Employers who transfer employees to a “new” employer (transferee) under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“the TUPE Regulations”) are under a duty ahead of the transfer to provide certain information about those employees to the transferee. Failure to provide this “Employee Liability Information” at least 28 days ahead of the transfer or providing information which is defective could result in the “old” employer (transferor) having to pay a minimum penalty of £500 per employee, and potentially more to cover any losses sustained by the transferee. In a recent case, the transferee alleged that the information it had been provided with in relation to a Christmas bonus was defective, and claimed over £100,000 in compensation.
TUPE may apply when:
- a business or “undertaking” (or part of it) is taken over as a going concern by another organisation; or
- services are outsourced, retendered or taken back in-house (known as a “service provision change”): for example, catering services, facilities management or helpline services.
If TUPE applies, subject to certain exceptions, employees who are assigned to that part of the business, or those services, are transferred from one organisation to the other and their terms and conditions transfer with them to their new employer.
The case of Born London Ltd (“Born”) v Spire Production Services Ltd (“Spire”) involved a service provision change. Both were print-finishing businesses, and Born took over from Spire the contract for printing the catalogue of Sotheby’s, the auctioneers. As a result, 32 employees were transferred from Spire to Born, and Spire provided Born with the ELI in respect of those employees. When it did so, it listed their terms under headings of “contractual” and “non-contractual”. Under “non-contractual” it listed a Christmas bonus, made up of one week’s pay plus £7.50 per year of service, payable in November each year.
It was later suggested by the transferred employees that in fact the Christmas bonus was contractual. The bonus was referred to in the contracts of employment and although some of the employees’ contracts said it was non-contractual, others did not. It also transpired that the bonus had been paid to all 32 employees every year they had worked at Spire. Following a claim lodged by Born seeking a declaration as to the status of the bonus, an Employment Tribunal ruled that the bonus was contractual either as an express term, or a term which had been implied through custom and practice.
Did Spire properly provide Employee Liability Information?
Born also lodged an Employment Tribunal claim under the TUPE Regulations, alleging that Spire had provided defective ELI when it stated that the employees’ bonus was not contractual. Under the TUPE Regulations, ELI must include “those particulars of employment that an employer is obliged to give to an employee pursuant to section 1 of the 1996 Act” (the Employment Rights Act 1996). Section 1 of the 1996 Act requires the employer to give particulars of “the scale or rate of remuneration or the method of calculating remuneration” and “the intervals at which remuneration is paid”. Born argued that this must mean providing details of contractual entitlements. Born suggested that this was supported by the reference to the “method of calculating remuneration” and also by the European Directives underpinning both the 1996 Act and the TUPE Regulations. In its claim under the TUPE Regulations, Born sought compensation of over £100,000 for its losses to span the life of the contract.
EAT rejects the claim
The Employment Tribunal rejected Born’s claim, and on appeal the Employment Appeal Tribunal (EAT) agreed. Section 1 of the 1996 Act (referred to in the obligation to provide ELI) does not give a right to a written contract of employment but to a statement of employment particulars. The so-called “section 1 statement” does not amount to a contract of employment although it is evidence of what the contract terms are. Although some of the information which has to be provided will be contractual, not all of it will be. The EAT did not consider that a distinction should be made between those particulars that are contractual and those that aren’t.
The method of calculating pay may be a strong indicator as to whether a payment is contractual or not, but is not conclusive. In addition, both the European Directives underpinning the section 1 statement and the TUPE Regulations infer that what must be conveyed are essential aspects of the contract or employment relationship – not only contractual information. The EAT noted that in any event it is not always possible to state categorically (without the ruling of a court or Employment Tribunal) whether a bonus is contractual or non-contractual. The EAT ruled that by specifying the bonus, the method of calculating it and how often it had to be paid (as required in the section 1 statement), Spire had complied with its duty to provide ELI under the TUPE Regulations, and therefore Born was not entitled to compensation.
As part of the due diligence process, it is usual for the transferee to ask questions about the transferring employees. Often such questions go beyond what is strictly required under the TUPE Regulations. It is common for the transferee also to require that sufficient warranties and indemnities are included in the outsourcing agreement or business purchase agreement to protect it in the event that information which has been provided by the transferor in relation to the employees is incomplete or inaccurate.
Such indemnities may, however, be harder to obtain in a retendering scenario, particularly because the transferring employees will not be the employees of the organisation conducting the retender and they are unlikely to be in a position to and/or willing to provide any assurances about the employees engaged by the outgoing provider. In such a scenario, the transferee may find it has a limited ability to go against a party on the basis of contractual indemnities and may have to rely on a failure to comply with the transferor’s obligations under the TUPE Regulations. It was pointed out to the EAT that one of the reasons Born pursued an Employment Tribunal claim was because of the difficulties it would face in bringing any other kind of claim in the civil courts.
For these reasons, it is important to have comprehensive employment entrance and exit provisions in service provision change contracts between the client and the outgoing and incoming provider. An incoming provider should always insist that the outgoing provider is under sufficient obligation to comply with its obligations under TUPE (including the provision of ELI). If this is not possible then the incoming service provider will need to take this into consideration as part of the retendering process.
The EAT’s interpretation of ELI under the TUPE Regulations is helpful for both transferors and transferees in that the ruling does not impose on a transferor the obligation to categorise whether a bonus is contractual or non-contractual, which can be particularly difficult to determine. Similarly, the transferee will not miss out on important information about a bonus simply because the transferor believes it is non-contractual.
However the case does highlight the importance of the transferee raising comprehensive initial enquiries and further enquiries as part of the due diligence process as well as ensuring that there is adequate protection in the transaction documents should any of the transferor’s answers turn out to be inaccurate or untrue. Transferors should also take heed: Spire may have lost the case if it had specified the wrong amount of the bonus, rather than wrongly specifying (incorrectly) the contractual status of it.
Enjoy That? You Might Like These: