TUPE - What's it all about?

Whether you’re acquiring another company or taking on a contract from an outgoing service provider, chances are you’ll have heard of TUPE. But what actually is it?

Below we have sought to explain a broad overview of when TUPE might apply in relation to service providers, what it means if it does, and how you can reduce your risk where it does apply.  

What is TUPE?  

TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006) is a set of rules designed to protect employees' rights and it can apply:  

• when a business or part of a business is transferred to a new owner (Business Transfer); or  

• when the provision of a service is taken over by a new provider (Service Provision Change). This occurs when the provision of a service might be outsourced, change in contractors or brought in-house. For example: 

-a company grows rapidly and decides it needs to outsource its IT support to a specialist IT company; or  
-a local authority decides to engage a new and cheaper company to handle its IT support instead of using the previous contractor; or 
-a company decides it’s more cost effective to use its own internal resources for IT support so does not renew its contract with the existing IT support company.  

In this article we focus only on TUPE in the context of a Service Provision Change and from the perspective of an incoming supplier.  

Why do I need to know about TUPE?  

Even if ultimately, it does not apply, TUPE will be a consideration in nearly all service provision changes. It is not possible to contract out of TUPE and where TUPE applies, there are key legal obligations that an incoming supplier must be aware of and understand to minimise risk and ensure a smooth transition.  

When is TUPE likely to apply? 

Whether or not TUPE applies can be very complex and will depend on a number of factors being considered, including whether: 

• The activities to be carried out by the incoming provider are fundamentally the same as or similar in nature, scope and volume to the services carried out by the outgoing/existing service provider. 

• The outgoing/existing service provider has in place a group of employees in Great Britain that are organised into groupings to provide services to that same client.   

As the application of TUPE is very fact specific, all factors must be looked at in the round and we would always recommend taking specialist legal advice as to whether or not it applies. 

What is the effect of TUPE? 

If TUPE does apply, the employment of those employees assigned to the organised grouping will automatically transfer from the outgoing/existing service provider to the incoming supplier.  

Such employees within this scope are often referred to as employees “wholly or mainly assigned to the services”. Whilst there is no specific percentage of time which an employee must devote to the activity in question before being regarded as assigned to it, it can be useful and practical to look at percentages of working time an employee spends on activities for that client; the higher the percentage the more likely it is the employee is assigned to that grouping. For example, more than say 60% might point towards being assigned to the services. However, this in itself, will only be an indication as to whether that employee should transfer and it is important to consider factors such as how and why the employee spends their time in such a way and the importance of other responsibilities they may have.  Tip: Including a schedule to the agreement with the client which lists the names of employees who will transfer will assist parties in knowing where they stand.  

When such employees transfer, this means that the incoming supplier: 

• becomes the employer of those transferred employees;  

• inherits the transferred employees on their original terms and conditions, including pay, benefits, and other employment rights. There are very limited circumstances in which the incoming supplier can change these.  

• Inherits all (with limited exceptions) employment related liabilities of these employees, including: 

-Unfair dismissal claims: TUPE also provides enhanced protection against dismissal over and above general unfair dismissal law. 
-Other employment claims: For example, ongoing or future claims arising from the employees' previous work, such as contract disputes, grievances, discrimination, disciplinary issues or claims related to breach of employment rights. 
-Outstanding wages or holiday pay: Employees may have accrued wages, bonuses, or holiday pay entitlements that the incoming supplier will need to address post-transfer. 

What are the information and consultation obligations?  

Both the outgoing/existing service provider and the incoming service provider must: 

• Inform all affected employees, or their representatives, about the facts of the transfer and any measures that may be taken as regards the affected employees.  

• Consult all affected employees, or their representatives, about any such measures to be taken.  

There are very specific rules on: who an affected employee is (this goes beyond those who will transfer), the information and consultation obligations regarding what, how and when information must be shared; and how consultation with representatives should be carried out. Given the failure to comply with these obligations can result in exposure of up to 13 weeks' uncapped pay per affected employee, legal advice should be taken on the process.  

As the outgoing/existing service provider and the incoming service provider can be jointly and severally liable for this compensation, cooperation is key and it is important to obtain indemnities to protect you from any failure to inform or consult by the outgoing/existing service provider.  

How to reduce risk if TUPE applies?  

While the incoming supplier cannot avoid inheriting certain liabilities under TUPE, below we set out just two key steps that can be taken to reduce exposure to these risks.  

1. Conduct thorough due diligence  

• The existing/outgoing supplier must provide you with certain written information regarding the employees that will transfer. Tip: Seek to obtain information over and above the statutory minimum – knowledge is key and having more information about the employees you will inherit allows you to identify any problematic provisions and prepare for the financial and operational impacts.  

• The default position under TUPE is that this statutory minimum information must be provided to you at least 28 days before the transfer. Tip: Seek to obtain this information earlier to enable you have time to fully review it, understand the implications, and if necessary, adjust the price of the services.  

2.     Liability allocation in the contract – Indemnities

• As set out above, as the incoming supplier you will take on all liability for the existing/outgoing service providers actions in respect of the transferring employees. Whilst you cannot contract out of this liability, you can seek to obtain an indemnity from the client or existing/outgoing service provider.  

• Typically indemnities assign employee liabilities for: 

-pre transfer matters to the Client or existing/ outgoing service provider (i.e. the Client or existing/ outgoing service provider pays for all costs/claims/expenses/interest etc. arising from anything they did or did not do as regards the employees before the transfer date); and 
-post transfer matters to the incoming supplier (i.e. the incoming supplier pays for all costs/claims/expenses/interest etc. arising from anything they do or do not do as regards the employees after the transfer date and until they finish providing the service). 

• Whilst it will depend on your bargaining position as the incoming supplier, and to some extent what protections the client has in place regarding its existing contracts, given the risk allocation is weighted towards the incoming supplier, it is usually reasonable to obtain such indemnities. 

• There are however nuances to the above position and times when you may want additional protection. Tip: Look out for and consider when additional or carve outs of the above general indemnity position will be needed. For example:   

-As the incoming supplier, are you likely to have to make redundancies if you are inheriting more employees than needed? In such a case, you may want to try and negotiate that the client/outgoing service provider pays for such redundancies proving they take place within a certain time after the transfer date.  
-Even if you have agreed a list of employees who will transfer to you as the incoming supplier, it may be that an unexpected employee alleges they should have transferred to you. In such a case, it will be helpful to have a woodwork indemnity from the client/outgoing provider to protect you from the costs of such an employee “coming out of the woodwork”.  

TUPE in Summary

TUPE exists to ensure employees’ rights are protected when a service is transferred from one supplier to another. As an incoming supplier, taking over a service where TUPE applies, you need a clear understanding of what your obligations and risks are. Whilst you cannot avoid the effects of TUPE if it applies, you can seek to mitigate the risks by careful planning and negotiation of favourable contract terms.  

Do get in touch with us if you would like more useful tips and advice concerning the application of TUPE and its effect in your commercial contracts. 

Please note this is a general overview only and specific legal advice should be sought when considering TUPE given the complexities that can arise.