TUPE: case study

Alice Townley Smith of Steeles (Law) LLP continues a series of articles on TUPE with a case study about an employer that decides to contract out a service. Whether or not TUPE applies, and the effect of TUPE on employees, is examined.

Assembly Point Ltd, a car manufacturing company, opens a small coffee shop for its employees in one of its factories. The coffee shop employs two members of staff: Martha the manager and Sam her assistant.

After two years it becomes apparent that it would be more economical for Assembly Point Ltd to outsource the coffee shop. It chooses Cuppa Coffee as the contractor. Cuppa Coffee has several coffee shops in the UK, employing 75 employees. The employees in Cuppa Coffee's other coffee shops are paid less than Martha and Sam are paid by Assembly Point Ltd, and have fewer days' holiday. Cuppa Coffee wishes to harmonise Martha and Sam's terms and conditions with its other employees' terms. Once it has taken over responsibility for running the coffee shop it writes to Martha and Sam explaining that it wishes to vary their terms and conditions.

Can Cuppa Coffee vary Martha and Sam's terms and conditions?

Changes to terms and conditions are void under reg. 4(4) of TUPE if the sole or principal reason for the changes is either the transfer itself, or a reason connected with the transfer that is not an economic, technical or organisational (ETO) reason entailing changes in the workforce. A Guide to the 2006 TUPE regulations for employees, employers and representatives (PDF format, 175K) (on the BERR website) makes clear that changes to terms and conditions, made to harmonise the transferring employees' terms of employment with existing employees' terms, will amount to changes because of the transfer. Therefore, if the reason for reducing Martha and Sam's pay and holiday entitlement is to bring about harmonisation, these changes will be void and unenforceable, even if Martha and Sam agree to them.

When Cuppa Coffee has been running the coffee shop for eight months, Assembly Point Ltd decides that there have been too many complaints regarding the quality of the coffee and gives Cuppa Coffee notice that it will be re-tendering the coffee shop contract. Cuppa Coffee pitches for the new contract, but Assembly Point Ltd awards it to Splendid Coffee.

Sam used to be employed by Splendid Coffee before he worked for Assembly Point Ltd. He was dismissed by Splendid Coffee for persistent lateness. Splendid Coffee decides that it does not want Sam working in the coffee shop and dismisses him immediately following the transfer. Jack is employed to replace Sam.

Will Sam's dismissal be fair?

Under reg. 7(1) of TUPE, dismissal of an employee before or after a transfer will be automatically unfair, if the sole or principal reason for the dismissal is the transfer itself or a reason connected with it that is not an ETO reason. To bring most unfair dismissal claims employees must have at least one year's continuous service. Sam has been employed by Splendid Coffee for eight months and was previously employed by Assembly Point Ltd for two years. Continuity of employment is not broken if the employer's business is acquired by, or transferred to, another employer (s.218 of the Employment Rights Act 1996). Continuity is preserved and employees' contracts are treated as if they have been made at the commencement of employment with the transferor. Therefore Sam has more than one year's service and is able to bring a claim for unfair dismissal.

Whether or not a dismissal is connected to the transfer is a question of fact. It will be for the employee to show that it is. Where the dismissal takes place around the time of the transfer this will be relatively easy. The employer will have to show that there is no connection between the two events, in effect that the dismissal would have happened anyway.

It will be very difficult for Splendid Coffee to rely on the misconduct that Sam committed when he previously worked for it, which occurred over two and a half years ago, as grounds for dismissal. This will almost certainly be considered unreasonable by an employment tribunal.

If Sam's dismissal is found to be for a reason connected to the transfer, Splendid Coffee will be able to avoid liability only if it is able to show that the dismissal was for an ETO reason entailing changes in the workforce. As a result of Delabole Slate Ltd v Berriman [1985] IRLR 305 CA, "changes in the workforce" means changes in the overall numbers or functions of employees comprising the workforce. Sam's dismissal is for misconduct, not changes in the numbers and functions of employees. Therefore it is very unlikely that Splendid Coffee will be able to avoid liability for unfair dismissal.

If Sam successfully argues that his dismissal is due to the transfer itself or a reason connected with it, and if Splendid Coffee cannot establish an ETO defence, Sam's claim against Splendid Coffee for automatically unfair dismissal is likely to succeed.

Even if Sam fails to show that the reason for his dismissal is the transfer, or a reason connected with it, and the tribunal accepts Splendid Coffee's argument that he was dismissed for misconduct, he is likely to still have a claim for unfair dismissal. Misconduct dismissals must be reasonable and a fair procedure must be followed. It is unlikely that Sam's dismissal will be fair in these circumstances.

Splendid Coffee has been running the coffee shop for a year. Assembly Point Ltd decides that the arrangement is not proving as economical as it had hoped and brings the coffee shop back in-house. After six months Assembly Point Ltd decides to close the coffee shop altogether.

Are Martha and Jack entitled to statutory redundancy pay?

The closure of the coffee shop will result in Martha and Jack's positions being redundant.

Employees need two years' continuous service to qualify for statutory redundancy pay. As above, continuity of employment is preserved on a TUPE transfer and employees' contracts are treated as having commenced when they joined the transferor.

This means that Martha's period of continuous employment commenced when she was first employed by Assembly Point Ltd, more than four years ago. Therefore she will be eligible for statutory redundancy pay, calculated on the basis of her four years' service. Jack's period of continuous employment began when he was first employed by Splendid Coffee, which was one and a half years ago. Therefore he is not eligible for statutory redundancy pay.

Assembly Point Ltd has operated a contractual enhanced redundancy payment scheme for over 10 years. Are Martha and Jack entitled to payments under the scheme?

Under reg. 4(2)(a) of TUPE, all the transferor's rights, powers, duties and liabilities under or in connection with the transferring employees' contracts pass to the transferee. This automatic transfer principle includes the transfer of redundancy schemes and other benefits. Martha's contract has transferred three times under TUPE with her contractual terms and continuity of service preserved from when she first joined Assembly Point Ltd over four years earlier. Therefore she is entitled to the enhanced payments, calculated on the basis of four years' service.

Jack is entitled to the benefit of any redundancy scheme that was in place under his contract with Splendid Coffee. He will be entitled to benefit from Assembly Point Ltd's enhanced redundancy scheme only where there has been an agreed variation to his contract, incorporating the scheme. Even in these circumstances, it is possible that such an agreement may be void and unenforceable (see TUPE: recent cases in this series for more details).

Next week's topic of the week article will be FAQs on TUPE and will be published on 20 October.

Alice Townley Smith is a solicitor in the employment team at Steeles (Law) LLP (lonemp@steeleslaw.co.uk).

Further information on Steeles Law can be accessed at www.steeleslaw.co.uk.