Editorial from IDS Brief 851, April 2008

Transfers – a question of identity

Death and taxes are two things one can always count on. Another is the never-ending capacity of the TUPE Regulations to generate complex litigation. So far this year there have been two cases where the issue of the transferee’s identity was critical to a finding of a transfer of an undertaking. The first is CAB Automotive Ltd v Blake and ors (reported on page 11), where the employees were dismissed by an administrator with no prospective purchaser lined up. After considering a number of conflicting decisions, the EAT in this case endorsed the approach adopted in Morris v John Grose Group Ltd 1998 IRLR 499, the effect of which is that if a dismissal is effected simply to make a business more attractive to potential purchasers, that dismissal will be connected with any transfer that eventually takes place, and hence, in the absence of an ‘ETO reason’, automatically unfair. Accordingly, it is not essential that actual or prospective purchasers be identified at the time of dismissal for there to be a transfer.

The problems of fragmentation and repackaging

The second case is reported on the News page on www.idsbrief.com. Unlike Blake, which involved a standard transfer under Reg 3(1)(a) TUPE, Thomas-James and ors v Cornwall County Council and ors arose out of a ‘service provision change’ (SPC) within the meaning of Reg 3(1)(b). An employment tribunal decided that there was no SPC where it was not possible to identify the entity to which the service provision contract had been transferred. The tribunal’s decision is one of the first to examine in any detail the application of the SPC provisions, which were introduced by the 2006 Regulations.

In IDS Employment Law Handbook, ‘Transfer of Undertakings’ (2007), we discussed the situation where a contract involving a number of different activities is repackaged and transferred to two or more employers. The Government, in its DTI (now BERR) Guide to TUPE 2006, took the view that TUPE might apply and that ‘the key test is whether an organised grouping of employees has as its principal purpose [before the change in contractor] the carrying out of the activities that are transferred’. As we point out in the Handbook (pages 51–52), this test may create a loophole in TUPE depriving employees in a number of SPC scenarios of TUPE rights.

The impact of fragmentation on the identity of potential transferees was the critical element in Thomas-James. There, 17 companies held contracts with the Legal Services Commission (LSC) to provide free legal advice over the telephone. Callers to a national number would be routed to an available, competent adviser who had been waiting longest for their next call. Each contractor was allocated by LSC a certain number of hours of service to fulfil, and was obliged to employ one adviser for each 1100 hours of service allocated. The claimants were all employed by one contractor, Cornwall County Council, which had a dedicated team servicing the LSC contract. Following a re- tendering exercise in April 2007, the total number of service providers had been reduced to nine. These nine took over the work of the contractors who no longer provided services, which included the Council. The claimants and the Council asserted that the claimants’ contracts of employment had transferred to one of the new service providers, which all of the new service providers denied. It therefore fell to the tribunal to decide if there had been a relevant transfer for the purposes of TUPE 2006.

The employment judge accepted that the claimants, when employed by the Council, were assigned to an organised grouping of employees that had as its principal purpose the carrying out of such activities on LSC’s behalf. Accordingly, the loophole discussed above did not arise. However, because it was not possible to identify to whom the hours previously allocated to the Council had been allocated following the re-tendering exercise, there was no connection between the activities performed by the claimants as employees of the Council and those performed by the nine service providers after April 2007.

Another TUPE loophole?

It has been suggested that this ruling, if correct, would allow contractors to avoid TUPE by splitting up and parceling out activities to different entities, thereby making it impossible for employees to identify the transferee(s). The facts of this case were, however, very specific and we would suggest that if a loophole has been created, it’s a small one. In this case the work was allocated randomly to advisers by a national telephone system before and after the changeover in contractors; the number of contractors changed from 17 to nine so the percentages of advice hours provided by each provider could not be directly compared between old and new contractors; and the allocation of hours was not uniform amongst the outgoing and incoming contractors. Critically, it was impossible to trace the allocated hours from Cornwall County Council to any of the new contractors. As the employment judge stated: ‘Had the activities been defined by location or alphabetically or in some other way and been allocated to the new contractors according to that definition then the answer might again have been different.’

This is not, however, the end of the matter. The employment judge was referred to another tribunal decision, Hambley and ors v Leena Homes and ors, which raised similar issues. There, the tribunal decided that there was a service provision change covered by TUPE where activities were split up and awarded to two separate contractors on re-tendering. The appeal from that decision is due to be heard by the EAT later this month.