When buying all or part of a business, it is important to be aware that you will inherit not only its employees, but the responsibility to honour all existing contracts, conditions of employment and any ongoing disputes, tribunal claims and collective agreements relating to those employees. Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (known as TUPE), “all the transferor’s rights, powers, duties and liabilities under or in connection with the transferring employees’ contracts of employment are transferred to the transferee”. This legislation, designed to protect employee rights, enables employees to enjoy exactly the same terms and conditions and continuity of employment as they did under the previous employer, with any changes (for example to bring conditions of employment in line with the buyer’s existing employees) classed as constructive dismissal.
When is TUPE applicable?
TUPE is applicable wherever there is deemed to be a “relevant transfer” of an undertaking, and applies to a wide range of situations including mergers, the sale of a business by sale of assets, the sale of a going concern, a change in licensee or franchisee, the inheritance of a business through the execution of a will, changes to contractors or the contracting out of services, and where all or part of a sole trader’s business or partnership is sold or transferred.
It does not apply to:
- transfers by share take-over
- transfers of assets only (such as equipment).
- transfers of a contract to provide goods or services where this does not involve the transfer of all or part of a business
- transfers of undertakings situated outside the UK (although these may be covered by equivalent foreign legislation).
- “bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor” - It is important to note that going into administration, administrative receivership, or a voluntary arrangement is not viewed as being “analogous to insolvency proceedings.”
When considering a potential business purchase, it is essential to conduct thorough due diligence on any existing disputes or claims against the current employer so that these are reflected in any contract you sign. Although there is nothing you can do to prevent TUPE applying, it may be possible to lessen the burden by dividing up the liabilities contractually with the previous employer. As a buyer, you are entitled under TUPE legislation to receive written information from the vendor about all employees who are to be transferred, and all the associated rights and obligations towards them: if you do not receive this, you may be entitled to compensation of at least £500 per employee for whom incorrect or inadequate information was provided. In turn, it is your responsibility to provide the vendor with any action you plan to take that will affect employees in advance of the sale, so that there is enough time for those employees to be consulted. If you fail to do this, employees may be able to claim compensation of up to 13 weeks’ pay.
Are any employees excluded from the legislation?
TUPE legislation applies to all those employed immediately prior to the sale who have provided the business with a year’s service or more. It also includes those dismissed immediately prior to the sale (i.e. during the negotiation period) where that dismissal was for reasons connected with the transfer. Employees who refuse to work for the new employer are entitled to do so, however they forfeit all rights to compensation from you as an employer.
Are there any exceptions?
Although this is not strictly covered under TUPE, existing legislation under the Pensions Act 2004 requires you to provide some form of pension arrangement for all those who were previously eligible under the previous employer. If this involved share or share option schemes, you will need to provide an equivalent - although if you don’t take over the previous business’ shares, you won’t be able to provide these to your staff.
In some cases, you may be able to make changes to employment terms and conditions if you are able to prove that these changes are for an economical, technical or organisational reason (ETO) and provided a fair procedure is followed. In practice, the scope for acceptable ETO reasons can be very narrow and difficult to prove to an employment tribunal. However there is one notable exception: for insolvent business, the regulations have been relaxed so that the incoming employer is not liable for redundancy, notice and other payments to employees. Furthermore, subject to agreement with trade union or employee representatives, terms and conditions of employment can be changed without an ETO, to reflect that an incoming employer is effectively safeguarding employment by attempting to rescue the business from collapse.
In conclusion, the TUPE regulations were originally designed to protect employee rights after businesses were privatised or large contracts with companies were transferred to new owners. For many transactions where a business is sold by way of shares then TUPE will not apply as the company has not changed. However, entrepreneurs must consider it if thinking of structuring any transaction in a way other than a simple transfer of shares.
* TUPE is a complex piece of legislation and if there is any doubt over when or how it is applicable it is essential to seek legal advice. In the event of a dispute, the situation will need to be resolved by an employment tribunal or higher court.
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