There has been a recent case at the Inner House of the Court of Session (the Scottish equivalent of the Court of Appeal) which held that the benefit of a non-contractual share incentive plan transfers under the Transfer of Undertakings (Protection of Employment) Regulation 2006 (“TUPE”).
This decision confirms that TUPE can cover share scheme benefits, even where the contractual documentation containing the right to participate is separate from the contract of employment.
Although the decision was reached by the Court of Session in Scotland, the relevant provisions in TUPE apply across England and Wales. Faced with the same issue, it is likely the Employment Appeal Tribunal in England and Wales would follow the Court of Session decision, if a similar case arose here.
This case may change the way potential transfers are dealt with by purchasing companies. We therefore felt it would be beneficial to provide a re-cap concerning the key elements of TUPE.
When does TUPE apply?
Before proceeding with a transfer, employers must consider whether a transaction qualifies as a TUPE transfer. TUPE applies where there is one of two types of ‘relevant transfer’:
- A business transfer: the transfer of a business, undertaking or part of a business or undertaking where there is a transfer of an economic entity that retains its identity.
- Service provider transfers: when a previously outsourced service is brought in-house or vice-versa; when outsourced services are switched from one contractor to another.
What is the effect of a relevant transfer on the employment relationship?
Under Regulation 4(1) of TUPE, individuals employed by an undertaking are automatically transferred on their existing terms if their employment contracts ‘would otherwise be terminated by the transfer’. An employee’s contract does not end by reason of the transfer; instead the contract will be transferred from the old employer to the new one on the existing terms and conditions and with the employee’s existing continuity of service. The employees, in other words, have the same rights against the transferee as they had against the transferor, as if they had remained in their original employment.
It also means that all the original employer’s rights, powers, duties and liabilities under the employee’s contract of employment transfer to the new employer.
Can the transferee change the terms of the employment post-transfer?
A transferee should not attempt to change their new employees’ contractual terms to reflect those of their existing workforce, unless there is a valid reason for the change. Any changes to employees’ terms will be void if the sole or principal reason for the change is the transfer itself and where the changes are not for Economic, Technical or Organisational reasons (commonly referred to as “ETO”):-
- Economic reasons relate to the company’s performance;
- Technical reasons relate to the equipment or processes the company uses; and
- Organisational reasons relate to the structure of the company.
However, changes may be permissible where there is an existing contractual right to vary – although legal advice should be sought in this respect.
Can the transferee dismiss their inherited workforce post-transfer?
Any dismissal will be automatically unfair where the sole or principal reason for the dismissal is the transfer itself and is not for an ETO reason. It will also be necessary to show that the dismissal was procedurally fair.
Can the transferee insist that the workforce is dismissed by the transferor pre-transfer?
Similarly, any dismissal will be automatically unfair where the sole or principal reason for the dismissal is the transfer itself and is not for an ETO reason.
What to consider as a transferee?
- Obtain information from the transferor
The transferee should find out how many transferring employees there are and whether any of the current employees might be affected by the transfer.
Regulation 11(1) of TUPE specifically requires the transferor to provide the transferee with the employee liability information. This information should include:
- The identity and the age of the employees who will transfer;
- Information contained in their employment contracts;
- Information about any relative collective agreements;
- Details of any disciplinary action taken against an employee in the last two years; and
- Details of any legal action brought against the employer by an employee in the last two years and information about any potential legal action.
- Provide any ‘measures’ information to the transferor
The transferee should inform the transferor of any changes to employment arrangements it may wish to make after the transfer (commonly referred to as “measures”).
Regulation 13(6) requires the transferor to consult the affected employee representatives and/or unions with a view to seeking agreement to the intended measures.
- Identify the transferring employees’ contractual benefits
The transferee should identify any contractual benefits that must be provided to employees following the transfer so that it can make the necessary arrangements to continue to provide those benefits in good time before the transfer.
Following the recent Court of Session decision, the transferee should also identify whether a shared incentive plan or other non-contractual benefits are in place during the due diligence process, so that any issues can be addressed before the transfer takes place.
- Meet and inform transferring employees
Before the transfer, the transferee may arrange, with the transferor’s approval, to meet with the transferring employees to discuss measures and check the employee information. This is also the opportunity for the transferee to answer any queries the employees might have.
The transferee should also write to the transferring employees to confirm the details of their new employment.
Please note that this is a very brief summary of the key elements concerning TUPE. The contents of this article do not constitute legal advice. If you require any further information please contact us at firstname.lastname@example.org or on 02920 345 511.