Financial Services Mergers And Acquisitions - The 2006 TUPE Regulations

March 2006

The new Transfer of Undertakings (Protection of Employment) Regulations known as TUPE, will affect any financial services firm that is considering any form of merger, acquisition, buy out, buy in or even a reorganisation exercise. Each of these steps could constitute a Transfer of an Undertaking under the regulations.

Firms that are currently involved in, or planning to become involved in, the "Transfer of an Undertaking", either as the transferee or the transferor should note that the new Transfer of Undertakings Regulations 2006 (the new Regulations) have now been published together with guidance on them.

The new regulations have widened the scope of the old TUPE regulations, for the first time imposing obligations in respect of certain changes to outsourcing and contracting arrangements. In addition, there are many new, and potentially onerous, requirements to ensure that information is passed on in respect of transferring employees within set timescales and, more crucially still, to ensure that employees are consulted with. A new stand alone constructive dismissal claim is also introduced to protect employees where the changes result in a detriment to their working conditions. Some flexibility is however provided which will assist in a transfer of an insolvent business.

Transfer of Undertakings

Key to interpreting the Regulations is an understanding that the purpose of TUPE is to protect employee rights and continuity of employment of employees in the event that their employer changes as the result of a Transfer of an Undertaking.

In cases where a transfer that falls within the TUPE definition takes place employees will automatically become employees of the new employer (or contractor) upon the same terms as they were previously employed, provided that they are part of an organised grouping of employees that are based in the UK.

Firms should particularly be alert to the fact that, as a result of the new Regulations, the definition of "Transfer of Undertaking" will be much broader. Firms should also be aware that there is no minimum size of business to which the Regulations apply - TUPE applies equally to both large and small business transfers.

Transfer of Undertakings (Protection of Employment) Regulations 2006

It has been confirmed that the new Regulations will apply to relevant transfers with an effective transfer date on or after 6th April 2006. This therefore leaves little time for businesses already involved in a 'Business Transfer' to prepare and ensure that the new requirements are met.

The changes fall into five key areas, including those relating to service provision changes, employee liability information, variation of contracts of employment, transfers of insolvent businesses and dismissal of employees.

Service Provision Changes

As mentioned above, the first point about which firms need to be alert is that the scope of TUPE has been widened so that the new regulations not only apply where: -

there is a transfer of the whole or part of a business from one employer to another. For a part of a business to fall within the definition it must be an "economic entity which retains its identity", whether or not it is core or ancillary to the main business of the employer;

but now will also apply where there is: -

a service provision change. This will cover, for the first time, cases where services are outsourced, in-sourced or assigned to a new contractor.

Firms that are proposing to enter into such an arrangement therefore need to address the new Regulations unless completion of the transfer can be carried out before 6th April 2006.

Employee Liability Information and consultations

Probably the most onerous part of the 2006 Regulations is the creation of the duty for the transferee to notify specific "employee liability information" to the transferor at least 14 days before the transfer takes place. The information that is required is: -

the identity of the transferring employees;
their age;
information contained in the employees statements of employment particulars;
information relating to any collective agreements;
details of any disciplinary action and grievances; and
details of any legal action.

A new duty is also placed on both the transferee and the transferor employers to inform and consult with representatives of the affected employees. Firms should note that this includes not only employees who are to be transferred but also employees who will remain with the transferee employer and those existing employees of the transferor. The affected employees representatives must be informed of: -

the fact that the transfer is to take place, including when and why;
the "legal, economic and social implications" of the transfer for the employees; and
any action that the employer envisages taking in connection with the transfer that may affect the employees.

Changes to Terms and Conditions of Employment

Under the original TUPE Regulations all the employees were automatically transferred on the same terms that they were previously employed on by the transferor employer.

The new Regulations however provide a little freedom for making a variation to a transferring employees contract of employment to be agreed, provided that the reason for the variation is: -

- unconnected with the transfer;

or, if it is connected with the transfer,

- an "economic, technical or organisational" reason entailing changes in the workforce. It should be noted the harmonisation of terms for employees is not considered to fall within the freedom granted by this provision. What does constitute an "economic, technical or organisational" reason is not always clear cut and firms are recommended to seek appropriate legal advice before seeking to vary contracts where a Transfer of Undertaking is either recent or imminent.

Insolvent Businesses

The new Regulations have made two changes to make it easier for an insolvent business to be transferred to a new owner. One of these is to ensure that some of the transferor's debts are not passed to the transferee. Secondly, in the case of an insolvent business, the restrictions on the variation of employees contracts of employment are effectively waived, enabling pay to be reduced and possibly other inferior terms to be introduced. Firms involved in a Transfer of Undertaking should ensure that they take advantage of these concessions, aimed at protecting the jobs of employees of the insolvent business.

Dismissal of Employees

The new TUPE Regulations provide additional protection for employees by creating a new stand alone constructive dismissal claim to protect employees where they have imposed on them, as a result of the transfer, a "substantial change for the worse in their working conditions". Under the original TUPE legislation, if an employee was dismissed by either the transferor or transferee employer, the dismissal would be automatically deemed unfair only if the dismissal was: -

because of the transfer itself; or
for a reason connected with the transfer unless it is an "economic, technical or organisational" reason entailing changes to the workforce.

Conclusion

Firms that are: -

considering transferring the whole or any part of their business to another entity, or having transferred to them the whole or any part of their business from another entity; or
that are considering outsourcing or conversely in-sourcing any element of their business; or
that are considering entering into a contracting out arrangement in respect of any aspect of their business,

should ensure that they are aware of, and comply with, the revised obligations that will apply with effect from 6th April 2006. Where there is any doubt over the application of the provisions, or the action that needs to be taken to comply with the provisions, suitable legal advice should be sought.

As stated above, the new TUPE Regulations will affect any financial services firm that is considering any form of merger, acquisition, buy out, buy in or even a reorganisation exercise. Each of these steps could constitute a Transfer of an Undertaking under the regulations. You must ensure you take appropriate advice. Remember a breach of a regulation such as the TUPE regulations can result in an employment tribunal or legal action, which may then become a notifiable event to the FSA.

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