TUPE, pensions and public sector outsourcing

14 minute read
20 April 2022

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply where there is a 'relevant transfer', which can involve (i) a business/asset transfer; or (ii) a service provision change (SPC). It is the relevant transfer of a SPC that is most relevant in public sector outsourcing and retendering.

SPCs can occur when services are outsourced for the first time from the Authority to a service provider/contractor; when services are retendered from the current contractor to a new contractor; or when services are insourced from a contractor to the Authority.

When TUPE applies the employment of employees who are 'assigned' in connection with the services which are to transfer, will automatically transfer from the transferor (the Authority or, in the case of a retender, the incumbent service provider) to the transferee (the new provider or, in the event of insourcing, the Authority). Most liabilities relating to employment will transfer and the employees' terms and conditions of employment will benefit from enhanced protection.

Employees who have two or more years' service are protected from dismissal by reason of the transfer. Dismissals may be fair if the party making the dismissal has an economic technical or organisational (ETO) reason for the transfer. There is an obligation to consult representatives of employees who are affected by the transfer. Liability for failure to inform and consult (of up to 13 weeks' pay per employee) is joint and several between the transferor and the transferee.

How does TUPE feature in the CCS process?

The TUPE schedule forms a key part of any Crown Commercial Service (CCS) contract. The most common form is the Cabinet Office's Model Services Agreement that includes a TUPE schedule in four parts. Each part contains clauses that apply where it is expected that there is: (A) a transfer of Authority employees on commencement, (B) a transfer of incumbent contractor employees, (C) no transfer of employees on commencement and (D) potential for a transfer of employment when services transfer on expiry, termination or partial termination.

In a retendering scenario it is important to review the contracts with incumbent service providers to understand what protection the Authority has from the transferor which it can pass on through a contractual chain of indemnity to the transferee. Any gaps in protection should be identified so that the Authority can consider the most advantageous commercial approach to address that in the TUPE schedule.

In addition, the Authority may need support throughout the various stages of the tender process. This includes advice on obtaining employee information from incumbent providers and how to approach TUPE in any invitation to tender. Further, advice may also be required on the impact of contractual changes requested by the bidders and revising the draft terms to take account of any accepted changes, attending bidder calls with subject specialists and advising in relation to any data protection issues which may arise in the provision of employee data to the bidders.

What are the key issues to look out for?

  1. Lack of cooperation from current provider / insufficient exit information provisions in the current contract. This can give rise to issues regarding the accuracy or extent of information which can be provided to bidders in the ITT and may need creative solutions to enable workforce requirements to be identified and bids to be priced.
  2. Inadequate TUPE indemnity protection on exit. Where gaps are identified in the TUPE protection available from an outgoing contractor this will usually result in increased costs for the Authority. Careful thought is needed to ensure the issue can be managed in the most cost effective way.
  3. Robust TUPE protection is available from incumbent providers but has not been passed on to the new provider. The Authority has started from a position that it will not provide any protection for the new contractor in respect of the previous contractor's transferring employees. This approach can result in increased cost for the Authority as it does not realise the benefit of previously negotiated protections. The Authority may benefit from advice on the options to obtain value from the robust protection without exposing itself to liability.
  4. Assignment. The Authority may have to act as an intermediate between the transferor and transferee if there are questions, uncertainty or disagreement regarding the list of transferring employees. While seemingly an issue between transferor and transferee a better commercial outcome may be achieved for the Authority if issues can be resolved. Where there is a dispute, ultimately the Tribunal would need to determine the answer but uncertainty can result in bidders submitting risk averse pricing (thereby increasing costs for the Authority) and it is of course better for the parties to agree the point between them.
  5. Fragmentation / disaggregation of services. Where a service is transferred from a single contractor to more than one contractor, fragmentation can give rise to several challenges:

    Firstly, it can defeat the application of TUPE if:
    1. it is no longer possible to identify the activities that are transferring and where they have transferred, and/or the activities are no longer fundamentally the same, or
    2. if it is not possible to identify an organised grouping of employees for the purposes of the services in respect of each transfer.

    Secondly, it may mean that employees are not assigned to any transfer in respect of the services, which are fragmenting, between a number of new providers.

    Issues can arise if the absence of a transferring workforce means that it is difficult for bidders to tender and/or if there is a dispute between the transferor and transferee as to assignment. The Authority will require guidance to navigate this potentially tricky situation.
  6. Transfers of employees to or from the Authority on retender. A narrowing or broadening of services in connection with a retender can result in employees transferring to or from the Authority. For example, where contract management activity is taken in-house or an ancillary service line is put out to tender for the first time. It is important to consider whether this may be the case to ensure contracting arrangements reflect the operation of TUPE.
  7. Worker status. An employee is defined in slightly wider terms for the purposes of TUPE than is normally used for employment protection purposes and it is generally considered 'workers' should be included as well as employees and apprentices, although we do not have any appellate court decisions confirming this interpretation. Where workers are in scope to transfer, this can raise interesting questions as to the parties approach, given that while they may in principle transfer (and obligations under TUPE will apply), their rights arising in connection with the transfer are limited because they do not qualify for key employment protections. The Authority will need guidance on the status of its "employees" and how to approach situations where they have individuals who may fall outside of the scope of "employee".
  8. Redundancy indemnities on entry and exit

    Entry. Often the new bidder is asked to 'right size' the service and make efficiencies to reduce the cost of the service going forward. It is common for the Authority to bear the costs of transformation where this is a first generation outsourcing, or the parties may share the costs where the bidder is promising that efficiencies will be made in comparison to the incumbent service provision. Cost can be covered by direct indemnities or it can be included in the overall pricing. This can give rise to challenges in respect of the level playing field and bid evaluation. The Authority requires advice to provide them with commercial options to achieve a level playing field and available options to minimise exposure to entry costs.

    Exit. The bidder will often seek protection again redundancy costs should TUPE not apply on exit and therefore they cannot transfer their staff to a new provider. This is particularly relevant if there is a risk that the Authority could choose to fragment services on a future retender. Sometimes, the Authority will agree an indemnity in certain circumstances. In addition, where fragmentation is an issue in connection with a procurement it is important that a review of existing contracts takes place to check whether the incumbent provider is entitled to recover its redundancy costs as part of the exit arrangements under that contract.
  9. Govearts. This is a recent Court of Justice of the European Union (CJEU) case in which it was determined that where there was more than one transferee, the employment contract of an employee working for the transferring business could be split between the transferees, as separate part-time contracts, unless the division of the contract of employment was not possible or caused a worsening of working conditions or adverse effect on the individual's rights.

    This Govaerts principle also applies to outsourcing situations following the domestic case of McTear. It has the potential to raise significant practical difficulties and additional drafting may need to be included to deal with possible situations in the future. However, the principle of splitting an employment contract as per Govearts is generally considered to be unworkable and not in the best interests of either party or the employees. For these reasons, parties often prefer to deal with the issue with an appropriate practical solution rather than implementing transfers of a number of split employment contracts as envisaged under these cases.

What are the key pensions issues to look out for?

Complex pension issues can arise on a transaction and careful consideration is needed. While there is an exclusion from TUPE for the majority of pensions rights, two pieces of legislation/guidance do have an impact:

  1. Pensions legislation requires the transferee to provide a minimum level of pension provision for transferring employees who had a defined benefit pension prior to the transfer (which is highly likely if they were working in the public sector); and
  2. The "New Fair Deal" guidance requires certain public sector bodies, when outsourcing, to procure in the outsourcing contract that the transferring staff can continue in membership of their public sector pension scheme, or a broadly comparable scheme.

    The key issues to look out for are:
    1. Lack of clarity about populations of Transferring Employees (and whether any of them are Fair Deal Employees). A failure to understand or be aware of what obligations you have to the employees could mean an unwanted liability in the future.
    2. Pass through provisions where the contractor agrees to pay pension costs but then passes the costs straight back to the authority (sometimes with a cap and collar). This may be necessary as part of the commercial deal between the parties as it creates a more level playing field, but it's important to be clear what costs are "passed through" and which are not.
    3. Bulk transfers. Fair Deal employees also have rights to transfer their accrued pension. Where this applies, specialist advice may be needed on the actuarial and legal impacts of that.

Finally, while TUPE does not generally apply to pension rights, there is a narrow class of rights which relate to early retirement or redundancy known as "Beckmann" rights.

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