Commonly asked questions on the legal issues relating to transfers of undertakings
A transfer of undertakings occurs in one of two situations - either a business transfer or a service provision change. When a business moves to a new owner in one of these 'relevant transfers', the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) protects the entitlement of UK employees to the same terms and conditions, with continuity of employment, as they had before the transfer.
This factsheet provides introductory guidance on the law governing the transfer of an undertaking. It lists the types of circumstances in which TUPE has been found to apply (such as mergers) as well as those circumstances in which it does not apply (such as transfers by share take-over), and also provides a checklist to help determine whether or not it is applicable in a particular situation. Finally, the factsheet offers introductory guidance on managing a TUPE situation, particularly when it comes to dismissals, consultation and notification, pensions, and required written information.
TUPE transfers are a complex legal area, so it’s essential for employers to seek legal advice for their individual situation. Where a business, or part of one, is being transferred, both parties (the transferor and the transferee) should obtain such advice at the earliest possible stage. It’s not possible to prevent TUPE from applying because the law prevents employers and employees from 'contracting out of' the regulations. However, it’s common practice for the old and new employer to negotiate on how to divide any liabilities which arise by including 'indemnities' in their agreement. The key to a successful TUPE transfer lies in good planning. This should include identifying key risks at an early stage and holding a genuine dialogue with employees throughout the process.
What is a transfer of an undertaking?
A transfer of an undertaking falls into one of two broad categories, either a business transfer or a service provision change. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply to protect UK employees when one of these ‘relevant transfers’ takes place and the business changes to a new owner.
TUPE applies if there is a transfer of an 'economic entity that retains its identity'. This can be determined by asking:
- Is the type of business being conducted by the ‘transferee’ (the new owner, or the employer who is receiving staff) the same as the ‘transferor's (the old owner, or the employer who is transferring staff)?
- Has there been a transfer of tangible assets such as building and moveable property (although this is not essential)?
- Are there intangible assets (such as such as patents, trademarks, copyright, goodwill or brand recognition) transferred at the time of the transfer?
- Have the majority of employees been taken over?
- Have the customers been transferred?
- Is there a high degree of similarity between the activities carried on before and after the transfer?
If the answer to several of the above questions is 'yes', then TUPE is likely to apply. In some cases just one of these factors has been enough for TUPE to apply.
Service provision changes
A ‘service provision change’ occurs when a client who engages a contractor to do work on its behalf involves either:
- reassigning such a contract (whether by contracting out, outsourcing or re-tendering and in some cases subcontracting), or
- bringing the work ‘in-house’ (where a contract ends with the service being performed in-house by the client themselves).
In addition, the activities undertaken must be essentially the same after the transfer as they were before it.
It won't be a service provision change if:
- the contract is wholly or mainly for the supply of goods for the client’s use, or
- the activities are carried out in connection with a single specific event or a task of short-term duration.
The relevant law
TTUPE regulations were introduced in the UK to comply with relevant European Directives. They govern the transfer of an undertaking, or part of one, from one business to another. TUPE protects employees by entitling them to the same terms and conditions, with continuity of employment, as they had before the transfer. TUPE applies to all relevant transfers, including situations where services are assigned to a new contractor, for example in labour-intensive services such as office cleaning, catering, security and refuse collection. Various other statutes and regulations also have an effect on TUPE.
See Useful contacts for links to European and UK websites to see the text of this legislation. CIPD members can find out more in our Tupe law Q&As.
In the referendum on 23 June 2016 the UK voted to leave the EU. For information on what Brexit could mean for employment law, read the blog by our Public Policy Advisor (Employment Relations). We’ve also created a Brexit hub.
The situations where TUPE applies
TUPE has been found to apply to:
- sales of businesses by sale of assets
- a change of licensee or franchisee
- the gift of a business through the execution of a will
- transfers out of companies in administration
- contracting out of services
- changing contractors
- situations where all or part of a sole trader's business or partnership is sold or otherwise transferred.
TUPE doesn't apply to:
- transfers by share take-over
- transfers of assets only (for example, the sale of equipment alone would not be covered, but the sale of a going concern including equipment would be covered)
- buying in services from a contractor on a one-off basis - rather than entering into an ongoing relationship for the provision of the services
- a situation where there is a change of business identity, for example if the nature of the work or the organisational structure changes radically
- the supply of goods for the client's use (for example, supplying food to a client to sell in its staff canteen, rather than a situation where the contractor runs the canteen for the client).
- transfers of undertakings situated outside the UK (although these may be covered by the regulations of other member states).
It’s important to remember that, overall, TUPE only applies to situations where a business or part of it retains its identity after the transfer; if it doesn’t, there's no transfer as envisaged by the regulations.
Changes of contractors for labour intensive activities, such as security, catering, refuse collection and cleaning, have caused confusion in the past, but TUPE usually applies in these situations. TUPE may also apply where an organisation, such as an advertising agency or a law firm, takes over a client from another firm following a tender process. The new firm may be under an obligation to take on the staff working on the client account for the previous firm.
Managing a TUPE situation
All employees employed in the organisation (or part of the organisation) that is transferring will be entitled to carry on working for the new organisation with their existing terms and conditions of employment; their continuity of service is also preserved.
The transferee also takes over the liability for all statutory rights, claims and liabilities arising from the contract of employment, for example liabilities in tort, unfair dismissal, equal pay and discrimination claims. The exception to this rule is criminal liabilities. It may be possible for a legal representative to negotiate warranties and indemnities which will provide a partial, or total, cushion against the financial impact of any claims resulting from the application of TUPE.
Our practical guidance for people managers on the requirements for transfers of staff in A guide to people management when preparing and transferring services is relevant to most UK public sector and voluntary sector employers. It provides a minimum set of standards for all parties and includes sections on commissioning and transferring services, steps to follow when transferring staff teams, pension issues when transferring staff, and the harmonisation of terms and conditions.
If an employee is dismissed because of the transfer, their dismissal is automatically unfair. However, the dismissal will not be automatically unfair if the employer can show an 'economic, technical or organisational' (ETO) reason entailing a change in the workforce. ETO reasons are explained further below. Dismissal more generally is covered in our dismissal factsheet.
Consultation and notification
The transferor must conduct a full and meaningful consultation with employees at the earliest feasible time. Employers who failure to consult properly can be required to pay staff up to 13 weeks' pay in compensation. The transferor and transferee are both liable to pay this compensation.
If there are no trade union or employee representatives, then the law stipulates that representatives must be elected by the affected employees for the purposes of consulting over the transfer. The employer must facilitate the election process. Micro businesses (under 10 employees) can inform and consult with employees directly if there is no trade union.
The employer must provide the following information to the representatives:
- that a transfer is to take place
- the reason for the transfer and when it is expected to take place
- the implications for employees
- the measures that the current employer expects to take in relation to the employees
- the measures that the new employer expects to take in relation to the employees.
If the previous employer provided a pension scheme then the new employer has to provide some form of pension arrangement for employees who were eligible for, or members of the former employer's scheme. It will not have to be the same as the arrangement provided by the previous employer but will have to meet the minimum standard specified under the Pensions Act.
Strictly speaking, pension rights related to old age, invalidity or survivors benefits in employees' occupational pension schemes do not transfer under TUPE. However other legislation means that in effect some provisions equivalent to TUPE do apply to pension rights. Where pension arrangements are in place, employers should assess the nature of the scheme and identify any pension benefits that may transfer.
Transferors are obliged to give the transferee written information about the employees who are to transfer and all the associated rights and obligations towards them. This information includes, for example, the identity and age of the employees who will transfer, information contained in the employees’ written particulars of employment (under section 1 of the Employment Rights Act 1996) and details of any tribunal claims that the transferor reasonably believes might be brought.
If the transferor does not provide this information, the transferee may apply to an employment tribunal for such amount as it considers just and equitable. Compensation starts at a minimum of £500 for each employee about whom information was withheld or defective.
The ETO reason
The economic, technical or organisational (ETO) reason entailing a change in the workforce is one of the few legitimate factors for a refusal to take on the transferor's workforce by the prospective transferee. If an ETO is the main cause of a dismissal, then the dismissal may be justifiable provided that the employer acted reasonably in all circumstances. Examples of ETO reasons may include a severe reduction in output that makes trading unsustainable without dismissing staff (economic) or new technology which means that far less staff are needed (technical). Even if there is an ETO reason, the normal law and practice on redundancies and unfair dismissals will still apply. If there was no real change in the job functions of the employees, nor a change in the number of employees making up the workforce, the economic (or other reasons) may be disputed. If the workforce was not taken on in order to avoid the application of TUPE, the transferee will be liable for potential tribunal claims.
The regulations governing transfer related dismissals and ETO reasons changed from January 2014. CIPD members can find out more about ETO reasons in our Tupe law Q&As.
Useful contacts and further reading
DERBYSHIRE, W. and HARDY, S. (2012) TUPE: law and practice. 4th ed. London: Spiramus Press.
INCOMES DATA SERVICES. (2015) Transfer of undertakings. Employment law handbook. London: IDS.
Do the TUPE 2014 changes cut red tape for employers? (2014) Employers’ Law. April. pp12-13.
FINDING, P. (2015) TUPE: protecting employers' interests with post-termination restrictions. Employers' Law. July/August. pp14-15.
STEPHENS, C. (2014) HR's worst nightmare unravelled. People Management. October. pp34-37.
TUPE: identifying a service change. (2015) IDS Employment Law Brief. 1030, October. pp12-19.
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This factsheet was last updated by Lisa Ayling, solicitor and employment law specialist, and by Rachel Suff.
Rachel Suff: Employee Relations Adviser
Rachel joined the CIPD as a policy adviser in 2014 to increase the CIPD’s public policy profile and engage with politicians, civil servants, policy-makers and commentators to champion better work and working lives. An important part of her role is to ensure that the views of the profession inform CIPD policy thinking in ER areas such as health and well-being, employee engagement and employment relations.
As well as developing policy on UK employment issues, she helps guide the CIPD’s thinking in relation to European developments affecting the world of work. Rachel is a qualified HR practitioner and researcher; her prior roles include working as a researcher/editor for XpertHR and as a senior policy adviser at Acas.