Proposed changes to UK’s TUPE will impact outsourcing deals

The UK government has issued a consultation on proposed changes to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (TUPE).

TUPE is the UK’s implementation of the Acquired Rights Directive (2001/23/EC) (ARD) and, broadly speaking, protects employees when the business or undertaking for which they work transfers to a new employer. Critics of TUPE (which revoked the 1981 TUPE regulations) have raised concerns that it ‘gold plates’ the ARD (i.e. it does more than is strictly required by the Directive) and is too bureaucratic. They also cite a number of practical difficulties. In November 2011, the UK government responded by publishing a Call for evidence on the effectiveness of TUPE, subsequently concluding that the gold plating aspects of TUPE should be removed and the operation of the regulation be made more practical.

What does this mean for outsourcing and other long-term service arrangements? The most significant change being proposed is the repeal of the regulations relating to “service provision changes.” The “service provision changes” provisions were introduced in 2006 in an attempt to avoid uncertainty as to when TUPE applied. The 2006 Regulation expressly states that TUPE applies at the end of a services relationship in the same way that it already applied under the earlier TUPE regulation to a “relevant transfer” at the outset. Thus, in certain circumstances (which have had to be clarified recently by a number of employment tribunal and decisions and appeals), an automatic transfer of the staff working on delivering outsourced services would take place under TUPE at the end of an outsourcing deal, regardless of whether the work is taken on by another third party as a successor to the original supplier or is brought back in-house by the customer.

Since 2006, the commercial models underpinning outsourcing arrangements with a UK service delivery component have been negotiated on the assumption that TUPE will apply on termination. Because of this, the government plans for a long a lead-in period to apply to this change. The consultation seeks views on whether the lead-in period should be less than a year, one to two years, three to five years or five years or more.

As a result, service providers are advised to review the exit provisions of their current outsourcing agreements with particular focus on those clauses dealing with termination charges and stranded costs, in case the proposed changes would make them liable to bear unexpected redundancy costs should the change be implemented during the life of each such contract. For customers and service providers looking at new agreements, it will be important to understand the impact of the proposed changes on the underlying cost models and the economics of the deal and to ensure that the contract contains robust provisions which protect those economics regardless of when the changes are implemented. Looking ahead, the pre-2006 test will once more be applied, which will mean deciding whether the normal definition of a transfer applies.

The consultation opened on 17 January 2013. Responses are due by 11 April 2013. Changes to the regulation are expected to be introduced in October this year. Other proposed changes include the removal of obligations to provide employee liability information and a right for transferees to consult on collective redundancies with transferring employees prior to the transfer.