Features: August 13th, 2010

By Alison Weatherhead

The continuing pressure to cut costs in the public sector has led to many local authorities looking to squeeze the best possible value from their contractors by re-negotiating and re-packaging. This is creating uncertainty about employee rights. The author sets out a path to navigate this legal minefield.

To provide better service and a better deal financially, local authorities are currently restructuring many contracts – even long-standing arrangements. This usually means splitting services between multiple contractors or re-packaging contracts, leading to fewer providers.

This has a knock-on effect for employees and, invariably, the question as to whether the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) are triggered rears its head.

There used to be a lot of uncertainty over whether TUPE came into play or not. New TUPE Regulations were introduced in April 2006 and were heralded as a new dawn, promising clarity and certainty. It is only now, with some cases reaching the courts, that the legal position is becoming clear.

But clarity raises many questions. What do these cases show us about determining whether individual employees are covered by TUPE transfer rules when a contract is being split or re-packaged?

What are the potential implications for both local authority procurement and those tendering for such contracts?

And how can public bodies structure their services so that the re-tender of services goes through without incurring unnecessary trouble and cost?

The key question in any situation where services are being split or re-packaged is whether existing employees will be covered by TUPE. This will have a significant impact on the costs of the contract.

The four-stage test

In a recent case – Kimberley Group Housing Ltd v Hambley and others – the Employment Appeal Tribunal (EAT) put forward a four-stage test, which could be used by parties facing the question of whether TUPE applies.

The first stage is to identify the ‘activities’ before and after a transfer. Activities which transfer must be fundamentally or essentially the same but need not be identical. Employment tribunals should take a “common sense and pragmatic” approach and look at a broad definition of the activities involved.

This, however, may be easier said than done, as was demonstrated in another recent case, which dealt with the re-tender of a catering contract.

In OCS Group UK Limited v Jones and another, the EAT ruled that providing a full catering service of hot meals cooked on the premises was a wholly different operation to selling pre-prepared sandwiches with a salad bar and that there was, therefore, no transfer.

The second test asks whether one contractor has ceased to carry out services and been replaced by another. This should be clear, unless the contract is split.

In Kimberley, the first to consider a split contract, there was a transfer where one contractor became two. In this case, it was clear where the activities had transferred, but it will not always be so straightforward.

Tribunals have decided activities must have a distinct identity so their destination can be recognised. In Thomas-James and others v Cornwall County Council, 17 contractors reduced to nine when services were re-packaged, but the activities did not have a distinct identity, so there was no transfer.

In another case decided by the EAT, accommodation and services previously delivered to asylum seekers by Clearsprings Management were to be split between three separate contractors.

Over a three-month transitional period, new contractors gradually acquired the leases of properties from Clearsprings, with asylum seekers being distributed between those properties at random.

The EAT held that the activity previously carried out by Clearsprings was “too fragmented” after being moved to the new contractors, so there was no transfer under TUPE. The transition process and random nature of service allocation was significant to the outcome.

The third test considers whether there is an organised grouping of employees with the principal purpose of carrying out the activities. Guidance from the Department of Business Innovation and Skills suggests employees need to be “essentially dedicated to the activity” to transfer, though it is likely that the test is not this strict.

Instead, the well-established assignment test under the landmark Botzen case will continue to apply. This means parties need to look at factors, such as how much time employees spend on activities, how the cost is allocated and the value to the contractor of the time spent.

Such a calculation is clear in cases such as Kimberley, where the contractor that took on most of the activities – 71 per cent – inherited the employees.

However, difficulties will arise in cases where it is less obvious how employees spend their time. Unhelpfully, TUPE does not give contractors the right to access this information.

Finally, the parties should consider whether they are involved in a “business transfer”. Even if the service provision change rules under TUPE are not triggered, there may still be a transfer of an economic entity. If this retains its identity post transfer then there may still be a TUPE transfer, so this must also be considered.

What is the potential cost?

If the incumbent and/or contractor wrongly determine there is no TUPE transfer and fail to inform and consult, employees may claim up to 13 weeks’ pay each. New contractors also have a claim against the incumbent for failure to provide the employee liability information.

If these costs can be passed to the client under the contract, the local authority cannot afford to ignore this. Additionally, because these workforces may be in unions, this does not encourage a positive union relationship, which is not in the interest of any parties.

Where there is no transfer, or where employees are not “wholly or mainly assigned” to transferring activities, the incumbent may face making the employees for whom it has no work redundant.

This can be expensive and time-consuming, especially where collective consultation processes are triggered. Employees can again claim up to 13 weeks’ pay for consultation failures, on top of their pay for the consultation period itself, notice periods and any redundancy payments that may then be due.

It is important for the local authority to check the contract to ensure these costs could not be passed on.

While the TUPE rules provide welcome clarity for transfers that fall clearly into its ambit, determining whether particular employees are covered is often a significant challenge in itself.

Particularly where provision is being restructured to provide better value or security of service, great care should be taken to prevent unexpected tribunal costs further down the line.

Managing the risk: Top Tips

• As the local authority, especially where this is a 2nd generation re-tender, consider carefully before giving certainty in tender documents about whether TUPE applies, unless the position is absolutely clear.

• Tendering contractors should ensure the price/cost proposal includes conditions that are triggered where there is a TUPE transfer, especially in relation to the costs of employees, as employees will retain their existing terms and conditions of employment.

• Neither party should forget termination. Think about what costs may be triggered and how these will be dealt with under the contract.

• The new contractor and the local authority want certainty about whether TUPE is triggered before commencement date. Both parties should consider what information the local authority holds or has access to in order to enable a proper assessment to be made. The best service will be delivered where there is a smooth transition – whether TUPE applies or not.

Alison Weatherhead is an associate in the employment pensions and benefits team at Maclay Murray & Spens LLP