Legal Consequences of Relevant Transfer

Legal Consequences of a Relevant transfer

What individuals are affected?

The TUPE Regulations protect employees who are employed by the transferor and assigned to the organised grouping of resources or employees that is subject to the transfer immediately before the transfer (i.e. at the moment of the transfer) (Reg. 4(1)).  It is irrelevant if the employee is off work at the time of the transfer due to sickness, holiday, maternity leave, etc.  In addition, those employees who would have been employed immediately before the transfer if they had not been unfairly dismissed because of the transfer (and the ETO defence does not apply) are also protected (Reg. 4(3)).

If an employee objects to being employed by the transferee, he/she will not transfer and his/her contract will instead terminate at the moment of the transfer (Reg. 4(7)).  Generally, such termination will not constitute a dismissal, subject to Regs. 4(9) and 4(11). 

Reg. 4(11) codifies the right of an employee to resign and claim constructive dismissal in response to the employer’s repudiatory breach of contract. Reg. 4(9) also enables an employee to claim he/she has been dismissed if the transfer involves a substantial change in working conditions to his/her material detriment. 

What rights and obligations are transferred?

Where the TUPE Regulations apply, the new employer (the transferee) stands in the shoes of the old employer (the transferor) for most purposes.  The contractual terms and conditions are transferred (Reg. 4(1)), as are all the transferor’s rights, powers, duties, liabilities, acts or omissions under or in connection with the contract (Reg. 4(2)).

Examples

Note that criminal liabilities are not transferred to the transferee (Reg. 4(6)).  In addition, occupational pension obligations are not transferred under the TUPE Regulations.  However, the Pensions Act 2004 requires a transferee to provide a pension arrangement similar to that provided by the transferor following a relevant transfer.

Note that there are special rules where the transferor is subject to insolvency proceedings, the detail of which is beyond the scope of this note.

To ensure the transferee is well-placed to honour the obligations towards the employees who will transfer, the transferor must give the transferee specific written employee liability information at least 28 days before the transfer (Reg. 11).  The information includes the identity of the employees who will transfer and their age; information about any disciplinary action or grievances relating to the employees who will transfer, and any legal action taken by the employees against the transferor.  Failure to provide such information, or supplying inaccurate information, can lead to compensation for loss the transferee has incurred being awarded against the transferor of at least £500 per employee (Reg. 12).

Dismissals due to the transfer

It is automatically unfair for the transferor or transferee to dismiss an employee if the sole or principal reason for the dismissal is the transfer (Reg. 7(1)).  It is important to note that, even if such a dismissal occurred prior to the transfer, the employee would be protected under Reg. 4(3), so the liability for the dismissal would transfer to the transferee.  This is the effect of Regs. 4(2) and 4(3).  Note that an employee who is claiming automatic unfair dismissal in such circumstances does need two years’ continuous service in order to qualify, despite the fact it is an automatically unfair reason for dismissal.

ETO Defence

However, if the sole or principal reason for the dismissal is “an economic, technical or organisational reason entailing changes in the workforce” (the ‘ETO defence’), it is not an automatic unfair dismissal (Regs. 7(2) and (3)).  Instead, the dismissal shall be regarded as having been by reason of redundancy or for some other substantial reason. 

Note that the effect of the ETO defence is that there will be a potentially fair reason for dismissal; the dismissal must still be fair in all the circumstances to avoid unfair dismissal liability.  If such a dismissal (i.e. if the ETO defence applies) is not fair in all the circumstances, the transferor will be liable if it takes place before the transfer and the transferee will be liable if it takes place after the transfer.  However, note that if the dismissal is made pre-transfer, the transferor would not be able to establish the ETO defence on the basis of an anticipated change in the transferee’s workforce.  Hynd v Armstrong and others [2007] IRLR 338 confirms that the transferor cannot rely on the ETO defence on the basis of an anticipated reduction in numbers by the transferee.

ETO reason

There is no statutory definition of what an ETO reason is, but the BEIS guidance assists as follows:

  •  Economic reason

  • Technical reason

  • Organisational reason

"Economic" factors have to do with how the business is doing. Technical explanations have to deal with the tools or procedures the business employs. "Organisational" factors have to do with the way the business is set up. If the employee's current employment agreement permits such adjustments, the employer may implement them.

Entailing changes in the workforce

It is important to remember the second requirement of the ETO defence.  Whilst there is no exhaustive statutory definition of ‘entailing changes in the workforce’, interpretation by the courts has restricted it to the following:

  1. a change in the numbers of people employed; or

  2. a change in the employees’ functions

Note that the Amendment Regulations have added an additional situation to this definition, namely a change to the place where the employees are employed (Reg. 7(3A)).

The employee must be dismissed for a reason which entails that particular change, e.g. the employee must be dismissed for redundancy (economic reason entailing a change in the numbers of people employed) or because his/her own job function is changing (technical or organisational reason entailing a change in that employee’s function).

Changing contractual terms and conditions

The TUPE Regulations state that any changes to the contractual terms and conditions of employment of the transferring employees will be void if the sole of principal reason for the changes is the transfer itself (Reg. 4(4)). 

This reflects the ECJ's interpretation of the Directive in Foreningen af Arbejdsledere i Danmark v Daddy's Dance Hall A/S [1988] IRLR 315, where it held that a variation to the employment contract is ineffective if the transfer itself is the reason for the variation, even where the variation is consensual and the less favourable terms are offset by other benefits so that the contract as a whole is no less favourable. 

The BEIS guidance provides that changes to terms and conditions agreed by both employee and employer which are purely advantageous to the employee will not be void, although note the EAT’s decision in Ferguson v Astrea Asset Management Ltd UKEAT/0139/19.

Practical issues for transferee

The transferee will very often want to harmonise the terms and conditions of the employees who transfer over to it.  However, such a transferee should be cautious.

The question whether the ETO defence is applicable when a transferee makes changes to harmonise terms was answered by the Court of Appeal in Berriman v Delabole Slate Ltd [1985] ICR 546.  This case established that harmonisation of contractual terms will in most cases be due to the transfer and will not ‘entail changes in the workforce’ in terms of numbers or job functions (and by extension the the place of work). The Court of Appeal stated:

“the phrase ‘economic, technical or organisational reason entailing changes in the workforce’ in our judgment requires that the change in the workforce is part of the economic, technical or organisational reason. The employer's plan must be to achieve changes in the workforce. It must be an objective of the plan, not just a possible consequence of it.”

The restriction in Reg. 4(4) does not affect a transferee's ability to make changes to the terms of its existing workforce as it only applies to transferring employees.  In this respect the restriction on contractual variations is narrower than the protection against dismissal under Reg. 7(1) which applies to all employees of the transferor or transferee who are dismissed by reason of the transfer.

Duty to inform and consult

Reg. 13(2) requires an employer to inform appropriate representatives of any ‘affected employees’ of the following:

‘Appropriate representatives’ are defined in Reg. 13(3) as trade union representatives (if recognised by the employer) or employee representatives.

In addition, an employer must consult appropriate representatives of any affected employees if it is envisaged that he will be taking measures in relation to affected employees (Reg. 13(6)). There is no definition of ‘measures’ but it has been interpreted very widely in case law, to include any action, step or arrangement. 

The obligation to inform is to do so ‘long enough before’ the transfer to allow for adequate consultation.  The obligation to consult is to do so with a view to seeking agreement of the appropriate representatives to the intended measures.