TUPE – Hero or Villain?

It will have escaped no-one's attention that retail insolvencies are currently big news. Tough retail conditions, including changes to consumer spending habits, business rate hikes and the possibility of a hard Brexit are likely to continue this trend. Retail businesses are by their very nature likely to possess a large workforce. Sean Field-Walton, an employment specialist in our Business Recovery and Reconstruction Group, takes this opportunity to consider the interplay between the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and insolvency legislation, and to ask whether TUPE protections are in the best interests of employees?  

TUPE was implemented with the unapologetic goal of safeguarding employee rights. It achieves this by automatically transferring employees' employment and associated liabilities where there is a transfer of a business' assets (or a service provision change). The employees assigned to the business will transfer with the assets and the purchaser cannot simply pick and choose who they wish to employ.  It is automatically unfair to dismiss transferring employees solely or principally because of the transfer, unless the reason for dismissal is an 'economic, technical or organisational' reason requiring changes in the workforce (called an 'ETO reason').    TUPE also limits the new employer's ability to change the terms and conditions of transferring employees.  With limited exceptions, any changes which are imposed primarily or solely because of the transfer will be void, unless the changes are made for an ETO reason.   This means, for example, that post-transfer harmonisation of terms is not permitted. In insolvency situations, this could deter potential rescuers of the business, who will fear inheriting liabilities and any redundancy costs.  Although such liabilities are often 'priced in' in straightforward asset purchases by means of indemnities given to the new employer, in an insolvency situation there is often far less room for negotiation. 

Contrast this with the position in the United States, Australia and other non-EU jurisdictions where employees do not transfer automatically in asset sales. Arguably TUPE acts as a disincentive to foreign investors and perhaps narrows the field of potential bidders to those specialist funds who have experience of dealing with the intricacies of TUPE. 

However, the law recognises these difficulties and TUPE's operation is modified in insolvency situations.   How far it is modified depends on whether the insolvency procedure was opened with a view to liquidating the business' assets (i.e. terminal insolvency such as liquidation) or not (e.g. administration where the purpose is business rescue). 

Terminal insolvency

These rules apply where the business is in bankruptcy proceedings, compulsory liquidation or a creditors' voluntary liquidation under the supervision of an insolvency practitioner. 

In these situations, employees assigned to the transferring business do not automatically transfer under TUPE, so the purchaser can decide if it wants to employ them and does not inherit any pre-transfer liabilities. Likewise, the restrictions on varying contracts do not apply to any employees who are offered employment.

Non-terminal insolvency

The rules are slightly more complex in non-terminal insolvency processes such as administration, administrative receivership and other voluntary arrangements supervised by an insolvency practitioner.

In these cases, employees assigned to the business (or part of the business) being purchased will transfer automatically and most of the protections in TUPE will apply, but with some modifications:  

• Liability for payments due to a relevant employee from the National Insurance Fund (NIF) or the Redundancy Payments office (RPO) does not transfer to the purchaser. This will include (i) up to 8 weeks' arrears of pay, (ii) up to 6 weeks' holiday pay, (iii) statutory notice pay, (iv) the basic award in relation to unfair dismissal compensation, and (v) any statutory redundancy payment.  So, for example, if the employees were left without pay for a few weeks while a new purchaser was found, the transferring employees would claim these debts from the NIF rather than their new employer. 
• Purchasers and administrators have been given more scope to amend the terms and conditions of the workforce.  Changes agreed with employee representatives designed to safeguard employment opportunities by ensuring the survival of the undertaking are permitted. Nevertheless, this is not a free pass for incoming employers. 

Otherwise, however, in non-terminal insolvencies TUPE operates to transfer to the purchaser liabilities for the employees assigned to the business. This highlights the need for purchasers to carry out as much due diligence as timescales permit although carrying out due diligence is often difficult where administrators are acting. Even where due diligence is possible, the scope for securing contractual protection against potential liabilities is limited as administrators will not give warranties and indemnities.    

Undoubtedly, TUPE provides essential protection for employees in solvent transactions. Nevertheless, in administrations it may deter rescue bids and therefore cost jobs. In the retail sector in particular we have certainly seen the cessation of trade and liquidation in several instances where a rescue of at least part of the business might have been possible but for the employment issues.  

As TUPE is derived from EU legislation, the UK's ability to reform it to encourage more business rescues has so far been limited.   However, the prospect of Brexit may offer an opportunity for the UK to review the way TUPE works in insolvency scenarios – particularly in administrations.