Hello and welcome to our webinar on TUPE and pensions: the tricky issues.
Today we have Louise Clifford and Caron Gosling who are both directors in our employment and equalities team and also Liz Wood a director in our combined human resources team here at Wragge Lawrence Graham & Co. I am going to hand over firstly to Louise to talk about assignment issues.
Thank you Siobhan.
Good afternoon everybody, as Siobhan says, I am going to look first of all in this session at who transfers in a TUPE situation. Now, it's an area which I know from practical experience causes quite a number of headaches for the clients who are dealing with TUPE on a day to day basis. It is also an area where we have seen a number of appeal court decisions over the past year which have highlighted some of the particular traps that a party can get into when applying assignment in service provision change cases. I think it's worth reflecting on those cases to see what lessons can be learned. I will come back to those at the end. I thought we would start by, first of all, looking at why it is important to be clear from the outset who is likely to transfer and, of course, the issues are different depending on whether you are the transferor or the transferee in a TUPE situation.
From the transferor's point of view, the key issue is going to be liability. So, there is an obligation to provide Employee Liability Information to the incoming employer, at least 28 days before the transfer, and a failure to provide information about the right employees could lead to a direct claim by the transferee against the transferor. You might also be expected to provide an indemnity for unexpected transferring employees, that the transferee has not accounted for, and it is worth remembering that, if you are the supplier in a second generation outsourcing situation, it is possible that you have already committed to give that indemnity when you started to provide the services to the ultimate customer, which could have been some years ago. Finally, we have got the information and consultation obligations under TUPE. So, it is important to comply with those, that you are speaking to the right staff and giving them the right information. There are also various planning issues for the transferor, so depending on the number of employees that are going to transfer to the incoming provider, it may be that the transferor will have some redundancies to carry out in its retained functions or it might have the opposite issue. It might have lost key staff and they need to back fill to cover the staff that have been lost.
From the transferee's point of view, the key issue really is around certainty in terms of costs. So, transferee is going to want to know how much staff it's taking on, what the general staffing costs are going to be through the life of the contract, which of course goes directly to costability, and any up front restructure costs which it might need to incur and, typically, want to do that by having a defined list of transferring employees and an indemnity for anybody who is not on that list. So, there needs to be some kind of meeting of minds in terms of who will be put on the list. Also, from the transferee perspective, they have also got their own planning issues to take into account. So, I have already mentioned redundancy. You also may need to think about recruitment because, of course, their focus is going to be to have the ability to deliver the services from day one. And all of that planning, of course, feeds into its measures, which it needs to give to the transferor, to allow the information and consultation obligations to be carried out. So, now, why it matters?
So then, let's move on to what the test looks like. Well, slightly oddly, I am going to start talking about what it's not and the reason for doing that is because there is a very common misconception when it comes to assignment that it is all about the time an individual spends in an undertaking or on a particular set of services. The question I think I get asked more commonly than any other is what percentage of time this particular employee must be spending on services to be regarded as being assigned. And the simple answer to that question is there is, unfortunately, no magic number. Time is just one of a number of factors that we will come on to look at but also TUPE, itself, is not very helpful in terms of defining what assignment needs. All it says is that you need to be 'assigned other than on a temporary basis'. So, if you have a temporary employee, like a secondee, for example, who has a fixed return date to move back to another part of the business, say then that employee would not be assigned.
However, to get to the meat of the test you really need to look at the Botzen decision, a European decision from the mid 1980's. I am not going to go into the facts of that case but I just wanted to share the key message which, basically, derived from that case. And what it says is that, when you are looking at the question of assignment, you need to be asking yourself the question whether the transferring undertaking of grouping represents the organisation framework within which the informal relationship took effect? In other words, you are essentially looking for some sort of clear nexus between the employee and the transferring undertaking, other than the simple fact that an employee might be spending most of their time working there and it's at the given time. So, how does that break down in terms of what you actually need to consider?
Well, you need to look at the whole range of factors. This is not an exclusive list by any means. But what you need to be doing is, basically, taking all relevant facts into account and coming to the view as to whether, taking all those things into account, there is a sufficient nexus to establish that an employee is assigned to the undertaking. So, first and most obviously, you have got how much time is an individual spending in an undertaking of services and what type of work are they doing at the relevant time. But, you also need to look more broadly so, for example, it might be relevant to look at the contract of employment because that might talk about other responsibilities that the employee has and particular responsibilities towards other parts of the business that may not be transferring. It might also be relevant to look at the way in which an employer deals with the cost of a particular employee so, for example, if the cost of an individual is effectively channelled back to a client under a charging mechanism in the contract, that might be quite a good indicator that that employee is assigned as opposed to a situation where the individual is essentially an overhead for the business. Another way of potentially looking at it is in terms of the value a particular employee brings to the business as a whole. Is the real value of an individual in the work that they are doing on the transferring undertaking or is there real value in the fact that, for example, they may be a trouble shooter providing services across a whole range of different contracts? Another two key points to remember in all cases is, first, that you are principally looking at what is happening immediately before the transfer. The second point is that assignment is ultimately a fact for the tribunal. So in any given case the best that the parties can do is to come to some sort of educated assessment as to whether an individual is assigned or not. It is definitely a case of being an art not a science and, ultimately, if there was a legal challenge, it is perfectly possible that a tribunal could come to a different view than the one taken by the parties.
So, let's turn to look briefly at some of the cases. I won't have time to look in detail at all of the facts but there are some common things across these cases. All of them involve a service provision change situation, where it was acknowledged by the transferee that TUPE applied and it was acknowledged that there were at least going to be some transferring staff. But in each case there was a particular issue with either an individual or a group of individuals. And, in each of the situations, the tribunal had found, at first instance, that each of these individuals these transferred to the new employer. The cases all then came before the employment appeal tribunal.
Before moving on, it's also worth just pausing at this point to mention that, in service provision change cases, it is essential, as a starting point, to identify whether you have got an organised group of employees. Remember, this is a key part of the test. You need to have an organised grouping whose primary purpose is delivering services on behalf of the client and remember, it is not just about that there happens to be a group of employees providing the service, there needs to have been some deliberate putting together of the group to perform the services on the client's behalf.
So let's look at this first case of Costain v Armitage. The situation was that Mr Armitage was a project manager who spent about 67% of his time on services which were transferring from his employer, ERH, to the new supplier, Costain. And in the first instance the ET, having been largely influenced by the time he spent, concluded that he had transferred notwithstanding the fact that he also worked on other services for The Welsh Assembly, which weren't in fact transferring to Costain. When the EAT looked at this, what they said was that there were two fundamental mistakes potentially in what the ET had done. The first is that it had failed to appreciate that there is a two stage process in SPC cases, which involve first of all identifying whether you have got an organised grouping and then moving on to whether any particular individual is assigned to that grouping. And those are analytically distinct issues which need to be dealt with separately. The failure in this case to undertake the first step meant that the finding in terms of assignment was unsafe. The tribunal also focused too much on the time the individual is actually spending on the services. There was evidence before the tribunal that he had a contract which meant that he had responsibilities across a range of services, only some of which were transferring. So, the case was remitted to the tribunal for further consideration.
The next case is London Borough Hillingdon v Gormanley. This was a family owned business that had been undertaking repair and maintenance work for Hillingdon for some time, until the services were eventually brought in house by Hillingdon. The issue here was whether the owner/managers there (mother, father and son) who were working in the business at the time of transfer ought to have been treated as transferring staff. And what the EAT said here was, effectively, the tribunal failed to focus on the way the organisation was structured and the particular employees' contractual duties within it. It was true that, at the time of the transfer, the three individuals happened to be working on this particular site contract but the EAT said that was just happenstance. If you actually looked at the situation differently and worked out how the work would have been organised, if there was more than one client, then you would probably come to a different conclusion.
Thirdly, we have got the case of WGC Services v Oladele. And this involved area managers who had started out being responsible for 19 separate cleaning contracts across a group of hotels. Now, the number of contracts had gradually dwindled over the course of the summer until they were responsible just for six remaining contracts and, of those six, three of them transferred to one provider, WGC. And what the tribunal did in this case, when it came to identify the organised group of employees providing the transferring services, it effectively amalgamated all the activities that were being carried out across the three separate contracts and, on that basis, it had concluded that the area managers, who had been originally responsible for the 19 contracts, had essentially become assigned to the activities that transferred to WGC. When the EAT came to look at it, they said that they tribunal had really failed here to identify why it's gone through that amalgamation exercise. On the face of it, it seemed more appropriate to the appeal court that you would look at each contract individually and within each contract you would have an organised grouping of employees providing the relevant activities. It didn't go as far as to say that that was the only conclusion that you could draw from the evidence but it did send it back to the tribunal for further consideration.
So, let's move on to consider finally what practical point we can draw from what we talked about and particularly the recent cases. First, I think, and foremost in SPC cases, it is essential to define the organised group of employees who provide the services before you go on to consider the assignment question in relation to any particular employee. If you don't have an organised grouping then you don't have a TUPE transfer. Secondly, remember genuinely temporary employees should be excluded. In terms of time, it's got to be a relevant factor, but use it as an initial gauge only. Where there is potential scope for dispute, you need to be considering all aspects of the Botzen test that we have talked about and, in particular, focus on those known grey areas. So, we are seeing cases that project managers are pretty tricky, area and regional management and another one we encounter quite a lot is central support and head office functions, where staff may or might not transfer depending on how they are currently organised, and all those areas can be particularly problematic and would generally require some further analysis. So, with that, I am going to hand back to Siobhan to take you through the first poll.
Right, thank you very much Louise.
The first poll is going to concentrate on the issue of assignment and it's flashed up on your screen now. So, here are the questions:
What is the main way you manage a disagreement about whether an employee is assigned?
- Further investigation?
- Obtain legal advice?
- Do a 'deal' with the other side?
- Wait for a claim from the employee?
Okay, a massive 74% go for further investigation, 21% take legal advice and then 4% do a deal and 1% wait for a claim from the employee. So, I think that pretty much reflects what we see in practice as well, getting as much information as you can often reveals the actual situation but, as Louise says, it is an art more than a science, so it isn't always clear at that stage. Okay, thanks for that. I am now going to push over to Caron Gosling, who is going to talk about changing terms and conditions.
Good afternoon everybody.
One of the most significant practical issues that we come across, particularly for transferees, is how and if it is possible to change terms and conditions following a TUPE transfer and the aim of my section of the talk today is to explore what the restrictions are in a bit more detail and to look at how you can deal with these in practice. So, starting with what TUPE provides. TUPE provides that, where the sole or principal reason for the change is the transfer, then the change is potentially unenforceable, unless the reason for the change is an ETO reason (which is an economic technical or organisational reason entailing changes in the workforce) and the employee agrees or the terms of the contact itself, the contract of employment that is, permit that change. Now, this is an issue in practice because it effectively prevents the transferee from harmonising terms and conditions following a transfer which means that the transferee can't have a single consistent set of terms and conditions for all its employees across the board. And case law is very clear that a transfer related change would include a harmonisation of terms and conditions. TUPE protection goes beyond normal contractual protection for employees in two ways. The first is regulation 4(9), which I will deal with in more detail later, and the second way is, even with employee consent, changes following a TUPE transfer may well not be enforceable. Now, clearly this is not going to be an issue for beneficial changes because no employee is going to challenge a change which benefits them. And we also have case law to the effect that beneficial changes are enforceable. But it is an issue when you are trying to impose further restrictions on an employee and would be an issue even if you are trying to do a bargain with the employee, for example, by promising a bonus in exchange for agreeing new post-termination restrictions. Because what this protection does, it looks at the protection on a term by term basis, rather than on a holistic basis, and this means employees can cherry pick the best terms and conditions and can seek to enforce that additional bonus, that they have been promised, but then challenged the effectiveness of the post-termination restrictions when the employer comes to rely upon them. As you can see from that example, issues can arise years after the event. Now, unfortunately, there is no real guaranteed solution to this. I mean it’s more of a case of managing it in a way so as to present the least risk.
So, how do you manage to change terms and conditions when there has been a TUPE transfer in the past? Well, the first question to ask is whether the sole or principal reason for the change is the transfer because, if it isn't, then the TUPE protection won't apply and that will just then be the normal contractual rules. There was a new test introduced in January 2014, which is the sole and principal reason for the change, and arguably this is a narrower test than the previous test of the changes being connected to the transfer. But we haven't really had any case law on this yet, so we're not sure how this will work itself out in the tribunals.
There are some similarities between the new test and the old test and the reason for the changes is ultimately a question of fact. Under the old test, examples of changes which were deemed not to be transfer related were where the employer said that the change had arisen because of a mistake in the past, so correcting a mistake was not transfer related and the change could go ahead. Another case, which I think is very helpful for transferees, is a transferee proposed to introduce a new performance related pay scheme on the basis of enhancing productivity, and this is following a TUPE transfer, but the tribunal held that that wasn't TUPE related either, so that change could go ahead. And it's clear that where changes are labelled as harmonisation, then it's still problematic whether that's under the old test or the new test and, given that this is essentially a question of fact, it's inherently uncertain. So, although the first step is to try and take the change outside of the scope of TUPE it's useful to have some back-up strategies in place.
So, what are the back-up strategies? The first one is try and find an ETO, an economic technical organisational reason and entailing changes in the workforce, for the change. This now expressly covers geographical relocations. That changed in January 2014, so that's the good news. The bad news here, or the sting in the tail, is the limitation of entailing changes in the workforce because this means that there needs to be some changes in the numbers and/or functions of the employees in question and, of course, this isn't always the case when you're looking at changing terms and conditions. And even where there is a redundancy situation running alongside the changes to terms and conditions, the employer needs to be careful to ensure that the reason for the changes is the ETO and the employer, Manchester College v Hazel and Huggins fell foul of this. They were changing terms and conditions at the same time as running a redundancy situation. The two employees, Mrs Hazel and Mrs Huggins, were told that they were outside of the redundancy exercise and therefore not at risk and the tribunal held that that meant the ETO did not apply to the changing of their terms and conditions. So, you can see that there are risks here. If there is an ETO, then the employer and the employee also need to agree the change and that is in accordance with the normal rules of contract.
Back-up strategy number 2. So, this is a new change that was introduced in January 2014 as well. And this provides that a change can be made where the contract of employment already permits that change. So, it's really something that the transferee inherits and then the question is how far does this go? I think there are two types of clauses here. The first type would be a general right to vary employment terms unilaterally by the employer. Now, following Bateman v Asda, you might think that this would be fairly effective. In the case of Bateman v Asda a general right to vary was upheld by the tribunal, but it's becoming increasingly clear that this case is being limited to its own facts and a later case, of Hart v St Mary's School, said that the general unilateral variation clause was not effective to vary working hours. So, I think this clause will really only be effective where the change is reasonable and fairly minor in nature and is not for fundamental changes. So, I think this will be of limited practical application in a TUPE situation.
The second type of clause is more likely to be helpful, I think. And this is specific variation clause and most common is, perhaps, a geographical mobility clause. So, a transferee may be able to rely upon this provided that the terms of that clause are clear and unambiguous and, of course, that they cover the proposed change in question. Just as a warning, employers do need to be aware of regulation 4(9). They're not completely out of the woods yet because 4(9) gives employees specific TUPE related protection.
So, turning now, to regulation 4(9). This seems to be mainly invoked by bus drives (for those of you who know the case law). This provides that an employee can resign and treat himself or herself as having been dismissed where there is a substantial change in his or her working conditions which is to his or her material detriment. And where they establish a regulation 4(9) claim, the dismissal may be unfair and it may be wrongful if there is also a repudiatory breach of contract. But the key thing about the protection under regulation 4(9) is that there's no need to establish a breach of contract. It goes much wider than the right to claim constructive dismissal. So, for example, in the mobility clause example, a transferee could require a transferred employee to relocate within the terms of the mobility contract and there would be no breach of contract there, but the employee may still have a claim under regulation 4(9). If the employee can establish that the change in question is a substantial change, and that's a question of fact, that's an objective test, and that the change is to his or her material detriment, and that's a subjective test. So, it all depends upon the employees individual circumstances.
Another key thing in terms of regulation 4(9) is to assess whether the employee has objected or not. A resignation under 4(9) is not necessarily an objection to the transfer under regulation 4(7) and whether there has been an objection is another question of fact. This is important because where an employee has objected, then any liabilities arising from the regulation 4(9) claim will stay with the transferor. But where the employee hasn't objected, then those liabilities will transfer to the transferee.
So, back-up strategy number 3, again this is new from January 2014 and we're not quite sure how it will work in practice. But TUPE now provides that, where an employer wants to change rights derived from a collective agreement, that is possible provided the change takes effect more than 12 months from the transfer and overall the employees' rights are no less favourable. Clearly there is some doubt as to what "no less favourable" means. It's clear that it's not a term by term approach, as we discussed earlier, but it's by no means clear how you measure the value of non-monetary benefits or whether the no less favourable is determined on the subjective or an objective basis. And when all is said and done, the employee still has their protection under regulation 4(9). So, we wait to see case law and see how this works out in practice
In relation to practical steps, trying to bring all this together, there is one clear thing arising from the case law. That is that employers should avoid referring to any changes following a transfer as harmonising terms and conditions of employment. This creates a presumption that changes are transfer related and, in effect, puts forward an extra hurdle to arguing that they're not. And given that the first step in any case is trying to get the changes outside the scope of the TUPE protection, this really does not help. So, if possible, avoid references to harmonisation.
The next step is to try and find another reason for the changes, to try and take the changes outside the scope of TUPE, and have a look at the case law in this area because there are a broad range of reasons which the tribunals have upheld. For example, enhancing performance or correcting a previous mistake. If there's another reason for the changes, that is going to help, meaning that the changes aren't transfer related.
And then, if all else fails, in extreme cases, consider dismissing and re-engaging the employees on new terms and conditions. Now, this is really a last resort as it's clearly not risk free. In the Manchester College case, for example, the two employees Mrs Hazel and Mrs Huggins were dismissed and re-engaged on new terms and conditions but the employer didn't get a settlement agreement. So, Mrs Hazel and Mrs Huggins brought a claim before the tribunal that they'd been unfairly dismissed and their remedy was reinstatement on their old terms and conditions. So, the whole exercise was effectively wiped out. So, if you are going to dismiss and re-engage employees, get a settlement agreement. You can settle claims for unfair dismissal under TUPE but you can't use a settlement agreement to achieve changes of terms and conditions without there being a dismissal as well. And you can't settle by way of a settlement agreement for failure to inform and consult under TUPE, you can only settle those by way of an ACAS COT3. And even if you do dismiss and re-engage, continuity of employment is probably going to be preserved, so that is something to bear in mind as well.
Right, thank you very much Caron. We've got another quick poll coming up now and this is looking at how often organisations do change terms and conditions following a transfer.
Following a TUPE transfer, does your organisation change the terms and conditions of employment of the transferring employee?
- Always?
- Often?
- Sometimes?
- Rarely?
- Never?
So, here we have the results. With 35% saying 'sometimes' and also 35% saying 'rarely' and then lesser in the other categories. So, that's a really interesting result, it's showing it's still an important issue for organisations out there but there are quite a few that don't change terms and conditions going forward. So, thank you for sharing that. I'm going to pass on now to Liz Wood who is going to look at the next topic, which is TUPE and Pensions.
Thanks Siobhan
So, I'm going to look at the key implications of a TUPE transfer on transferring employees' pension rights. The main principal is that where a TUPE transfer applies, in broad terms, occupational pension schemes are excluded from a TUPE transfer, where an occupational pension scheme has been offered to the transferring employees immediately prior to the TUPE transfer, and this is generally called the TUPE pensions exclusion. By contrast, personal pension schemes, which are not occupational pension scheme, would transfer with the transferring employees' contract of employment on a TUPE transfer and I'm going to look at this in some more detail.
So, personal pension schemes transfer and that's consistent with all the other terms and conditions of an employees' employment on a TUPE transfer. And that means any rights and obligations in relation to those personal pension schemes would also transfer. So, for example, if a transferor employer has agreed with a transferring employee pre-transfer to make relatively high contributions to a personal pension scheme, at say 10% of that employee's salary, that would be a right that would transfer under TUPE. And this is subject to the usual restrictions on variation as set out in TUPE and as already explored by Caron.
So, what are you looking for if you're trying to identify if personal pension schemes are offered immediately prior to the transfer? Well, you're looking for contract based pension schemes which are entered into between an individual employee and the provider. So, for example, you're looking at the Scottish Widows, Standard Life, Legal and Generals of this world. And these schemes provide defined contribution or money purchase benefits. So, essentially, what the employee and an employer put it into that defined contribution or "DC" pot and the investment returns on that, are essentially what the employee takes when they come to retire. These remain personal pension schemes even when an employer has gone out to the market and chosen a group personal pension or "GPP" on behalf of the workforce. Personal pension schemes also include stakeholder schemes, which are essentially just a type of personal pension with a low charging structure and other legislative requirements are met.
By contrast, in terms of occupational pension schemes, the pension exception applies and this is found at regulation 10 of TUPE. This says that the general transfer principal found in TUPE does not apply to so much of a contract of employment or collective agreement as relates to an occupational pension scheme. As such, occupational pension schemes are excluded from a TUPE transfer and remain the seller (or the transferor's) obligation. What that means for the transferring employee is that, whilst they may have had the right to participate in an occupational pension scheme prior to the TUPE transfer, they won't have the right to continue to participate in that scheme, or an equivalent scheme, following the transfer.
Now, the wording in regulation 10 is widely phrased, and it refers to any "rights, powers, duties or liabilities in connection with an occupational pension scheme" and this wording forms part of the pensions exclusion. But the carve-out found at regulation 10 only extends to so much of the scheme that provides benefits "in old age"; in cases of "invalidity", so essentially sickness benefits or "survivor's benefits". The implication of this is that there could be rights contained in the pre-transfer scheme which are not "old age, invalidity or survivors' benefits" but which may well transfer with the transferring employees on a TUPE transfer.
So, what are you looking for in terms of identifying an occupational pension scheme?
Well, there's a technical definition found at section 1 of the Pension Schemes Act 1993 which I'm not going to go through! But, on a more practical level, if you are putative transferee or buyer and you're expecting a TUPE transfer of employees, you need to have a look at whether there's a trust based pension scheme being offered in respect of the transferring employees pre-transfer. So, ideally, you're looking for a trust deed and rules and/or a board of trustees who are overseeing the provision of benefits.
Traditionally, occupational pension schemes provided defined benefit pensions, so, essentially this would be a guarantee being offered by the employer as to what kind of pension benefits would be provided for the employees when they came to retire. But that's not always the case, and certainly in the last 10 to 20 years, we've seen occupational pension schemes increasingly being used to provide defined contribution benefits and those provide benefits as I described in relation to personal pension schemes. So, essentially what you put in, plus investment returns, is what you get out.
And that's been made more pronounced with the arrival of automatic enrolment in 2012, because many pension providers choose to make use of master trusts in order to provide automatic enrolment compliant schemes and many employers have chosen to make use of those master trusts to discharge their automatic enrolment liabilities.
So, the implications for a TUPE transfer context, are that there may well be many more transferring employees who are offered occupational pension scheme benefits than might have been previously been the case in a pre-automatic enrolment world. So, I would definitely recommend checking whether the scheme being offered pre-transfer is an occupational pension scheme and seek legal advice if you are in doubt on that point.
Now, I mentioned that the pensions exclusions, found in regulation 10 of TUPE, excludes occupational pension scheme benefits from transferring insofar as they relate to "old age, invalidity or survivors' benefits". And that leaves open the possibility that other benefits transfer from the transferor's scheme, so essentially we are looking for benefits which are not "old age" in nature.
There are two guiding cases in this area called Beckmann and Martin and you may well often hear references to the Beckmann or Martin principle. These are both European Court of Justice decisions, both decided in the early 2000's, and they were looking at enhanced pensions which were payable on redundancy, in the Beckmann case, and an early retirement pension payable on enhanced terms, in Martin. And in both of those cases, the Courts held that those were not old age benefits. They were essentially paid before the member was reaching the normal retirement age for the scheme and so, therefore, they weren't subject to the pensions exclusion found in TUPE. The transferee would become liable for such rights, even if they derived from the seller or transferor's schemes. In addition, Martin held that transferred employees cannot waive those rights following the principles held in the seminal TUPE case of Daddy's Dance Hall.
Now, we had these decisions for a number of years, but they left some unanswered questions, not least the fact that both Beckman and Martin were in the context of public sector pension schemes and they also provided very specific types of pension benefits, which were only paid for the period from the employees' either early retirement or redundancy up to their normal retirement date. So, the real question is around Beckmann/Martin rights would be provided in practice, particularly in a private sector context.
We've more recently had the Procter & Gamble decision, which was a 2012 High Court decision, and this was about the sale of Procter & Gamble's European toilet tissue business to a company called SCA. In that case there were a number of employees, who were transferred across from Procter & Gamble to SCA, who had been members of the Procter & Gamble defined benefit pension scheme. And it was recognised by the parties to the deal that, the Procter & Gamble pension scheme had Beckmann and Martin type rights to enhanced early retirement benefits. As the parties were very aware of this they made an adjustment to the purchase price to take account of it. And then there was essentially an argument, over actually what the liability for SCA would be. Procter & Gamble alleged that SCA's liability would be zero pounds. SCA alleged its liability would be £19 million and so you can see why this went as far as the High Court.
Now, the decision was really helpful for us, in terms of just making it a little more clear, around what Beckmann/Martin rights might transfer to a transferee. The first point decided was that early retirement rights do transfer; there is no doubt about this. And, whilst Beckmann and Martin were in a public sector context, this would also be true for a private sector context, as was the case for the Procter & Gamble scheme.
In addition, the Court was very keen to establish that there would be no windfall for the transferring employees. So, a transferring employee would not benefit from both the deferred benefit entitlement from the Procter & Gamble scheme and also a full enhanced pension payable by the transferee, in this case SCA. Essentially, the Court said TUPE is there to protect transferring employees' terms and conditions at the point of transfer, but it's not intended to go further than that.
So, the transferee was only liable for the enhancement over and above the deferred pension entitlement from the Procter & Gamble scheme. Also, early retirement or redundancy payments only remain the liability of the transferee whilst they are not "old age" benefits. So, it is only for a very finite period of time that the transferee would be responsible for meeting those Beckmann or Martin liabilities and, once the transferring employee reaches their normal retirement date, that is simply the responsibility of the transferor to continue to fund and pay for that deferred pension.
Any consents associated with the early retirement or redundancy right would also transfer, which I think is very helpful for the transferee employers because it means that they could essentially refuse consent. Bt this is subject to the Imperial Tobacco pensions and employment case which talks about the implied duty of mutual trust and confidence between an employer and its employees. So, care must be taken by a transferee in refusing consent. I have already mentioned the transferor still has that liability to fund the deferred pension payable at normal pension age.
So, what are the key lessons here in terms of the Procter & Gamble decision? Well, it has given us much more clarification than we used to have on Beckmann and Martin rights, but due diligence remains absolutely essential in terms of understanding what your potential exposure might be here. And seek an indemnity from a transferor if Beckmann and Martin rights look like they exist, not least because I think the lesson learnt from the Procter & Gamble decision is to not adjust the purchase price in anticipation of a Beckmann/Martin right arising because, actually, trying to assess what the liability might be would be very difficult.
The next slide shows a summary of the points that we have covered so far in terms of what would transfer under TUPE. And I am now going to turn to look at the legislative minimum requirements in terms of what has to be offered by a transferee where occupational pension scheme benefits were offered immediately prior to the transfer.
This legislation comes from the Pensions Act 2004 and also the Transfer of Employment (Pension Protection) Regulations 2005 which I will refer to as "TEPP". Essentially, where employees were either active members of an occupational pension scheme or eligible to be members of that scheme, (and it does not matter whether that scheme was offering defined benefits or defined contribution benefits before the transfer where that was in place pre-transfer), the transferee must offer minimum level pension provision following the transfer.
And there are essentially two broad options for the transferee; either the transferee can offer occupational pension scheme membership on a defined benefits basis, and that would satisfy certain minimum requirements; alternatively the transferee must offer occupational pension scheme or stakeholder pension scheme benefits with "relevant contributions".
Now, I am not going to cover the defined benefit offering in any detail as, in my experience, it would be very rare for the transferee, or buyer, to choose to discharge its TEPP obligations by making use of defined benefit schemes for transferring employees, unless there's a contractual obligation to do so, say, for example, in a public sector context.
What we have seen much more, in practice, is that the transferee employer chooses to discharge the TEPP obligations by offering defined contribution or "DC" benefits, either through an occupational pension scheme or a stakeholder pension scheme and, for that, read a group personal pension scheme or personal pension scheme.
In this case, the transferee employer is obliged to make relevant contributions to the scheme post transfer and this is either a matching scenario, where the transferee offers to match up to 6% of the transferring employee's contribution (and that is on a basic pay basis, so it excludes bonus, commission or overtime), or, alternatively, and this is new since 6 April 2014, the transferee can choose to simply match the transferor's pre-transfer contributions in respect of the transferring employees. This only applies where the transferor was "required" to make contributions and contributions were solely to provide defined contribution or money purchase benefits.
So, what we are tending to see is, where the transferor was offering minimum level contributions to comply with its automatic enrolment obligations before the transfer, that could reduce costs for a transferee, because it (the transferee) may decide that, actually, instead of offering the up to 6% matching contributions, as it had to do in the past, it could, for example, only make 1% contributions, where that is what the transferor was paying pre-transfer in order to discharge its automatic enrolment obligations.
Now, automatic enrolment has put another spin on the question of pensions, in terms of TUPE transfers, because automatic enrolment obligations do not mean that you don't have to pay attention to what you are doing in a TUPE transfer context. There is no exemption from TUPE or TEPP where automatic enrolment applies. And there are various scenarios set out on this slide, setting out where the transferor employer has passed its staging date and the transferee has not; where the transferee employer had passed its staging date and the transferor had not, because each of those scenarios will impact on whether you have automatic enrolment duties and whether you have TUPE and/or TEPP obligations. And, sometimes, we see that there are complexities arising as a result of that, for example, where a transferee might have in place its automatic enrolment compliant scheme, but, actually, there are TUPE protected employees coming across with either TEPP protections or, indeed, personal pension protections which the transferee then has to be mindful of.
So, we have talked through the impact of a TUPE transfer on where the pension scheme rights transfer. In broad terms, personal pension schemes rights transfer; rights relating to occupational pension schemes do not, but that is subject to the Beckmann and Martin cases. Legislation provides a statutory underpin to ensure a minimum level of pension protection is provided to transferring employees following the transfer and automatic enrolment obligations do not detract from the need to also follow TUPE obligations. So, given the complexity in this area, this last slide includes a chart detailing the headline terms, the key points.
Thank you very much, Liz.
We have one final poll, which is a poll on pensions. What is the most difficult aspect that you find of dealing with pensions on a TUPE transfer? Is it:
- identifying the risk of rights transferring under an occupational pension scheme (such as the early retirement and enhanced redundancy rights), or
- costing the pension liability, or
- negotiating the contractual protection, or
- understanding the impact of the automatic enrolment rules, or
- something else?
So, the most difficult aspects are almost joint first, but the most difficult one is costing the pension liability at 38% and 36% is showing as identifying the risks of rights transferring, such as the early retirement and enhanced redundancy rights.
Liz, do you have any other comments on the results from that poll?
No, it is just interesting that the key issue really is what I was talking about around the due diligence that is required for people to understand exactly what is being offered pre-transfer, which can be a little bit complex and daunting, I think.
In many scenarios that I look at in TUPE transactions, we know that there's a pension scheme being offered before the transfer but, actually, what kind of pension it is and what is being offered is the harder question to establish. And yes, absolutely, in terms of costing the pension liability, the Procter & Gamble case only demonstrates exactly how hard that can be. Not least because, in the Beckmann and Martin scenario, it is so difficult to predict who exactly might be made redundant or subject to the enhanced early retirement rights that might arise, over the next 10-20 years, so how we cost that? We often see actuaries being involved in order to do the number crunching on that because it is so complex and challenging.
Thank you very much. Ok, we have had a lot of questions coming in so what I am going to do for this part is to ask each of the presenters, who will deal with a question in turn coming through, and we will start with Louise.
Louise: Ok, thank you. Yes, somebody has asked the question, "Can one employee still constitute an organised grouping?" This is for the purposes of the service provision change test and, if so, what do we need to look for? Well, the short answer is, yes, the legislation itself provides for one individual employee to constitute an organised grouping. We have also had some, I think, Court of Appeal authority, in the case of Rhijnsburger, which did in fact involve an individual who was held to be an organised grouping in her own right. Because of what you need to look out for, it is slightly odd to think of a single employee being organised in any way but, in that case, the key issue was really about whether, on the facts, there had been some kind of agreement that the employee would focus exclusively on a particular set of activities to the exclusion of everything else so was that effectively their principal purpose and was it clear that they were providing activities on behalf of a particular client. So, in practice, the issues of assignment and organised grouping when you have got an individual employee very much overlap but, certainly, the case law and the legislation is clear that you can have an organised group in those circumstances.
Caron: Ok, we have had a question on, "What if it is not possible to replicate the same terms going forward, for example, bonus linked to old company performance, so those terms have to be changed because the transferee simply cannot replicate them?"
This is a live issue and one we come across quite a lot and applies to, for example, share option schemes, company discounts, commission plans. There is a case of MITIE Managed Services Limited v French, which I think was in 2000, or some years ago now anyway, which held that, where benefits could not be replicated by the transferee, then the transferee had to provide the employees with benefits which were substantially equivalent. So, it is the principle of substantial equivalence. And this may give rise to employee relations issues, so communicating those changes and the measures are going to be important. There may be claims under regulation 4(9) arising as a result of this but, I think, if the transferee is proposing to replace the benefits with something as an substantial equivalent, then the employee would not be able to establish the first limb of regulation 4(9) claim. They would not be able to establish that there had been a substantial change to their working conditions but it is an interesting question and one that needs to be handled quite carefully.
Liz: I have had a question in, in relation to the Transfer of Employment (Pension Protection Amendment) Regulations. And the question is around the fact that there was a complication on this, which I remember, and that is the amendments to the regulations which were originally due to be implemented in 2013, and then potentially April 2014, and the questioner says, "This all seemed to go quiet, what happened?".
Now, this is about the point which I mentioned around the TEPP protection and the fact that, with effect from April 2014, there is now the ability of the transferee to choose, essentially, which kind of contributions it makes in respect of the transferring employees where occupational pension scheme benefits were offered before the transfer, so be that either up to 6% matching the employee's contribution or alternatively (and this is the new bit, the amendment), is that the transferee could alternatively replicate the transferor's pre-transfer contributions in respect of the transferring employees. The transferee could therefore potentially choose to cherry pick one of those two elements. That is the only thing that flowed through from that earlier consultation document., From memory, the consultation document contained other potential changes but I do not think they went through, so that is what happened there.
Louise: Ok, we have got another question here, "What happens if the transferor is unable to provide employee liability information 28 days before the transfer due to time constraints, for example, where the customer wants to transfer services from its incumbent within a 10 day period?". Well, I think, in reality, if you were the transferor in that kind of situation then you are, potentially, at risk there in terms of failing to provide the information within the necessary time limits. That said, in terms of compensation and potential claims from the transferee, the legislation does talk about compensation that is just and equitable in the circumstances. So, there might, potentially, be an argument there around whether it would be just and equitable to award any compensation, if you were not able to deliver the information on time, but it is likely that you would be expected to do as much as you can in the circumstances. In terms of kind of practical steps, it would be worth looking at whether what the client or the customer is proposing to do is within the terms of an existing contract and whether there can be any negotiation about timescales with a view to trying to push it out and allowing the transferor to comply with its obligations.
Caron: Ok, we have had another question "What happens if you need to change everyone's terms and conditions following the transfer?", so they are all on the same terms and conditions but this does not just affect the transferring employees, I am assuming. Well, this might well be possible and the first practical point I would say here is, try not to call any such process, do not call it harmonisation because that is linking it, I think, to the TUPE transfer. Try and find some other clear reasons for effecting those changes, for example, modernising the workplace or enhancing productivity or something like that and you can draw some help from the case law in this area. Because the reason for the change is essentially a question of fact, as I explained, it is useful having some back up strategies, just to back that up, in case there is a challenge and the tribunal holds that it is transfer related, so you know find an ETO. If possible, have a look at the contract to see if there is a right to change within the contracts and, if the terms derived from a collective agreement, then wait at least 12 months following the transfer and you may be able to change them then.
Liz: Thanks Caron. We have a question in relation to pensions and what happens where employees were offered rights in a personal pension scheme before the transfer and the questioner asks whether, in a case where the contribution rates were different in terms of what was being offered by the transferor to its employees and higher than what the transferee offers to its existing workforce, what they can do about that?
So, this is quite a difficult question to answer because employees who have rights in relation to contract based pension schemes before the TUPE transfer dates are entitled to retain those rights following the TUPE transfer and, of course, any changes made to those rights must follow the usual TUPE restrictions on making changes.
And, so, changes would either have to be for a non-TUPE related reason, which would be difficult to argue here, i.e. the changes are void if the sole or principal reason for the variation is the transfer, or would have to be an ETO reason entailing changes in the workforce and agreed to between the employer and the employee. And an ETO reason could be difficult to establish here, unless you are making changes to the "numbers or functions of" employees, i.e. redundancies at the time when you are proposing to change the pension rights.
So, ideally, you would want to try and find a way to accommodate these employees' higher contribution rates which were being offered as part of the transferor's pension obligations. Try and accommodate those as part of your existing pension arrangements, as a transferee, accepting that these are TUPE protected employees and, so, should be treated as such.
And you should also, of course, take into account your automatic enrolment duties in relation to these employees if you have passed your staging date although, if they are entitled to relatively high employer contribution rates in respect of their personal pension benefits, you may find that you have discharged those automatic enrolment duties depending on the nature of the scheme.
Thank you very much to all of the presenters. I am afraid that is all we have got time for on the question front today and we have had a lot of questions in but we will pick those up offline so do not feel that your questions have gone unanswered, we will follow up with you after the event.
Just a reminder about the download tab. You can print off the slides, get the speaker's details and some more information, some alerts we have produced on the topics we have covered today. There will also be a recording on our website and we will let you know when that is available and, if you do have a moment, we would be very grateful, if you have time, to fill in the quick feedback questionnaire to let us know how you think today's session has gone.
So, finally, thank you very much for listening, thank you for your participation in the polls and for your numerous questions.
Goodbye.