As an employer, one of the most complex and delicate transitions your business will go through is a change of ownership, whether that takes the form of a divestiture or a cross-border merger or acquisition.
One market that remains dynamic for mergers and acquisitions is the UK. To cite one example, inward mergers and acquisitions [where UK companies were acquired by a foreign company] were worth £6.1 billion in the first quarter of 2024.
But there’s one piece of legislation which, if ignored, can lead to global companies facing legal challenges, financial penalties, and employee unrest.
The regulation we’re talking about? The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).
Awareness of and compliance with the regulations surrounding TUPE transfers is crucial if you’re in the middle of any kind of merger, acquisition or outsourcing arrangement that involves a UK business.
TUPE is an example of a country-specific law that global employers can’t afford to ignore. As with many local regulations, failure to comply with TUPE can result in a globalised business facing severe penalties and long-term reputation damage. Partner with global employer services to better comply with TUPE regulations.
Specifically, non-compliance with TUPE regulations can lead to:
- Legal challenges - employees may bring claims against the employer for unfair dismissal or breach of contract if their rights under TUPE are not upheld.
- Financial penalties - tribunals can impose significant fines on employers who fail to comply with TUPE regulations.
- Reputational damage - failing to adhere to TUPE can tarnish a company's reputation, making it harder to attract and retain top talent. Negative publicity can also erode trust with customers and business partners.
- Employee unrest - when employees feel their rights are not protected, it can lead to low morale, reduced productivity, and increased turnover. This disruption can affect the overall performance of the business and hinder smooth operations.
So, if your company is managing or acquiring workers in the United Kingdom, it’s important to know your obligations under TUPE regulations.
In this article, we’ll explain what employers need to know about TUPE and give you the tools you need to take a proactive approach to compliance.
What is a TUPE Transfer? and why does it matter?
The TUPE employment regulations, first published in 2006 and amended in 2014 and 2018, TUPE (Transfer of Undertakings (Protection of Employment) Regulations) protects employees' rights when the business they work for transfers to a new owner. This may happen as a result of a merger and acquisition (M&A), takeover, or outsourcing of services.
Understanding your TUPE responsibilities as an employer
In order to comply with TUPE, it’s first necessary to determine whether it’s applicable to your employee transfer in the first place. If it does, you're going to need to take the necessary steps to consult with your employees and their representatives. And, of course, you’re going to need to put a plan in place to ensure you’ve done the necessary due diligence at every stage of the transfer. There’s no room for error.
Step 1: Identify if TUPE is relevant
There are two types of transfers TUPE regulations apply to, business transfers and service provision transfers.
Business transfers
This is when one employer moves all or some of its business to another employer, meaning that employees would now work for the new company.
Service Provision Changes (SPC)
This is when an employer outsources work previously in-house to a contractor (or vice versa) or switches from one contractor to another. There are normally three types of service provision change that employers need to know about:
- Outsourcing – This occurs when a client organisation transfers activities to an external service provider. For example, a company might outsource its IT support to a specialised firm.
- Insourcing – This is the opposite of outsourcing. It happens when a client organisation brings activities back in-house that were previously carried out by an external service provider.
- Change of service provider – This occurs when a client changes from one external service provider to another. For instance, a business might switch from one cleaning company to another.
In practice, TUPE regulations apply to almost all employees that are being transferred to other organisations (or parts thereof) that are located or do business within the UK. However, in the case of workers and contractors, there are exceptions if the contract or agreement involves only goods (not services) or if the engagement is of a one-off or short-term task (i.e. an event).
Step 2: Informing and consulting with your employees
Employers are required to inform employees about the transfer, including the date, reasons for the transfer, and its legal, economic, and social implications.
TUPE transfers are often a complicated, multi-step process and clear communication helps to alleviate employee concerns and fosters transparency.
Additionally, employers must consult with employee representatives or unions to discuss the transfer. This consultation should cover measures the new employer intends to take and allow employee representatives to voice concerns or suggestions.
Due diligence and liability
Employers must provide the new employer with detailed information about the transferring employees, including their rights, obligations, and any potential liabilities.
This includes information on employee contracts, benefits, and any ongoing disputes. Maintaining accurate records is crucial. Ensure all documentation related to employee contracts, benefits, and liabilities is up-to-date and accessible.
Perfecting these steps is critical to protecting employees and preventing possible legal and financial consequences of a TUPE infringement (see the “Impact” section below). To walk through the TUPE process, it may be helpful to refer to a TUPE transfer checklist. It is important to recognize the potential complexities and challenges that can arise for any affected employee during this process.
Key considerations for employers during a TUPE transfer
As both the old employer and the new employer during a TUPE transfer, there are a number of key compliance considerations.
Employee rights and continuity
Under what is known as the automatic transfer principle of TUPE, employees automatically transfer to the new employer with their existing terms and conditions intact, meaning that all contractual rights and obligations continue as before.
This not only includes pay, but any other statutory and contractual benefits offered by the old employer, including:
- Holiday pay
- Health insurance
- Bonus or commission schemes
- Any enhanced maternity or redundancy packages.
With this in mind, preparation for TUPE transfers needs to start well in advance of the actual transfer of business.
Not only is this sound business practice; certain elements of the process itself require the transferor to act. For example, TUPE 11 requires information sharing between the transferor and the new employer.1
It’s worth noting that TUPE transfers happen automatically once they’ve been set in motion. An easy-to-miss implication of this is that, even if a business has not been preparing for a TUPE transfer, it will happen anyway. So, any steps that needed to be taken (e.g., informing workers—see below) may be considered neglected. As a result, current or former workers may have grounds to bring charges against the employer. And even if they don’t, there could be reputational harm that makes recruiting and retaining talent harder in the future. This is an obvious but important compliance error that an employer can’t afford to make.
As soon as the new employer takes on a worker as part of a TUPE transfer, they assume responsibility for upholding pre-existing employee rights and liabilities.
One of the most important rights is the employee’s right to continuity. Time served with the previous employer continues forward with the new one; any entitlements based on service time continue to use their initial start dates. This ensures that the current employer respects the worker’s accrued rights and benefits.
Dismissals that happen solely or primarily because of the transfer are considered unfair dismissal.2
Contractual obligations
A TUPE transfer itself does not and cannot incur changes to an employment contract.
In fact, per TUPE 4(4), changes to a contract that are made solely or mainly because of the transfer will be voided unless the existing contract already had a stipulation in place allowing such a change.3 This protection applies to any relevant transfer under the TUPE regulations.
However, changes can be made related to broader shifts in the workplace if they involve4:
- Economic factors related to how the company is performing
- Technical factors related to systems and tools workers will use
- Organisational factors related to the company’s overall structure
Employers are also able to propose positive changes, or those that benefit the employee or improve upon their working conditions, absent an economic, technical, or organisational (ETO) reason. But any and all changes must be agreed to by the employee; they cannot be imposed.
Understanding your redundancy obligation as an employer
It’s important to stress that an employee’s right to a fair redundancy process must be preserved throughout the entire TUPE process.
Before the TUPE transfer, the original employer cannot act on any request from the new employer to make an employee redundant. This would count as unfair dismissal.
Likewise, after the transfer, a new employer can only make redundancies if there is:
- A need to make changes to the workforce for economic, technical, or organisational (ETO) reasons
- A genuine redundancy situation
Examples of an ETO change could include a change in the location of work, a reduction in the number of employees at the new company or too many employees transferred into a narrow set of roles.
Notification and consultation requirements
One of the original employer's most important responsibilities is notifying affected employees ahead of time and consulting them about the move.
Specifically, employers need to give workers anything that could impact their working relationship before, during, or after the transfer.
All workers need to know that and when the transfer is happening, whether and how it would impact them, and any information about the target company that is relevant to them (e.g., the structure of the company, which department they’d work within, how many other workers are there.).5
Employers need to document that they have asked workers for their input on matters related to the transfer and demonstrated that they have taken employees’ input into account. This includes meeting with union or employee representatives where relevant.
Impact of TUPE on businesses
TUPE exists to protect workers, so its impacts on businesses can be seismic and even disruptive if the necessary due diligence isn’t observed in advance.
For example, as noted above, TUPE voids contract changes made directly because of a business transfer or SPC (with some exceptions), and dismissals made for these same reasons typically qualify as unfair.
Managing a TUPE transfer can present several challenges for business operations. Employers need to plan for the integration of transferred employees into their existing workforce, addressing any cultural or operational differences that may arise.
Additionally, the financial implications of retaining employee benefits and potential liabilities should be carefully considered. Early planning and clear communication can help mitigate these challenges and ensure a smooth transition.
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