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How to protect your staff when merging

This how-to guide will look at the practical issues that you will need to consider in TUPE situations.

TUPE is an acronym for 'Transfer of Undertakings (Protection of Employment) Regulations'.

1

Pensions

Occupational pension rights earned up to the time of the transfer are protected by social security legislation and pension trust arrangements. Strictly speaking, ongoing pension provisions do not transfer under TUPE although this provision is restricted to benefits for old age, invalidity and survivors. Redundancy and early retirement pensions, for example, will not be covered by this exclusion and so would transfer under the regulations.

For pension provisions after the transfer, the Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005 provide for certain minimum requirements.  They provide that, where there is a relevant transfer and the transferred employees were either active members of an employer-contributed occupational pension scheme, or were not active members but were eligible to join the scheme either immediately or on completion of a period of continuous service with the employer, the transferee must offer them a prescribed level of pension provision after the transfer.

This prescribed level of provision is membership of:

  • a non-money purchase (defined benefit) occupational pension scheme satisfying the statutory standard referred to in s.12A of the Pension Scheme Act 1993, or a scheme that provides benefits of equivalent value to those provided by the transferor's scheme; or
  • a money purchase (defined contribution) occupational or stakeholder pension scheme to which the transferee must make contributions in respect of each period for which the employee contributes to the scheme, provided that the amount contributed by the transferee equals the employee's contribution to the scheme, subject to an upper limit of 6% of the employee's basic pay. 

In calculating the amount of a transferee's pension contributions in the case of a money purchase occupational pension scheme, only payments made in respect of basic pay need be taken into account. Bonus, commission, overtime and similar payments should be disregarded.

2

Trade Union recognition

There are a number of scenarios that may occur within trade unions:

Neither employer recognises a trade union

There are no particular TUPE issues that arise in this scenario. The transferee continues to deal directly with employees and/or elected representatives.

Both employers recognise the same trade union

The same trade union will continue to be recognised post-transfer, for the service that is transferring. Note, however, that there will be two different recognition agreements (that of the transferor and that of the transferee). It is appropriate to review the agreements and consider whether a single agreement can be reached.

The transferor does not recognise a trade union, but the transferee does

In this case, the transferee employer can invite employees in the transferring service to join the trade union and, if they wish, to be covered by collective bargaining.

The transferor recognises a trade union, but the transferee either does not recognise a trade union or recognises a different union

Where the transferor voluntarily recognises an independent trade union in respect of some or all of the transferred employees, then at the point of transfer and subsequently, the transferee employer will also be required to recognise that union to the same extent. It is, however, open to the transferee employer to later initiate a process of derecognition, in the same way that any employer could derecognise a trade union.  

However, this requirement to recognise the union of the transferring employees only applies if the organised grouping of transferred employees maintains an identity distinct from the remainder of the transferee’s business. If there is no distinct identity, the previous trade union recognition lapses, and it will then be up to the union and the employer to renegotiate a new recognition agreement.

3

Dismissal of employees for a reason connected with the transfer

A dismissal of an employee by either the transferor or transferee because of the transfer will be automatically unfair unless there is an ‘economic, technical or organisational’ reason entailing change in the workforce (an ‘ETO reason’).

This means that a dismissal may only occur before or after a transfer where the sole or principal reason for dismissal is either:

  • Unconnected with the transfer; or
  • Connected with the transfer, but for an ETO reason.

Examples of ETO reasons for dismissal include:

  • Economic reasons - where the demand for a service has fallen to such an extent that the service becomes unsustainable without dismissing staff.
  • Technical reasons - where the transferee wishes to use new technology and the staff employed by the transferor in the undertaking to be transferred do not have the requisite skills to use that technology.
  • Organisational reasons - where the transferee operates at a different location and it is not practical to transfer staff.

As with any dismissal, an employer must act reasonably and follow a fair procedure in dismissing an employee. Please note that employees with less than one year's service cannot present unfair dismissal claims.  Claims for discrimination however can be presented.

4

Changing an employee's terms and conditions of employment

Variation of an employee’s terms and conditions of employment for a reason related to the transfer is prohibited under TUPE. A desire to harmonise the terms and conditions of existing and newly-transferred staff in your organisation is therefore NOT a legitimate ground for changing terms and conditions.

If there is a need to change the terms and conditions of employees for a reason related to the transfer, this is only possible if there is an ETO reason that also entails changes to the workforce.

The change might be a change to the numbers of employees employed or their functions. For example, a functional change might be a new requirement on an employee who held a managerial position to move to a non-managerial position – or vice-versa. This may be considered to be a valid ETO reason justifying the change of terms and conditions.

In the event that there is a valid ETO reason, an employer will still need to seek the employee’s agreement to a variation of the contract prior to any changes being made.  This is because the employment contract, as with any other contract, is an agreement made between the parties to the contract.  Consent of all parties is required to enter into the contract and likewise to vary the contract unless agreed otherwise.  In practice, an employee may only agree to a change in terms and conditions if the new terms are equal to, or better than, his/her existing terms. Consequently if you are contemplating changing terms and conditions of employment for an ETO reason as outlined above, then you will need to consult with the employee to seek the employee’s agreement to the change.

5

Insolvency

Special rules apply which are designed to make it easier to rescue aspects of insolvent organisations so making them more attractive to buyers.  In the event of ‘terminal’ insolvency proceedings, employment rights and liabilities do not transfer under TUPE, nor are employees protected against a dismissal that is connected with the transfer.  Where the transferor is subject to ‘non-terminal’ insolvency proceedings there is a wider possibility to agree ‘permitted variations’ to terms and conditions of employment even in the absence of ETO reasons.  There are however certain conditions that apply.

‘Terminal’ insolvency proceedings are proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner.

‘Non-terminal’ insolvency proceedings mean insolvency proceedings which have been opened in relation to the transferor NOT with a view to the liquidation of the assets of the transferor and which are under the supervision of an insolvency practitioner, for example administration proceedings.

The conditions in relation to ‘permitted variations’ are as follows:

  • The transferee (or an insolvency practitioner) and appropriate representatives of transferred employees must agree to the variation;
  • The sole or principal reason for the variation is the transfer itself or a reason connected with the transfer that is not an economic, technical or organisational reason entailing changes in the workforce; and
  • The variation is designed to safeguard employment opportunities by ensuring the survival of the undertaking, business or part of the undertaking or business that is the subject of the relevant transfer.
6

Employees with public sector contracts of employment

There are a number of issues that are particular to transfers from the public to the private sector which are the product of government guidance and statutory provisions built upon the existing provisions of TUPE.

The first point of reference for public sector transfers is the Statement of Practice on Staff Transfers in the Public Sector.  This was issued by the Cabinet Office in January 2000 and remains the main reference point for public sector transfers.  It sets out a framework which should cover all public sector organisations where the public sector is the employer or the client in a contracting situation.

The guiding principles of the Statement of Practice are as follows:

  • To ensure that the public sector is a good employer and a model contractor and client.
  • The modernising of public services to include services being provided by or in partnership with the private sector.
  • Clarity and certainty about the treatment of staff involved in the reorganisations.
  • To ensure that TUPE applies except in truly exceptional circumstances and that where TUPE does not apply, its principles should still be followed.

In addition the Fair Deal for Staff Pensions was introduced in 1999 to address the problem of employees transferring out of the public sector with no protection in relation to their pension entitlement.  The main points include that transferred employees must be provided with a “broadly comparable” pension scheme.  What is “broadly comparable” is determined by the Government Actuary’s Department.

On 13 December 2010, the coalition government withdrew the Code of Practice on Workforce Matters in Public Sector Service Contracts with immediate effect and replaced it with Principles of good employment practice.  Compliance with the Principles set out in the Cabinet Office statement is voluntary. However the Code of Practice will continue to apply to public sector contracts in existence prior to 13 December 2010.

The Code of Practice on Workforce Matters in Public Sector Service Contracts, which was introduced in March 2005, was automatically incorporated into the service specifications and conditions of every public sector contract awarded to a service provider that involved a transfer of staff from the relevant public sector organisation, or from an outsourced public sector organisation to a new provider under a retender of contract. The Code required, among other things, that "where the service provider recruits new staff to work on a public service contract alongside staff transferred from the public sector organisation, it will offer employment on fair and reasonable terms and conditions which are, overall, no less favourable than those of transferred employees".

In contrast, the Principles of Good Employment Practice provides that: "where a supplier employs new entrants that sit alongside former public sector workers, new entrants should have fair and reasonable pay, terms and conditions. Suppliers should consult with their recognised trade unions on the terms and conditions to be offered to new entrants."

Employers should therefore refer to any relevant statutory guidance in addition to ensuring that they comply with the provisions of TUPE 2006 when considering transfers involving the public sector.

These additional obligations can substantially increase the cost of such a venture and so it is important to be fully appraised of potential liabilities before any terms are agreed.

Further information

 

 

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Page last edited Jul 20, 2017 History

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