular circumstances of the case, it may be necessary for the buyer to arrange for the restrictive covenants
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to be amended, but this will be subject to the buyers limited rights to make changes to the contract (see Changing terms of employment). The right to object Employees have the right to object to their transfer to a new employer under TUPE (regulation 4(7), TUPE). However, if they do so (by informing either the seller or buyer), their employment with the seller is treated as terminating by operation of law with effect from the transfer date. Since there would have been no dismissal or resignation, they would not be entitled to any statutory or contractual compensation on termination. For further information, see PLC Employment, Practice note, TUPE (3): the automatic transfer principle: The right to object . Liabilities that remain with the seller TUPE transfers liabilities and obligations relating to the transferring employees to the buyer. However, the seller retains few residual liabilities, including: The TUPE transfer may give employees the right to exercise their share options under the sellers share option scheme. Accrued occupational pension rights up to the transfer date remain the responsibility of the seller (subject to the Beckmann decision (see above)). However, regulation 10(2) of TUPE provides that any provisions of the scheme that do not relate to "benefits for old age, invalidity or survivors" do not count as part of the scheme and are therefore outside the exception. . Criminal liabilities (for example under health and safety legislation and liabilities under the Data Protection Act 1998) will remain with the seller. Responsibility for pay as you earn (PAYE) and National Insurance contributions (NICs) up to the transfer date remain with the seller because an employers obligations under PAYE are owed to HM Revenue & Customs, and not to employees. However liability for PAYE and NICs in relation to payments made after the transfer date will pass to the buyer, even if the payments should have been made prior to the transfer date. For further information, see PLC Employment, Practice note, TUPE (3): the automatic transfer principle.

Changing terms of employment

Under TUPE, any changes in the employees terms of employment are void if the sole or principal reason for the change is either: The transfer itself. A reason connected with a transfer which is not an economic, technical or organisational reason entailing changes in the workforce (an ETO reason). , the However, this does not enable the buyer to avoid being bound by any new terms it has agreed with employeesPower v Regent Security Services Ltd [2007] IRLR 226, see PLC Employment, Legal update, Employers cannot use TUPE to avoid being bound by new terms agreed with the transferring employees. Moreover, it is possible to make changes to employment terms before or after a transfer where the sole or principal reason is either:

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A reason unconnected with the transfer. A reason connected with the transfer which is an ETO reason. The ability to make changes may have a limited effect in practice. There will only be an ETO reason if there is a change in the workforce and it has been held that this must involve a change in the numbers, or possibly functions, of the employees (see An ETO reason). Relatively few contractual changes will also involve such a change in the workforce. In particular, this provision is unlikely to catch harmonisation of terms following a transfer. If the changes are part of a wider reorganisation which is nothing to do with the transfer then they may be effective. However, there is no specific period after which it is safe to say that the connection with the TUPE transfer has been broken. Some employers have tried to dismiss employees immediately before the TUPE transfer, thus enabling the buyer to argue that since, at the moment of transfer, the employees had no existing terms, the buyer was free to agree new terms of employment after the transfer. This approach has been accepted as resulting in an effective termination of employment by the House of Lords, but the employees are likely to have a claim for automatic unfair dismissal and there is the risk that a tribunal may order that the buyer reinstate the employees on their original terms. For further information, see PLC Employment, Practice note, TUPE (4): changing terms of employment Constructive dismissal The common law right of an employee to resign and claim constructive dismissal (and unfair dismissal) where the buyer commits a repudiatory breach of contract is expressly preserved by TUPE (regulation 4(11)). Such a dismissal may be unfair under the usual principles or it may be automatically unfair under regulation 7(1). However, regulation 10(3) of TUPE expressly states that transferring employees cannot claim for breach of contract or constructive dismissal because of a loss or reduction in their rights under an occupational pension scheme as a result of the transfer, unless the loss or reduction occurred prior to 6 April 2006. Where a transfer occurred prior to 6 April 2006, sellers had to manage this potential liability by obtaining an indemnity from the buyer (see Practice note, Pension issues on a TUPE transfer).For further information, see PLC Employment, Practice note, TUPE (5): protection against dismissal Substantial change to the employees detriment Regulation 4(9) of TUPE introduced a new right for transferring employees to resign if the transfer involves a substantial change in their working conditions to their material detriment. In this situation, the employee will be treated as dismissed (with notice) by the employer. They will therefore not be able to claim pay in lieu of notice, but will still have any statutory rights and may be able to claim damages in relation to any benefits that would have been due during the notice period. For further information, see PLC Employment, Practice note, TUPE (5): protection against dismissal: Substantial changes to working conditions to the employees material detriment

Protection against dismissal

Any dismissal will be automatically unfair where the sole or principal reason for the dismissal is either:
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The transfer itself. A reason connected with the transfer that is not an ETO reason. Connected with TUPE transfer Whether a dismissal is connected to the TUPE transfer is a question of fact. Although it will be for the employee to prove that the dismissal was so connected, this will be reasonably easy for the employee where the dismissal takes place around the time of the TUPE transfer. The employer will then have to prove that there is no connection between the two events. This means showing, effectively, that the dismissal would have happened anyway (for example, because of performance, misconduct, or a decision to reduce the workforce which has nothing to do with the TUPE transfer). An ETO reason Where a dismissal is potentially automatically unfair (because it is connected with the transfer), the employer may avoid liability if it can show both that the reason for the dismissal was an ETO reason entailing changes in the workforce and that it was procedurally fair: The dismissal must be for an economic, technical or organisational reason. This will probably involve reasons relating to profitability or market performance, the nature of the buyers equipment or production processes or the buyers management or organisational structure. A dismissal which is effected in order for the sale to go through (for example, because the buyer says it will not buy the business unless the seller gets rid of a certain number of employees, where such request has nothing to do with the running of the business) will not fall within the scope of an ETO reason. The reason must also entail changes in the workforce. This has been held to mean that it must be to do with the numbers and functions and levels of employees. Dismissal following an attempt to harmonise terms of employment will not satisfy this second limb because it has nothing to do with the numbers, functions and levels of employees (Delabole Slate Co Limited v Berriman [1985] IRLR 305). If the employer establishes an ETO reason, then the mainstream law on unfair dismissal will apply: the tribunal has to be satisfied that the decision to dismiss was reasonable in all the circumstances. This applies to both those employees who transfer and any other employees who are dismissed as a result of the transfer (regulation 7(4), TUPE 2006). There is no specific period after which the automatic unfairness rule will not apply, although the greater the time between the dismissal and the TUPE transfer, the greater the possibility of arguing that there is no connection between the two. Where the seller and the buyer agree that dismissals will be made prior to the transfer, the reason for such dismissals will be important. Who is liable for such unfair dismissal will depend on the reason for the dismissal: If the pre-transfer dismissal is by reason of the transfer itself, the dismissal will be automatically unfair and the buyer will be liable.

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If the pre-transfer dismissal is for a reason connected with the transfer but it is not an ETO reason, the dismissal will be automatically unfair and the buyer will be liable. If the pre-transfer dismissal is for a reason connected with the transfer, which is an ETO reason, and the dismissal was procedurally unfair under the normal unfair dismissal rules, the seller will be liable. If a pre-transfer dismissal is not connected with a TUPE transfer but is unfair under the normal rules, then the seller will be liable. However, the buyer and seller may apportion liability between themselves by way of an indemnity. Employees must have at least 12 months continuous service before they can make a complaint of unfair dismissal for a TUPE-related reason. However, this qualifying period does not apply where an employee is bringing a claim that they were unfairly dismissed for asserting their rights under TUPE (sections 104 and 108, Employment Rights Act 1996). For further information, see PLC Employment, Practice note, TUPE (5): protection against dismissal.

Obligations to inform and consult

Both the seller and buyer have an obligation to inform and consult with recognised trade unions or elected employee representatives ("appropriate representatives") in relation to any of their own employees who may be affected by the transfer or any measures taken in connection with it (regulation 13, TUPE ). (Where an employer recognises a trade union, it must consult with that union.) The obligation is to inform and consult in relation to any "affected" employees, which is wider than just those employees who will be transferred under TUPE and includes any employees who will be affected by the transfer of the employees or the measures being taken. There are detailed regulations concerning the election of employee representatives for these purposes, and their functions and responsibilities (for further information, see PLC Employment, Practice note, Electing employee representatives). If either the seller or buyer does not recognise a trade union or have appropriate elected employee representatives already in place, they will need to hold elections for appropriate representatives before the consultation process can begin. This may mean that employers have to break the news of a proposed TUPE transfer earlier than they would otherwise like. The seller and/or buyer may also be obliged to inform and consult any European Works Council or "national works council" that exists (for further information, see PLC Employment, Practice notes, Establishing a European works council and Information and consultation agreements). Moreover, if redundancies are being planned at the same time as the transfer, the obligation to consult on collective redundancies may arise (see PLC Employment, Practice note, Collective redundancy consultation). In practice, it may be possible to inform and consult a single group of representatives in relation to both the proposed redundancies and the proposed transfer, and to consult with them under both obligations. The two consultation periods could therefore run concurrently. This time frame will not apply if dismissals are proposed after the transfer.

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Obligation to inform The seller or buyer must inform appropriate representatives r long enough before the relevant transfer to enable consultations to take place (regulation 13(2), TUPE ). There is no minimum prescribed time limit (although the underlying Directive suggests that it means "in good time") and, of course, much depends on the extent of any changes which are likely to take place. Regulation 13(2) provides that the following information must be given to the relevant recognised trade union or employee representatives: The fact of the transfer, when it is to take place and the reasons for it. The legal, economic and social implications of the transfer for the affected employees. The measures which the employer envisages it will take in connection with the transfer in relation to "any affected employees". If no measures are to be taken then that fact should be stated. The term "measures" has been held to have the "widest scope", covering any "action, step or arrangement" taken in connection with the transfer. The seller must also state the measures that the buyer envisages it will take in relation to the transferring employees in connection with the transfer. Again, if the buyer envisages taking no measures, then that fact should be stated. It is important to note that, in relation to this last category of information, the buyer has an obligation to provide the information to the seller in time to allow the seller to perform its obligation to give the information to the union/employee representatives. Where the employer is a listed company, the Disclosure Rules provide that information may be passed to individuals in the normal course of their profession, duties or employment, provided that person owes the company a duty of confidentiality (DR 2.5). A company can disclose inside information to its employees in these circumstances if the employees require the information to perform their functions and other categories of recipient to whom the company may be able to disclose the information include employee representatives or trade unions acting of their behalf (DR 2.5.7G). The names of any employees, advisers or agents of the company who have access to inside information should be recorded on an insider list maintained by the company (DR 2.8). Obligation to consult The seller or buyer will be under an obligation to consult with appropriate representatives if it envisages that, in connection with the transfer, it will be taking measures in relation to any affected employees (regulation 13(6), TUPE 2006). For these purposes, an affected employee is any employee that will be affected by the transfer. This includes the transferring employees, but could also include employees of the seller who are "left behind" and any existing employees of the buyer who are affected by the transfer. TUPE requires the obligation to consult to be more than simply giving the recognised trade unions and/or elected employee representatives the opportunity to air their views: it must be with a view to seeking their agreement to the relevant measures envisaged (regulation 13(6), TUPE 2006). In practice, this means that the employer must negotiate in good faith over all areas of the proposed redundancies or the measures it intends to take over the TUPE transfer. Special circumstances defence

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An employer has a defence for failure to inform or consult if it can show that there were special circumstances making it not reasonably practicable for information to be given or consultation to take place, and that it had done the best it could to comply in the circumstances (regulation 10(7), TUPE). However, in practice, this defence is likely to be construed very narrowly. It is important to note that the fact of commercial confidentiality is not necessarily regarded as being sufficient reason to make the defence available. While a tribunal may appreciate that it is necessary for a deal to be kept confidential up to the moment when contracts are exchanged, the general view is that there is nothing stopping a seller and buyer from providing a reasonable period of time between exchange and completion to allow the information and consultation processes to run their course. It has been argued that the secrecy required by the City Code on Takeovers and Mergers amounts to special circumstances. In fact, the point was not considered in the Employment Appeal Tribunals decision in the relevant case, but its obiter comments do appear to support this view (MSF v Refuge Assurance PLC [2002] IRLR 324). For further information, see PLC Employment, Practice note, TUPE transfers. Remedies for failure to inform and consult If there is a failure to comply with the obligations to inform and/or consult, the appropriate representatives may bring a claim in the employment tribunal. If the tribunal upholds the claim it may award up to 13 weeks pay for each affected employee. Unlike some statutory awards, there is no limit on the amount of a weeks pay. Under regulation 15(9) of TUPE 2006, the buyer and seller are jointly and severally liable for failure to inform and consult. The representatives of the transferring employees (or the employees themselves in some cases) will be able to bring a claim against either (or both) of the parties. The tribunal will then apportion liability between the parties under the Civil Liability (Contributions) Act 1978. If there is a claim against the seller for failing to comply with its obligations to inform employee representatives of any "measures" proposed by a prospective buyer, the seller may argue that it was "not reasonably practicable" to give that information because the buyer had not provided the necessary information at the right time. In such cases, the seller must tell the buyer that it intends to rely on that reason for its failure to comply with its consultation obligations, and the buyer becomes a party to the proceedings (regulation 15(5), TUPE 2006). For further information, see PLC Employment, Practice note, TUPE (6): obligations to inform and consult

Obligation to provide employee liability information

The seller is required to provide certain "employee liability information" to the buyer about the transferring employees before the relevant transfer takes place, namely: The identity and age of the employees who will transfer. Information contained in those employees written particulars of employment under section 1 of the Employment Rights Act 1996.

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Information on any collective agreements affecting those employees which will still have effect after the transfer. Any disciplinary proceedings taken against an employee or grievance brought by an employee in the previous two years in circumstances where a Code of Practice issued under Part IV of the Trade Union and Labour Relations (Consolidation) Act 1992 relating exclusively or primarily to the resolution of disputes applied. At present, the only such Code is the Acas Code of Practice on Disciplinary and Grievance Procedures. Any legal actions taken by those employees against the seller in the previous two years, and any such potential legal actions where the seller has reasonable grounds to believe such actions might occur. The information should be given not less than 14 days before the transfer or, if special circumstances make this not reasonably practicable, as soon as reasonably practicable thereafter (regulation 11(6), TUPE ). However, once the relevant information has been provided, the seller must provide written notification of any changes (regulation 11(5), TUPE ). This may complicate the management of transactions in practice. It is not possible to contract out of the obligation to provide this information. However, it should be possible to compromise the claim or include an indemnity in relation to any liability arising from a failure to comply with obligations under regulation 11. If the seller does not provide the relevant employee liability information, the buyer can bring a claim in the employment tribunal. The tribunal can award such amount as the tribunal considers just and equitable having regard to the buyers loss and any contractually agreed terms between the parties, subject to a minimum of 500 for each employee in respect of whom the information was not provided or was defective (unless the tribunal considers that it would be unjust or inequitable to award this minimum payment). The employee liability information is unlikely to provide the buyer with sufficient information about the transferring employees and so it will still require additional information about the employees as part of the due diligence exercise. This additional information will still have to be anonymised in order to avoid data protection issues (see Data protection issues). There are therefore two ways in which the information process can be handled in a transaction: The employee liability information could be provided at the same time as the due diligence information. As it will still be necessary to anonymise the due diligence information, it is likely that the employee liability information would be provided separately, but at the same time. This approach means that the seller could then seek indemnities from the buyer in the sale and purchase agreement in relation to any failure to provide the employee liability information. The due diligence information is provided in the normal way, and then the employee liability information is provided later (but at least 14 days before the transfer). In most transactions, there will be more than 14 days between exchange and completion and so the information will be provided after the parties have entered into the sale and purchase agreement. For further information, see PLC Employment, Practice note, Employee due diligence issues on transactions.

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Data protection issues The statutory requirement to identify the transferring employees and provide certain personal information contained in regulation 11 of TUPE means that it will not be necessary to anonymise such information as part of the due diligence exercise . For further information, see Practice note, Data protection issues on commercial transactions and PLC Employment, Practice note, Employee due diligence issues on transactions.

Insolvent businesses
TUPE 2006 will apply to the purchase of the business or assets of an insolvent seller if that purchase amounts to a business transfer. However, there are modifications to the application of TUPE 2006 where the seller is insolvent. These modifications result from the Governments commitment to the rescue culture and were intended to aid the sale of insolvent businesses as a going concern. For more information, see Practice note, TUPE (7): insolvent businesses.

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Boxes
Warranties and indemnities
Warranties The usual warranties in a business sale agreement are of a fairly standard nature in respect of employment related aspects. They will include confirmation that: Details of transferring employees (for example, names, personal details, start dates, notice periods, salary and benefit details, details of all standard terms of employment, but subject to any data protection issues) included in the disclosure letter are accurate. The employee liability information has been provided (whether in the disclosure letter or otherwise) (see Obligation to provide employee liability information). The seller has complied with its obligations to inform and consult with trade unions, staff associations and other worker representatives or bodies. The seller has settled all outstanding claims and debts with transferring employees and that there are no claims (whether actual, threatened or foreseeable) which are currently outstanding and which have not already been disclosed in the disclosure letter. There are no actual or threatened industrial disputes. Details of all collective agreements, and the current state of all negotiations and consultations with trade unions or worker representatives or bodies, have been provided. There has been no dismissal where the sole or principal reason for the dismissal is the transfer itself or a reason connected with the transfer which is not an ETO reason. The seller has not made any changes to the transferring employees terms of employment where the sole or principal reason for the change is the transfer itself or a reason connected with the transfer which is not an ETO reason. Relevant pension notices due to be given to employees have been given or will be given by the completion date. The only employees working in or assigned to the undertaking (or part of the undertaking) being transferred are as listed in the sale agreement (usually in a schedule). No employees are only temporarily assigned to the undertaking. Details of all contracts which terminate on more than three months notice have been disclosed. There are no formal investigations or enquiries being carried out by the Equal Opportunities Commission, the Commission for Racial Equality, the Disability Rights Commission or any similar organisation. The seller has paid all PAYE taxes, national insurance and other liabilities in respect of transferring employees employment up to the completion date.
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Indemnities TUPE indemnities are more difficult to standardise. However, mutual indemnities between seller and buyer are commonly used: The seller indemnifies the buyer against all claims and other liabilities, where the material facts which resulted in the claim: occurred prior to the transfer in respect of any of the transferring employees or any trade unions, staff associations or worker representatives of such transferring employees; or have occurred or do occur before, on or after the transfer in respect of any other person employed by the seller (other than transferring employees, or any trade union, staff association or worker representatives in respect of such other employees).

The buyer indemnifies the seller against all claims and other liabilities the effects of which occur on or after the transfer in respect of any transferring employees or any trade union, staff association and worker representatives of such employees and any such liabilities which arise prior to the transfer arising from any anticipatory breach of contract by the buyer. There may also be liabilities that arise in relation to the obligations to inform and consult under TUPE and on collective redundancies. The parties will be jointly and severally liable in relation to the TUPE obligations, and at present liability in relation to the collective redundancy obligations will pass to the buyer. If the parties want to allocate liability in any other way it will be necessary to include appropriate indemnities. There may also be other indemnities to reflect any measures which may be taken in relation to the transferring employees before or after the transfer date. For example, if redundancies are to occur before the transfer, the buyer may indemnify the seller in respect of claims arising out of such redundancies. If so, the following matters need to be considered: Is there to be a total financial limit on claims under this indemnity? If so, how much? Will the indemnity cover all claims, or only redundancy pay and pay in lieu of notice? If a general indemnity given by the buyer covers compensation for unfair dismissal or sex discrimination, should an exception be given where there has been an unlawful act by the seller? For example, selection on account of the employees sex, race or trade union membership, or where the acts of the seller were procedurally unfair? If such redundancies are to take place after the transfer, the parties might agree that, as part of the commercial transaction, the seller will provide a fund to cover some of the redundancy costs, but this might relate only to redundancies within a specified period (for example, three or six months after completion). The buyer may also want an indemnity from the seller where there is a time lapse between exchange and completion to prevent the seller from agreeing changes in terms of employment which, after completion, will be treated as binding on the buyer. Such an indemnity should be combined with an express covenant in the business sale agreement preventing the seller from making changes to the terms of employment or creating any liabilities to employees without the prior written consent of the buyer.
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Article Information
RESOURCE INFORMATION

The fulltext is available at http://www.practicallaw.com/3-107-3541

General

Article ID: 3-107-3541 Document Generated: 23-Apr-2010 16:54:30

Jurisdiction

England http://www.practicallaw.com/topic9-103-0624 Wales http://www.practicallaw.com/topic4-103-1070 United Kingdom http://www.practicallaw.com/topic1-103-0717

Subject

Acquisitions: private (assets) http://www.practicallaw.com/topic5-103-1079 Transfer of undertakings http://www.practicallaw.com/topic4-103-1225

References

Pensions for employment lawyers (http://www.practicallaw.com/0-200-2530) Establishing a European works council (http://www.practicallaw.com/0-200-4237) Disclosure Rules (http://www.practicallaw.com/0-200-9273) TUPE: subsidiary's employees transferred to holding company following share sale (http://www.practicallaw.com/0-309-7952) Office of Public Sector Reform: Code Of Practice On Workforce Matters In Public Sector Service Contracts (http://www.practicallaw.com/0-383-5074) Pension issues on a TUPE transfer (http://www.practicallaw.com/1-201-1534) DTI Guidance: Employment rights on the transfer of an undertaking (March 2007) (http://www.practicallaw.com/1-367-9959) Pensions: asset purchases (http://www.practicallaw.com/A1919) Collective redundancy consultation (http://www.practicallaw.com/2-200-2987) Employment: share purchases (http://www.practicallaw.com/3-107-3758) Overview of Northern Irish employment law (http://www.practicallaw.com/3-201-9874) TUPE (1): when does TUPE apply? (http://www.practicallaw.com/3-380-7946)

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Employment: asset purchases

TUPE (5): protection against dismissal (http://www.practicallaw.com/3-380-8521) Electing employee representatives (http://www.practicallaw.com/3-384-3548) Personal pension scheme (http://www.practicallaw.com/4-107-7001) Automatically unfair dismissal (http://www.practicallaw.com/4-200-3033) Continuous employment (http://www.practicallaw.com/4-200-3108) Economic, technical or organisational reason (ETO) (http://www.practicallaw.com/4-200-3189) TUPE can apply to transfers outside the UK (http://www.practicallaw.com/4-379-8418) Data protection issues on commercial transactions (http://www.practicallaw.com/5-200-2146) Information and consultation agreements (http://www.practicallaw.com/5-200-4522) TUPE (6): obligations to inform and consult (http://www.practicallaw.com/5-380-7945) Cabinet Office Statement of Practice: Staff transfers in the Public Sector, January 2000 (revised November 2007) (http://www.practicallaw.com/5-384-0563) Employee due diligence issues on transactions (http://www.practicallaw.com/6-200-2155) Employers cannot use TUPE to avoid being bound by new terms agreed with the transferring employees (http://www.practicallaw.com/6-379-0812) TUPE (4): changing terms of employment (http://www.practicallaw.com/7-380-8519) Occupational pension scheme (http://www.practicallaw.com/8-107-6900) Constructive dismissal (http://www.practicallaw.com/8-200-3106) TUPE transfers (http://www.practicallaw.com/8-202-1704) TUPE: House of Lords rules on date of the transfer (http://www.practicallaw.com/8-203-1388) TUPE (2): employment issues on outsourcing (http://www.practicallaw.com/8-204-4041) Resource not found (http://www.practicallaw.com/8-380-7944) Acas Code of Practice on Disciplinary and Grievance Procedures (http://www.practicallaw.com/9-200-4742) A Fair Deal for Staff Pensions (http://www.practicallaw.com/9-367-9960) TUPE (3): the automatic transfer principle (http://www.practicallaw.com/9-380-8518)

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