Selling a Business – Part 2 – TUPE or not TUPE

With any purchase or sale of a business, there are many aspects to consider, such as the price for the business, the due diligence that should be undertaken, and whether it will be an Asset or Share sale. It is also essential to understand the legal standing when it comes to employees and/or some workers.

When both buying or selling a business, it is important to be aware of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), which operate to protect employees if the business in which they are employed changes hands.

This article is the second of a two-part series – please find part one here.

TUPE imposes certain obligations on employers which operate to protect employees. If you do not comply with these, you could potentially expose yourself to very expensive claims.

TUPE can apply when:

• There is a business transfer, i.e. companies buy or sell part or all of a business as a going concern (an asset sale);
• Companies make a ‘service provision change’. This involves either (a) an initial outsourcing of services; (b) a subsequent transfer (e.g. transferring services from one outsourced provider to another); and (c) bringing the service back in-house (i.e. insourcing); or
• Companies grant or take a lease or licence of premises and operate the same business from those premises.

The size of your business does not matter. When TUPE applies, your employees’ terms and conditions of employment, jobs and continuity of employment will all transfer to the new employer (the buyer).

Depending on the type of transaction, the legal requirements in relation to employees are different.

Asset sale

Employees and apprentices usually automatically transfer under TUPE to the purchasing business on their existing terms and conditions, meaning the employees will continue to benefit from the same rights and protections. Purchasers of a business should therefore ensure they carry out effective due diligence to properly understand the potential implications of transferring staff, including (but not limited to) any additional benefits given to the employee, which must continue post-transfer. As mentioned, employees also retain their service continuity and therefore any potential redundancy payments or notice pay would be greater.

As the seller of the business, you have an obligation to provide the purchaser with all the necessary information connected to the employees, and refrain from dismissing employees as part of the transfer, otherwise, they can be exposed to liability.

During the process, both parties (seller and buyer) need to ensure that they follow a proper inform and consult process with the employees prior to completing the sale and comply with the legislative requirements to reduce the risk of exposing themselves to a claim. This needs to be carried out as early as possible to reduce exposure.

Share sale

In a share sale, employees remain contracted with the same company and do not need to transfer to the buyer. Therefore, TUPE will usually not apply. Please do note that in some cases, particularly where there is a parent and subsidiary company relationship, TUPE can apply to a share sale, and this will depend on what is done with the business of the acquired company.

Your employees have certain rights under the law that protect them from being treated unfairly. These rights include:

• Not being dismissed where the dismissal is directly linked to the transfer and does not fall within one of the limited exceptions.
• Being informed and consulted about the transfer. Therefore, both the purchaser and seller should ensure that a fair process is followed.
• Preserving the employee’s rights under their contract of employment. If an employee’s terms and conditions change, they can resign and claim constructive unfair dismissal and they can argue, even years later, that the new contract of employment is void.

Employees of the target company are protected from changes to their jobs or employment contracts. If changes are made based solely on the transfer, then these will be automatically unfair, and employees will have the option to resign for repudiatory breach of contract and bring a claim for constructive dismissal.

The exception to this is if changes are made for an Economic, Technical or Organisational (ETO) reason, entailing changes in the workforce:

• Economic – this relates to the profitability or market performance of the new employer’s business,s including, e.g., essential cost-saving requirements where output has fallen to such a level that the business cannot continue trading without dismissing employees.
• Technical – this relates to the nature of equipment or production processes that the new employer operates, such as increased mechanisation of activities reducing the number of employees needed to carry out a particular function.
• Organisational – this relates to the management or organisational nature of the new employer’s business, including, for example, the need for restructuring resulting in redundancies, or dismissal in circumstances where it is impractical for employees to transfer to a new business due to location.

Please note that even if there is an ETO reason, employees will still need to consent to change their contracts before you can do this. However, there is still the risk that employees could argue that the changes are void at a later date as the scope is likely to be limited. This is because the reason is unlikely to entail “changes in the workforce”.

The employee can either inform the transferor or the transferee (the buyer or the seller) that they object to the transfer. Their contract will then end on the day the transfer completes. The employee will not be treated as having been unfairly dismissed and therefore should have no claim against either party. This means there will be limited scope for them to claim for redundancy pay and/or unfair dismissal. However, there are some exceptions to this scenario and legal advice should be sought.

An employee is automatically treated as unfairly dismissed if the sole or principal reason for the dismissal is the relevant transfer either by the buyer or the seller. As you may expect, there are financial sanctions available if the buyer and/or the seller fails to comply with their obligations under TUPE.

If the old or new employer does not follow the TUPE process (Inform or consult), there is a chance that they may be jointly or individually liable. If an employee brings a claim and the employment tribunal claim is successful, either employer could have to pay compensation to the affected employee. The compensation is up to 13 weeks’ gross pay for each affected employee.

TUPE Regulations can be a minefield – they are extremely complex and ever changing. So, if you are considering buying or selling a business, you should always take legal advice. Contact Backhouse Solicitors to speak to one of our employment law experts.

Tel:          01245 893400
Email:     info@backhouse-solicitors.co.uk
Visit:       17 Duke Street, Chelmsford, CM1 1JU
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