Service provision changes and TUPE

These are all factors in the overall assessment that must be made and cannot, therefore, be considered in isolation.

The ECJ subsequently made it clear in the specific context of outsourcing that the mere loss of a contract by a contractor providing services to a client was not a transfer of an undertaking. In Süzenv Zehnacker Gebäudereinigung GmbH Krankenhausservice and Lefarth GmbH [1997] IRLR 255, it stated that what is required, over and above a mere changeover of service provider, is a concomitant transfer of tangible or intangible assets from the old service provider to the new service provider, or the taking over by the new service provider of a major part of the old service provider's workforce in terms of numbers and skills.

The test meant that it could never be stated with any certainty, in any particular outsourcing case, if TUPE was applicable. Whether or not it applied depended on whether or not there was a transfer of assets or the taking over of a major part of the workforce. Many service provision changes involve "labour intensive" industries - such as cleaning, maintenance and security - where it is rare for assets to change hands between respective service providers. In such cases, whether or not there was a transfer depended on whether or not the new service provider was willing to take over a major part of the old service provider's workforce in terms of numbers and skills. In effect, the new service provider - sometimes in liaison with the client - could determine if TUPE applied by deciding whether or not to take on the old contractor's staff. Many questioned if this was truly within the spirit of the Acquired Rights Directive, the purpose of which is to protect employees' rights on transfers, and which the TUPE Regulations are supposed to implement. From an analytical point of view, Süzen laid down what was essentially a circular test: whether or not employees had the right to transfer was dependent on whether or not, in the end, they did transfer.

Adding to the problem was the difficulty, on occasion, in distinguishing between a "labour-intensive" service provision and an "asset-reliant" service provision. If a service provision was the former, whether or not the workforce was taken over was critical to the existence of a transfer. If it was the latter, whether or not there was a transfer was dependent on the transfer of assets. Sometimes, however, the performance of a service contract is not easily categorised as either "asset reliant" or "labour intensive". In a case before the ECJ, Abler and others v Sodexho MM Catering Gesellschaft mbH and Sanrest Großküchen [2004] IRLR 168, the Court ruled that a catering service that had changed hands between contractors after the client had put the contract up for re-tender was an "asset-reliant" function. However, the case could have swung either way. In this kind of borderline case there were difficulties in practice in deciding which factor - assets or people - was more important, and how the decision about whether or not TUPE applied should be made.

Departing from the European model

Although the legal test referred to above was developed by the ECJ, and still applies in EU countries that have continued to apply this definition of a transfer in deciding whether or not outsourcing is covered by their domestic legislation, it is possible for member states to choose to depart from the definition, so long as, in so doing, workers are no less well, or better, protected (art. 8).

The UK government took preliminary steps towards this possibility by enacting s.38 of the Employment Relations Act 1999, which allows legislation to deem transactions that would not be transfers under Community law to be transfers under the domestic legislation. Mindful of the legal uncertainties in the ECJ test, it decided, when drafting the new TUPE Regulations 2006 to use this power and create two definitions of a transfer. Regulation 3(1)(a) of the TUPE Regulations 2006 applies to all transfers other than an outsourcing or service provision change. The test remains whether or not there is a transfer of an economic entity that retains its identity. This definition would apply to the sale of a business, for example.

However, in relation to outsourcing or service provision changes, the government decided that there should be a new, extended definition of a transfer of an undertaking. The intention behind this was to: reduce the uncertainty in the law; insulate the parties to service provision changeovers from the effects of the ECJ jurisprudence; and create a level playing field, so that contractors' bids for services would be based on their commercial merits, rather than on their differing views of employees' rights.

The new, supplementary, definition of a transfer on a service provision change in reg. 3(1)(b) provides that, so long as service activities cease by one person (the transferor) and are taken up by a new person (the transferee), and, prior to the changeover, there was an organised grouping of employees, the principal purpose of which was to carry out those activities on behalf of the client, there will be a transfer.

Regulation 3(1)(b) covers client to contractor, contractor to contractor, and contractor to client changeovers. For these purposes, "contractor" includes "sub-contractor" (reg. 2). A reference to an "organised grouping of employees" includes a "single" employee (reg. 2).

Exclusions

The new extended definition of the transfer of an undertaking on a service provision change does not apply:

Both these exclusions lead to difficulty in interpretation. In relation to the first point, the exclusion could have been more clearly drafted. Does the exclusion apply where there is a single specific event (of whatever duration) or task of short-term duration, or where there is a single specific event of short-term duration or a task of short-term duration? Either interpretation is possible, although the government guidance (PDF format, 163K) (on the DBERR website) suggests that the latter interpretation, which is clearly preferable, is correct.

The guidance gives the following example:

"To illustrate this point, take the example of hypothetical contracts concerning the security of an Olympic Games or some other major sporting event. The first contract concerns the provision of security advice to the event organisers and covers a period of several years running up to the event; the other concerns the hiring of security staff to protect athletes during the period of the event itself. Both contracts have a one-off character in the sense that they both concern the holding of a specific event. However, the first contract runs for a significantly longer period than the second; therefore, the first would be covered by the TUPE Regulations (if the other qualifying conditions are satisfied) but the second would not."

The guidance gives another example of when the Regulations would not apply:

"The Regulations should not be expected to apply where a client engaged a contractor to organise a single conference on its behalf, even though the contractor had established an organised grouping of staff - eg a "project" team - to carry out the activities involved in fulfilling that task. Thus, were the client subsequently to hold a second conference using a different contractor, the numbers of the first project team would not be required to transfer to the second contractor."

In relation to the second point regarding the supply of goods for the client's use, it is not clear why it was considered necessary to exclude from the supplementary definition of a TUPE transfer a contract for the procurement of goods. If, for example, employees of a supplier of widgets are organised by their employer in a dedicated fashion to supply those goods to a customer, and the customer subsequently terminates their employer's contract and sources the goods from a new supplier, why should they not be protected under TUPE? It should, however, be noted that, although this situation is exempt from the supplementary service provision definition of a transfer, it might still qualify as a relevant transfer under the standard definition if there was a transfer of an economic entity retaining its identity.

The government guidance (PDF format, 163K) (on the DBERR website) gives an example of how this exclusion is intended to operate:

"The Regulations are not expected to apply where a client engages a contractor to supply, for example, sandwiches and drinks to its canteen every day, for the client to sell to its own staff. If, on the other hand, the contract was for the contractor to run the client's staff canteen, then this exclusion would not come into play and the Regulations might therefore apply."

However, difficult arguments will arise when the contract is a mixed one for the supply of goods and services - for example, for computer hardware installation and subsequent support. The issue will turn on the question of whether or not the activities consist "wholly or mainly" of the supply of goods - not a straightforward issue in some cases.

Professional services

The government originally intended that service provision changeovers of "professional services" were to be excluded. This provision was, however, dropped from the TUPE Regulations 2006. The first tribunal case on reg. 3(1)(b) (Hunt v (1) Storm Communications Ltd (2) Wild Card Public Relations Ltd (3) Brown Brothers Wine (Europe) Ltd ET/2702546/06 - discussed below) involved precisely such a changeover of professional services.

Innovative bids

The standard definition of a TUPE transfer requires the transfer of an economic entity that "retains its identity". However, for the extended service provision changeover definition it is sufficient that the "activities" cease to be carried out by one person and are carried out in the future by another. This supports the government's intention, in drafting the TUPE Regulations 2006, no longer to exclude cases where the incoming service provider envisages carrying out the service activities in a new or "innovative" manner. Although an "innovative bids" exception was floated, it was abandoned because requiring the new service provider to take on all the employees might encourage retention and retraining by the transferee of any employees lacking the skills required for the new contract. If innovative bids had been excluded under TUPE, such employees would, in all likelihood, have been made redundant by the original employer. In addition, treating all contractors, including those making "innovative bids", on an equal footing should contribute to the key policy objective of creating a level playing field in tendering exercises, with increased certainty for all concerned in the transfer process.

The extended definition in practice

As discussed above, under the provisions of the TUPE Regulations 1981, whether or not there was a transfer of an undertaking on a service provision change was dependent on the test in Süzen: whether or not there was a transfer of significant tangible or intangible assets or the taking over by the new employer of a major part of the workforce in terms of numbers and skills. Under the TUPE Regulations 2006, it is the mere service provision changeover that triggers TUPE, so the new contractor does not have the ability to decline to take on the employees of the previous contractor. All members of staff who are assigned to the organised grouping of employees dedicated to providing the service to the client will transfer to the new contractor.

Whether or not an employee is assigned to the particular contract for a client depends on the facts in the case. Sometimes it is helpful to look at the percentage of time spent by a contractor's employee on a particular client contract. If the majority of the employee's time is spent servicing a particular client, it is likely that the employee will be assigned to the contract and therefore transfer on the service provision change (see The first tribunal case under reg. 3(1)(b)). However, the percentage of time spent on a particular contract is not the sole determinant, and the terms of the employment contract must also be considered. An employee who is temporarily assigned to the client will not transfer. Neither will members of a contractor's staff who are engaged on a number of assignments, simply because they spend some of their time on the service that is changing hands. Likewise, a contractor's head office staff - a finance director or HR manager, for example - will not transfer: although, in the snapshot of time before the service provision change, they may have been spending a significant part of their time on the contract being transferred, they are not employed to look after a single contract.

The TUPE Regulations 2006 also attack a client's flexibility to change poorly performing staff on a contract. If the service provision changeover definition of a transfer applies, poorly performing members of staff have the right to transfer from the old contractor to the new contractor, while other European countries whose domestic legislation is still drafted in conformity with Süzen retain the flexibility to change poorly performing staff in similar circumstances.

If TUPE applies, there is still relatively little scope to change the employment terms of the transferring employees. Under European law, it is settled by Foreningen af Arbejdsledere i Danmark v Daddy's Dance Hall A/S [1988] IRLR 315 that a variation of employment contracts by reason of the transfer is void, a rule carried forward into reg. 4(4) of the TUPE Regulations 2006. Any purported variation of the employment contract where the sole or principal reason for the variation is the transfer itself is void. Although reg. 4(5) allows a variation where the employer can show an economic, technical or organisational (ETO) reason entailing changes in the workforce, the courts have held that, for an ETO reason to apply, there must be a change in the number or composition of the workforce, ie a reduction in workforce numbers. When employers seek to change uneconomic terms and conditions of employment after a transfer, they are generally seeking to retain the same workforce but on lower rates of pay. In such cases, there would be no ETO reason entailing changes in the workforce, because the workforce numbers would remain the same. The TUPE Regulations 2006 do not, therefore, materially assist employers in changing uneconomic terms and conditions of employment that they inherit following a service provision change.

As the government guidance (PDF format, 163K) (on the DBERR website) says: "The desire to achieve 'harmonisation' is by reason of the transfer itself. It cannot therefore constitute 'an ETO reason connected with a transfer entailing changes in the workforce'."

It also makes clear that there is no particular time period after which it will be "safe" for the new employer to vary contracts: "There is likely to come a time when the link with the transfer can be treated as no longer effective. However, this must be assessed in the light of all the circumstances of the individual case, and will vary from case to case. There is no 'rule of thumb' used by the courts or specified in the Regulations to define a period of time after which it is safe to assume that the transfer did not impact directly or indirectly on the employer's actions."

One question that often arises in relation to service provision changes is whether or not it makes any difference to the application of TUPE if, after a contract has changed hands, the service is intended to be carried out in a different geographical location. There was some argument under the TUPE Regulations 1981 that a dramatic change in geographical location might mean that TUPE did not apply, because the provisions of the TUPE Regulations 1981 depended in all cases - including outsourcing - on whether or not there was a transfer of an economic entity retaining its identity. Thus, it was argued that if the new geographical location of delivery of the services was dramatically different from the old geographical location, the change might be such as to change the identity of the economic entity. However, while this argument might have some credence if there were, for example, a transnational transfer, the case law suggests that a change in the geographical location from which services are to be provided did not disapply the provisions of the TUPE Regulations 1981. For example, in Skittrall and others v Camden Primary Care Trust and another [2005] All ER (D) 205 (Jul) EAT, an arrangement for the delivery of a university course in podiatry changed hands between University College London and the University of East London. Lecturers who were reluctant to transfer disputed there was a TUPE transfer, one of the grounds for their objection being the change in the geographical location where the services were performed from Bloomsbury in central London, to Stratford in east London. However, the EAT held that the geographical relocation did not alter the identity of the transferring undertaking. Likewise, in Germany, the Federal Labour Court held in the 2003 Englischer Dienst case that the transfer of an electronic news service from Germany to Ireland did not alter the identity of the transferring economic entity for the purposes of the German law on transfers of undertakings. This was because the electronic news service could be carried out using modern technology and the geographical location was immaterial.

In contrast to reg. 3(1)(a), reg. 3(1)(b), the provision in the TUPE Regulations 2006 that deals with service provision changes, does not contain the condition that, on the service provision change, the service must retain its identity. It is enough that service activities cease to be provided by one person and are, thereafter, provided by another. Therefore, if there is a geographical change of provision of the service, this is unlikely to stop TUPE applying.

The new Regulations - a different outome?

There are undoubtedly some service provision changeover cases decided under the TUPE Regulations 1981 that would have been decided differently under the TUPE Regulations 2006.

One such case is Swanton and others v Computacenter (UK) Ltd [2004] All ER (D) 211 (Nov), in which the EAT applied Cheesman and others v R Brewer Contracts Ltd [2001] IRLR 144 and Süzen and found that, although there was an economic entity to transfer, it was not transferred from transferor to transferee.

IBM held the head contract with Lloyds TSB Bank plc to provide computer maintenance services to the bank. It subcontracted with Specialist Computer Centres plc (SCC), under which contract SCC undertook to service computers that were subject to a manufacturer's warranty, although it was later agreed that it would also cover computers that were out of warranty. The employment tribunal found that SCC had eight employees specifically designated to the contract: a service delivery manager, five on-site engineers and two call administrators.

In October 2002, IBM gave notice of termination of the contract with SCC. SCC unsuccessfully re-tendered for the contract, which was given to Computacenter. The contract was in all material respects identical to the SCC contract, save for two aspects. First, the Computacenter contract specifically included out-of-warranty work and second, SCC's contract provided that there would be a dedicated service-delivery manager, whereas Computacenter had to provide only a nominated service-delivery manager. The employment tribunal found there was a stable economic entity in the hands of SCC whose activity was not limited to performing a specific works contract. There was an organised group of employees who were specifically and permanently assigned to the common task of repairing Lloyds TSB computers. This amounted to an undertaking for the purposes of TUPE. As to the contracts between IBM and SCC and IBM and Computacenter, the tribunal concluded that the differences in the contracts were not of any real significance.

Importantly, none of SCC's employees were taken on by Computacenter. However, the tribunal did not regard this as a significant factor, as the reason for this was that Computacenter did not believe that there was a transfer of an undertaking so did not consider itself obliged to employ any of SCC's employees. Looking at the picture as a whole, the tribunal concluded that there had been a transfer of an undertaking that retained its identity.

The EAT agreed that there was a stable economic entity in the hands of SCC that was capable of being transferred. However, it disagreed with the tribunal on the issue of whether or not there had been a transfer. No resources were identified as being part of either the SCC contract or the Computacenter contract, and there was no contractual link between SCC and Computacenter. No employees or assets were transferred, and there was no finding that Computacenter had in any way deliberately not taken on the SCC employees to avoid its obligations under the TUPE Regulations. Accordingly, the tribunal decision that there was a transfer had to be reversed.

This case would now clearly fall under reg. 3(1)(b) of the TUPE Regulations 2006. The EAT had found specifically that the employees concerned were all dedicated to the service being provided to the client. That being the case, this would now be sufficient to trigger the provisions of reg. 3(1)(b).

The view of the new contractor as to whether or not it was required to take on the previous contractor's staff would not now be relevant. Under the TUPE Regulations 2006, the new contractor would have no choice.

In Balfour Beatty Power Networks Ltd and another v Wilcox and others [2006] IRLR 258 Western Power Distribution outsourced a number of services to Hyder. The litigation concerned two contracts that came to an end in 2001 when Hyder was unsuccessful in bidding for their renewal. One was a "jointing contract", which involved services for joining electric cables, and was awarded to Balfour Beatty. The other contract (the "RASP" contract) was awarded to Interserve Industrial Services Ltd. Each contract had been operated by Hyder as a separate entity, with its own dedicated employees, contract supervisor, foreman and administration. An employment tribunal considered that in both instances there had been the transfer of a stable economic entity retaining its identity to the respective transferees.

Balfour Beatty appealed in relation to the jointing contract, arguing that there was no economic entity as there was no identifiable element of work that could be said to belong to Hyder, and that the work was not sufficiently unique or self-standing to be an identifiable economic entity. In addition, it argued that the contract did not give Hyder any exclusive right to jointing work within a prescribed area and there was no guarantee of continuity of work. The work could dry up at any moment or be contracted out to another company. Balfour Beatty argued that, as this was a "defeasible" contract, there could be no transfer of a "stable" economic entity. The EAT rejected this, saying that to do otherwise would have the effect of encouraging employers to draft contracts so that they were "defeasible" in nature to avoid TUPE. Whether or not there was a transfer should be determined by reference to the wording of the Acquired Rights Directive and not other canons of legal interpretation. The EAT took the same view in relation to the RASP contract taken over by Interserve.

The employment tribunal had also characterised the jointing contract as "labour intensive". Balfour Beatty argued that this was wrong and the contract relied on significant plant and equipment. The fact that the plant and equipment used by the transferor was leased, and could not therefore transfer, prevented the transfer of an undertaking. The EAT disagreed. In a case where a transferor chooses to lease, rather than to own, the equipment, it is not of critical importance that the leases are not transferred over to the transferee, if the transferee then leases similar equipment.

However, the EAT allowed Balfour Beatty's appeal on the ground that there had been an inadequate finding by the employment tribunal that sufficient numbers of employees to amount to a major part of the workforce had transferred to Balfour Beatty. The case was therefore remitted to another employment tribunal on this point.

As far as the RASP contract was concerned, there was evidence that 13 out of 26 designated workers had been taken on by Interserve, and Interserve argued that this was only half and not a majority of the workforce. However, the EAT held that this approach focused too closely on the word "majority" and not on the sense of ECJ decisions that have emphasised a more expansive approach to the expression "major part" of an undertaking in terms of the numbers and skills of the workers taken on. Moreover, in this case the evidence suggested that there could have been either 25 or 28 people in the undertaking, so it was at least open to the employment tribunal to find that a numerical majority had transferred.

The Court of Appeal upheld the EAT's decision, and agreed with its reasoning.

If the facts of Balfour Beatty were to arise now that the TUPE Regulations 2006 are in force, the question would be whether or not there was a service provision change, immediately prior to which there had been an organised grouping of employees that had as its principal purpose the carrying out of the activities concerned on behalf of the client. It would, in such circumstances, be much more likely that there would be a TUPE transfer, without the need to make fine distinctions between asset-reliant and labour-intensive undertakings. Cases like this will no longer hinge on the question of whether or not a majority of employees have actually been taken on by the new employer.

The first tribunal case under reg. 3(1)(b)

The first tribunal case on reg. 3(1)(b) of the TUPE Regulations 2006 was Hunt v (1) Storm Communications Ltd (2) Wild Card Public Relations Ltd (3) Brown Brothers Wine (Europe) Ltd ET/2702546/06, a case on changeover of professional services.

Storm Communications is a public relations services provider. Brown Brothers Wines was its client. In June 2006 Brown Brothers gave Storm notice that it was re-tendering for the provision of its public relations services. Storm lost the pitch and the work went to Wild Card with effect from 1 September. The case is especially interesting because the employment tribunal found that there was no relevant transfer under the standard (reg. 3(1)(a)) definition of a transfer, but that there was a transfer under the new service provision definition (reg. 3(1)(b)).

The claimant, Ms Hunt, was employed as an account manager. Her job description made no specific references to any particular client. However, she started working on the day-to-day management of the Brown Brothers account from the outset of her employment and continued to do so without interruption until she ceased working for Storm. Storm had a specific structure in place for providing services to a client. Each client had an account director, an account manager and an account executive. The account director on the Brown Brothers account left to set up her own consultancy business (and Brown Brothers continued to use her in that respect). Ms Hunt's evidence was that she spent some 70% of her working time each year on the Brown Brothers account, and that this never fell below 50% in any one month. There was also evidence of unrecorded and weekend time. Although the evidence about the time commitment was largely oral, it was accepted by the employment tribunal.

When the account changed hands and Wild Card took over, Storm was of the view that TUPE applied and that Ms Hunt would transfer to Wild Card. This was disputed by Wild Card, largely on account of a difference of view about the amount of time that Ms Hunt was spending on the Brown Brothers account. In the end, Wild Card took the view that Ms Hunt did not have the right to transfer under TUPE. Her employment with Storm was therefore terminated with no offer of employment from Wild Card, and Ms Hunt had no alternative but to apply to the employment tribunal to resolve the issue.

The employment tribunal was invited to consider both reg. 3(1)(a) and reg. 3(1)(b). In considering the law under reg. 3(1)(a) and, in particular, Cheesman, it found that there was no transfer of an economic entity retaining its identity. There was no structured or autonomous undertaking for the purposes of a transfer of an undertaking, and the work that the claimant undertook for Brown Brothers as a single employee did not amount to an economic entity (although in light of ECJ cases such as Schmidt v Spar- und Leihkasse der Früheren Ämter Bordesholm, Kiel und Cronshagen [1994] IRLR 302, in which the Court held that a single cleaner could comprise an "economic entity", this is somewhat questionable).

However, the tribunal had no difficulty in finding that there was a service provision change under reg. 3(1)(b). Undoubtedly there was a change of service provider as envisaged by the TUPE Regulations 2006, as the services for Brown Brothers had ceased to be provided by Storm, and were thereafter provided by Wild Card. The only question was whether or not prior to this service provision change there was an organised grouping of employees, the principal purpose of which was to provide the services to the client as required by reg. 3(3)(a), a pre-condition for the operation of reg. 3(1)(b). The former account director who had left to set up a consultancy could not be counted in any organised grouping of employees because she was, by then, an external self-employed consultant. Ms Hunt had help from an account executive but the account executive was not dedicated to the Brown Brothers account: she worked for a number of other clients as well. However, the tribunal found that, given her dedication to the account (70% of her time being spent on it), Ms Hunt was an organised grouping of employees, and the conditions in reg. 3(3)(a) were therefore satisfied.

This feature was contributed by Dr John McMullen, partner and head of employment law at Watson Burton LLP and professor of labour law at the University of Leeds (john.mcmullen@watsonburton.com ).