DAVID ROYDEN - EMPLOYMENT SOLICITOR
UK EMPLOYMENT LAW

David Royden is a Partner with Laytons Solicitors and Head of Employment Law, Manchester, UK

Laytons Solicitors is a national law practice specialising in all aspects of Company and Commercial Law

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TRANSFER OF UNDERTAKINGS

Purpose

The Transfer of Undertakings (Protection of Employment) Regulations 1991 (“the Regulations”) are designed to preserve employees' terms and conditions when a business or undertaking, or part of one, is transferred to a new employer. Any provision of any agreement (whether a contract of employment or not) is void so far as it would exclude or limit the rights granted under the Regulations.

The Regulations have the effect that:

  • Employees employed by the previous employer when the undertaking changes hands automatically become employees of the new employer on the same terms and conditions. It is as if their contracts of employment had originally been made with the new employer. Thus employees' continuity of employment is preserved, as are their terms and conditions of employment under their contracts of employment (except for certain occupational pension rights).
  • Representatives of employees affected have a right to be informed about the transfer. They must also be consulted about any measures which the old or new employer envisages taking concerning affected employees.

Transfers covered by the Regulations

The Regulations apply when an undertaking or part of an undertaking is transferred from one employer to another.

Some examples of transfers are:

  • where all or part of a sole trader's business or partnership is sold or otherwise transferred;
  • where a company, or part of it, is bought or acquired by another, provided this is done by the second company buying or acquiring the assets and then running the business and not acquiring the shares only;
  • where two companies cease to exist and combine to form a third;
  • where a contract to provide goods or services is transferred in circumstances which amount to the transfer of a business or undertaking to a new employer.

The Regulations can apply regardless of the size of the transferred undertaking. Thus the Regulations equally apply to the transfer of a large business with many thousand employees or of a very small one (such as a shop, pub or garage). The Regulations apply equally to public or private sector undertakings.

Transfers not covered by the Regulations

The Regulations do not apply to the following:

  • transfers by share take-over because, when a company's shares are sold to new shareholders, there is no transfer of the business - the same company continues to be the employer;
  • transfers of assets only (for example, the sale of equipment alone would not be covered, but the sale of a going concern including equipment would be covered);
  • transfers of a contract to provide goods or services where this does not involve the transfer of a business or part of a business;
  • transfers of undertakings situated outside the United Kingdom.

Those provisions of the Regulations which relate to dismissal of employees because of the transfer, the duty to inform and consult representatives and the failure to inform and consult them as required, do not apply to employees who, under their contracts of employment, normally work outside the United Kingdom.

Employer's position in a Transfer

Under the Regulations, when an undertaking is transferred the position of the previous employer and the new employer is as follows:

  • The new employer takes over the contracts of employment of all employees who were employed in the undertaking immediately before the transfer, or who would have been so employed if they had not been unfairly dismissed for a reason connected with the transfer.1 An employer cannot just pick and choose which employees to take on.
  • The new employer takes over all rights and obligations arising from those contracts of employment, except criminal liabilities and rights and obligations relating to provisions about benefits for old age, invalidity or survivors in employees' occupational pension schemes.
  • The new employer takes over any collective agreements made on behalf of the employees and in force immediately before the transfer (see also Trade union recognition).
  • Neither the new employer nor the previous one may fairly dismiss an employee because of the transfer or a reason connected with it, unless the reason for the dismissal is an economic, technical or organisational reason entailing changes in the workforce. If there is no such reason, the dismissal will be unfair. If there is such a reason, and it is the cause or main cause of the dismissal, the dismissal will be fair provided an employment tribunal decides that the employer acted reasonably in the circumstances in treating that reason as sufficient to justify dismissal. If, in this case, there is a redundancy situation, the usual redundancy procedures will apply (see Redundancy).
  • The new employer may not unless the contract of employment so provides unilaterally worsen the terms and conditions of employment of any transferred employee.
  • The previous and new employers must inform and consult representatives of the employees (see Information and consultation).

Employees' position in a Transfer

When an undertaking is transferred the position of the employees of the previous or new employers is as follows:

  • An employee claiming to have been unfairly dismissed because of a transfer has the right to complain to an employment tribunal.
  • Transferred employees who find that there has been a fundamental change for the worse in their terms and conditions of employment as a result of the transfer generally have the right to terminate their contract and claim unfair dismissal before an employment tribunal, on the grounds that actions of the employer have forced them to resign. Employees may not make this type of claim solely on the grounds that the identity of their employer has changed unless the circumstances of an individual case change and that change is significant and to the employee's detriment.

In both the above cases dismissal because of a relevant transfer will be unfair unless an employment tribunal decides that an economic, technical or organisational reason entailing changes in the workforce was the main cause of the dismissal and that the employer acted reasonably in the circumstances in treating that reason as sufficient to justify dismissal. Even if the dismissal is considered fair, employees may still be entitled to a redundancy payment (see Redundancy).

  • Employees employed in the undertaking immediately before the transfer (or who would have been so employed had they not been unfairly dismissed) for a reason connected with the transfer automatically become employees of the new employer, unless they inform either the new or the previous employer that they object to being transferred. In this case the contract of employment with the previous employer is terminated by the transfer of undertaking but the employee is not dismissed. The previous employer may re-engage the employee.

An employee's period of continuous employment is not broken by a transfer, and, for the purposes of calculating entitlement to statutory employment rights, the date on which the period of continuous employment started is the date on which the employee started work with the old employer. This should be stated in the employee's written statement of terms and conditions; if it is not, or if there is a dispute over the date on which the period of continuous employment started, the matter can be referred to an employment tribunal.

  • Transferred employees retain all the rights and obligations existing under their contracts of employment with the previous employer and these are transferred to the new employer, with the exception that the previous employer's rights and obligations relating to benefits for old age, invalidity or survivors under any employees' occupational pension schemes are not transferred. If the new employer does not provide comparable overall terms and conditions, including pension arrangements, it is possible that an employee may have a claim for unfair dismissal, although this has never been tested in the courts.

Occupational pension rights earned up to the time of the transfer are protected by social security legislation and pension trust arrangements.

Redundancy

Dismissed employees may be entitled to redundancy payments. Employers must also ensure that the required period for consultation with employees' representatives is allowed.
Entitlement to redundancy payments will not be affected by the failure of any claim which an employee may make for unfair dismissal compensation.

Where there are redundancies and it is unclear whether the Regulations apply, it will also be unclear whether the previous or the new employer is responsible for making redundancy payments. In such cases employees should consider whether to make any claims against both employers.

Trade Union Recognition

If the transferred undertaking maintains an identity distinct from the remainder of the new employer's business, the new employer will be considered to recognise an independent trade union, in respect of employees transferred, to the same extent that it was recognised by the previous employer. If the undertaking does not keep its separate identity, the previous trade union recognition lapses, and it will then be up to the union and the employer to renegotiate recognition.

Information and Consultation

Who must be informed and consulted?

Where employees who may be affected by the transfer are represented by an independent trade union recognised for collective bargaining purposes, the employer must inform and consult an authorised official of that union. This may be a shop steward or a district union official or, if appropriate, a national or regional official. The employer is not required to inform and consult any other employee representatives in such circumstances, but may do so voluntarily if desired. A trade union may be recognised for one group of employees, but not for another.

Where employees who may be affected by the transfer are not represented by a trade union as described above, the employer must inform and consult other appropriate representatives of those employees. These may be either existing representatives or new ones specially elected for the purpose. It is the employer's responsibility to ensure that consultation is offered to appropriate representatives. If they are to be existing representatives, their remit and method of election or appointment must give them suitable authority from the employees concerned. It would not, for example, be appropriate to inform and consult a committee specially established to consider the operation of a staff canteen about a transfer affecting, say, sales staff; but it may well be appropriate to inform and consult a fairly elected or appointed committee of employees, such as a works council, that is regularly informed or consulted more generally about the business's financial position and personnel matters. If the representatives are to be specially elected ones, certain election conditions must be met. These are described below.

What are the election rules applying in cases where employee representatives are to be specially elected?

The rules are:
a. The employer shall make such arrangements as are reasonably practical to ensure the election is fair.
b. The employer shall determine the number of representatives to be elected so that there are sufficient representatives to represent the interests of all the affected employees, having regard to the number and classes of those employees.
c. The employer shall determine whether the affected employees should be represented either by representatives of all the affected employees or by representatives of particular classes of those employees.
d. Before the election the employer shall determine the term of office as employee representatives so that it is of sufficient length to enable relevant information to be given and consultations to be completed.
e. The candidates for election as employee representatives are affected employees on the date of the election.
f. No affected employee is unreasonably excluded from standing for election.
g. All affected employees on the date of the election are entitled to vote for employee representatives.
h. The employees entitled to vote may vote as many candidates as there are representatives to be elected to represent them; or, if there are to be representatives for particular classes of employees, for as many candidates as there are representatives to be elected to represent their particular class of employee.
i. The election is conducted so as to secure that:

  • so far as reasonably practicable, those voting do do in secret, and
  • the votes given at the election are accurately counted.

Where an employee representative is elected in accordance with these rules but subsequently ceases to act as such and, in consequence, certain employees are no longer represented, another election should be held satisfying the rules set out at (a), (e), (f) and (i) above.

The legislation does not specify how many representatives must be elected or the process by which they are to be chosen. An employment tribunal may wish to consider, in determining a claim that the employer has not informed or consulted in accordance with the requirements, whether the arrangements were such that the purpose of the legislation could not be met. An employer will therefore need to consider such matters as whether:

  • the arrangements adequately cover all the categories of employees who may be affected by the transfer and provide a reasonable balance between the interests of the different groups;
  • the employees have sufficient time to nominate and consider candidates;
  • the employees (including any who are absent from work for any reason) can freely choose who to vote for;
  • there is any normal company custom and practice for similar elections and, if so, whether there are good reasons for departing from it.

What must an employer do?

First, the employer of any employee who may be affected must tell their representatives:

  • that the transfer is going to take place, approximately when, and why;
  • the legal, economic and social implications of the transfer for the affected employees;
  • whether the employer envisages taking any action (reorganisation for example) in connection with the transfer which will affect the employees, and if so, what action is envisaged;
  • where the previous employer is required to give the information, he or she must disclose whether the prospective new employer envisages carrying out any action which will affect the employees, and if so, what. The new employer must give the previous employer the necessary information so that the previous employer is able to meet this requirement. The information must be provided long enough before the transfer to give adequate time for consultation.

Second, if action is envisaged which will affect the employees, the employer must consult the representatives of the employees affected about that action. The consultation must be undertaken with a view to seeking agreement. During these consultations the employer must consider and respond to any representations made by the representatives. If the employer rejects these representations he/she must state the reasons.

If there are special circumstances which make it not reasonably practicable for an employer to fulfil any of the information or consultation requirements, he/she must take such steps to meet the requirements as are reasonably practicable.

Rights of Representatives

Representatives and candidates for election have certain rights and protections to enable them to carry out their function properly. The rights and protections of trade union members, including officials, are in some cases contained in separate provisions to those of elected representatives but are essentially the same as those of elected representatives described below.

The employer must allow access to the affected workforce and to such accommodation and facilities, eg use of a telephone, as is appropriate. What is "appropriate" will vary according to circumstances.

The dismissal of an elected representative will be automatically unfair if the reason, or the main reason, related to the employee's status or activities as a representative. An elected representative also has the right not to suffer any detriment short of dismissal on the grounds of their status or activities. Candidates for election enjoy the same protection. Where an employment tribunal finds that a dismissal was unfair, it may order the employer to reinstate or re-engage the employee or make an appropriate award of compensation. Where an employment tribunal finds that a representative or a candidate for election has suffered detriment short of dismissal it may order that compensation be paid.

An elected representative also has a right to reasonable time off with pay during normal working hours to carry out representative duties. Representatives should be paid the appropriate hourly rate for the period of absence from work. This is arrived at by dividing the amount of a week's pay by the number of normal working hours in the week. The method of calculation is similar to that used for computing redundancy payments.

Complaining to an Employment Tribunal

The following may complain to an employment tribunal:

  • an employee who has been dismissed or who has resigned in circumstances in which they consider they were entitled to resign because of the consequences of the transfer. An employee must complain within three months of the date when their employment ended.
  • It may be unclear whether claims should be made against the previous or the new employer. In such cases, employees should consider whether to claim against both employers.
  • an elected or trade union representative, if the employer does not comply with the information or consultation requirements. A representative must complain within three months of the date of the transfer;
  • a representative or candidate for election who has been dismissed, or suffered detriment short of dismissal. A complaint must be made within three months of the effective date of termination (or, in the case of a detriment short of dismissal, within three months of the action complained of);
  • a representative who has been unreasonably refused time off by an employer, or whose employer has refused to make the appropriate payment for time off, may also complain to an employment tribunal. A complaint must be made within three months of the date on which it is alleged time off should have been allowed or was taken;
  • an affected employee where the employer has not complied with the information or consultation requirements other than in relation to a recognised trade union or an elected representative. A complaint must be made within three months of the date of the transfer.

(In any one of the above cases the tribunal can extend the time limit if it considers that it was not reasonably practicable for the complaint to be made within three months.)

  • an employee who wishes to claim a redundancy payment. The application should normally be made within six months of the dismissal.

If a representative complains to an employment tribunal that an employer has not given information about action proposed by a prospective new employer, and if the employer wishes to show that it was "not reasonably practicable" to give that information because the new employer failed to hand over the necessary information at the right time, the employer must tell the new employer that he or she intends to give that reason for non-compliance. The effect of this will be to make the new employer a party to the tribunal proceedings.

Conciliation

The tribunal will send a copy of the completed form to a conciliator of the Advisory, Conciliation and Arbitration Service (ACAS), who will try to promote a settlement of the complaint without a tribunal hearing.

The services of a conciliator will also be available in the absence of a formal complaint, if the employee or either employer requests them. In such a case the employee or employer can get in touch with a conciliator through an office of ACAS. Information given to conciliators in the course of their duties will be treated as confidential. It may not be divulged to the tribunal without the consent of the person who gave it.

Tribunal Hearing and Awards

If no settlement is reached, the employment tribunal will hear the case. If complaints are upheld, awards may be made against the previous or new employer, depending on the circumstances of the transfer.

Unfair dismissal awards - Employment tribunals may order reinstatement or re-engagement of the dismissed employee if the complaint is upheld, and/or make an award of compensation.

Detriment awards - The employer may be ordered to pay compensation to the person(s) concerned. The compensation will be whatever amount the tribunal considers just and equitable in all the circumstances having regard for any loss incurred by the employee.

Information and consultation awards - The employer who is at fault may be ordered to pay compensation to each affected employee, up to 13 weeks' pay. If employees are not paid the compensation, they may present individual complaints to the tribunal, which may order payment of the amount due to them. These complaints must be presented within three months from the date of the original award (although the tribunal may extend the time-limit if it considers that it was not reasonably practicable for the complaint to be presented within three months).

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