Government proposes removing changes in service provider from scope of TUPE

A new consultation (71-page / 521KB PDF) proposes abolishing the service provision change (SPC) rule, introduced when the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) were last updated. The change, which took place in 2006, expanded the regime to govern situations where work is outsourced, brought back in-house or the service provider is changed.

Employment law expert Christopher Mordue of Pinsent Masons, the law firm behind Out-Law.com, said that the proposed change would have significant repercussions for contractors.

"For the past six years since this test was introduced the working assumption for contractors has been that TUPE will apply on a change of service provider," he said. "This stability could now be removed, throwing us back to the pre-2006 position where there were huge difficulties in applying the EU and UK case law test and predicting whether TUPE would apply. There's a major task for contractors in just getting to grips with what that test was and with all of the complexities and problems that they've largely been able to forget about since 2006."

"The SPC rule was introduced - and welcomed by contractors - precisely to solve this uncertainty in the case law. While it goes above and beyond the requirements of EU law, there was a real benefit to business by providing greater certainty and reducing disputes," he said.

Other proposed changes to TUPE include giving new employers more freedom to change the terms and conditions of transferred employees after the transfer has taken place, repealing specific requirements regarding the notification of employee liability information and allowing 'micro-businesses' to consult with affected employees directly, rather than through representatives.

The consultation was published on the same day that the Government set out (48-page / 450KB PDF) how it would take forward proposals to encourage greater use of settlement agreements, allowing parties to avoid a tribunal when an employment relationship has broken down. It also plans to cap compensation that may be awarded in the event of a successful claim of unfair dismissal at 12 months of the employee's salary. The overall unfair dismissal cap will remain unchanged, at £72,300.

An SPC occurs when a client outsources activities for a contractor to perform on its behalf, re-tenders for provision of such activities or brings those activities back in house. In each case, for TUPE to apply, the change must affect an "organised grouping" of employees which has the "principal purpose" of carrying out those activities on behalf of the client, and those activities must remain "fundamentally or essentially the same" after the transfer.

The 2006 amendments brought more SPCs within the scope of TUPE, with the intention that employees would transfer to the new service provider in the majority of cases. However the EU Acquired Rights Directive, from which TUPE originates only applies to transfers involving the "transfer of an economic entity which retains its identity". Principles for determining whether an SPC would be covered by the Directive are set out in European case law, and can include factors such as whether the new employer "takes over a major part of the workforce".

"The Government suggests that the 2006 service provision changes may have actually imposed unnecessary burdens on business, and questions whether they have delivered the benefits originally anticipated," it said in the consultation paper. "In theory the service provision changes work in favour of small and medium-sized businesses who do not have large staff resources, as they can bid for work against incumbents in the knowledge that if they are successful they will inherit the staff to carry out the work. However, this also means they necessarily take on employment liabilities too, which can be a disincentive to bid."

However, employment law expert Mordue said that the Government had wider policy reasons in mind than simply removing 'gold plating' over and above the requirements of EU law.

"The driver is really to enable public sector outsourcing, and the second generation contracting of public services, to take place outside the scope of TUPE - in other words without an automatic transfer of the current staff providing the service, without the need to replicate existing terms and conditions of employment and with greater flexibility to change service provision and reduce costs," he said.

"The proposal would create both risks and opportunities for contractors, depending on whether they are an incumbent or are bidding for services. Existing contractors are likely to have assumed that if they lose the contract they will be able to use TUPE to avoid redundancy costs and to simply pass their workforce onto the new contractor. That may not be possible and contractors may be hit with unexpected, unbudgeted redundancy liabilities. On the other hand, those commissioning services and contractors bidding for work will have greater freedom to start the new contract with a clean slate and save costs," he said.

The consultation, which is open until 11 April 2013, proposes that a transitional period of between one and five years would apply before any change took place in order to give contractors time to prepare for unexpected costs.

"The issue will still need to be taken into account for all new contracts, and in any event case law over the past 12 months has consistently shown that the certainty promised by the SPC rule is often illusory – it is now being very restrictively interpreted by tribunals," Mordue said. "Incumbent contractors need to be very aware that there is a good chance that TUPE may not apply at the end of current contracts, and take what steps they can to protect their position."