New rulings help employers weigh up when TUPE applies

August 2012

A string of cases over the last twelve months should help employers trying to interpret TUPE regulations, which dictate the circumstances where a company must take over the employment obligations of another employer.

TUPE stands for the Transfer of Undertakings Protection of Employment Regulations 2006 and their purpose is to protect employee jobs when a business is transferred.  If a business is sold, then the new owner of the business has to honour the employment contracts of the seller’s employees – the buyer steps into the shoes of the seller, so far as the employees are concerned.

The rules may also apply when there is a ‘service provision change’. This arises when a company cancels or does not renew a long term contract for the supply of services and either takes the services in-house or awards the contract to another service-provider. When this happens, TUPE may mean that the employees of the original service-provider become employees of the new service-provider, or if the contract is going in-house, then they may become employees of the company to which the services were provided.
It is this aspect of TUPE which still comes as a shock to some employers, particularly smaller ones, who discover the strange outcomes that can arise when it is applied to service provision changes.  A major customer decides it is not getting a good service from Company A and so it awards the contract to Company B. It must come as a shock for Company B to discover they might have to take on the very employees who provided such a poor service when they were working for Company A.

But it isn’t cut and dried as to exactly when TUPE will apply following a service provision change.  Now, a number of cases have clarified the conditions that must be satisfied for TUPE to apply when a service provision change has taken place.

In Seawell v Ceva Freight (UK) Ltd, Ceva provided freight forwarding services to Seawell. One of Ceva’s employees worked solely on the Seawell contract and when the contract was cancelled with Seawell taking the service back in-house, Ceva claimed that TUPE applied and that Seawell were liable for unfairly dismissing Mr Moffat, the employee concerned. At the first hearing, the Employment Tribunal agreed and ordered Seawell to pay Mr Moffat £25,000.  But on appeal, the Employment Appeal Tribunal found that this was wrong, saying that for TUPE to apply in a service provision change scenario, there must be a clear and formal grouping of employees brought together for the purpose of the client’s contract.  That an employee spends all his time working on a single client’s contract is not enough for TUPE to apply.

Similarly, in Eddie Stobart Ltd v Moreman and others, Eddie Stobart provided storage and transport services to ASDA, among other supermarkets. Staff were organised into shifts, one of which, because of the timing of orders from ASDA, worked principally on the ASDA contract. When ASDA awarded the contract to another company, Eddie Stobart dismissed the workers on the ASDA shift in the belief that the new company was now responsible for them under TUPE. However, both the Employment Tribunal and the Employment Appeal Tribunal held that TUPE did not apply: because that shift did in fact deal with other clients as well as ASDA, those employees could not be regarded as a recognised team working for a particular client.

The other aspect that must be satisfied for TUPE to apply on a service provision change is that the service activity taken in-house or contracted to another supplier must remain the same. In Johnson Controls Ltd v Campbell, taxi administrator Johnson Controls lost their contract with UKAEA, as the company decided that its own staff would place bookings direct with taxi companies. One of the employees was made redundant by Johnson Controls, as he was not taken on by UKAEA.  He subsequently sued both Johnson and UKAEA, but the tribunal found that under the new regime, the taxi booking services had been significantly remodelled and that, therefore, TUPE did not apply.

Employers who think they are running teams who may be affected by TUPE if contracts were terminated need to respond to the decisions of these cases by reviewing their current employee contracts.  

Fulfilling an important contract that requires taking on employees, who will service that contract exclusively, requires major investment. It is equally important to both employer and employees to make sure that they have the protections they are entitled to. If a team is taken on to service “Client X”, their contracts of employment should say so, and they should be formally labelled and recognised as the “Client X” team.

That way there is a good chance that if the employer subsequently loses the contract, the team will be in a more secure position and the company will not be hit by a double whammy of losing the income from the contract, as well as being liable to make redundancy payments to the team who serviced the contract.