16 February 2004
A number of employment law issues impact on sales or outsourcings in the commercial property sector. All real estate lawyers should be aware of statutory rules that might apply on the sale of a commercial property, so that staff who are part of an ‘undertaking’, such as shopping centre security guards and cleaners, are transferred along with the property from vendor to purchaser. In the next year, the provision of property security services will become regulated. New regulations will have major implications for workforce management, particularly on proposed property transactions and redevelopments.
The Transfer of Undertakings Regulations 1981 (Tupe) have the largest affect on employment in real estate transactions. Tupe applies wherever there is a transfer of an undertaking. An ‘undertaking’ is broadly defined as an economic entity and includes, for example, a shopping centre and a serviced office block with just a caretaker or building manager. It also includes the provision of services under a contract, such as a managing agent’s agreement.
‘Transfer’ is also a broad concept and will cover the sale of a commercial property, the grant of a new lease, the outsourcing of a particular service or the termination of such contract or service.
In Tupe jargon, the vendor or outsourcer of a contract is known as the ‘transferor’ and the purchaser or the contractor is the ‘transferee’. There are several important effects of Tupe. Employees in the undertaking are automatically transferred from the transferor to the transferee, with their continuity of employment and on their existing terms and conditions of employment – currently excluding certain rights under occupational pension schemes). Under Tupe, the responsibility for anything done by the transferor prior to the transfer in connection with transferring employees, for example health and safety problems or discrimination, is transferred to the transferee. Any dismissal connected with a Tupe transfer is automatically unfair, unless it is for “an economic, technical or organisational reason entailing changes in the workforce”. Tupe also requires transferors and transferees to inform and consult with employee representatives or trade unions prior to the transfer.
Detailed due diligence should be undertaken by the transferee as to employee liabilities. As the effects of Tupe are automatic and cannot be contracted out of, both transferor and transferee must assess how the risks and liabilities associated with Tupe should be apportioned. This is normally done by means of cross indemnities for pre and post transfer liabilities.
Tupe applies to employees where services are provided in-house under a contract entered into by the managing agent or outsourcer. The Tupe considerations depend on whether the contract is terminated, assigned or novated at the time of a sale or transfer of a lease etc.
Managing agent agreements might provide that the agents are acting on behalf of the principal and that the agents are not responsible for any employees. As a result, liability for failure to comply with Tupe in relation to transferred staff may pass directly to the vendor or purchaser.
Outsourcing contract issues
The key Tupe issues that a property owner must deal with in any outsourcing contract, whether for cleaners or with a managing agent, are: to ensure that they and any successor contractor are protected on the termination of the contract by suitable indemnities, covering all liabilities arising in relation to employees during the term of the contract and failure to consult in accordance with Tupe; to prevent contractors ‘cherry-picking’ the workforce in the lead-up to the end of the contract by replacing the best employees and increasing benefits; and to require contractors to provide information about transferring employees towards the end of the contract, so that the property owner or agent can comply with their Tupe consultation obligations.
If these indemnities and provisions are not negotiated at the start of the contract, it will be impossible to extract them from contractors or agents on the termination of the contract, when the relationship may have broken down.
The transferor must inform and consult its employee representatives long enough before the transfer to allow consultation with their appropriate representatives. The consultation must include the measures which the transferee envisages it may take in relation to affected employees such as changes to terms, redundancies and relocation.
The transferee, as the prospective employer, is under a separate duty to provide information about measures. If managing agents are involved, as the employer, it may be necessary for them to take a role in the inform and consult process. The potential liability for failure to consult – up to 13 weeks full pay per employee – can be substantial and the liability for any failure by a transferor passes to the transferee under Tupe.
Stamp duty schemes
Stamp duty saving schemes are often complex transactions, involving property being passed between a number of different entities over a matter of days or weeks. In these circumstances it is important to plan the transaction to ensure that any employees end up employed by the correct entity, and that, as far as possible, employees are not Tupe transferred to a number of different entities during the transaction.
New Tupe regulations
New draft Tupe regulations are overdue from the Department of Trade and Industry. These are expected to provide for Tupe to apply to outsourcing, but otherwise are not expected to greatly alter the existing framework.
The new Pensions Act is also expected to contain provisions affecting occupational pension schemes on a Tupe transfer, including a requirement on transferees to provide a pension scheme “no less favourable” than that provided by the transferor. It is anticipated this will be limited to the provision of a stakeholder pension scheme with capped employer contributions.
The Private Security Industry Act 2001
The requirement for individuals to hold an appropriate licence from the Security Industry Authority (SIA) is scheduled to be rolled out to door supervisors and vehicle immobilisers (operating, for example, in shopping centre or office building car parks) in summer 2004 and to security guards in 2005. Property owners or managers will need to consider how to ensure any in-house or outsourced provision of these services is compliant with the new requirements. This is likely to involve the register of approved contractors proposed by the SIA.
Informing and consulting employees
Regulations to implement an EC directive on informing and consulting employees are expected this year. Unless employers create their own information and consultation forum, they will be forced to adopt the more onerous statutory procedures requiring them to: inform the forum of any recent and probable developments of the business’s activities and economic situation; both inform and consult on any developments or measures which may affect employment; and most controversially, reach agreement on decisions likely to lead to substantial changes in work organisation or contractual relations.
Such procedures would require employee agreement on the sale of a large commercial property undertaking, such as a shopping centre or a major outsourcing exercise. It is, therefore, important for employers, including the real estate sector, to begin to consider now how they will implement their own procedures, and avoid being fixed with these statutory procedures. The final regulations are due to come into effect in March 2005, and will be rolled out in stages, applying initially to undertakings with at least 150 employees. This threshold will be lowered to 100 employees in 2007 and 50 employees in 2008.
Valmai Adams is an employment partner at Nabarro Nathanson
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