Concept for - Buying or selling a business - latest update about TUPE

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?

What is TUPE?

“TUPE” stands for the Transfer of Undertakings (Protection of Employment) Regulations 2006 and as amended in 2014.

What do the TUPE Regulations do?

The TUPE Regulations are a powerful piece of law designed to protect employees when a business changes owner (a ‘business transfer’), including against certain changes being made to terms and conditions of employment.

TUPE can also apply where there is a service provision change, which covers outsourcing and contracting i.e. where an organisation engages a contractor to do work on its behalf, reassigns such a contract or brings the work back “in-house”. In this article, we focus on business transfers.

What is a TUPE transfer?

The size of the business doesn’t matter. When TUPE applies, the employees’ jobs, their terms and conditions, and continuity of employment all automatically transfer under TUPE 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 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. See further below for the Government’s proposal to achieve greater certainty on this point, i.e. that TUPE does not apply to workers.

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 has completed.

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. This is about ensuring your ‘house is in order’ before sale. For example, common issues we see include:

  • Ensuring holiday pay has been calculated and paid correctly;
  • That legally compliant and relevant employment contracts are in place for all staff (not least so that existing terms and conditions of employment are clear);
  • That you hold appropriate evidence as proof of Right to Work checks having been undertaken for every employee; and
  • That the employer paid the national minimum wage.

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, depending on the buyer’s approach to risk.

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 in some cases 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 around confidentiality of the proposed sale, 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 of staff at that time 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.

This exception is being extended, for small-scale TUPE transfers that occur on or after 1 July 2024 (and where there are no existing employee representatives already in place). From that date, the requirement to hold an election to put employee representatives in place is removed in two circumstances:

  • Where an employer has less than 50 employees, irrespective of the size of the transfer; or
  • Where the proposed transfer includes less than 10 employees, irrespective of the size of the employer.

For this exception to apply there must be no appropriate representatives already in place. In other words, a recognised trade union or employee representatives who have been appointed by affected employees who would have authority to be consulted about the transfer. 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.

Government consultation on TUPE

The Government recently announced a consultation on changes to TUPE on 16 May 2024. This includes proposals to clarify when TUPE does and doesn’t on a couple of areas, ‘where case law has introduced uncertainty’. See here for further information on the consultation.

The consultation runs until 11 July 2024 is seeking views on issues including the following changes:

  • To confirm that TUPE only applies to employees and not to workers. Currently, the TUPE legislation is stated to apply to ‘employees’. However, the definition of ‘employee’ is wider than the definition in the Employment Rights Act 1996 and other UK employment legislation. This led to the 2019 tribunal case of Dewhurst v Revisecatch Ltd which held that TUPE would also apply to workers. Although as this is a first instance decision, it is not binding on future cases, the Government wishes to clarify the position.
  • To confirm that if a business transfers to multiple transferees (or buyers), the employees assigned to that business transfer cannot have their employment split between the various transferees. This is what the European Court of Justice had held was possible in the case of ISS Facility Services NV v Govaerts). Instead, the whole employment of a particular employee must transfer to one transferee. The Government is proposing that in the future transferees would be required to agree who should take on each employee. It is yet to be clarified how this point of the proposal would work in practice.