Service provision changes under TUPE 2006

31 August 2006

Elizabeth Lang

The Transfer of Undertakings (Protection of Employment) Regulations 2006 have now been in force for more than three months. They revoked the 1981 Regulations in their entirety. One significant change under the new regime is the extension of the definition of relevant transfer so that both ‘standard’ business transfers and qualifying service provision changes will be covered by TUPE 2006. The position in relation to standard business transfers is the same as under the 1981 regulations, although the drafting now codifies some of the principles which have evolved through case law. In the second instalment on the new TUPE regulations 2006, Elizabeth Lang looks at service provision changes.

This extension of rights was not required by the Acquired Rights Directive and sets the UK apart from other EU member states. The government’s rationale for implementing it was that it would provide a ‘level playing field’ by removing uncertainty as to whether or not the regulations apply upon an outsourcing or insourcing of services or a change of service provider. The certainty given will, supposedly, enable bids to be made for contracts on a true commercial basis, without the need for margins to be built in to cover the uncertainty.

The provisions

Regulation 3(1)(b) describes a service provision change as a situation in which activities cease to be carried out:

  • by a person (a client) on his own behalf and are carried out instead by another person on the client’s behalf (a contractor);

  • by a contractor on a client’s behalf (whether or not those activities had previously been carried out by the client on his own behalf) and are carried out instead by another person (a subsequent contractor) on the client’s behalf; or

  • by a contractor or a subsequent contractor on a client’s behalf (whether or not those activities had previously been carried out by the client on his own behalf) and are carried out instead by the client on his own behalf;

  • and in which the conditions set out in paragraph (3) are satisfied.

The conditions prescribed by regulation 3(3) are that immediately before the service provision change:

  • there is an organised grouping of employees situated in Great Britain, which has as its principal purpose the carrying out of the activities concerned on behalf of the client;

  • the client intends that the activities will, following the service provision change, be carried out by the transferee other than in connection with a single specific event or task of short-term duration;

  • and the activities concerned do not consist wholly or mainly of the supply of goods for the client’s use.

Under the 1981 regulations service provision changes could be relevant transfers if they also fell within the definition of a ‘standard’ business transfer. In Ayse Suzen v Gebauderreinninging GMBH Krankenhausservice the ECJ established that upon a change of contractor in a labour-intensive sector, the regulations would only apply where the activity in question amounted to an economic entity that would continue after its transfer (the degree of similarity being a factor in determining this), and there was also a transfer of the majority of the workforce in terms of skills or numbers.

Following Suzen the courts considered the position where in a labour-intensive sector there is a transfer of activity but no transfer of employees. Specifically could transferees circumvent the application of the Regulations by refusing to take on the employees from the transferor? In ECM (Vehicle Deliveries) Limited v Cox and RCO v Unison and Others the Court of Appeal decided that when determining this matter, the transferee’s motivation in failing to take on the employees from the transferor was a factor which should be considered in the context of all the facts. In ADI (UK) Ltd v Willer the Court of Appeal held that the transferee’s motivation in its failure to take on the employees should be a decisive factor where, but for the fact the employees did not transfer, there would otherwise have been a relevant transfer.

How different will things really be?

Some commentators have taken the view that the majority of service provision changes will already be covered by the standard business transfer definition in regulation 3(1)(a). Indeed the Department of Trade and Industry guidance states that this is “likely”. It is clear, though, that some cases decided under the 1981 regulations would be decided differently under TUPE 2006. There may not have been a relevant transfer under the 1981 regulations if a replacement contractor took no employees or other assets from the old contractor and carried out the services in a different way, to the extent that no economic entity had transferred. The motivation of the transferee in not taking on the employees would not be at issue in such a case. This was, in essence, the situation in Computacentre (UK) Ltd v Swanton & Others. Such a case would be likely to fall within TUPE 2006 because, provided the conditions in 3(3) are met, the transfer of activity would be sufficient to trigger regulation 3(1)(b)(ii).
It seems clear that the new provisions are designed to capture situations such as this. However, the way they have been drafted gives rise to uncertainty about how far they extend.

‘Organised grouping of employees’

In the March 2005 Consultation document, the Government explained that the intention was to give protection to organised groupings of employees set up by suppliers to provide services on an ongoing basis to the client. Reference was made to ‘project teams’. The draft regulations did not specify that an organised grouping could mean a single employee. It was observed in the response to the Consultation (including by ELA) that, as drafted this would preclude service provision changes involving single employees (a grouping by definition meaning more than one).

Regulation 2(1) was amended to provide that ‘references to “organised groupings of employees” shall include a single employee’. Bringing single employees within the regulations may be consistent with the desire to extend employee protection as widely as possible on a service provision change. However, as currently drafted, it arguably extends the provisions beyond what was intended.

For example, a law firm may have a number of individual solicitors who principally work for one particular client on long term projects. These solicitors may be dispersed across the firm in different disciplines. It cannot be said that they are an organised grouping in the sense of a team. They have, however, individually developed a strong client relationship so that instructions come to them directly. Each individual solicitor is, according to the regulations, capable of representing an organised grouping of employees and would transfer to a new law firm or in house (provided the other conditions are met) upon a transfer of the client’s work. This does not seem consistent with the intention set out in the March 2005 Consultation or the DTI Guidance, which refers to a ‘team’. However, until there is guidance in relation to the circumstances in which a single employee does or does not represent an ‘organised grouping’, this is the literal interpretation of the Regulations.

Principal purpose

The condition in regulation 3(3)(a)(i) requires the employees to carry out the activity in question as its principal purpose. What does this mean? The DTI guidance explains that the team should be ‘essentially dedicated to carrying out the activities that are to transfer (though they do not need to work exclusively on those activities)’. It then gives the example of a courier service serviced by various different couriers on an ad hoc basis (which would not qualify) in contrast to a service carried out by an identifiable team of employees (which would).

Situations are often not so clear cut. Some employees of a courier company may in practice at times work almost exclusively work for one client, and at times not. There is no guidance as to the percentage of time spent by the employee, and over what period, which is necessary to meet the ‘principal purpose’ threshold. Since many individual employees would seem to potentially fall within the scope of the service provision changes, it will be crucial for this to be determined at an early stage in order for our clients to have certainty in this respect.

In practice, many businesses will want to retain a stable workforce and retain their employees when they cease to provide services to a particular client. Some businesses will adopt practical measures to incentivise their employees to remain with them, even if they technically should transfer to the client’s new service provider. In some cases they may ‘cherry pick’ particularly valuable employees by encouraging them to object to the transfer pursuant to regulation 4(7) and making appropriate contractual arrangements with them. It will also be open to businesses to put in place systems to ensure that no employee or group of employees becomes dedicated to a particular client (whether exclusively or not) in the provision of services. This may cause real problems in terms of quality of service, particularly where the client relationship is important for the delivery of a good service.

Similarly many clients who are unhappy with the service they are receiving will not want to find themselves dealing with the same individuals when they change suppliers. It is unlikely, for example that a client who is unhappy with the creative input of its advertising agency will want to find the same team working on the account when they switch to a new agency.
Sophisticated end users will find a way around this by imposing conditions in their contracts for supply of services. These may include a requirement that no employee engaged in the activity in question should spend more than x per cent of their working time on that activity, and including appropriate warranties and indemnities from the supplier. Clients may also seek to identify in new contracts the specific employees they do and do not want to carry out work on their behalf, although new contractors may factor into the price the costs of dealing with any ‘unwanted’ transferring employees.

Exclusion of a ‘single specific event or task of short-term duration’

The draft regulations referred only to an exclusion of a single specific event or task, with no reference to the duration of it. Although the wording of 3(3)(a)(ii) could be interpreted to mean that the short term duration only applies to the task (and that therefore the specific one off event would be excluded even if long term), it is submitted that both specific events and tasks must be of short term duration to be excluded.

This would be consistent with the DTI guidance which differentiates between the provision of security advice to the Olympics organisers covering several years before the event (which would not be excluded), and the hiring of security staff to protect athletes during the games (which would be excluded). This would also be consistent with the ‘going concern’ concept in ‘standard’ business transfers. Importantly, it is the intention of the client in this respect that counts. This will prevent attempts to circumvent the Regulations by entering into ostensibly short-term contracts which are then extended.

No guidance is given as to what ‘short term’ actually means or whether there could indeed be one rule for all types of businesses with different business cycles. Until we get some guidance on this, the position will be uncertain.

Frequently a number of one off tasks given to a supplier will build up to represent a substantial volume of work, to the extent that one or more employees will be principally servicing one client, albeit on a series of discrete short term one off projects, and without an ‘umbrella’ agreement being put in place for the supply of services. It is not clear if such an activity would genuinely be categorised as a series of tasks of short term duration or whether the amalgamation of a number of such tasks renders it an activity which meets the conditions in 3(3)(a)(ii). If the latter interpretation applies, the client (who will be neither transferor nor transferee) may be indirectly affected by the pricing adjustment a future supplier may impose to cover the risk that employees will transfer from the old supplier. It will therefore be in the client’s interests to minimise this risk.

This could be done by increasing the number of, and frequently switching between, suppliers, and by providing work to them only intermittently. The advantages of doing this would have to be weighed up against any disadvantages such as losing continuity and the detrimental effect on the client/supplier relationship.

Who is the client?

In practice, many contractors use sub-contractors to provide services to the end user. Regulation 3(1)(b) refers throughout to services for the ‘client’. ‘Client’ could be interpreted as the party with whom the service provider contracts. In the case of a sub-contractor this would be the contractor and not the end-user. A common situation in a re-tendering situation would be where the end-user pays contractor A to provide, say, facilities management services. Contractor A has a small number of employees who manage the services on behalf of their clients. It also has sub-contracts in place with sub-contractor A for the supply of printing and cleaning services. Sub-contractor A has no contractual relationship with the end-user, but has a team dedicated to working for it. The client is unhappy with the services provided by contractor A and signs a new contract with contractor B. Contractor B has its own team of facilities managers, and always uses sub-contractor B when its clients need printing and cleaning services.

In this case, the new service provision changes seem designed to protect the employees of sub-contractor A. Whether or not they are protected will turn on whether their ‘client’ is the contractor or the end-user. The same position will arise in an outsourcing or insourcing situation where services are provided by a contractor through a sub-contract. Whether or not employees transfer to or from the sub-contractor to the end-user will depend directly on the definition of ‘client’ in this provision.

It is likely the courts will want to interpret the ‘client’ in a purposive way as being the end-user. This fundamental question was raised by ELA as a concern in its response to the March 2005 Consultation, but there has been no clarification in the Regulations.

If regulation 3(1)(b)(ii) is not triggered in this situation the standard business transfer provisions may, of course, still apply so as to transfer the employees from sub-contractor A to sub-contractor B in any event.

Interpreting ‘activities’

The concept of an economic entity (key to the standard business transfer provision) does not exist in the context of service provision changes. The requirement is simply that there is a cessation of activities by one party and a resumption of the activities by another party. The meaning of ‘activity’ leaves scope for argument. Using a basic example, a bakery has always employed bakers to make organic bread by hand, which it sells to a specialist market for £3 per loaf. It now wants to mass market white sliced bread instead for £1 per loaf and outsources its production to a factory. In this case, is the activity the making of bread itself (which is continuing) or the making of handmade bread (which is ceasing)? The decision not to exclude ‘innovative bids’ from the regulations indicates that a broad interpretation will be given to ‘activity’ and that in this case it is the making of bread. In this case, the employees would have the opportunity to transfer and, presumably, to be retrained.

Conclusion

These new changes will place many employees in a more favourable position than was intended by the Acquired Rights Directive. Some may say that the impact on the ability between parties to contract freely will be seriously affected as a result. Whether or not one agrees with the policy considerations of government which gave rise to the extension of rights, it is clear that the drafting of the regulations gives rise to a number of fundamental questions that should be clarified as soon as possible. Without such clarification, our clients will continue to operate in a climate of uncertainty.

Cases referred to:
Ayse Suzen v Gebauderreinninging GMBH Krankenhausservice [1997] IRLR 255
ECM (Vehicle Deliveries) Ltd v Cox [1998] ICR 1162
RCO v Unison & ors [2000] ICR 1502
ADI (UK) Ltd v Willer [2001] IRLR 54
Computacentre (UK) Ltd v Swanton & ors (EAT/02546/04)

Published in the Employment Lawyers Association Journal August 2006

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