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TUPE and Tenders: Don’t Get More Than You Bargained For!

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Bidding for contracts is a difficult business. A bidder treads a fine line between pricing competitively and ensuring the project will generate sufficient profit for the business. When TUPE is likely to apply to a contract up for tender, things become more complicated and the line between competitiveness and profitability can become even harder to find.

The Transfer of Undertakings (Protection of Employment) Regulations 2006, or TUPE, applies in two situations:

  1. Where there is a transfer of a business or undertaking (such as a merger or the purchase of a business); and
  2. Where a client engages a contractor to do work on its behalf, moves any such work to a different contractor or takes the work in house (“a service provision change”). 

It is the second scenario that usually comes into play when a contract has been put out for tender. 

The key purpose of TUPE is to protect the rights of employees where there has been a change of employee. The main effect is that the contracts of employment of all employees working on the undertaking or service being transferred will transfer from the ‘transferor’ to the ‘transferee’ on their current terms and conditions. 

In a business sale, the employees will transfer from seller to buyer, but where there is a service provision change, they will transfer from the outgoing contractor to the incoming contractor. As such, if you are successful in bidding for a contract, you may inherit employees from the incumbent provider. 

TUPE applies as a matter of fact and law and not by a decision of the parties. If you bid for contracts where TUPE may apply, you therefore need to be aware of the effect of TUPE and account for it when putting your bid together. In some cases, the costs associated with TUPE could negate the advantage of winning the work. 

The Impact of TUPE on Tenders

As set out above, if TUPE applies, employees who are ‘assigned’ to the service being transferred will transfer over to the successful bidder on the date the service starts being provided by the new provider. Those employees will transfer on their current terms and conditions of employment. 

The eventualities that need to be considered by any bidder therefore include:

  1. If successful, a bidder may wish to provide the service in a different geographical location and the employees may, reasonably, not be willing to relocate. This will result in redundancies, which the new provider would have to pay for.
  2. The bidder may have little visibility on the employees engaged on the service and the potential liabilities it might inherit, particularly if the incumbent is a competitor. This makes it hard to account for such costs and expenses as part of any bid.
  3. The transferring employees may be on much more favourable terms and conditions of employment, which the new provider would then have to replicate. This would have a knock on effect on the profitability of the contract. This is particularly common when a public sector body outsources a service.
  4. In addition to the contracts of employment, TUPE also operates to transfer any inherited employment liabilities relating to the transferring employees. This would include any disciplinaries or grievances or Employment Tribunal claims, which could be costly.
  5. Redundancies or resignations may arise where the new bidder wishes to change the scope of the contract going forward – particularly if it is having to undercut the incumbent provider and so will have to run the service differently to operate it profitably. This could lead to employment claims from transferring employees and greater initial cost. 
  6. Sometimes the situation is not as simple as one service transferring from one provider to another. A service could be fragmented. You may only be bidding for part of a service or for a slightly different service than is currently provided. In such cases it is less clear whether TUPE applies and, if so, which employees are assigned and where they would transfer.
  7. Where employees transfer to you pursuant to TUPE, you would have to replicate their current terms and conditions, and provide a ‘broadly comparable’ pension scheme. This can be particularly challenging and costly, where the employees were members of a public sector pension scheme.

How To Reduce the Risks

Where there is any possibility that TUPE will apply to the bid or tender, you need to ensure that you carry out due diligence at the outset. Ideally, the business tendering the contract should provide information about the employees currently working on the contract to allow you to factor any associated costs into any bid. 

If information is lacking, you have to use ‘best guess estimates’ to work out how many employees you may inherit and what the associated salary costs might be. You then need to consider whether you would want to keep the employees who would transfer across to you and use them to provide the service going forward. 

If the service will be provided from a new location or you intend to use existing staff members and integrate the provision of the service into your existing business, consider the cost of any redundancies when putting your bid together. 

If you are successful in any bid, TUPE should be considered as part of the negotiation. TUPE sets out that the transferor (i.e. the incumbent provider) must provide information to the transferee (the new provider) regarding the employees who will transfer – including the terms on which they are employed and any existing disputes or claims – at least 28 days before the transfer takes place. Once that information comes through, you will have a better picture of what you will inherit. At that point, you may want to request indemnities in any contract for any claims relating to acts or omissions of the incumbent provider (the liability for which will otherwise transfer to you). 

The amount of protection that can be obtained through warranties and indemnities will depend on the respective bargaining position of the parties and the circumstances of the transfer of the service (outsourcing, in-sourcing or transfer between providers). However, in some cases, a successful bidder will have only the bare minimum information regarding the employees it will inherit and will be expected to take on the risk of any inherited claims. 

There is no doubt that TUPE complicates the bidding process and adds a degree or uncertainty that bidders have to try to deal with. It is best to be aware of the likelihood of TUPE applying and take advice on how it might affect the provision of the service you are bidding for and how to best account for that effect in putting your bid together and in actually providing the service you are bidding for.

Please contact the Clarion team if you want further advice on TUPE or a tender process more generally so that you are well prepared for the process.

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.