The TUPE Regulations 2006: case study on service provision changes
Sue Nickson, Partner and International Head of Employment at Hammonds, continues her series of articles looking at the TUPE Regulations 2006 with a case study on service provision changes.
Scenario
The board of Harrisons plc has been reviewing the business and is now considering a number of options.
Harrisons would like to make cost savings by outsourcing the warehouse and distribution function. It has been in discussions with Freshco Ltd and Freshco has agreed to take on the employees and the lease of Harrisons' warehouse, at least in the short term.
Harrisons wants to streamline its group structure by moving the property development operation into Harrisons (Property Development) Ltd.
Harrisons is not doing as well as expected so it has been looking for a buyer. A potential buyer is keen to purchase the shares in Harrisons.
Harrisons' cleaning contract with Super Cleaners Ltd is due to expire in a few months. Although Super Cleaners has done a satisfactory job, Harrisons wants to see whether it could get a more competitive rate or whether it should consider taking the contract back in-house.
The proposed activities will not take place before the TUPE Regulations 2006 come into force on 6 April 2006.
What is a relevant transfer under the TUPE Regulations 2006?
The TUPE Regulations 2006 apply only to relevant transfers. A relevant transfer is where:
a business or the whole or part of an undertaking is transferred from one employer to another as a going concern (a 'business transfer'); or
a client engages a contractor to do work on its behalf or reassigns the contract, including bringing the work in-house (a 'service provision change').
These categories are not mutually exclusive; it is possible that some transfers (for example, many outsourcing situations) will qualify both as a business transfer and as a service provision change.
In determining whether a particular transaction amounts to a business transfer under the TUPE Regulations 2006, it is important to consider:
the type of undertaking involved;
whether any tangible assets are to be transferred (eg plant, building, vehicles and equipment);
the value of any intangible assets to be transferred and their significance (eg intellectual property, work in progress and know how);
whether the majority of employees are to be transferred;
whether any customers/clients are to be transferred;
the degree of any pre- and post-transfer similarity (eg size and administration);
the degree of 'stability' involved;
whether there will be any interruption or suspension in any activities pre- and post-transfer; and
what label will be attached to the transaction (ie is it being treated as a TUPE transfer?).
In determining whether a particular transaction amounts to a service provision change under the TUPE Regulations 2006, it is important to consider whether:
there will be a change in service provision (ie contracting-out, second generation contracting-out or contracting-in); and
immediately prior to the change, there was an organised grouping of employees dedicated to providing the service (ie an identifiable team of employees allocated to providing the service in question).
However, the Regulations will not apply:
where a client buys in services from a contractor in connection with a single specific event or for a task of short-term duration; or
where the arrangement is mainly for the procurement of goods rather than services.
What are the TUPE implications of Harrisons outsourcing its warehouse and distribution function to Freshco?
The outsourcing of the warehouse and distribution function is likely to qualify as a service provision change and a business transfer.
There are a number of factors that point towards it being a service provision change, namely that Harrisons proposes a change in service provision (contracting-out) and that currently (ie prior to the change) there seems to be an organised grouping of employees dedicated to providing the service. In addition, it appears that Harrisons is intending to enter into an ongoing relationship with Freshco (as opposed to a one-off event of short-term duration) and the arrangement is not mainly for the procurement of goods rather than services.
There are also a number of factors that point towards the proposed outsourcing being a business transfer, namely that:
there is a stable and discrete economic entity;
the employees in the warehouse and distribution function will transfer; and
the purchaser has agreed to take on the lease of Harrisons' warehouse.
The factors relating to the definition of a relevant transfer would also need to be considered (see above).
What are the TUPE implications of Harrisons transferring the property development operation to Harrisons (Property Development) Ltd?
Case law has shown that TUPE can apply to a business transfer between two companies within a corporate group (for example, Allan and ors v Amalgamated Construction Co Limited [2000] IRLR 119). Harrisons' property development operation would appear to be a stable and discrete economic entity and, if all employees, assets, etc transfer, this is likely to amount to a business transfer under the TUPE Regulations 2006.
Will the TUPE Regulations 2006 apply to the sale of Harrisons' shares?
The TUPE Regulations 2006 do not apply to a share sale since, in order for there to be a relevant transfer, there has to be a change in the identity of the employer. When a company's shares are sold to new shareholders the same company continues to be the employer and there is no transfer therefore within the meaning of the Regulations.
Will the TUPE Regulations 2006 apply if Harrisons' cleaning contract is moved from Super Cleaners to another contractor or brought back in-house?
This would appear to come within the definition of a service provision change; the TUPE Regulations 2006 have been designed to cover second generation contracting-out (the cleaning contract moving from Super Cleaners to another contractor) and in-sourcing (Harrisons taking the cleaning back in-house). However, in order to provide a definitive answer it would be necessary to consider how Super Cleaners has been providing the service. For there to be a service provision change under the TUPE Regulations 2006, there has to be an organised grouping of employees dedicated to providing the service immediately before the change. If different cleaners at Super Cleaners carry out the work on an ad hoc basis, it could be argued that there is no organised grouping of employees dedicated to providing the service. If, however, Super Cleaners has a team of allocated cleaners who provide Harrisons' cleaning on a regular basis, this would constitute an organised grouping of employees dedicated to providing the service and the definition in the TUPE Regulations 2006 would be satisfied (assuming the other conditions are also met).
Even if this transaction does not meet the definition of a service provision change, it is still likely to come within the definition of a business transfer.
Next week's article will answer frequently asked questions on the TUPE Regulations 2006.
Sue Nickson is Partner and International Head of Employment at Hammonds (Sue.Nickson@Hammonds.com)
Further information on Hammonds Solicitors can be accessed at www.hammonds.com
