Outsourcing TUPE

The Employment AppeaL Tribunal (EAT) has recently looked for the first time at the outsourcing or 'service provision change' (SPC) aspects of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). Its conclusion suggests a relatively relaxed approach to the requirement that it must be possible to identify the transferee in order for there to be a transfer.

The facts in Kimberley Group Housing Limited v Hambley EAT/0488/07 and 0489/07 were that Leena provided accommodation for asylum seekers, employing staff in both Stockton and Middlesbrough, where it ran properties. After Leena lost its Home Office contract in 2006, the services were taken over by two companies, Kimberley and Angel. After the transfer, Kimberley took over

97 per cent of Leena's Stockton work and 71 per cent of its Middlesbrough work, but there was no clear transfer of work from Leena to either organisation. Six Leena employees lost their jobs and brought unfair dismissal claims against Kimberley and Angel on the basis that liability had transferred.

Both Kimberley and Angel denied that TUPE applied but the tribunal decided that there had been an SPC and that the financial liabilities for the contracts should be split between them. The EAT disagreed, saying that the tribunal could not simply split the unfair dismissal liabilities between the two companies.

Having decided that what they were looking at was an SPC under reg 3(1)(b) of TUPE, rather than an 'ordinary' TUPE transfer under reg 3(1)(a), the EAT held that the tribunal needed to:

 identify the activities being transferred. It did not matter that the services are split between a number of different providers following the transfer;

 ask whether these activities stopped being carried out by the contractor on the client's behalf and started to be carried out by someone else instead; and

 ask whether there is an organised grouping of employees that has as its 'principal purpose' the carrying out of the activities.

The EAT commented that this should not be decided simply on percentages '“ for example if 30 per cent of activities were being transferred and 70 per cent retained, the 70 per cent activities do not necessarily equate to the 'principal purpose'.

The EAT said that, in this case, while the tribunal was entitled to take difficulties in identifying the transferee into account, it was free to come to the view that there was an SPC. However it was not right to decide that they could simply 'split' the unfair dismissal liabilities between the two transferees. As with any TUPE transfer, they should have considered whether employees were assigned to the group being transferred, taking the approach sanctioned by the European Court of Justice in the Botzen case and focusing on whether there was a link between the employee and the work being done. On that basis, both the Stockton and the Middlesbrough employees should have transferred to Kimberley, given the percentage of Leena's old work that Kimberley was doing in both locations.

SPC or ordinary transfer

This case does illustrate an important difference between SPCs and 'ordinary' TUPE transfers; for the latter there will be a TUPE transfer only if there is 'a transfer of an economic entity which retains its identity'. The assignment issue is relevant to whether the employees are allocated to the economic entity that is being transferred and has to be considered at that stage. For SPCs, on the other hand, there is a different analysis because 'retaining identity' is not a requirement; all that is needed is one party ceasing to provide the services and another taking them over.

Nevertheless, reg 3(1)(b) does require the activities to be carried out after the transfer either by the client itself or by 'another person'. This must mean the transferee or transferees have to be capable of identification.

The problem is that we do not know how this test works in practice. The government's 2007 guidance on TUPE notes that an SPC can include the situation where the original service contract is split up into two or more components, each of which is assigned to a different contractor, provided the key 'organised grouping' test is met. This seems to suggest that you only have to look at the position before the transfer.

But an unreported employment tribunal case, Thomas-James v Cornwall County Council (ET case 1701021-22), decided earlier this year, suggests that more analysis may be required in cases where services are repackaged.

The tribunal decided that there was no SPC because the services (running a legal advice helpline) were so fragmented after the transfer of the contract that it was impossible to identify the transferee. The council had chosen not to bid to retain its randomly allocated hours of telephone advice and given that 17 companies were involved before the transfer and nine after, it was impossible to say to whom those hours had been transferred. And the EAT in Kimberley also accepted that there might be circumstances in which the service being provided is so fragmented that no SPC has taken place.

What now?

We can expect this issue to be addressed again in the tribunals. A major consideration in bringing the SPC provisions into TUPE was to prevent service providers from avoiding TUPE by performing the services in a different way. Although reg 3(1)(b) does not derive directly from European law, and as such does not have to be interpreted 'purposively', it seems unlikely that tribunals will accept fragmentation as a reason for deciding that there is no TUPE transfer, unless the facts are exceptional (as they were in Thomas-James).

Nevertheless, an element of uncertainty has been reintroduced to contracting and outsourcing arrangements as a result of these cases. One perceived advantage of the 2006 revisions to TUPE was that they would reduce the complexity and transaction costs, because in most cases there would be no need to spend time considering whether TUPE applies. This now looks to be an increasingly naive assumption.