Employees have rights when businesses transfer

Businesses are bought, sold or transferred all of the time. While many think of the body corporate moving from one owner to another, not everyone gives thought as to what happens to the employees.

Where do they stand? What are their rights, and do they transfer to the new employer? And what are the rules that employers must observe?

Warehouse pickers with a manager. (Luis Alvarez/Getty)

There are legal protections

The law has had a view on the subject for more than forty years through the Transfer of Undertakings (Protection of Employment) regulations – TUPE. First introduced in 1981, TUPE implemented an EU directive relating to the safeguarding of employee rights in the event of transfers of businesses. TUPE was updated in 2006 to reflect developments in case law and to extend the protections to include service provision changes (in broad terms, when a service is outsourced or taken back in-house). 

In brief, and as Lucy Gordon, a director at Walker Morris explains, “TUPE provides protection for employees when the business in which they are employed is sold or there is a change in the service provider to a client.”

When a business is sold or transferred

As Gordon details, if there is a sale of the shares in a business, TUPE does not apply, as there is no change in the identity of the employer of the employees. However, she says that “if a business, or part of a business is sold – often referred to as a sale as a going concern, or a business and assets sale – then TUPE will apply” and will protect the employment rights of those employees employed in the business, or part of the business, being sold to the new owner.

In essence, in this situation, employees transfers to the new employer automatically under law. The employees, Gordon explains, “are entitled to transfer on their current terms and conditions of employment, apart from some terms in relation to pension rights, and their continuity of service is maintained.” This means that, for example, employees retain any protection they have against unfair dismissal; if they are dismissed because of the transfer, they may have a claim for automatic unfair dismissal.

It should be said that beyond employee rights, there are obligations placed on the existing employer and the new employer to share information about the transferring employees and any ‘measures’ that the new employer intends to take in relation to the transferring employees. “’Measures’”, says Gordon, “has a wide meaning and means anything that is more than ‘administratively minor’. This might include, for example, the fact that the new employer does not have a subsidised canteen to which it can offer access for transferring employees, if they have previously enjoyed access to a canteen with the former employer.”

Notably, the existing employer and the new employer also have obligations to inform, and potentially consult, with elected employee representatives of the employees who may be affected by the transfer. Here Gordon says that “there is no minimum timescale in which this process must take place, but this must be ‘in good time’ before the transfer takes place.” In her experience, this is often done at least a month before the transfer takes place.

Gordon warns that “if employers fail to comply with this requirement, they can potentially face compensation of up to 13 weeks’ gross pay per employee… this can mount up quickly – a failure to inform representatives of 50 employees who earn the national minimum wage could result in compensation of up to almost £250,000.”

Employee contracts and benefits

A natural question here is whether the new employer or owner can unilaterally change terms or reduce the value of benefits?

The simple answer, according to Gordon, is no. In fact, she says that “employees transferring under TUPE transfer on their existing terms and conditions of employment and any changes made because of the transfer are void.” This means that any changes that the new employer makes, even if these are with the employee’s consent, are technically unenforceable – this typically creates a headache for any new employers who want to harmonise new employees’ terms with those applicable to existing staff after the transfer has taken place.

Interestingly, Gordon points out that even if the new employer offers a benefit, such as increased holiday entitlement, in exchange for removing a benefit, such as a bonus, “the employee remains entitled to the original benefit as well… this means employees can ‘cherry pick’ the most favourable provisions to them from the two sets of terms.

It follows, then, that employers are keen to know how long after a transfer it is ‘safe’ to harmonise terms – the truth, says Gordon, “is that there is no safe period, not even after two, five or ten years, if the reason for the change is the transfer.” However, she notes that the more distance between the transfer and the change, the more likely it is that an employer is able to find another reason for the change, that is not the transfer itself

If there’s a silver lining for employers, it’s the fact that the protection only applies to terms and conditions of employment, so non-contractual benefits aren’t covered unless they have become contractual through custom and practice. This might apply to maternity and paternity benefits, etc. or a regular Christmas bonus.

Legal practicalities of the law

With the background set, employers must be mindful of the legal obligations around the transfers of employment and make sure that they operate within the law. As Gordon says, “employees are becoming more knowledgeable about their rights to be informed about transfers and this can present a real risk for employers if the rules are not adhered to. Equally, however, in some industries, employees prefer to be consulted directly about changes, rather than through a representative, and employers must ensure that the right to elect representatives is still made clear in such cases, to avoid the risk of claims for technical non-compliance.”

At the end of the day, as in with many elements of business, garnering best results is essentially about transparency – employees should be able to know what is happening with their employment and generally, where this is done, claims are few are far between. 

Gordon highlights a key area which often provokes litigation – where the existing employer and the new employer don’t agree about who transfers, or whether there is a TUPE transfer at all. As she says, “this can leave employees in the lurch, not knowing whether to turn up for work with the existing employer or the new one. Litigation is often then complex and costly for all parties to work out where the employee’s claims lie, if any.” Her recommendation for sensible employers is to set out their positions at an early stage, consider settlement agreements, or seek indemnities from the other employer if agreement cannot otherwise be reached.

Something else to bear in mind, says Gordon, is that often, commercial terms will be agreed by the parties to put into effect arrangements outside of the confines of TUPE. Here she says that “whilst it is not possible to contract out of TUPE, the resulting liabilities can nevertheless be apportioned between the parties through the use of indemnities in commercial agreements.

The unions

In the context of TUPE, the role of employee representatives is relatively limited – they can’t stop the transfer from taking place, and the obligation to consult only comes into play if ‘measures’ are envisaged – it’s a commercial decision after all. However, Gordon says that if there’s a union present, the benefit for employees is that it “will have experience of TUPE transfers and can request relevant information at an early stage. If an employer recognises a trade union in respect of the transferring employees, the union will be the employee representatives for those employees and will be entitled to receive information (and potentially engage in consultation) on the employees’ behalf.

Changes on the horizon

While TUPE has been around for decades, there’s no guarantee that it’ll stay on the statute books forever. Indeed, the Retained EU Law (Reform and Revocation) Bill aims to enable the government to create regulations tailor-made to the UK’s needs. The government has had the power to change or revoke EU retained law since 31 December 2020, but the Bill aims to speed up reform by including a ‘sunset clause’ under which any EU-derived subordinate legislation and retained direct EU legislation not amended, replaced or repealed by 31 December 2023 will be revoked

It is not currently known which employment-related legislation the government intends to amend or replace, however the existing employment-related legislation affected by the Bill includes TUPE. As such, Gordon says that “unless TUPE is actively renewed, it will be lost. We expect that TUPE will be retained but is likely to be simplified by relaxing the rules on information and consultation and potentially allowing some post-transfer harmonisation of terms – the two most unpopular aspects of TUPE.

In summary

From experience, Gordon has seen TUPE transfers go well when employers have an organised plan in place for their communications, both with employee representatives and their counterparty employers. And if an employer has an existing representative body in place, whether it be an employee forum or a recognised trade union, this can make things easier in terms of not having to factor in the time to carry out elections. For her, “engaging in dialogue with the counter-party employer at an early stage about any areas of dispute can make the process smoother.

She adds that “when things go wrong, they can go spectacularly wrong.” She gives the example of a construction industry firm that wanted to cut short the red tape and simply sent all employees a letter informing them that the transfer would be taking place, details of some measures that would be effected by the new employer – but not all of them, and asked employees to raise any questions with HR

The problem for the firm, as Gordon explains, is that “one of the affected employees had been transferred under TUPE previously and was aware of his rights. He encouraged 80 of his colleagues to bring claims in the Employment Tribunal and the potential compensation amounted to over £1.6 million.” With help, the employer was able to settle the claims for just under £300,000 in total, but they also incurred legal fees in defending the proceedings in the meantime. A costly mistake

Consider that a warning.

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