Better the devil you know? Proposed reform to Service Provision Changes and the application of TUPE

The Government has recently announced that it is proposing to make a number of changes to the scope of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”).

These proposals include the removal of references to service provision changes: outsourcing, ‘second generation’ outsourcing (i.e. the transfer of the outsourced services from one provider to another) or in-sourcing.

As it currently stands, TUPE will apply where a service provision change takes place which involves an organised grouping of individuals in Great Britain whose principal purpose is carrying out activities which are transferred to a new provider. The effect of this is, of course, that the outgoing and incoming parties in such a scenario have duties to inform and consult with the affected employees about the transfer, and the affected employees’ employment will automatically transfer to the new provider.

For many the benefit of the current system is certainty. Generally, parties involved in a service provision change will presume that TUPE will apply and are prepared to negotiate the contractual documentation on that basis – the parties know where they stand.

However, the UK Government was not under an obligation to develop TUPE law by expressly stating that TUPE would apply on a service provision change and many felt that this was a step too far – increasing costs on the parties in respect of situations which may previously have been outside the regulations’ scope. These concerns have led to the Government’s current proposals.

Should the service provision change references be removed from TUPE it must be remembered that many service provision changes will still be caught by TUPE anyway. The standard TUPE test is met where there is a transfer of an economic entity that retains its identity. However, parties will be left having to step back in time to look at older case law to assess whether TUPE applies to their situation

What now?
The Government’s consultation closes on 11 April 2013.

Should the Government decide to take the proposals forward any changes will not be implemented until October 2013. Even if the reference to service provision changes is removed at that time there is certainly no need to panic! The Government is aware that:

  • many contracts involving service provision changes are drafted on the basis that TUPE will apply on the cessation of the services (i.e. on ‘exit’), and therefore obligations and liabilities in respect of TUPE will have been heavily negotiated and factored into the deal commercials; and
  • outsourcing projects can be very large, complicated and a significant amount of time can pass between the initial planning stage and the implementation stage where the services actually transfer.

As a result, the Government recognises that there will need to be a transitional period prior to any change in the law becoming effective.

The Government is due to publish its response to the consultation in July and there will be much more clarity on what is going to happen at that time. Many hope for the status quo to continue and say it’s never too late for the Government to change its mind, but given the numerous changes the Government are making to employment law at the moment I would be surprised if the changes didn’t go ahead. However, it’s certainly a case of watch this space…

You can take part in the consultation by following this link.

Andrew McConnell

Andrew is an associate in Brodies’ Employment, Pensions and Benefits department, and regularly advises on the application of TUPE to outsourcing and services agreements. Andrew blogs on Brodies’ EmploymentBlog.

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