The Risks in Winning Contracts Involving TUPE

What is TUPE?

A “TUPE”, or a transfer of undertakings, under the EC (Protection of Employees on Transfer of Undertakings) Regulations 2003 (the “Regulations”) occurs where there is a transfer of a business, or part of a business, which retains its identity after the transfer. In very basic terms, the Regulations provide that employees attaching to a business which is being transferred are entitled to “follow the work” and transfer with the business to the new employer on the same terms and conditions of employment (save for an important exception relating to pensions). The employees also enjoy certain protections from transfer related dismissals.

General Application of TUPE

When determining whether TUPE applies to the sale of a business, the following factors must be considered on a case by case basis:

• whether tangible assets are transferred;
• the value of the business’s intangible assets;
• whether the majority of employees are taken over by the transferee;
• whether or not customers are transferred;
• whether pre-and post-transfer activities are similar; and
• the period of suspension of any activities.

However, additional factors must be considered when determining whether TUPE applies to the transfer of a contract (i.e. the right to provide a service or function).

Application of TUPE to outsourcing

While the transfer of a contract is not specifically mentioned in the Regulations (unlike in the UK Regulations where any “service provision change” will more often than not trigger the application of TUPE), the Court of Justice of the European Union and the Employment Appeals Tribunal (the “EAT”) has determined in several cases that the Regulations can apply where there is a change in the provider of a service.  This can come about in a number of ways including:

1. Contracting out activities - when a company contracts out part of its business (e.g. cleaning or payroll) to another company (known as a first generation transfer);
2. Changing contractors - when a company decides to change contractors for a function that has already been contracted out (known as a second generation transfer); or
3. In-sourcing a previously contracted out activity - when a company decides to bring a service back “in-house” that was previously contracted out.

The key test in determining whether TUPE applies to the transfer of contract is whether there is:

• a transfer of significant tangible or intangible assets or,
• the taking over of the majority of the workforce in terms of numbers and skills.

A distinction is thereby drawn between an undertaking that is “labour intensive” and one which is “asset reliant”. In an asset reliant undertaking, for example, manufacturing, even if a majority of the workforce transfer, TUPE may not apply if there no transfer of significant tangible or intangible assets. In a labour intensive undertaking, i.e. one comprising of manpower alone, for example, cleaning or security work, if the transferee refuses to accept the transfer of a major part of the workforce of the incumbent contractor then TUPE will, most likely, not apply. This test results in a somewhat bizarre circular effect which effectively allows the incoming contractor to orchestrate whether TUPE applies or not.

The risks in winning contracts involving TUPE

Where a company wins a contract for services which displaces an incumbent contractor in circumstances where TUPE applies, a number of cost implications will arise for the incoming contractor including:

• general costs involved  in taking on the additional headcount;
• the cost of maintaining the transferring employees on their existing terms and conditions of which may be more favourable than the existing workforce – both in terms of financial cost and employee relations issues which will inevitably arise where two groups of employees are performing the same work on potentially different terms and conditions;
• the cost of implementing redundancies either immediately after the transfer where there is insufficient work, or, at the end of the contract where the work cease to exist;
• the costs of taking on any liabilities connected with the transferring employees.

Issues which arise on entry and exit Contractors will often seek an indemnity from the awarding party in respect of any liability the contractor incurs under TUPE on entering into the agreement or at the conclusion of the agreement.  This can cause difficulties where there is a changeover of contractors. Where there is a changeover of contractors, instead of making good on that indemnity, the party awarding the contract will often attempt to transfer the liability to the incoming contractor by insisting that, as a term of the contract, TUPE applies, irrespective of the law.  If the incoming contractor is required to concede as a term of an agreement that TUPE applies, this can be an expensive concession and is a factor that should be considered when determining the value of the contract.

The sage advice which if often proffered to prospective property purchasers– “the day you buy is the day you sell” - is advice that contractors should bear in mind when tendering for a contract to which TUPE may apply. If a contractor is required to take on employees on entry, the contractor must consider what will happen to these employees on exit.  It is impossible to say with any certainty if TUPE will apply on exit, either as a matter of law or as a matter of commercial reality. For that reason, a contractor would be well advised to negotiate, as a part of the agreement on entry, an indemnity from the awarding party in respect of the costs of any redundancies that it may be required to implement, together with the costs of all claims that may be brought by employees in connection with the termination or their employment, on exit.

Do your homework!

If you are considering tendering for a contract where TUPE may apply, a number of enquiries should be carried out including:

• Find out as much as possible about the terms and conditions of the incumbent contractor and the intentions of the incumbent contractor i.e. will it want to retain its workforce or transfer them to the incoming contractor? Under section 21 of the Employees (Provision of Information and Consultation) Act 2006, which supplements the Regulations, the transferor (or the outgoing contractor in the case of a second generation outsource) is required to notify the transferee (the incoming contractor) of all of the rights and obligations arising from a contract of employment existing on the date of a transfer which will be transferred to the transferee. Failure by the transferor employer to fully and accurately disclose relevant information can result in a cause of action for the transferee employer against the transferor employer for loss which arises as a result. However, in order to rely on Section 21, the transferee has to ask specifically for the information before it can rely on the indemnity to recover financial loss as a result of the transferor’s failure to disclose the relevant information. Therefore, it is recommended that the incoming contractor employer should have a detailed list of questions which would be submitted to the incumbent contractor as a part of a due diligence exercise.
• If TUPE does apply, make sure you know exactly who you are taking on, for example, do any employees exist that you are not aware of, for example, employees on long-term sick leave or maternity leave.
• If TUPE does apply, make sure you know what liabilities you are taking on, for example, do any of the existing employees have any claims against the incumbent contractor for outstanding pay or bonuses, liability for which will transfer to you following the transfer.
• If the contract is an all-Ireland contract, even if TUPE does not apply in the Republic of Ireland, it may apply in Northern Ireland.
• Negotiate indemnities as soon as possible in respect of TUPE issues that arise on entry and on exit.
• If possible, do not agree on the contract price or sign any agreements until such time as the above enquiries have been made as the answers may have a significant impact on the value of the contract.

For more information on this topic please contact Julie O’Neill at joneill@mcdowellpurcell.ie. Related Articles:

• Outsourcing- The Big Issues, by Feilim O' Caoimh, Partner at McDowell Purcell Solicitors.
• Outsourcing Agreements- Under the Bonnet, by Elizabeth McCann, Solicitor at McDowell Purcell Solicitors.
• The Business Case for Outsourcing, by Clair Hayes, Solicitor at McDowell Purcell Solicitors.