How TUPE applies to the Transfer of a Service Contract

24 January 2019

Introduction

A transfer of undertakings under the EC (Protection of Employees on Transfer of Undertakings) Regulations 2003, S.I. No. 131 of 2003 (“TUPE”) occurs where a business or part of a business is being transferred from the transferor (employer) to the transferee (another employer). Employees that attach to the business are entitled to transfer on their existing terms and conditions of employment and with their accrued service intact.

When does TUPE apply?

The key criteria to be considered in determining whether there is a transfer pursuant to TUPE are as follows: –

  • The type of undertaking or business concerned;
  • Whether or not the business’ tangible assets, such as buildings and moveable property are being transferred;
  • The value of its intangible assets at the time of transfer;
  • Whether or not the majority of its employees are taken over by the new employer;
  • Whether or not its customers are being transferred;
  • The degree of similarity between activities carried on before and after the transaction, and the period, if any, for which these activities were suspended.

How does TUPE apply to the transfer of a service contract?

Throughout the 1990s, the Court of Justice of the European Union had to deal with problematic issues regarding whether outsourcing of services would constitute a transfer for the purposes of the Transfer of Undertakings Directive 2001/23/EC.

A series of European case-law established three different types of scenarios where a transfer of a service contract occurs and where there is a potential trigger of TUPE:

  • A service previously performed inhouse is contracted out; or
  • The service remains but there is a change of contractors for the outsourced activity; or
  • A service provided by an outside contractor is brought in-house.

There is no short answer as to whether or not TUPE applies to the transfer of a service contract and it will often depend on what is being outsourced. It must be examined on a case-by-case basis taking into account the key criteria above, the specific facts of the outsourcing situation and the business itself.

For TUPE to apply in a transfer of a service contract scenario, there must firstly be an outsourcing of an economic entity which retains its identity. Secondly, there has to be a transfer of either the use or ownership of assets or the majority of the employees in terms of numbers and/or skill.

In undertakings that are asset reliant such as a distribution or logistics business where there is a transfer of trucks and trailers, TUPE is often triggered as the transfer of assets is a key factor in establishing the application of TUPE. However, in the scenario of a logistics company, TUPE may not be triggered if there is a transfer of the majority of employees but there is no transfer of assets.

In undertakings that are labour intensive such as cleaning or security services, TUPE will likely apply where the new service provider continues the activities but also takes over the majority of employees who previously carried out the activities. In other words, if it is the human capital or personnel function of the business that is transferring, TUPE will be triggered.

Points to be aware of if you win a service contract and TUPE applies

The winner of the service contract will undoubtedly, where TUPE is involved, have unexpected costs implications, including: –

  1. The terms and conditions of employees may be more favourable than the existing employees of the winning service provider, for example bonuses, allowances or other benefits;
  2. The costs of redundancies if they are to be implemented after the transfer or when the contract ends;
  3. The costs of any potential claims or liabilities connected with the new employees related to grievance, disciplinary issues etc.;
  4. General costs of having a larger workforce.

If you are considering tendering for a contract where there may be a potential application of TUPE, it is recommended to gather as much information as early as possible and ideally in advance of completing tender documents.

It is not unusual for the existing contractor to seek an indemnity from the winning service provider in respect of any liability the contractor incurs under TUPE and employers may have to consider negotiating indemnities in respect of any TUPE issues that may arise at this stage.

The legal implications of outsourcing with regard to the potential application to TUPE can be highly complex and there are numerous practical issues to consider and pitfalls to avoid. It is imperative to investigate and seek advice as to whether or not TUPE is triggered as early as possible in the process of the transfer of a service contract.

 

For further information please contact Laura Feely or another member of the Employment & Employee Benefits Group

Laura Feely
Solicitor Employment & Employee Benefits
D: +353 1 202 6421
E: lfeely@efc.ie

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