Transferring employees on an outsourcing in the UK (England and Wales): overview
A Q&A guide to outsourcing in the UK (England and Wales).
This Q&A guide gives a high level overview of the rules relating to transferring employees on an outsourcing, including structuring employee arrangements (including any notice, information and consultation obligations) and calculating redundancy pay.
Please note: on 23 June 2016, the UK electorate voted to leave the EU. This is likely to have an impact on a number of areas of law discussed in this Q&A. However, at the time of writing, the precise form of the UK's future relationship with the EU was unclear. In view of this uncertainty, the authors have not sought to speculate in detail on the possible changes. Negotiations over the UK's exit are likely to take some time and as a result it may be several years before any changes become law.
To compare answers across multiple jurisdictions, visit the Transferring employees Country Q&A tool.
This Q&A is part of the global guide to outsourcing. For a full list of jurisdictional Q&As, visit www.practicallaw.com/resources/global-guides/outsourcing-guide.
For the general rules relating to outsourcing, visit Outsourcing: UK (England and Wales) overview.
Transfer by operation of law
On an initial outsourcing, if the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply, the customer's employees who are wholly or mainly assigned to the service being outsourced automatically transfer to the supplier. The employees can opt out of TUPE and resign from their employment without any compensation instead of transferring.
Change of supplier
On a change of supplier employees wholly or mainly assigned to the outsourced service transfer from the existing supplier to the new supplier.
TUPE also applies where the outsourcing terminates and the customer brings the services back in-house. In this situation, the employees of the supplier who are wholly or mainly assigned to the outsourced service transfer to the customer.
It is not possible to contract out of TUPE. However, in practice, it is common for the financial liabilities for transferring employees to be apportioned in the outsourcing contract between the customer and supplier.
It should be noted that TUPE is derived from EU law. It is, therefore, possible that the UK leaving the EU could have an impact on TUPE and its application to outsourcing situations. However, it is impossible to say with any certainty what this impact might be, not least because the precise for of the UK's future relationship with the EU remains unclear. In addition, TUPE goes further than EU law in many respects and UK businesses have become accustomed to it. Ant changes are also likely to be met with opposition from trade unions, so there may be little appetite for significant reform.
Under TUPE, employees wholly or mainly assigned to the services transfer on all their existing terms of employment, although special rules apply to occupational pension schemes (see below, Pensions). Any employment liabilities (for example, arrears of pay and discrimination claims) also transfer.
It is possible for the customer or existing supplier to retain employees who would otherwise transfer provided the employee expressly agrees. It is also possible for the customer or existing supplier to make redundant employees who would otherwise transfer. However, the customer or existing supplier would need to have genuine reasons for the redundancies over and above the fact of the transfer itself, otherwise such redundancies would be unfair and liability for them would transfer under TUPE to the new supplier, although it is possible for the parties to apportion financial responsibility for such liabilities in the outsourcing contract.
The treatment of pension rights on a TUPE transfer depends on whether the transferor operated an occupational pension scheme or contributed to personal pension schemes for the benefit of the transferred employees:
If the transferor made contributions to employees' personal pension schemes or to a group personal pension arrangement, the obligation transfers.
Rights to the provision of old age, survivors' and invalidity benefits under an occupational pension scheme do not transfer, but some other occupational pension scheme rights can. For example, an employee's entitlement to a pension at normal retirement age (which is an old age benefit) does not transfer, but a right to take an early retirement pension on redundancy (which is not an old age benefit) does. Rights to death benefits under an occupational pension scheme do not transfer (but they do if the benefits are provided under a free-standing life assurance scheme).
If the transferred employees were members of an occupational pension scheme, the transferee has a separate obligation to provide pension arrangements for them. These do not have to match the transferor's pension arrangements, but must meet minimum standards prescribed by law.
Employers' automatic enrolment duties apply to the transferee in respect of the transferred employees.
All contractual benefits transfer under TUPE (for example, holiday, car allowance and medical insurance).
Difficulties arise where the transferred employees belonged to a share or share option scheme operated by the transferor, which the transferee cannot replicate. In that situation, the transferee usually takes on a modified obligation, for example, providing a profit-sharing scheme.
Collective agreements transfer under TUPE. The transferee is usually able to terminate the agreement (but this can give rise to adverse employee and trade union relations issues).
Employees made redundant on a TUPE transfer are entitled to a statutory redundancy payment calculated by reference to the employee's age, length of service and weekly pay (which is subject to a statutory maximum). Employees can also be entitled to more favourable redundancy payments under their employment contracts.
Under TUPE, any change to employees' terms and conditions is void if the sole or principal reason for the change is the transfer (even if the employees agree to the change) unless it is an economic, technical or organisational reason (ETO reason) entailing changes in the workforce. Examples of ETO reasons include:
A re-organisation involving changes in the roles of some or all of the employees.
A change in workplace location.
A change to terms and conditions purely to harmonise with those of the transferee's existing workforce is not for an ETO reason and is therefore void. However, if the changes are beneficial, employees are unlikely to challenge them.
Dismissals can be implemented before or after the outsourcing, but a dismissal is automatically unfair if the sole or principal reason for the dismissal is the transfer. However, a dismissal will not be automatically unfair (and will be potentially fair) if the sole or principal reason for the dismissal is unrelated to the transfer or is an ETO reason (see Question 4). Employees with at least two years' service can claim unfair dismissal.
Liability for any pre-transfer dismissals by the transferor passes to the transferee under TUPE, unless the dismissal was for an ETO reason.
Information, notice and consultation obligations
The transferor must provide the transferee with the following information on the transferred employees:
Their identity and age.
Certain particulars of employment (including notice, holiday, pay, hours, job title and place of work).
Details of any disciplinary or grievance procedure involving the employee in the last two years.
Details of any legal claim brought by the employee in the last two years or which the outgoing employer believes the employee can bring.
Details of any collective agreements.
The transferor must provide this information at least 28 days before the transfer and keep it up to date.
The transferor must inform any recognised trade union (or, if there is none, elected employee representatives of "affected employees") about the transfer and consult with them on any proposed measures (for example, redundancies, or changes to terms and conditions or working practices). The transferor must provide the trade union or elected representatives with certain prescribed information about the transfer and the transferor's business.
"Affected employees" means both:
Employees that transfer.
Employees that remain with the transferor and are affected by measures taken in connection with the transfer.
To assist with the transferor's consultation duty, if the transferee proposes measures that will affect the transferred employees after the transfer, it must notify the transferor of the measures before the transfer. If any of the transferee's own employees will be affected by the transfer, the transferee must also inform any recognised trade union or elected employee representatives of its affected employees about the transfer and consult with them on any proposed measures.
The transferor should preferably begin its consultation before signing the outsourcing contract. However, unless it wishes to implement measures such as redundancies, it is generally acceptable to wait until conclusion of the contract. In this case, the transferor should not suggest in its internal statements that it has made decisions in relation to any measures. It should, where possible, refer to "proposals" and state that matters are "subject to consultation". Where there is no trade union or existing worker representative group, the timetable must allow for the election of employee representatives.
There is no fixed timetable for TUPE information and consultation; however, there is an obligation to provide the information sufficiently in advance of the transfer to enable the necessary consultation to take place. In practice, the timetable which applies to multiple redundancies is often used as a guide (see below).
The penalty for failure to inform and consult is up to 13 weeks' pay per employee. The transferee is jointly and severally liable for any failure to inform or consult. Where there are proposals to make 20 or more employees redundant, the employer making these redundancies must also consult with trade union or employee representatives under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992, at least 30 or 45 days before the first dismissal (depending on the number of dismissals).
Redundancies must often be implemented by the transferee immediately after transfer. In these circumstances, the transferee can carry out pre-transfer consultation about the redundancies, provided the transferor agrees. In practice, there would need to be a high degree of co-operation between the transferor and transferee for this to work.
Additional consultation obligations apply if the transferee or transferor has a National or European Works Council. In practice, it can be possible to run any redundancy or other consultation process concurrently with any TUPE consultation.
It is not possible to contract out of the information and consultation obligations under TUPE.
Travers Smith LLP
Professional qualifications. Solicitor, England and Wales, 2001
Areas of practice. Employment.
- Successfully defending a whistleblowing claim for around GB£7 million in compensation in the Employment Tribunal.
- Advising on employment protections (including TUPE) on an outsourcing from a national fuel supplier.
- Advising on the enforcement of post-termination restrictions against a departing senior executive.
- Implementing a collective consultation redundancy programme (including training for employee representatives).
- Advising on the removal of an executive board member and the negotiation of agreed terms of a settlement agreement.
Travers Smith LLP
Professional qualifications. Solicitor, Australia, 2003
Areas of practice. Employment
- Advised a major logistics company on the outsourcing of its collection services, including appropriate indemnity protection for employment liabilities.
- Advised a leading international manufacturer of fresh prepared foods on the employment implications of outsourcing part of its laboratory testing services.
- Advised a media technology business on resisting the transfer of employees and employment liabilities from an outgoing contractor after winning a contract from a competitor.