 The new TUPE Regulations were designed to improve the old legislation on outsourcing. Barry Mordsley (left) and James Davies consider whether the Regulations have been successful since their introduction in 2006
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (the new TUPE Regulations), which came into force on 6 April 2006, put on a statutory footing the concept that certain rights of employees should be protected when business functions are outsourced from one company to another. 

Previously, this protection had developed on a somewhat piecemeal basis by the English courts and, more often, by the European Court of Justice (ECJ). It was derived from the Transfer of Undertakings (Protection of Employment) Regulations 1981 (the old TUPE Regulations), under which employment rights were protected when a business, undertaking, or part of a business or undertaking, was transferred to a third party. 

The old TUPE Regulations introduced three key concepts into English employment and industrial relations law that still remain in place today:

However, when the old TUPE Regulations came into effect on 1 May 1982, outsourcing was in its infancy. Companies still directly employed cleaners and schools employed their dinner-ladies. However, by the early 1990s, there was a surge in outsourcing arrangements covering every conceivable business function or service. 

These outsourcing arrangements did not sit easily within the concept of a transfer of a business or undertaking. The Acquired Rights Directive 2001/23/EC (the Directive) was conceived with more traditional mergers and acquisitions in mind or, in other words, the sales of businesses or assets. 

Thus a growing number of outsourcing contracts were won at the cost of the in-house employees. This was at odds with the primary objective of the Directive, from which the old TUPE Regulations were derived, which was to safeguard employees’ rights on the change of the identity of an employer. This was demonstrated in the 1990 ECJ cases of Dr Sophie Redmond Stichting v Hendrikus Bartol & ors [1992] and Anne Watson Rask and Kirsten Christensen v Iss Kantineservice A/S (Social policy) [1992], and came to a head in Ayse Suezen v Zehnacker Gebaudereinigung GmbH Krankenhausservice [1997].

Protection for employees in outsourcing arrangements was achieved under the old TUPE Regulations by stretching the definition of a transfer of a business or undertaking. However, even the ECJ, applying a purposive interpretation of the Directive, could not stretch the definition quite so far as to cover outsourcing agreements per se. Thus, for the Directive to apply, the outsourcing arrangement required, among other things, a transfer of either:

- significant tangible or intangible assets; or

- a major part of the workforce in terms of numbers and/or skill.

The English courts, however, had never been wholly satisfied with the compromise struck by the ECJ in Ayse Suezen . In particular, it was clear that many employers were deliberately trying to avoid the old TUPE Regulations so as to deprive employees of protection under it. 

A new Directive was implemented in 2001 by the UK government in the TUPE Regulations 

Consequently, the UK government took the opportunity of the new TUPE Regulations both to implement several changes that were required by a revised Directive in 2001 and to address directly the issue of outsourcing. This included both consolidating the existing case law relating to outsourcing and widening the scope of the application of the TUPE Regulations expressly to include outsourcing arrangements.

The new TUPE Regulations therefore go beyond what is required to implement the 2001 Directive. The result of this is that, unusually, the protection afforded to English employees is more extensive than that offered to their European neighbours by their respective domestic legislation. 

New TUPE Regulations and Outsourcing 

Service provision change

The new TUPE Regulations apply to a relevant transfer. This still includes the transfer of a business, undertaking, or part of a business or undertaking, where there is a transfer of an economic entity that retains its identity (a business transfer). However, it also expressly includes a service provision change, ie outsourcing.

Regulation 3(1)(b) defines such a service provision change as a situation in which:

- activities cease to be carried out by a person (a client) on his own behalf and are carried out instead by another person (a contractor) on the client’s behalf (first occasion of outsourcing); 

- activities cease to be carried out by a contractor on a client’s behalf, whether or not those activities had previously been carried out by the client on his own behalf, and are carried out instead by a subsequent contractor on the client’s behalf (from first occasioned outsourced provider to new outsourced provider, known as second generation); or

- activities cease to be carried out by a contractor or a subsequent contractor on a client’s behalf, whether or not those activities had previously been carried out by the client on his own behalf, and are carried out instead by the client on his own behalf (bringing back in-house).

Three conditions must be satisfied for the service provision change clauses to apply.

First, there must be an organised grouping of employees situated in Great Britain, immediately before the service provision change, whose principal purpose is carrying on the relevant activities on behalf of the client. 

Secondly, that the client intends that the activities will, following the service provision change, be carried out by the contractor other than in connection with a single specific event or task of a short-term duration.

Thirdly, that the activities concerned do not consist wholly or mainly in the supply of goods for the client’s use.

Drafting Points in Outsourcing Agreements 

There are several interesting points to be noted about the definition of a service provision change and the conditions that must be satisfied for the service provision change clauses to apply. 

First, that the definition of a service provision change extends beyond a first-generation outsourcing agreement from a client to contractor. It also covers any subsequent re-tendering (second generation) and bringing the service back in-house. All of these possibilities need to be addressed in the outsourcing agreement, which should contain entry and exit provisions. In many respects the exit provisions relating to the termination of the services and their subsequent transfer to either a new contractor or back in-house to the client are the most critical. For example, requiring the current contractor not to increase the pay of the outsourced staff, nor to dump poor performing employees into the outsourcing section. Failure to address exit conditions therefore leaves the client potentially exposed to a legal risk when the agreement is terminated and also significantly weakens its bargaining position when it seeks to negotiate a subsequent agreement with a third party.

Secondly, the condition that there is an organised grouping of employees whose principal purpose is the carrying on of the activities, and also the absence of any requirement that the organised grouping retains its identity after the service provision change.

In respect of this, the new TUPE Regulations expressly state that an organised grouping can be a single employee. Also, the Department for Business Enterprise & Regulatory Reform (BERR) guidance on the new TUPE Regulations indicates that ‘principal purpose’ means that the employees must be essentially dedicated to the relevant activity. 

Unfortunately, there is no guidance on how much time must be spent on an activity for an employee to be essentially dedicated to it. Although not binding, the employment tribunal in Hunt v Storm Communications Ltd [2006] found that an employee who spent 70% of her time undertaking public relations work on one client account was ‘essentially dedicated’ to that activity. Thus, when the account was won by a competitor public relations firm, Hunt’s employee transferred to it by operation of the TUPE Regulations.

The organised grouping-principal purpose condition gives either the client or an outgoing contractor considerable scope to configure the employees who provide the service in such a way as either to come within, or fall outside of, the ambit of the outsourcing provisions. For example, prior to losing a contract, a contractor might reorganise its workforce so that employees who were previously providing non-dedicated services to several clients are re-grouped to provide a dedicated service in respect of the contract that is about to be lost. 

More alarmingly, such a contractor might assign its underperforming employees to the organised grouping so as to off-load them on the incoming service provider. These are matters that should have been dealt with in the exit provisions of the original outsourcing agreement.

Application of the New TUPE Regulations

If the outsourcing agreement satisfies the requirements for the new TUPE Regulations to apply, all of those employees who are assigned to the organised grouping of resources will automatically transfer to the contractor. If this is the case, the same principles will apply to the service provision change as would apply to a business transfer.

Essentially, this means that the client’s employees assigned to the organised grouping will become employees of the contractor. Further, the contractor will assume all of the client’s rights and liabilities in relation to them and also liability in respect of any act or omission of the client before the service provision change. 

Provided that the employee has 12 months’ qualifying service, any dismissal either before or after the service provision change will be unfair if the reason or principal reason for the dismissal is the transfer itself or a reason connected with the transfer that is not an economic, technical or organisational (ETO) reason entailing changes in the workforce. 

Similarly, any variation of terms of employment either before or after the service provision change will be void if the sole or principal reason is the transfer itself or a reason connected with the transfer unless it falls within the ETO exemption. 

Summary

The new TUPE Regulations finally achieve the protection for employees originally envisaged, and indeed go further than the new 2001 Directive requires. In many respects this is to be welcomed, as it provides greater legal certainty. Legal certainty enables businesses to make decisions with better knowledge of the risks and attendant costs. As set out above, businesses are still able, through the contractual documentation when entering into an outsourcing arrangement, to decide between themselves where those risks will ultimately lie. 

By Barry Mordsley, partner, and James Davies, associate solicitor, employment group, Salans.

E-mail: bmordsley@salans.com; jdavies@salans.com.
Ayse Suezen v Zehnacker Gebaudereinigung GmbH Krankenhausservice [1997] EUECJ C-13/95

Hunt v Storm Communications Ltd and Wild Card Ltd and Brown Brothers Wines 2702546/06 (ET)

Dr Sophie Redmond Stichting v Hendrikus Bartol & ors (Social policy) [1992] EUECJ C-29/91
