selling a business

What does “TUPE” mean, how does it protect employees and what part does it have to play in the buying or selling of a business?

“TUPE” stands for the Transfer of Undertakings (Protection of Employment) Regulations 2006. It is a powerful piece of law designed to protect employees when a business changes owner, including against changes being made to terms and conditions of employment.

The size of the business doesn’t matter. When TUPE applies, the employees’ jobs, their terms and conditions, and continuity of employment all transfer across to the new employer.

TUPE can be complex, so we suggest taking specialist legal advice at an early stage.

In particular, there are significant financial penalties for failing to inform and consult employee representatives or trade unions; and it is important for the buyer to understand risks associated with the transferring employees, including the limitations on harmonising terms. A seller must also be aware of the employee information they are obliged to provide to a buyer and the timescales for doing so.

This is a brief guide to steps the buyer and seller should consider when embarking on a business sale where TUPE is likely to apply.

I’m selling all or part of our business, and I’m not sure who should transfer. What do I do?

It can sometimes be very difficult to form a view on whether or not TUPE applies. Even if it is agreed by the parties that TUPE applies, it can still be hard to gauge who should transfer and who shouldn’t. Much of the TUPE case law has arisen from employees arguing that they should transfer in circumstances where the parties cannot agree on the legal position.

Do be aware that TUPE includes an Automatic Transfer Principle – so an employee’s contract of employment will automatically transfer from the seller (the ‘transferor’) to the buyer (‘transferee’). The buyer generally inherits all rights, liabilities and obligations in relation to the transferring employees and there are only a few limited exceptions to this.

There has been recent case law which indicates that TUPE could potentially apply now or in the future not only to employees, but also workers. ‘Workers’ have less employment rights than ‘employees’, but qualify for certain rights, including statutory paid holiday and minimum wage rights. You can read more about workers’ rights under TUPE here.

What will a buyer want to know about my employees?

Aside from minimum legal information requirements (see below), how much is requested from you will be specific to the nature of the proposed deal, the nature of your business, and the buyer’s approach to risk.

However, buyers will want to do at least some due diligence in relation to employees, before they commit to a deal, in case there are particular risks that they might find themselves “on the hook” for after a deal.

Providing information on staff can be an extensive process and time-consuming. You will need to be ready to disclose information on how you have managed employment matters in your business to date. As a completion date approaches, there may be last minute queries from a buyer.

It is well worth, if you anticipate selling your business in the medium term, undertaking a HR compliance audit in advance to identify any issues that may need to be addressed. Doing so should put you in a better position to be offering a business for sale that is in good health from an employment compliance perspective. This can help when negotiating warranties and indemnities that the buyer may wish and avoid price-chipping.

What do I have to provide to a buyer, as a minimum, about my employees?

The seller has a duty to provide specific information about the transferring employees to the buyer, referred to as “employee liability information”. This includes information such as their identity, age, terms and conditions, length of service, recent disciplinaries, grievances and claims and potential claims. Often a buyer will want to know much more by way of due diligence before completing a purchase.

The statutory information must be given no later than 28 days before the transfer. Although in practice it is helpful to provide this information sooner. If there are any changes then the information should be updated. If the employee liability information is not correctly provided, the buyer can make a claim for compensation for a minimum award of £500 per employee, which could prove costly.

What obligations do I have to inform and consult my staff?

TUPE requires the seller and buyer to inform and consult with their own affected employees about the transfer via recognised union representatives, elected employee representatives or the employees directly.

Failing to inform and consult in accordance with TUPE may result in each ‘affected employee’ making a claim to an Employment Tribunal and being awarded up to 13 week’s pay each, which can obviously amount to a very significant sum.

There is no set timescale for this process, but the relevant information needs to be provided “in good time” so effective consultation take place. If you have concerns on the timing, for example of confidentiality, please take advice on this.

If you do not have a formally recognised trade union representative to consult with, you should inform and consult with existing employee representatives (such as a Works Council), or new employee representatives will need to be elected. If the employees fail to elect employee representatives within reasonable time then you should provide information to them directly.

Once representatives are in place, the seller and buyer have to provide prescribed information to them, for the affected employees including:

  • The fact of the transfer, the date (or proposed date) when it is to take place and the reasons for it;
  • The legal, economic and social implications of the transfer for the affected employees; and
  • Measures to be taken in connection with the transfer (or if there aren’t any, to state that).

The seller must also provide information about any measures that the buyer envisages it will take in relation to the transferring employees in connection with the transfer or, if the buyer envisages taking no measures, that fact. This is information that the buyer must provide to the seller.

What do I then need to consult on?

The obligation to consult with appropriate representatives when selling a business will arise if the relevant employer envisages that in connection with the transfer it will be taking “measures” (so a positive or negative act, i.e. change) in respect of any of its own employees affected by the transfer. However, in practice a buyer will often want to speak to the employees that are due to transfer to it and the seller may agree to such a meeting while it is present to assist with the process.

I’m selling a small business – does this all apply to me?

Not necessarily. The duty to inform and consult an employee representative does not apply to micro-businesses (who employ fewer than 10 employees) where there is no recognised union or existing appropriate representatives. In that situation, you must inform and consult directly with the affected employees.

Can we dismiss employees in connection with a proposed business sale?

An employee will be automatically unfairly dismissed if the sole or principle reason for the dismissal is the transfer. This could be for example where a new employer tells the old employer that for the deal to proceed they do not want certain staff who would otherwise transfer.

However, an incoming employer may be able to defend dismissals if it can show an “economic, technical, or organisational reason” (or ETO reason) to make staff changes or changes to terms and conditions of employment following a TUPE transfer. An ETO reason must relate to the numbers or functions of staff members. Harmonisation of terms and conditions of employment with current staff will not usually qualify for this.

Can I avoid TUPE when buying or selling my business?

In some cases there may be an exit negotiation with staff entailing settlement agreements. In such circumstances both employers should take legal advice.

Employers cannot decide to opt out of TUPE if it applies. But the most straightforward way to avoid it is to structure your business sale as a share sale. In this way, the employing company does not change identity and generally TUPE will not apply. Take care if there is also a reorganisation or restructure involved in a share sale as that could lead to TUPE being relevant to the transfer of staff.

Should TUPE apply, the parties can also agree by way of the written commercial agreement between themselves who would bear the costs if there was a failure to comply with TUPE or for other employee related liabilities.

Have there been any implications on this from Covid-19?

Employers should refer to government guidance as to whether or not employees transferring to them are covered by the Coronavirus Job Retention Scheme (CJRS) and may need to take legal advice on this. If there is a TUPE transfer and the seller has topped up furlough pay to full pay and this amounts to a contractual right, then the buyer would be also be liable for this.

An employer can inform and consult with trade union representatives and employee representatives while they are on furlough. It is not clear if this permitted for individual employees on furlough, but this would be logical.

In the due diligence process, buyers are inevitably asking whether you have had employees on furlough and reviewing claims made under the CJRS. They want to know that this has been done correctly and are likely to seek warranties and indemnities that (in the event of any future fines or penalties for non-compliance) you will be ultimately liable, as the seller.