Changing terms of employment when buying a business or providing outsourced services

27 February 2018

If you are buying or selling a business or outsourcing or insourcing a service, you should have come across TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006).

What is TUPE?

TUPE is a piece of UK employment law which applies in these types of transactions ('Transfers') and protects the employees of the business being sold or the services being outsourced. Under TUPE, these employees are entitled to transfer to the buyer or the outsourced service provider under the same terms of employment. TUPE does not usually apply on the sale or purchase of shares.

What are the risks of ignoring TUPE?

There are financial penalties of up to 13 weeks’ gross pay per affected employee, potential unfair dismissal claims, slowing down the transaction and potentially stalling it altogether.

The TUPE legislation is complex and can create difficulties when trying to change terms and conditions of employment after a Transfer. Below we examine some of these complexities and what practical solutions might be.

When can changes to terms be made?

If TUPE applies to your transaction, you can only usually make changes to terms of employment in the following circumstances:

  • if redundancies are needed after the Transfer;
  • if there is a change in workplace location after the Transfer; or
  • if the jobs of the affected employees will change after the Transfer (for example, they will no longer be managerial roles but will instead be administrative).

A common request made by buyers and outsourced service providers is to bring the transferring employees’ terms of employment into line with their existing employees’ terms (known as 'harmonisation'). Case law has outlawed this as unlawful and confirmed that employees will be entitled to reject such changes.

However, there are some commercial solutions to this problem.

  1. Do the existing contracts permit the change you would like to make? If so, you should be able to make them.

  2. Is the change needed for a reason unrelated to the Transfer? If so, it should be acceptable to make the change. An example of an unrelated reason is the sudden loss of a big contract after the Transfer.

  3. Are all the proposed changes for the transferring employees’ benefit? If so, this is allowed if the employees agree to them. 

  4. Are some of the proposed changes for the employees’ benefit and some to their detriment? If so, you could make the beneficial ones conditional on the employees accepting the detrimental ones. This means that, if they challenge the enforceability of the detrimental ones, they’ll risk losing the beneficial ones and so are less likely to do so.

It is important to know what you are taking on

Before entering into a transaction, it is essential to do your due diligence to establish:

  • whether TUPE will apply;
  • the number of employees transferring;
  • their terms of employment;
  • their length of service; and
  • the liabilities that attach to them.

Only then will you know the true cost of the workforce you are likely to be taking on and the terms you may be bound by.

If you have any concerns about TUPE applying to your transaction or the effect of TUPE applying, please contact Carolyn Brown, Charlie Barnes or your usual RSM contact.