Foreword – thanks to Ben Jones of Darlingtons Solicitors for this helpful article. Ben specialises in employment law, including compromise agreements, restrictive covenant and restraint of trade issues, redundancy and employment tribunal claims for both employers and employees.
On an asset acquisition, the parties to the transaction must consider the impact of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE regulations’).
The TUPE regulations came into force for transfers taking place on or after 6 April 2006 replacing the 1981 regulations of the same name.
At common law the transfer of an undertaking from one employer to another automatically terminates the contracts of employment, which cannot be assigned as they are personal to the employer and employee. There is therefore a dismissal of the employees, and the seller of the undertaking may consequently be liable to the employees for contractual or statutory claims arising from that termination.
In this situation, the reason for the dismissals would generally be redundancy. However, the dismissed employees may have claims for wrongful dismissal (if incorrect notice given) or unfair dismissal by reason of redundancy.
The position of employees is different where there is a ‘relevant transfer’ under the TUPE regulations. If there has been a ‘relevant transfer’, the employee’s contract will automatically transfer with the undertaking and continue as if originally made between the employees and the buyer. The transfer does not terminate the employees’ contracts of employment and does not therefore, operate as a dismissal. The TUPE regulations also give a safeguard for employees that are dismissed, actually or constructively, before or after the transfer, if the dismissal is by reason of the transfer or a reason connected to it.
The TUPE regulations define a ‘relevant transfer’ in regulation 3 as “a transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in the United Kingdom to another person where there is a transfer of an economic entity which retains its identity”. The TUPE regulations further define an economic entity as “an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary”.
In ascertaining whether there has been a relevant transfer, it is necessary to determine whether what has been transferred is an economic entity which is still in existence, and this will be apparent from the fact that its operation, with the same economic or similar activities, is being continued or has been taken over by the new employer.
The parties cannot agree to exclude the operation of the TUPE regulations. Whether a transfer is a ‘relevant transfer’ is a matter of fact, therefore, the court of tribunal will look behind the label which the parties put on the transfer and will instead examine the substance of the agreement.
Regulation 7 of the TUPE regulations states that a dismissal is automatically unfair where the dismissal was by reason of the transfer or for a reason connected with the transfer, unless the employer can show that the dismissal was for an economic. Technical or organisational reason, commonly called an ETO reason.
The transfer of an employee will not occur if the employee informs the transferor or the transferee that he objects to becoming employed by the transferee. In this instance the employee will not be regarded as being dismissed by the transferor and will be regarded as having resigned. However, an employee whose contract of employment is or would have been transferred may treat his contract as terminated and still be treated as having been dismissed by the employer, where the relevant transfer involves or would involve a substantial change in working conditions to his material detriment. This preserves the common law right of an employee to resign and claim constructive dismissal for a fundamental breach of contract by the employer.
Neither the general application of the automatic transfer principle, nor the existence of the employee’s right to object is subject to a precondition that employees have knowledge of the fact of a transfer and / or the identity of the transferee. In addition, if the identity of the transferee is not known to the employee, he can object after a transfer, provided he does so promptly.
The transferee inherits those employees employed by the transferor immediately before the transfer on their existing terms and conditions, assuming they do not object. Changes to the employee’s terms and conditions are possible only in limited circumstances and the transferred employee has no right to insist that he be given the benefit of any superior terms enjoyed by the transferee’s existing staff.
The transferee inherits all accrued rights and liabilities connected with the contract of employment of the transferred employee, except for criminal liabilities and some benefits under an occupational pension scheme. The transferee will also inherit all the statutory rights and liabilities which are connected with the individual contract of employment, e.g. claims for unfair dismissal, redundancy and discrimination.
Under the TUPE regulations, any collective agreements made with a trade union by the transferor are deemed to have been made by the transferee. Further, the transferee is deemed to recognise the trade union to the same extent as did the transferor.
The regulations do not have the effect of assigning:
1) criminal liabilities; or
2) rights and liabilities relating to provisions of occupational pension schemes which relate to benefits for old age, invalidity or survivors.
Where an employee is dismissed, if the sole or practical reason for the dismissal is either the transfer or a reason connected with it that is not an ETO reason entailing a change in the workforce, the dismissal will automatically be unfair.
It is a question of fact whether a dismissal is for a reason connected with the transfer. Although dismissals which occur shortly before or after the transfer are likely to be found to be connected with it, if not necessarily by reason of it, an employee may have difficulty convincing a tribunal that a dismissal which took place weeks or even months before the transfer was by reason of the transfer or for a reason connected with the transfer. If the dismissal was for an ETO reason then liability for a pre-transfer dismissal will lie with the transferor.
If an ETO reason can be established, the dismissal will be deemed to be either for redundancy or for ‘some other substantial reason’ under the Employment Rights Act 1996. The employer must show an ETO reason entailing a change in the workforce, otherwise the dismissal will be unfair.