by Laura Graham, Partner in the employment law team at Reddy Charlton Solicitors
A transfer of undertaking can arise in a number of scenarios, including on the sale of a business, the award of a tender or simply switching service providers to a more competitive supplier.
Regardless of the situation, if there is a change in service provider, an assessment is required to determine whether TUPE applies.
If TUPE applies, the employees of the outgoing contractor transfer to the incoming contractor, with their terms and conditions intact. The application of TUPE is likely to be a significant consideration for any potential incoming contractor.
An Overview of TUPE’s application
To assess if TUPE arises on the transfer of an undertaking the following factors will be considered:-
- The nature of undertaking or business concerned;
- If assets, tangible or intangible, are being transferred;
- If employees are being taken over;
- Whether customers will be transferred; and
- The similarities between activities carried on before and after the transfer or the period, if any, for which those activities are suspended.
However, the mere changeover of a contractor is generally not captured by TUPE. In order for TUPE to apply to a change in contractor there must also be:-
An associated transfer of assets; or
- The taking over of a major part of the workforce in terms of numbers or skills.
- The tribunals and courts tend to analyse whether a function being transferred is either:-
- labour intensive (in which case the importance to be attached is whether there is a transfer of a workforce); or
- asset reliant (where the determining factor may be whether assets have transferred).
In a labour intensive undertaking (i.e. a service reliant on manpower such as cleaning) if the incoming contractor refuses to take over the majority of the workforce, TUPE will most likely not apply. This allows the incoming contractor to decide whether TUPE applies or not by choosing to take over the workforce or not.
In an asset reliant undertaking (e.g. manufacturing) even if the incoming contractor takes over the majority of the workforce, TUPE may not apply if there is no transfer of assets.
There is a degree of inconsistency in decisions from the courts and tribunals as to whether a function is labour intensive or asset reliant and accordingly whether TUPE applies or not, so a case by case analysis is usually required.
Some tribunals have commented that they have felt bound to follow the labour intensive versus asset reliant function analysis even when they feel that it does not produce fair results, in circumstances where the purpose of TUPE is to protect employees in a transfer of business situation. In a labour intensive undertaking, the incoming contract can avoid triggering the application of TUPE by not taking on any of the staff.
A recent shift in assessment criteria?
In a recent European Court of Justice (“the Court”) decision of Grafe v Sudbrandenburger Nahverkehrs GmbH (the “Grafe Case”) the assessment of whether TUPE applied to the changeover of contractors shifted away from whether the function was labour intensive or asset reliant and focussed instead on whether the economic entity retained its identity, after the transfer.
In the Grafe Case a local bus company Südbrandenburger Nahverkehrs GmbH (‘SBN’) had been operating a public bus service since August 2008. In September 2016, the district put out a tender for the provision of the public bus service. The tender included a requirement that the buses achieve specified technical and environmental standards. SBN decided not to proceed with the tender application and instead the company ceased trading and gave notice to its employees.
Kraftverkehrsgesellschaft Dreiländereck mbH (“KD”) was awarded the tender and was due to begin providing services from August 2017. KD employed the majority of SBN’s employees however, KD did not take on any of the SBN’s assets such as bus depots or buses, as the buses did not achieve the technical and environmental standards required.
Mr Grafe and Mr Pohle were both former employees of SBN. Mr Grafe was a bus driver with SBN and was employed by KD following the award of the tender to KD. However, KD did not recognise Mr Grafe’s previous years of employment with SBN and classed him as an entry level employee. Mr Pohle was not employed by KD following the successful tender. He argued that his employment should have transferred to KD pursuant to TUPE when they were successfully awarded the contract.
KD argued that TUPE did not apply on the basis that the service was:-
(a) asset reliant; and
(b) it did not take on any of SBN’s assets.
SBN argued that the taking over of it buses was precluded given the technical and environmental requirements set out in the tender. It also argued that the tender required bus drivers to have specialist knowledge in respect of the route, network roads, timetables etc. and inferred that the drivers were “vital to the economic entity”.
The Court agreed with SBN. It held that where there is no transfer of operating assets, as a result of legal, environmental or technical constraints, this doe not preclude TUPE from applying. It looked at the other factors and noted that the economic entity had retained its identity; KD ran the same routes, there was no interruption of service and it was a significant factor that KD took on the majority of SBN’s employees.
Furthermore, if SBN did apply for and succeed in obtaining the tender, they would have had to replace buses to achieve the required standards.
The Court held that the economic identity was retained and there was a relevant transfer of undertaking.
In light of the recent Grafe decision, the assessment of whether TUPE applies will be a little more nuanced. While the analysis of whether a service is labour reliant or asset reliant remains relevant, if external factors prevent the incoming contractor from taking on staff or assets, the importance of those factors fades and the assessment will focus more on whether there is a transfer of an economic entity which retains its identity.