Employee, TUPE, Regulations, Outsourcing

Update on TUPE and outsourcing

20 Dec 2005 | (News)

What happens to employees when there is an outsourcing? Whether they are protected under TUPE (Transfer of Undertakings - Protection of Employment) has been a matter of huge uncertainty for customers and suppliers of outsourced services in the UK over the last few years. The new TUPE Regulations scheduled for next April may provide clarity to a complicated area of the law, although whether they actually do so remains to be seen.

In the meantime, changes providing protection for transferred private sector employees' occupational pension rights have been in force since April of this year. The legal issues which have been and will be addressed by these changes are as follows.

The new TUPE Regulations

An important change to the law relating to the transfer of undertakings and the protection of employees' employment is scheduled for Spring 2006. This will cover, amongst other things, the protection of employees involved in an outsourcing. The law in this area has long been criticised as being too complicated. The Government is seeking to clarify and update the law, but only time will tell if this has been achieved. The new TUPE Regulations have been under consultation for five years, timeframes have slipped time and time again but they are now expected to come into force in April 2006.

As previously reported, the main effects on outsourcing of the new TUPE Regulations will be:

• Clarification of the application of TUPE to the contracting out of services, bringing outsourced services back in-house and re-tendering situations, with the intention that TUPE will normally apply in these circumstances and the intended effect of reducing unnecessary disputes and litigation;
• Ensuring that the outgoing employer is placed under an obligation to notify the incoming employer of the identities of the transferring employees and the associated rights and liabilities that will transfer;
• Clarification of when and how employers may lawfully dismiss employees or change terms and conditions of employment in connection with a transfer, and so reduce the problems caused by current case law in these areas; and
• Imposing joint and several liability on the outgoing and incoming employer for any failure to inform and consult with affected employees with significant financial penalties for non-compliance.

What types of outsourcing will now be caught by TUPE?

The clarification of the application of TUPE to outsourcing scenarios is dealt with in the new TUPE Regulations by means of a specific definition devoted to situations where there is a "service provision change". Under the "standard" definition of a transfer, the new TUPE Regulations will apply to "a transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in the United Kingdom to another employer where there is a transfer of an economic entity which retains its identity" where "economic entity" is defined as "an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary".

Many outsourcing scenarios will fall within the "standard" definition above. Under current case law, the ECJ decision in Ayse Süzen v Zehnacker Gebaudereinigung GmbH Krankenhausservice, a mere changeover of contractors does not amount to a TUPE transfer, what is required is a transfer of significant tangible or intangible assets or a taking over of a major part of the workforce in terms of numbers and skills. The new "service provision change" definition alters this by providing that, if service provision activities cease to be carried out by one person and are undertaken instead by another person and before the changeover there is "an organised grouping of employees situated immediately before the change in the United Kingdom which has as its principal purpose the carrying out of the activities concerned", there will be a TUPE transfer.

This means that, under the new TUPE Regulations, TUPE will normally apply  to outsourcing situations, i.e. when services are outsourced or taken back in-house, or when a replacement service provider is appointed. Note in particular that, whereas the "standard" definition of a transfer requires "the transfer of an economic entity which retains its identity", the "service provision change" definition simply requires that activities cease to be provided by one person and are carried out instead by another person. This means that it will no longer be possible for an incoming employer to defeat the application of TUPE by performing the services in a substantially different way to the outgoing employer, as can be achieved under current case law.

Examples

This all means that TUPE will apply not only in obvious cases (when it already applies) of the outsourcing of a distinct and self-contained function within a company, but also on less obvious service provision changes such as where a change is made to a preferred supplier list. Sectors which may be affected include recruitment and various HR service suppliers such as training companies and outplacement consultancies.

Exceptions

There are potential exceptions to the new "service provision change" definition. It is currently proposed that TUPE will not apply in the following three circumstances:

If, before the service provision change, the client intends that, following the service provision change, the service provider will only carry out the activities in connection with "a single specific event or task", i.e. where it is not intended that there be an ongoing relationship between the client and the service provider. This exception seems potentially fraught with difficulties and may prove unfair to employees if, for example, when they are working on, say, a PR campaign for the 2012 Olympics, their employer is replaced as the service provider for this event;
If the activities concerned consist wholly or mainly of the procurement or supply of goods for the client's use; or
Procurement of professional services (with sectors yet to be specified). This potential exception seems least likely to survive the consultation process. The Government has already abandoned a "generic description" of such services and raises more arguments against (five) than in favour of (two) introducing a professional services exception. Chief amongst the arguments against introducing this exception is that employees providing "white collar" services (such as chartered accountants, business consultancy, legal advice and computer software design) are arguably just as deserving of protection under TUPE as employees providing "blue collar" services (such as office cleaners, workplace catering, security guarding and refuse collection) when placed at risk of redundancy by the transfer of their jobs to a new employer, particularly as they may include secretaries and other support staff.

Protection of Occupational Pension Rights

Whilst timeframes have slipped implementing the above proposals, the Government has not held back in providing protection for transferring employees' occupational pension rights. The relevant sections of the Pensions Act 2004 and subsequent Transfer of Employment (Pension Protection) Regulations 2005 came into force on 6 April 2005.

The Pensions Act 2004 sets out for the first time a minimum standard of protection for occupational pension entitlements to be afforded to all transferred private sector employees who had an occupational pension entitlement prior to a TUPE transfer.

If, prior to the TUPE transfer, the transferred employee had access to an occupational pension scheme to which the outgoing employer contributed (or would have been required to contribute if the employee had been an active member), or the transferred employee would have had access to such a scheme if he had been employed by the outgoing employer for a longer period, then the new employer must secure at least a prescribed level of pension provision for the employee following the transfer.

If the transferred employee qualifies for the protection of his pension rights, the incoming employer has a choice of whether to meet the new obligations by offering the transferred employee membership of a non money purchase occupational pension scheme (defined benefit) or membership of a money purchase occupational scheme (defined contribution) or make prescribed contributions to a stakeholder pension scheme of which the transferred employee is a member.

If the new employer offers the transferred employee membership of a defined benefit pension scheme, the Act provides that the scheme must satisfy either the statutory reference scheme test or such other test as may be prescribed in Regulations. The Transfer of Employment (Pension Protection) Regulations prescribe the alternative test which the defined benefit pension scheme must comply with. This test is satisfied if the scheme provides either:

• For members to be entitled to benefits worth at least the equivalent of six per cent of pensionable pay for each year of employment together with the total amount of any contributions made by them, and, where members are required to make contributions to the scheme, for them to contribute at a rate which does not exceed six per cent of their pensionable pay; or
• For the new employer to make matching contributions of up to six per cent of basic pay to the scheme on behalf of each contributing employee who is an active member of the scheme.

With regard to defined contribution and stakeholder schemes the Act itself does not specify the level of contribution the employer has to make, rather it provides that the employer has to make (or offer to make in the case of a stakeholder pension scheme) "relevant contributions". It is the subsequent Regulations that prescribe that the incoming employer must match the transferred employee's contributions up to a six per cent maximum of the employee's basic pay. Any contributions above and beyond six per cent can be made at the parties' discretion. However, it should be noted that, as is the case for defined benefit schemes, if the transferred employee does not contribute to the scheme then the new employer is under no obligation to contribute.

Note also that, under the Transfer of Employment (Pension Protection) Regulations pension provision need not be made if or to the extent that the new employer and the transferred employee so agree at any time after the transferred employee transfers to the new employer's employment.

The overall effect of these changes is that the occupational pension rights of transferred employees are protected but without putting unnecessary burdens on the transferee employer. In fact transferred employees could be members of less favourable schemes than they were on with their old employer.

Source: Tarlo Lyons

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