TUPE Reforms: the next steps

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1 TUPE Reforms: the next steps Earlier this year the Government published a consultation seeking views on proposed reforms to the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). The consultation set out a package of measures designed to reduce the complexity surrounding TUPE and the practical difficulties encountered by organisations, including those in the pubic sector, when managing business or service transfers. It was also intended to address what was considered to be unnecessary gold-plating of the requirements of the EU Acquired Rights Directive, from which the UK Regulations stem, including the proposed repeal of the service provision changes (SPC) provision, often cited as a prime example of such gold-plating. This consultation formed part of the Government s on-going programme of employment law reform, designed to provide greater flexibility and effectiveness within the labour market. As HR professionals will be only too well aware, this programme has already brought about a number of regulatory changes, for example, increasing the qualifying period for making a complaint of unfair dismissal, reducing the time period for collective redundancy consultation, reforming the employment tribunal process and introducing fees for making tribunal claims, and changing equality and whistleblowing laws. Yet more changes are already in the pipeline, e.g. in relation to maternity, paternity and adoption leave and right to request flexible working. The outcomes from the TUPE consultation, which has recently been published by the Government, will add to the continuing list of changes which employers and HR professionals need to understand, become familiar with and assess the practical implications of for their organisations. Whilst the complexity of the current Regulations is no doubt widely recognised, commentators had expressed some trepidation that the repeal of specific measures, particularly that relating to service provision changes, would herald a return to the position prior to the current 2006 Regulations when there was considerable uncertainty, and much legal debate (and associated cost!) as to whether or not TUPE applied in particular circumstances. This was often a consideration for public sector organisations involved in the contracting-out of services. There was also a desire by many organisations that any reforms should provide greater flexibility in the Regulations by extending the scope for employers to harmonise terms and conditions following a TUPE transfer. (Although the Government had, perhaps, already dampened expectations on this issue by making clear in the consultation document the limitations on the scope for this type of change due to the requirements of the EU Directive) So what are the outcomes from this consultation and what practical implications will they have for HR professionals in the public sector? Deborah Moon, HR Consultant, summarises the main points, and considers the responses to the consultation, the Government s response and the changes now proposed. 1

2 Service Provision Changes The Government s earlier consultation document had looked at the position both under the EU Directive and as set out in the 2006 TUPE Regulations in relation to service provision changes and the circumstances in which a SPC may occur. It concluded that it was not clear that the intended benefits of the 2006 Regulations in this area (which brought the vast majority of SPCs within the scope of TUPE) had been realised. Indeed, there was a fear that there had been potentially anti-competitive effects as a result of avoidance measures taken by some organisations. The Government therefore set out its proposals to reverse the 2006 amendments relating to SPCs and align the definition of a transfer with that of the Directive. The Government felt that this could help the UK economy by making it easier for businesses to change the provider of a service. However, the Government has surprised many commentators by deciding that the SPC rules, which were added to the Regulations in 2006, should remain un-amended. In taking this decision, the Government appears to have listened to, and accepted, the views expressed by the 67% of respondents who did not support the repeal of SPCs. Reasons for these views included that the current Regulations: brought clarity for employers and employees and reduced the number of ET claims on this issue; created a level playing-field for contractors; provided continuity of staffing and security for service sector workers. Respondents were also concerned that the repeal of SPCs would: increase uncertainty and the potential for disputes; make commercial transactions more time-consuming and costly; have a detrimental impact on terms and conditions of employment. Whilst some potential advantages of repealing the SPC requirements were noted, for example, potential increased appetite for businesses to be involved in transfers and enhanced scope for innovative bids, the benefits of retaining them, particularly that of legal certainty, were felt to outweigh the potential benefits arising from repeal. The Government has therefore concluded that the responses to the consultation have presented a clear rationale for retaining the current SPC rules, thereby avoiding the potentially significant downsides of repealing them identified by respondents. The Government considers the uncertainty created by such a situation could hinder commercial agreements, damaging both the labour market and the wider economy. The Government also notes that some respondents called for professional services to be excluded from TUPE and considered whether it would be possible to provide an exception in certain circumstances. However, it has concluded that it would not be possible to draft an exception which would be precise enough, as well as identifying some other perceived problems with such an approach. 2

3 The document notes that there were also some calls for second generation contract changes and for micro-businesses or SMEs to be exempt from the SPC rules but the Government has also rejected these. Overall, the Government states that the SPC rules are an example of where good Regulation, additional to that required by a European Directive, can deliver benefits for both businesses and individuals. A somewhat surprising outcome, given the Government s previous stance on EU Regulation! In addition, as a number of commentators have noted, the Government s track-record on being prepared to accept views contrary to its own position on employment matters has not been particularly positive the introduction of employee shareholder contracts is, perhaps, a prime example of that! However, that is not the end of the matter, as the Government goes on to state its intention to amend the Regulations to reflect the approach set out in case law as to whether or not a TUPE SPC occurs, namely that for there to be a TUPE service provision change, the activities carried on after the change must be fundamentally or essentially the same as those carried on before it. This means that the greater the difference before and after the change, the less likely it is that it will be covered by the SPC provisions. This will, as always, depend on the particular circumstances and will ultimately be a matter for an Employment Tribunal to determine. However, the intention of this amendment is to provide a signal of the flexibility there may be in some service provision change situations. Employee Liability Information The current Regulations provide that certain information must be provided by the transferor to the transferee and by when. A number of practical problems had been identified with this and the Government had therefore proposed repealing this requirement, instead leaving the businesses involved in the transfer to agree among themselves how they would provide the information. This was another issue where the majority of respondents did not support the Government s proposed repeal, with 75% being against this. Although business representatives acknowledged the intended deregulatory nature of the proposal, it was considered that the provision of information is a significant part of the TUPE process and is commercially important. It was also felt that where the relationship between transferor and transferee may be difficult, the proposal could make such a situation worse. Improvements to the existing provisions were suggested and there was almost unanimous agreement that the current period for providing information of 14 days was too short a deadline, with 28 days being the time period most requested. As with the SPC proposals, the Government has taken note of the views expressed and has concluded that the current requirements should be retained. It has also taken note of the strength of feeling expressed on the time period for providing information and has decided to bring this forward to not less than 28 days before the transfer, rather than the current 14, other than where special circumstances make it not reasonably practical to comply (this exception applies currently). 3

4 The Government does not intend to increase the categories of information that should be provided, as argued by some respondents, nor does it intend to introduce a requirement that information be provided at the tendering stage in out-sourcing situations. However, on this latter point, it indicates that, when examining TUPE guidance, it will consider improvements such as the inclusion of model terms for contracts. Restrictions on terms and conditions One of the major concerns for employers over many years, including those in the public sector, has been the restrictions the Regulations place on them with regard to making post-transfer changes to terms and conditions the inability to harmonise employment contracts was identified as a burden by businesses when responding to the Government s initial call for evidence. Currently, terms and conditions cannot be varied, even if both parties agree to this, if those variations are connected with the transfer, unless they are due to an economic, technical or organisational (ETO) reason, entailing changes in the workforce, i.e. a change in workforce numbers or functions. Whilst it recognised this problem, the Government considered that there was a very high risk that any provision which allowed the parties to agree variations to terms and conditions for harmonisation purposes would be incompatible with the Acquired Rights Directive and EU case law. To seek to address this issue, the Government looked at whether any other amendments could be made to improve the situation and proposed to amend the current Regulation so that its wording more closely reflected that of the Directive and EU case law. 66% of respondents supported the Government s proposals, with a general view that the current Regulations go further than that required by the Directive. Many thought the proposed change could reduce the legal risk of altering terms and condition, although others thought it may not result in any practical difference, dependent on whether legal interpretation enabled more flexibility. This suggested that guidance would be necessary to mitigate any such legal uncertainty. Various other views were expressed, including that transferring employees may welcome more flexibility to discuss changes to terms and conditions and that consensual changes should be allowed. A number of views were expressed against the proposal, including that the Directive prohibits provisions which allow for harmonisation, that there was sufficient flexibility currently to allow for variations to the benefit of transferring employees, for an ETO reason or for a reason not connected to the transfer. Others felt this issue could be addressed through a properly negotiated collective agreement and were concerned that the proposed change could result in a worsening of pay and conditions for transferring employees. The Government has now confirmed its view that the present wording of the Regulations goes further than the Directive and will therefore amend this accordingly, with the exact drafting of the revised provision yet to be finalised. It goes on to state that it considers the new provision will continue to provide employee protection and will not result in 4

5 wholesale reductions in terms and conditions. The amendment will also seek to provide that unilateral variations to contracts are permissible where they are pursuant to a contractual provision, e.g. a mobility clause, and where such a change would be permitted had there not been a transfer (this was one issue identified by a number of respondents to the consultation). The Government has also confirmed it will retain the current ETO exception (supported by 83% of respondents), although recognises this may be of limited use in practice. However, the Government intends to amend TUPE so that a change in the location of the workplace is within the meaning of entailing changes in the workforce and can therefore be capable of being an ETO (see also change in workplace location, below). This would enable the contract to be varied by agreement to provide for a new place of work (rather than the employee being made redundant) and might also be used where there may be changes to terms associated with a change in job function (which could amount to an ETO). The Government acknowledges the concerns of businesses about the issue of harmonisation and states it believes the UK economy would benefit from a framework which would allow individuals and their employers to agree mutually beneficial changes to terms and conditions in support of this objective. It sates that it will engage with European partners to demonstrate the potential benefits of a harmonisation framework for individuals and the economy. Whether this will lead to any material change and within what timescale, remains to be seen! It seems therefore that this issue will continue to be a source of frustration for employers, although the intended change may offer some enhanced scope for legitimate contractual changes to be made, including through the ETO exception route, although this is likely to depend on how the new provision will be interpreted by the Courts. Unfortunately, this may be another area for increased legal argument! TUPE and Collective Agreements As the document reflects, collective agreements play an important part in how employers and their workforces agree and manage terms and conditions this is a particularly relevant issue within the public sector where they are commonly found. The Regulations provide for the transfer of collective agreements on completion of a relevant transfer but the extent to which they are then binding on the transferee, particularly where the new employer is not represented in the relevant collective negotiating machinery, such as the NJC for Local Government Services, is an issue which has been considered by the courts on a number of occasions. In particular, this issue has focussed on whether the current requirement should be given a dynamic interpretation (where employees are entitled to the benefit of future collective agreements relating to their original employer), or a static one (where employees are only entitled to the terms of the collective agreement(s) applicable at the time of transfer). As readers of this article may be aware, this issue arose in the case of Parkwood Leisure v Alemo-Herron, on which the ECJ has recently given its decision. (This case involved an 5

6 employee who worked for the London Borough of Lewisham and who transferred to a private contractor. Following the transfer a revised rate of pay was agreed by the NJC but the contractor refused to pay this. The Court of Appeal held that the new employer was not bound by the increase as it had been negotiated after the relevant transfer. The Supreme Court then referred the issue to the ECJ) The ECJ has now decided that the Directive precludes Member States from providing for a dynamic approach where the transferee does not have the possibility of participating in the negotiation process of collective agreements concluded after the date of the transfer. Interestingly, the ECJ also concluded that the Directive does not have the sole aim of safeguarding employees interests in the event of a TUPE transfer but seeks to ensure a fair balance between the interests of both employees and employers. A requirement that the transferee employer honour a clause within a collective agreement negotiated and agreed after the transfer, where that employer has not participated in the collective bargaining process, would undermine such a balance and seriously reduce the transferee s contractual freedom and ability to conduct its business. The ECJ decision supports the view taken by the Government in its earlier consultation document that only collective agreements agreed at the date of transfer should bind the transferee, i.e. there should be a static rather than dynamic approach. The Government had also indicated that it was considering limiting the future applicability of terms and conditions derived from collective agreements to one year from the transfer, after which variations would be possible provided the overall change was no less favourable to the employee, and views were sought on these issues. 61% of respondents were in favour of a one-year post-transfer limit - perhaps, not surprisingly, businesses, charities/social enterprises, local government and legal representatives were generally in favour but employee representative organisations were generally opposed. Most respondents agreed to the proposed one year limit, with many concerned at the impact on the new employer of collectively agreed post-transfer changes where that organisation was not party to the relevant negotiations. Some felt that the one year limit could help in enabling post-transfer variations, with fewer sets of terms and conditions for the employer to manage and a better integrated workforce. However, opponents saw this as another change which could lead to a downward pressure on transferring employees terms and conditions, limiting the ability of trade unions to protect their members interests through the collective bargaining process. The need for clarity on the position of collective agreements incorporated into individual contracts of employment and how the proposed one year limit would operate in these circumstances was another issue raised by respondents. Many respondents were in favour of including the proposed no less favourable overall condition in relation to any changes, which was seen as providing protection for employees and preventing the erosion of terms and condition, an issue which the trade unions were concerned about. However, the difficulty of defining no less favourable 6

7 overall was seen as potentially problematic, requiring clear guidance to limit the prospect of dispute. Most respondents supported a static approach on this issue, as described above, which was seen as providing certainty for transferee employers. The Government has therefore confirmed that it intends to amend the Regulations so that, one year after the transfer, the restriction on variations to contracts will no longer apply in respect of changes to terms derived from, or incorporating, collective agreements, provided that any change is no less favourable overall. The Government will also amend the Regulations to provide for a static approach to the transfer of terms derived from collective agreements. This means that only those terms existing at the date of transfer will be binding on the transferee and not those agreed subsequently where the transferee is neither party to those agreements nor to the relevant bargaining process. Protection against dismissal The underlying purpose of the Directive and the Regulations is, of course, to protect employees who transfer from one business to another. However, the current Regulations take a wider approach on this particular issue to that under the Directive, as they provide that a dismissal will be automatically unfair if the sole or principal reason is: a relevant transfer; or a reason connected with a relevant transfer that is not an ETO reason. The Government had therefore proposed amending the relevant wording to more closely reflect that of the Directive and EU case law. 76% of respondents supported this proposal again, not surprisingly, businesses, local government and legal representatives were generally in favour but employee representative organisations were predominately opposed. Generally, those in favour, felt the current Regulations were more restrictive than that required by the Directive and provided enhanced protection for transferring employees, relative to those not subject to a transfer. Opponents to the proposed change felt the current wording accurately reflected the EU position, with concerns expressed about the potential effects of weakening the current protections. The Government has concluded that, whilst it is important to ensure fairness in the labour market, both generally and during a transfer, there is a need to ensure that the Regulations do not regulate more than they need to. The Government considers the present wording of this particular provision is too wide and will therefore amend the relevant Regulation to bring it more closely in line with the Directive and EU case law. This will mean that dismissals which are connected to a transfer will not be automatically unfair (although the document notes this will be a new test when considering a TUPE dismissal claim) and that the Government will provide guidance on this. Dismissals where the reason is the transfer itself will remain automatically unfair. Whilst this less restrictive approach will undoubtedly be welcomed by many, it will be hoped that it does not create 7

8 greater uncertainty (identified as a potential short term effect of the change) and scope for increased legal argument. Substantial change in working conditions Currently, where a relevant transfer involves, or would involve, a substantial change in working conditions to the material detriment of the employee whose contract is, or would be, transferred, the employee may regard the contract as terminated and is treated as having been dismissed by the employer. The earlier consultation considered the problems which can arise from this provision, proposing that the scope of it should be narrowed to more closely reflect the wording of the Directive, the aim being to reduce some of the difficulties currently encountered. 67% of respondents supported the Government s proposal, agreeing that this change should remove the enhanced protection that transferring employees have of being able to claim unfair dismissal where there has not been a repudiatory breach of contract (and which would otherwise not give rise to an unfair dismissal claim). Employees would still be protected in genuine constructive dismissal cases. Opponents to the proposals (again, primarily trade unions or staff associations) considered the current provisions were appropriate and fully met the Directive s aim of preserving employees terms and conditions when a transfer takes place, suggesting that such a limitation on this could open the Regulations to challenge through the European Courts. In its response, the Government notes the strong support for the proposed amendment but, on reflection, considers that a copy out approach would not achieve the desired result. It notes that the situation which seems to be of most concern is a change in the employee s place of work. As noted above, the Government intends to include change of workplace location as capable of amounting to an ETO reason, so that an automatic unfair dismissal claim would not necessarily arise in these circumstances. The Government has decided that the proposed change would have added to the regulatory burden on businesses and would have added additional complexity to the Regulations. It has therefore decided not to amend the relevant regulations as originally proposed. Dismissals arising from a change in workplace location In its earlier consultation, the Government highlighted the fact that the courts have interpreted the meaning of entailing changes in the workforce (as part of the ETO exception) to changes in the numbers employed or changes in the functions performed by employees. However, this does not align with the definition of redundancy in the Employment Rights Act 1996 (ERA). The effect of this is that where the transferee employer intends to carry on the business in a different place, but with the same number of staff overall, then any dismissals as a result of a change in location would be automatically unfair. To address this discrepancy, the Government proposed amending the Regulations so that entailing changes in the workforce should be extended to include a change in the location of the workforce and would therefore come within the ETO exception. 8

9 79% of respondents were in favour of this change, identifying that many businesses need to change the location of the transferring undertaking, and this would therefore reflect business reality. It was also noted that the proposed change would remove the current anomaly whereby TUPE offered greater protection in this type of situation than that under the ERA. It was also considered important that TUPE did not undermine any contractual flexibility with regard to geographic mobility clauses. In its response, the Government has reflected on the dynamic nature of businesses and the economy, which will necessitate organisational changes such as moving locations. It considers the Directive recognises, and provides a framework for, organisational change following a transfer. However, the Government also recognises the concerns expressed by some respondents about the potential for employees being forced to change their work location and confirms that normal contract law and equality/discrimination provisions will continue to apply. The Government has therefore confirmed that it will amend the Regulations so that changes in location of the workforce, following a transfer, can be within the scope of ETOs. This will mean that, in future, employees dismissed by the employer due to a change in workplace would be unlikely to be able to claim automatically unfair dismissal, although the normal unfair dismissal and redundancy protections will still continue to apply. Consultation on collective redundancies The Government consulted on proposals which would enable pre-transfer consultation to count towards the collective redundancy requirements. This would enable the transferee employer to start consulting transferring staff about potential dismissals before they transferred to its employment. 66% of respondents supported this proposal for a number of reasons, including that it would increase flexibility for employers, increase the efficiency and speed of any restructuring, and reduce uncertainty for employees, encouraging openness and honesty about changes to the workforce. However, the majority of trade union responses opposed the proposals, considering this would fast track redundancy consultation at the cost of employees rights and undermine their position during a TUPE transfer. The Government has now confirmed it will implement this proposal, making clear that this will be on a permissive/voluntary basis, and will be dependent on cooperation/agreement between the respective parties. However, the Government notes that there are several issues which will need to be considered more fully before this change can be implemented, for example, at what point pre-transfer consultation can begin with the affected staff. It also confirms that the accompanying guidance which will accompany the TUPE changes will cover this particular measure, presumably, addressing some of the practical concerns identified by respondents. 9

10 The Government has also confirmed that there will be no change to the Regulations to enable the transferor to rely on the transferee s ETO reason in respect of pre-transfer dismissals. Other comments In its consultation, the Government invited other comments on the issues covered and the document summarises the issues raised by respondents, noting that the most common theme related to pensions. A number of respondents noted a general concern that the scale of public sector pensions was preventing small companies from competing for public sector contracts. Although occupational pensions do not generally transfer under TUPE, there are other requirements relating to pension provision following a transfer and the document states that BIS will work with DWP to find ways of improving the information available to employers and scheme members. Reference is also made to the Fair Deal policy, which provides for public sector workers pension provision when transferring out of the public sector. The Government has previously confirmed that the overall approach to Fair Deal will be maintained but that, in future, this will be delivered by offering access to public service pension schemes for compulsorily transferred staff. The document states that the Government will announce the detail of the new policy and publish updated guidance later this year. Public sector organisations will no doubt wish to look out for and assess the practical implications of this. Timescales/next steps The Government states that intends to provide a lead-in period to enable employers to plan future transfers in line with the new rules. The Government intends that the new Regulations will be laid before Parliament in December The main reaction from employers and other commentators appears to have been one of relief (and surprise) that the Government has decided not to proceed with the proposed repeal of the SPC provision and that it has listened to the consultation responses on this point. There was general agreement that removing this provision would have created much uncertainty about whether TUPE did, or did not, apply in this type of situation and that outcome appears to have been avoided. The proposed amendment to this particular provision may, however, mean that material changes in the nature/delivery of the particular service may, in future, take certain transfers outside of the scope of TUPE. The increase in the time period for the provision of employee liability information is also likely to be welcomed by employers, although may be considered not to have gone far enough. Employers will clearly need to have regard to this revised timescale. The change in the wording of the provision relating to automatically unfair dismissals and that relating to a change in workplace location are also likely to be welcome developments, although such situations will still need to be carefully managed, with continuing regard to other relevant employment protections. 10

11 The change to the collective redundancy consultation arrangements should make such exercises easier to manage, although this will be dependent on co-operation and agreement between the parties. The changes regarding collective agreements should provide greater flexibility in this area, although the scope for post-transfer harmonisation will continue to present challenges for employers. The reaction from the trade unions on these and other intended changes suggests that there will still be plenty of issues for legal argument and debate! The changing nature of our public services has brought with it an increasingly diverse range of provision and delivery models, along with a requirement for greater flexibility in workforce arrangements. Public sector employers will no doubt hope that the planned TUPE changes will make these situations easier and more straightforward to manage. Transfer of Undertakings (Protection of Employment) Regulations 2006 Government Response to Consultation available on the Department for Business Innovation & Skills website at Deborah Moon is a Consultant in Human Resources and is a regular contributor to Croner-i HR for Local Government. Croner-i HR for Local Government is an on-line employment law and practice reference source designed specifically for HR Managers and their teams in local government. 11