TUPE 2006: Still a “Significant Deterrent to Competition”?

25 February 2011

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) made a rare outing into the mainstream press this week. A Times editorial (a subscription to The Times’ website is required to follow the link) on Wednesday bemoaned TUPE as being a significant deterrent to competition”. Many would agree. TUPE means that, where there is a "relevant transfer" of an undertaking to a new provider, the employees employed in that undertaking, together with all rights and liabilities in connection with their employment, will automatically transfer from the transferor employer to the transferee with special protection against transfer-related dismissal. “Relevant transfers” include asset purchases where the identity of the business unit is maintained and, significantly, service provision changes like outsourcing and insourcing.

Prior to the original TUPE regulations being enacted in 1981 as a result of an EU, where there was a business transfer, or where there was a change of service provider in an outsourcing situation or similar, the parties could choose whether the attached employees transferred. The buyer was essentially free to engage the old employees on whatever terms it chose to and was not obliged to take on rights, duties or liabilities in relation to their contracts of employment. Unless the seller could find them alternative work, the remaining employees would usually be dismissed by reason of redundancy. This is doubtless the flexibility that many in the business community, and Times leader writers, would prefer to return to.

One particular area of controversy has been “rescue takeovers”. Prior to 2006 it was felt that the 1981 version of TUPE dissuaded businesses from taking over failing enterprises as they would be unable to restructure the workforce to get such enterprises back on their feet. In order to promote what it called a “rescue culture”, the Government introduced provisions into the new TUPE Regulations in 2006, that claimed to provide increased flexibility for buyers of businesses which are subject to "insolvency proceedings with a view to the liquidation of the assets of the company" (TUPE regulation 8(7)) increased flexibility in changing the terms of, or dismissing altogether, employees in those businesses.

However, the phrase "insolvency proceedings with a view to the liquidation of the assets of the company" did not sit at all well with definitions of insolvency in UK company bankruptcy law which has a distinction between “liquidation” and “administration” in company insolvency. Most pressingly, did Regulation 8(7) cover companies in administration? Could a company placed into a so-called “pre-pack” administration avoid the full effects of TUPE by relying on the “insolvency” proceedings exemption in Regulation 8(7)?

The President of the Employment Appeal Tribunal (EAT) this week answered “no” to that question – diverging significantly from that court’s previous decisions on the subject. In a decision that will find The Times’ leader writers spitting into their coffee, the EAT said in OTG Ltd v Barke that an administration doesn’t qualify as "insolvency proceedings with a view to the liquidation of the assets of the company" required by TUPE regulation 8(7). This means that employees of companies being bought out of administration enjoy the full protection of TUPE – including protection for their terms and conditions. The EAT noted, helpfully, that an insolvent company in liquidation (as opposed to administration) would be more likely to attract regulation 8(7), leaving the buyer with more freedom in relation to the transferor's staff.

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