Businesses are always looking for new ways of cutting cost and improving efficiency and outsourcing certain functions can be an attractive prospect.
However, the legal implications of outsourcing, particularly from the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”), are complex. Businesses who are considering outsourcing any function (or, indeed, bringing outsourced services back in-house or changing a service provider) need to understand the practical implications of TUPE and how it might affect their proposals.
The Effect of TUPE
TUPE protects certain employment rights where there is a ‘service provision change’. In general terms this occurs where a business:
- Engages a third party to carry out certain activities on its behalf (i.e. outsourcing);
- Takes activities that were previously outsourced back ‘in-house’ (insourcing); or
- Moves a service from one contractor to another (second generation outsourcing).
The effect of TUPE is that employees who are engaged ‘wholly or mainly’ in carrying out the relevant activities or service will transfer from the customer/existing supplier at the start of the outsourcing arrangement (on their current terms and conditions) and then from the supplier back to the customer or to a replacement supplier (depending on whether the services are taken back in-house or moved to a new supplier) at the end of the contract.
All of the TUPE obligations which apply on a business sale will apply in the same way where there is a service provision change, including:
- The obligation to inform and consult with affected employees prior to the transfer taking place;
- The requirement to provide employee liability information to the new provider of the service; and
- Restrictions on dismissing any affected employee or changing their terms and conditions of employment after the transfer.
When TUPE will not Apply
In most cases, when a service is being outsourced, TUPE will apply. However, this will not be the case where:
- there is no ‘organised grouping of employees’ who work on the services being transferred (for instance where the employees work in a shared services centre);
- the services, once transferred, will not be fundamentally the same; or
- the service is transferred to a number of different providers and becomes too fragmented.
The case law on these areas is detailed and complex, with each case being decided on its own particular facts. If you think your outsourcing arrangement might fit into one of these exceptions, you should take advice at the outset. Proceeding on the basis that TUPE does not apply, and later finding out that it should have, could be very costly.
How to Deal with TUPE on Outsourcing
Where a service is being outsourced and TUPE applies, the new provider will need to try to find out as much information as it can about how the service is currently being performed and about the individuals engaged on the service, to determine whether TUPE applies and, if so, whether there will be any significant changes to the service going forward that they will need to consult on.
Often part of the rationale for outsourcing is that the service can be provided more efficiently, sometimes with fewer staff. TUPE does not preclude redundancies being made, but, in order for any such redundancies to be fair, the new provider would have to make the redundancies after the transfer and may have to pool the new employees with its own workforce. Affected employees would have to be consulted in advance of the transfer and collective consultation obligations may apply.
The Outsourcing Agreement
It is common for the outsourcing agreement to include indemnities and warranties applicable at the start of the outsourcing arrangement and at the end of it (where employees might transfer back to the customer or to a new provider).
The extent of any indemnities and warranties will depend on the relative bargaining positions of the parties and to the commercial terms and length of the arrangement. Key areas of concern will be who bears the cost of any failures to inform and consult (which gives rise to a potential liability for 13 weeks’ full pay per employee), who will be liable for any dismissals or claims arising from dismissals pre and post transfer and for any pre-existing claims the transferring employees may have.
The following are examples of terms that might be included in an outsourcing agreement:
- A warranty to confirm the employee liability information is correct and accurate;
- Reciprocal indemnities for failures by the other party with regard to informing and consulting with relevant employees;
- An indemnity covering who will be liable for the pre-transfer liabilities (usually the incumbent provider or customer);
- Indemnities relating to ‘woodwork employees’ (i.e. those not on the list of transferring employees who ‘come out of the woodwork’ later and claim they ought to have transferred);
- An indemnity covering who will be liable for post-transfer liabilities (usually the new provider);
- Restrictions on what the provider can do once notice has been given by either party, e.g. preventing it increasing the pay of relevant employees and moving employees round to try to put underperforming employees on the service so they will transfer pursuant to TUPE.
Obviously the particular warranties and indemnities will be different in each case and will depend on the particular commercial arrangements. Whenever you are considering outsourcing, in-sourcing or taking on an outsourced function, you need to consider TUPE, take advice on the terms of the outsourcing agreement and also keep one eye on the future and what will happen at the end of the arrangement.
If you would like further advice on TUPE and outsourcing, please contact the Clarion Employment Team.