Rights and Liabilities relating to Mergers, In-Sourcing, and Out-Sourcing

Rights and Liabilities relating to Mergers, Restructuring, In-Sourcing, and Out-Sourcing arising from The Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’)

In a dynamic, thriving economy employers require freedom to change their economic activities or restructure themselves for many reasons. For example, an employer may want to change the objects of her business and she might require funds in order to invest in the new venture. One method of raising such funds may be to sell an ancillary part of the business as a going concern. Clearly, the staff employed to perform the employer’s ancillary activities will be affected. Under traditional contractual principles such employees have no protection from being dismissed by reason of redundancy because the buyer of that part of the business has a separate legal personality, he was not a party to the making of their contracts of employment, and so he will not acquire the seller’s obligations towards them. However, under The Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’) he may well acquire contractual obligations towards them.

The 2006 Regulations partly implement within the United Kingdom the European Union Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses. This Directive applies to any transfer of an undertaking, business, or part of an undertaking or business to another employer as a result of a legal transfer or merger provided that the transfer relates an economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary. The 2006 Regulations are more extensive in scope. They potentially apply additionally whenever there is a ‘service provision change’. Loosely speaking this means that they might also apply to situations involving in-sourcing where an employer opts to perform some activity rather than continue using an independent contractor, out-sourcing, and where there is a change of contractors performing the services for a client.

This sort of ‘gold plating’ of European law obligations whereby employers incur more obligations towards employees than is strictly necessary under EU law was criticised by both political parties in the current coalition government before the 2010 general election. In fact the Conservative Party appeared to advocate repealing the service provision change aspects of the 2006 Regulations. However, as yet the government appears to have made no attempt to enact any such repeal. Consequently, many more employers than would otherwise be the case will risk being affected by legal proceedings in the event that they ignore duties imposed by TUPE.

The law provides for;