TUPE: checklist for transferees

Louise Westby of Steeles (Law) LLP concludes a series of articles on TUPE with a checklist for transferees that includes details of the employee-related information that transferees should obtain prior to a TUPE transfer. This information, obtained as part of the due diligence exercise, can be used to ascertain and protect against the potential liabilities that transferees inherit.

1. Establish whether or not TUPE applies.

To establish whether or not TUPE applies the transferee needs to consider the nature of the transaction, and whether it is a share sale or asset acquisition. TUPE does not usually apply to share sales, because they do not normally involve a change in the identity of the employer. However, in Millam v The Print Factory (London) 1991 Ltd [2007] IRLR 526 CA, the Court of Appeal held that it is possible for TUPE to apply if a share transfer takes place at the time of a TUPE transfer.

TUPE does apply to asset sales on the transfer of an undertaking or business and has the effect of transferring employees' contracts to the transferee.

2. Request information about the transferring employees.

Information about the employees who will be transferring is vital in helping the transferee establish potential future liabilities. Regulation 11 of TUPE obliges the transferor to provide "employee liability information" to the transferee. The transferee should ensure that it receives this information or requests it if it is not forthcoming. See TUPE: frequently asked questions in this series for details of the information that must be provided. Further information not falling within reg.11 may also be useful.

The transferee can use information concerning employees to establish liabilities in the following ways:

• Details of wages and employee benefits help the transferee to assess the cost of both running the business and any future dismissals, and could reveal the potential for equal pay and other discrimination claims.
• Employees' continuous employment indicates the extent to which they qualify, or will qualify in future, for statutory rights, such as the right to claim unfair dismissal. The likely cost of redundancies can also be established. A prevalence of employees with short service may indicate high turnover.
• Information on headcount, job titles and functions, and staff costs within each department, provides an idea of how the business is run, where there will be overlap with the transferee's existing business, and any potential cost savings.
• Gender breakdowns give an overview of areas staffed predominately by one gender, and highlight potential liability for sex discrimination or equal pay claims.
• Details of notice periods assist in assessing dismissal costs.
• Information about place of employment and mobility clauses allows the transferee to consider the future staffing levels and potential location of the acquired undertaking.
• A breakdown of the numbers of employees who are full time, part time, fixed term, temporary, or permanent assists in determining the potential for future equality-related claims. Further investigation may reveal that part-time or fixed-term staff are excluded from benefits.
• Details of employees on long-term sick leave highlight a potential liability for claims by those employees.
• High absence levels may indicate other problems within the workforce, such as motivational issues and poor discipline.

3. Check whether or not there are claims pending against the transferor.

The transferee inherits claims that are pending against the transferor. Therefore it must be aware of ongoing grievance and disciplinary proceedings, and whether or not the statutory procedures have been followed.

It is vital for the transferee to establish if there are any claims pending against the transferor, particularly claims relating to: discrimination, unfair dismissal, breach of contract, wrongful dismissal, or outstanding wages or holiday pay.

If there is a claim ongoing the transferee should establish its current stage, and whether or not a claim form (ET1) has been received, and a response form (ET3) completed. The potential cost liability in respect of the claim must be identified. If there is a settlement agreement a copy should be requested.

Details of any employees who have been dismissed or who have resigned during the previous six months (as a minimum), and the circumstances surrounding their dismissal or resignation, should be obtained. The transferee should attempt to identify whether or not there is a risk that claims may arise as liability will pass to it.

Further, the transferee should not assume that just because an employee's employment has terminated before the transfer date, the employee will not transfer. If the employee is working out his or her notice period on the transfer date, he or she will transfer to the transferee for the remainder of the notice period. During this time the employee will be entitled to the usual rights.

4. Obtain copies of employees' contractual terms and conditions and supporting documents.

The transferee should obtain copies of employees' contracts, or sample contracts. Contractual rights and liabilities (for example terms that are expressed in a written contract or that have been agreed orally) transfer on the completion of a relevant transfer. Therefore all agreed terms, for example pay rates, benefits, sick pay arrangements, job titles, place of work, holiday entitlement and notice periods, will transfer.

Implied terms that are not expressly referred to in the contract (for example terms that have arisen through custom and practice) may also transfer and bind the transferee post-transfer. The transferee should therefore try to establish whether or not there are implied terms that will prove onerous.

Terms incorporated into employees' contracts through collective agreements will transfer. Transferees should therefore request copies of any relevant collective agreements.

The transferee should also obtain the contracts of key senior employees, not only to assess the cost of employing these individuals but also to identify terms specific to their contracts. Specific terms are dealt with below.

5. Look out for specific terms.

Restrictive covenants

Many employees, particularly senior employees, are bound by restrictive covenants in their contracts. The transferee should consider the implications and applicability of covenants. Restrictive covenants can transfer, although their effect may be limited. In Morris Angel & Son Ltd v Hollande and another [1993] IRLR 169 CA, the Court of Appeal held that a non-dealing covenant taking effect on the employee's dismissal could be enforced if the employee, within one year of termination, did business with customers that in the previous year had done business with the undertaking transferred, of which the transferee was deemed to be the owner. However, the employee was not under an obligation not to deal with any customers that had done business with the transferee in the year before the termination.

Restrictive covenants may not provide adequate protection for a transferee's business, as they will have been drafted with a view to protecting the transferor's business. Therefore, the transferee may wish to renegotiate the terms of the covenant. However, under reg. 4(4) of TUPE, any change is void if it is made because of the transfer or for a reason connected with the transfer that is not "an economic, technical or organisational reason entailing changes in the workforce".

Golden parachutes

A transferee may find a "golden parachute" term in the contracts of key employees. These terms trigger a payment on a particular event such as a business takeover, and are likely to transfer an immediate liability to the transferee to pay affected employees. The payment amounts to a debt rather than compensation so there is no need for an employee to show that he or she has mitigated his or her loss.

There is potential for the transferee to argue that a golden parachute term is void if it was negotiated by the employee with the possibility of a transfer in mind. The term attempts to limit the operation of the TUPE Regulations, which have the primary purpose of continuing the employment of those affected.

Notice periods

Many senior employees have extended notice periods. The transferee needs to be aware of the notice periods of the employees that it does not intend to retain, so that it can calculate termination costs.

Where key employees are vital to the operation of the undertaking, the transferee needs to ensure that notice periods are long enough to allow for sufficient cover in the event of resignations. Given that variations to contracts will be void in most situations where there has been a transfer, it is in the transferee's interest to ensure that notice periods are adequate at the outset.

Enhanced redundancy terms

The transferee should seek details of redundancy terms. There may be enhanced contractual redundancy schemes in place, particularly in respect of senior employees. Reducing benefits is difficult, therefore the transferee may wish to enter into negotiations with the transferor about how the latter can assist with the cost of redundancies.

The transferee should ask for details of redundancy and severance policies, practices, rights and procedures. Details of the method used for calculating redundancy payments should also be obtained.

6. Obtain warranties and indemnities.

During the due diligence process the transferee may overlook certain points, or the transferor may deliberately conceal certain information. Therefore, the transferee should seek warranties from the transferor on the validity of the statements made and the information provided (in particular the employee liability information under reg.11 of TUPE). If the information later proves inaccurate, such warranties will provide the transferee with a means of claiming damages against the transferor.

The transferee should also seek indemnities from the transferor in respect of certain liabilities. It is unlikely that the transferor will provide the transferee with an indemnity in respect of any claims that arise as a result of the acts of the transferee after the transfer. However, the transferee should obtain an indemnity from the transferor in respect of any acts or omissions that occur before the transfer.

Careful thought must be given to the wording of indemnities. The transferee should consider which costs need to be indemnified. Ideally indemnities should cover all compensation and legal costs incurred by it.

Next week's topic of the week article will be the first in a series on dealing with difficult times and will be published on 3 November.

Louise Westby is a trainee solicitor in the employment team at Steeles (Law) LLP (lwestby@steeleslaw.co.uk).

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