Recent TUPE developments: frequently asked questions

Kate Brittin of Lewis Silkin considers some of the practical issues that parties involved in a transfer of an undertaking under the Transfer of Undertakings (Protection of Employment) Regulations 1981 need to consider.

What is due diligence?

Due diligence is the process of gathering information prior to negotiating the transfer contract. This is how the transferee seeking to take on a business, or purchase a company, checks out exactly what it is going to get. It can cover a huge range of categories of information relating to the business, including information relating to the workforce. The transferee usually undertakes to keep this information confidential.

What kind of employment information should the transferor give to the transferee?

The transferor (A) needs to give the transferee (B) a profile of the workers being transferred, eg their names; dates of birth; absence records; and dates continuous employment began. Details of workers' terms and conditions of employment such as salaries; commission, bonus and incentive plans; working hours; holiday and notice entitlements; benefits (PHI, health and life insurance, company car, pension rights); and copies of contractual and other documentation should also be included.

A will need to tell B about past redundancies. This is to alert B to any possible claims for enhanced payments based on custom and practice. Information on any pending legal claims or circumstances which might give rise to claims and details of outstanding disciplinary matters or grievances should also be disclosed.

Other information A needs to give to B includes details on:

accrued holiday entitlements, because transferring employees will often claim large amounts of accrued holiday which B might not be in a position to verify;

any pregnant staff;

any staff who may be disabled, as this might give rise to obligations to make adjustments to the workplace;

any employees in receipt of care under any private medical insurance scheme;

union recognition, staff representative bodies or relevant collective agreements;

any centrally negotiated pay mechanisms; and

recent dismissals or changes to terms and conditions of employment - liability for these may pass to B and the changes may be ineffective.

How might this information affect the deal?

B may want to re-negotiate the deal on the basis of something it has learnt from the due diligence process. This might involve a re-structuring, an alteration to the price, adding a particular warranty or indemnity (see below) and/or an apportionment of liabilities. For example, A might agree to share redundancy costs for a limited period.

What are warranties and indemnities?

A warranty is a statement in a legal agreement of a fact that can be relied on (and sued on) by the person to whom the statement is given.

An indemnity is, in effect, a promise to compensate for loss arising from a specified event.

What sort of warranties and indemnities might be included in the contract?

Warranties may state that the information supplied (including by way of due diligence) is accurate and comprehensive; that no employees other than those listed will transfer; and that all necessary information to enable the other party to comply with their respective information and consultation obligations has been supplied.

By way of indemnities, the transferor (A) may ask for an indemnity in respect of any claims brought by the transferring staff which arise out of the proposed transferee's plans; in the case of first generation outsourcing, an indemnity in respect of claims that arise during the transferee's (B's) contract, which comes into force on the expiry of the contractual term both in A's favour and in favour of successor contractors; an indemnity covering A for claims arising from its failure to inform and consult where that failure is due to B having given A inadequate information about 'measures' it proposed to take after the transfer.

B may ask for: an indemnity in respect of claims which had their source or origin before the transfer (eg dismissals, unpaid salary, discrimination claims, collective consultation claims); an indemnity in respect of claims by employees other than those whom A and B agree will be transferring to it; an indemnity in respect of claims arising out of the Transfer of Undertaking (Protection of Employment) Undertakings Regulations 1981 (the TUPE Regulations) if the parties have concluded that TUPE will not apply; and an indemnity for the costs of carrying out a redundancy programme necessitated by the transferor's overstaffing.

The parties will often agree an apportionment of liability for ongoing duties, eg A will agree to reimburse B for accrued holiday, wages, commission and bonuses up to the date of completion.

Are there any special terms that should be included in an outsourcing contract?

In outsourcing situations, the transferor (A) will invariably wish to control the transferee's (B's) activities during the contract to minimise potential liabilities and obtain the best price on a re-tendering exercise on the expiry of the contract. In addition to the indemnities referred to above, A might do the following.

Restrict B from changing the staff assigned to the contract, at least towards the end of the contract. If B suspects it might lose the contract, it may assign less desirable staff to work on it, so that they transfer back to A (if the service reverts in-house) or on to a successor contractor.

Restrict B from changing terms and conditions - either to protect transferring staff from detrimental change or to stop B from giving them a large pay rise immediately before they are transferred back to A (or a successor contractor) at the end of the contract.

Require B to provide necessary information to A or to tendering parties to enable them properly to compete with B in a re-tendering exercise.

Seek to ensure that the transferring staff are protected from the exclusion under theTUPE Regulations of occupational pension rights. A might wish to oblige B to provide equivalent pension benefits or to arrange for the employees to continue under A's own pension scheme (where possible).

Finally, the parties might wish to ensure that the TUPE Regulations do or do not apply upon the expiry of an outsourcing contract. A might, for example, require B to continue to employ all the staff notwithstanding the loss of the contract (although it is not clear that this will necessarily avoid the requirements of the TUPE Regulations). Alternatively, B might require A to enter into a contract with a new, incoming contractor in a form under which the TUPE Regulations will apply.

The parties to a transfer contract should always take account of the ever-moving scope of the TUPE Regulations and not assume courts and tribunals will continue to interpret it consistently with current case law.

The next topic of the week article will be the first in a series of articles on redundancy.

Kate Brittin is a member of the employment team at Lewis Silkin (Kate.Brittin@lewissilkin.com)

Further information on Lewis Silkin can be accessed at www.lewissilkin.com