TUPE - what are the risks for private healthcare businesses

If you are buying or selling a healthcare business, or outsourcing or insourcing a service to the private healthcare sector, you will acquire or divest the people who work in that business or the provision of the service. Therefore, you need to be aware of the workforce protections included in the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and how this can impose costs which override commercial deal terms.

What is TUPE?

TUPE is UK employment law that applies in these types of transactions (‘Transfers’) and protects the rights of the employees in the business being sold or the services being outsourced. Under TUPE, these employees are entitled in summary to transfer to the buyer or the outsourced service provider on the same terms of employment. TUPE does not usually apply on the transfer of the shares in a company because the employer remains the same.

What are the risks of ignoring TUPE?

These range from:

• financial penalties of up to 13 weeks’ gross pay per affected employee for a failure to consult;
• potential unfair dismissal claims; 
• liability transfer risk slowing down the transaction and potentially stalling it altogether.

The TUPE legislation is complex and can create real difficulties if the transferee plans to change the terms and conditions of employment of the transferring workforce after a Transfer. We examine some of these complexities and what the 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 if:

• redundancies are needed after the Transfer;
• there is a change in workplace location after the Transfer; or
• 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 established that this is 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 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.

Here is an example of how an acquirer was recently caught out due to this principle and the extent to which it applies.

Recent Employment Appeal Tribunal case highlights risks around application of TUPE for private healthcare sector transactions

UK employment law, often known by the acronym TUPE, protects the rights of employees of a business being transferred or a service being outsourced or insourced. Under TUPE, these employees are entitled in summary to transfer to the buyer or the outsourced/insourced service provider on the same terms of employment.

There are exceptions to the broad rule of replicating terms; in the case of pension provision in certain types of employer-provided pension scheme and where terms cannot continue to apply, eg enjoying benefits under an employee share scheme where the requirement is to provide a benefit of substantial equivalence after the transfer has taken place.

However, private healthcare businesses need to ensure they give clarity to the transferred workforce in terms of the benefits they will provide particularly, as often happens in our sector, where there are workforce transfers both between private companies and from the public sector.

The recent Employment Appeal Tribunal case of Amdocs Systems Group Limited v Langton concerned the contractual entitlement to income protection payments during long term sickness absence.

Here, it was decided the summary of income protection payments benefits originally provided to the employee contained terms that were clear and certain, and objectively intended to be incorporated into the employment contract. As such, they conferred a contractual entitlement. When the new employer sought to limit its obligation to that employee to the amount of the insurance cover it held to meet that benefit, the employee’s claim for unlawful deduction of wages was successful. In the Tribunal’s view, there was no implied limitation of the employer’s obligation by reference to the extent of its insurance cover based on an appeal to commercial common sense. Instead, the new employer was bound by its inherited commitment to the employee.

Therefore, very careful due diligence as to the cost of employment obligations is required when acquiring a business or bidding for a contract. Active steps must then be taken to ensure those costs are mitigated on the rare occasions that contract changes are permissible after such a TUPE workforce transfer.

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