The European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 (the “Regulations”) safeguard the rights of employees when there is a change in the legal owner of the business or part of the business in which they are employed. This area of law is commonly referred to as “TUPE”. The purpose of TUPE is to protect employees from dismissal or other adverse consequences where the business in which they are employed changes hands. If you intend buying or selling a business – or part of one – you should consider taking legal advice on the applicability and effect of these Regulations; it can be a complex area. 

In essence, TUPE requires that the employees transfer to the employment of the new owner. The employees are entitled to the same terms and conditions of employment as applied before the transfer, their continuity of service is preserved and existing collective agreements must be honoured.  The new owner becomes liable for obligations that accrued to employees before the transfer but were not discharged. 

Occupational pension arrangements do not have to be continued by the new owner.  However, it is expected that legislation will be introduced in the future that will amend the current exclusion of pension benefits from the Regulations and impose on the new owner an obligation to provide some level of pension benefit to transferred employees. 

When do the Regulations Apply? 

The Regulations may apply where almost any kind of business is sold or transferred e.g. where a factory or hotel is purchased as a going concern, where a business division is transferred from one subsidiary within a group to another, or where part of a business is transferred into a new joint venture company. 

For the Regulations to apply, the business or part of the business being transferred must constitute an economic entity i.e. an identifiable, organised grouping of resources or people that performs a particular function.  There must be a legal transfer of the business to another party, which includes a direct sale and the assignment or forfeiture of a lease, and the business must retain its identity after the transfer.

What about the transfer of a contract?

While the transfer of a contract (i.e. the right to perform a service or function) is not specifically mentioned in the Regulations (unlike in the UK TUPE Regulations), the European Court of Justice (and in Ireland, the Employment Appeals Tribunal (the “EAT”)) has determined in several cases that the Regulations can apply where there is a change in the provider of a service. 

This can come about in four ways:

1. Contracting out activities – When a company contracts out part of its business (e.g. cleaning or payroll) to another company;

2. Changing contractors – When a company decides to change contractors for a function that has already been contracted out (known in TUPE law as a “second generation transfer”);

3. Contracting-in an activity – A company may bring in-house an external contractor to work alongside existing employees to avail of external expertise or to help with specific projects; or

4. In-sourcing a previously contracted out activity – When a company decides to bring a service back ‘in-house’ that was previously contracted out.

In any of the scenarios above, the Regulations might apply if the function which is the subject of the contract is a separate economic entity in itself.   Case-law has established that it is not sufficient that there is a transfer of the right to perform a service or a function by itself – a transfer of “significant tangible or intangible assets” or a transfer of a “major part” of the employees performing the function must, in addition, have taken place. 

The question as to whether the transfer of a contract triggers the application of the Regulations is determined on a case-by-case basis. 

TUPE does not apply to Share Sales

TUPE does not apply to a take-over of a company by way of acquisition of its share capital. This is because TUPE requires the transfer of an undertaking ‘from one person to another’. In other words, it requires the legal identity of the employer to change. On a purchase of a company by way of a share sale, the legal identity of the company actually remains the same; it is just that the ownership of its share capital changes hands. 

What Employees are protected by the Regulations?

All employees, whether full-time, part-time, temporary or permanent, who are employed in the business at the time of the transfer and who are wholly or mainly assigned to the part of the business being transferred are protected by the Regulations.  The determination of whether a given employee is ‘wholly or mainly assigned’ to the transferring part of a business is not always straightforward. 

Court-Supervised Insolvencies excluded

The Regulations do not apply where the transferor of a business is the subject of court-supervised bankruptcy or insolvency proceedings.  However, they do apply to transfers of other types of distressed businesses e.g. a sale by a receiver or an examiner, or a members’ voluntary winding-up.

Terms and Conditions of Employment must be preserved

The Regulations provide that the new owner of the business must honour an employee’s existing terms and conditions of employment.  They specify that where an agreement provides for a less favourable term or condition, it will automatically be deemed to be modified so as not to be less favourable.  This is so even where an employee consents to the less favourable term.  A provision which is more favourable to an employee, however, is permissible.

It is not possible for parties to a transaction to contract out of the Regulations. Any provision in an agreement which purports to exclude or limit the application of the Regulations is deemed to be void.

If an employee terminates his employment because a transfer has involved a substantial change in working conditions to the detriment of that employee, the employer concerned is regarded as having been responsible for the termination – it is treated as a dismissal. 

Dismissals

A dismissal of an employee, the reason for which is the transfer of an undertaking, is deemed to be automatically unfair, unless it can be justified by economic, technical or organisational reasons which entail changes in the workforce.  It is often difficult to establish these grounds until after the sale of the business has been completed.

Informing and Consulting with Employees

The Regulations require the transferor and the transferee to inform representatives of their respective employees of the following: –

• The date or proposed date of the transfer
• The reasons for the transfer
• The legal implications of the transfer for the employees and a summary of any relevant, economic and social implications of the transfer for them
• Any measures envisaged in relation to the employees

The affected employees must be given the above information, where practicable, not later than 30 days before, and in any event, in good time before, the transfer (or, in the case of the transferee, before its employees will be affected by the transfer).

In the absence of a trade union or staff association, the employer is obliged to put an arrangement in place whereby the employees elect employee representatives to consult with their employer in relation to the transfer. 

Where there are measures envisaged as a result of the transfer which will have an effect on the employees, for example redundancies, changes in work practices etc., the transferor must consult with the employee representatives with a view to reaching agreement.

Employees’ Refusal to Transfer
 
While the European Court of Justice has stated that employees are entitled to refuse to transfer to employment with the transferee, the legal effect of that objection on the contract of employment is a matter for each member state.  This situation was not legislated for in the Regulations. As a result, in Ireland, differing positions emerged as to how a refusing employee should be treated.

One view was that a refusal to transfer on the employee’s part meant in effect that the employee remained in the employment of the transferor, which, frequently having no option but to make the employee redundant, would then be liable for payments under the Redundancy Payments Acts.   The alternative view was that refusal to transfer (where the transferee is offering the same terms and conditions as distinct from where there are substantial changes to an employee’s detriment) effectively constitutes a resignation, whereupon an employee disentitles him or herself to a redundancy payment.
 
A 2009 High Court decision in Ireland brought welcome clarity on this issue.

The case concerned employees who had refused to transfer upon their employer selling the part of its business to which they were assigned.  The employees claimed that they had been made redundant and were entitled to statutory redundancy payments.  At first instance, the EAT held that the employees remained employed by the transferor.  Consequently, if the transferor was not in a position to redeploy them, the transferor would be liable for the ensuing redundancy payment.
 
In May of 2009, the High Court overturned this decision, holding that refusal to transfer does not result in an employee being deemed redundant but in fact of having resigned.  Therefore, the employee is not entitled to any redundancy payment, statutory or otherwise.  
 
Employee Remedies/Disputes
 
An employee may seek redress from a Rights Commissioner for any breach of the Regulations.  The Rights Commissioners have a very broad power to require the employer to “take a specified course of action” in order to comply with the Regulations
 
The Rights Commissioner may also make awards against employers of such compensation as is just and equitable, subject to the following limits:

• Up to four weeks’ remuneration for breach of the employers’ obligations to inform/consult with an employee
• Up to two years’ remuneration, for breach of any other provision of the Regulations (e.g. an improper dismissal or unlawful change to a term or condition of employment)

Data Protection Obligations

The transferring employer should be mindful of its obligations under the Data Protection Acts 1988 to 2003. Where possible, consent of the employee should be sought to the transfer of his/her personal data to the proposed new employer prior to the transfer date.  Any personal data that is transferred prior to an unconditional agreement being signed should only be furnished in an anonymised and/or aggregated form.

Contributed by Maura Roe & Louise Harrison