Avoiding TUPE headaches
Sharing-the-Love series: Avoiding TUPE headaches
At Paladin, we believe in sharing the love. So if a client asks a good question of general interest, we’ll publish it – and thus the world will be a happier and more informed place.
Question: What can we do to protect ourselves from being saddled with liabilities when we are exiting (or lose) a contract to a competitor?
This question relates to a specific scenario. TUPE aficionados dealing with service provision changes under Regulation 3(1)(b) of TUPE 2006 i.e. outsourcing, insourcing or retendering of services, will know that the more uncertain or complex the post-exit landscape, the greater the risk of being saddled with unexpected TUPE liabilities.
There are a couple of ways in which this might arise. The “organised grouping of employees” may have changed such that in the run up to exit the staff are not clearly assigned to the activities which are the subject of the contract, or perhaps the client intends to fundamentally change the way in which the contact is delivered next time around. This latter scenario is referred to as ‘fragmentation’ – the concept most famously identified by the EAT case Clearsprings Management Ltd v Ankers and Others. Put simply, the client intends that going forward the services will be shared between two or more contractors in such a way as to make it difficult if not impossible to identify the staff as being assigned to activities resting with a particular entity.
The question whether TUPE continues to apply or not is one of fact and degree, having regard to all of the circumstances. We make this point for the avoidance of doubt because, for example, the fact of some fragmentation or some changes to the organised grouping will not automatically have the effect of materially altering the outcome. Employers should not feel unduly constrained in making sensible and necessary commercial decisions for fear that the slightest alteration could undermine their position on TUPE, because that will rarely if ever be the case. If one thing is clear from the TUPE case law, the courts paint with a fairly broad brush when it comes to TUPE.
How can a business best protect itself?
In terms of the practical guidance we can offer, it is probably easiest to see the equation in three distinct parts:
- the pre-transfer phase (before you become the transferee);
- the contract phase (you are now the employer/transferee);
- the exit point (you become transferor at the point of a relevant transfer or service provision change out of the Norse Group).
Not only is the above order correct in chronological terms, but it is also overwhelmingly correct as the hierarchy of your ability to influence the outcome.
The pre-transfer phase is clearly where you have the ultimate ability (subject to extraneous considerations re your bargaining position) to control your own destiny. It would not be an exaggeration to say that you can exert 100% control at this point. This is because:
1. You can be alive to the fact that the more complex the procurement arrangements generally, the more TUPE may struggle to neatly fit the circumstances. This won’t necessarily change your decision on whether to contract or as to what you take on, but if it looks uncertain going in, you are on notice that it will probably look uncertain going out;
2. You have the ability to price to include provision for whatever risks you may have around TUPE on exit;
3. You can ensure that your contracts make clear and specific reference to affected employees/OGEs and how they are being handled through the process;
4. You can ensure that your contracts make proper provision for contribution/indemnity to cover the range of circumstances which might arise;
5. You can input into the consultation process to make sure – insofar as practicable – that you are going into the transaction with your eyes open.
Once into the contract, there is not much you can do to influence TUPE. If nothing materially changes and there are no significant changes in the law, then at exit the same position is likely to apply.
You also know that materially changing the economic entity (the organised grouping of resources) so that it loses its identity or the OGEs (or if not the OGEs themselves then their principal purpose) – whether those changes are driven by you or at the behest of the client – could result in TUPE no longer applying to part or all of the relevant staff.
So it is primarily a case of ensuring that those in a position to make such material changes (a) are alive to the impact which they might have on the TUPE question so as to ensure that at least they do not inadvertently cause a problem and (b) know the extent to which their business is or is not exposed to the consequences of such changes being made. Where you have comprehensive and robust TUPE indemnities, you need not be as concerned. Where you do not, those are the cases for caution.
At the point of exit or when that point is approaching, there is little if anything you can do. You will of course want to be all the more alive to client-driven change requests in the final 12 months and increasingly so the closer to exit that you get.
And you will again want to ensure that consultation is proper and meaningful so as to be able to head-off or at least tackle head-on any attempts to frustrate the application of TUPE by client or incoming contractor. To this end, even if you are not re-tendering it would always be useful for you to see tender documentation so as to understand whether what is being described is materially different and how that might play out.
Finally, you will want to make maximum use of your indemnities insofar as they apply.
What about TUPE indemnities?
As will be apparent from the above, the importance of sound TUPE indemnity clauses in your contracts cannot be overstated. The right indemnities – or indeed the absence of such indemnities – will influence your thinking and potentially your business decisions at every stage.
When negotiating indemnities, the general principle in a transaction where there is relative equality of bargaining power is that each party should be broadly liable for their own actions and influence, but not for that which they inherit or have brought upon them by others. Thus, pre-transfer issues are covered by the client, whereas post-transfer issues by the contractor; in-contract redundancies brought about by the contractor are covered by the contractor, in-contract redundancies occasioned by the client are covered by the client etc.
Having said that, you can agree whatever you can agree, so ultimately a great set of indemnities will not only cater for the normal run-of-the-mill type situations, but also could and should protect you against such unforeseen eventualities as fragmentation.
Paladin can prove your business with an exemplary set of TUPE indemnities for you to use as part of your standard commercial terms. With those in place, “TUPE, or not TUPE” no longer has to be the question. Please feel free to contact us for further information.
Protecting your business from nasty TUPE surprises –
that’s The Paladin Way.