The Government is as keen as ever to pursue PFI, but as Caroline Carter and Logan Mair report, problems may arise when transferring employees to a private contractor

The private finance initiative (PFI) was introduced just over a decade ago with the aim of attracting private sector finance to build and service public sector facilities. The key employment questions for the private sector contractor (the contractor) in PFI projects are:
• Will employees be transferred to the contractor and, if so, which employees?
• How much information does the contractor have about transferring employees?
• What protection will the transferring employees have?
• How are the risks, liabilities and costs for the employees to be allocated between the parties?
• What consultation is taking place?
• What happens to the employees at the end of the project?
• What about the employment terms of new joiners?
Whether employees will transfer to the contractor depends on whether the Transfer of Undertakings (Protection of Employment) Regulations 1981 (Tupe) applies, as well as on the provisions in the project agreement. Where Tupe applies, its effect is to transfer the contracts of the employees engaged in the undertaking to the contractor, who effectively steps into the previous employer’s shoes in relation to any pre-transfer liabilities (for example, any failure to pay wages or claims of discrimination).
Whether or not Tupe applies is often a vexed question and is case-specific. In summary, it applies if there is a stable economic entity that transfers to the contractor. It is, unfortunately, often difficult to say with any certainty whether this is the case. Therefore, common practice is to specify in the project agreement that the parties will act as if Tupe does apply, irrespective of whether it will by law.
It can also be hard to ascertain which employees will transfer into the private sector under Tupe. At law, employees who are engaged in the undertaking (ie the services transferring to the contractor) will transfer. These may include employees of the public service body and/or an existing contractor. Some employees may be engaged some of the time in the services but also perform duties unrelated to the transferring services. To work out who will transfer under Tupe requires an analysis of each individual’s work, which is an impractical approach. The project agreement, therefore, typically clarifies which employees will be treated as transferring.
The contractor should be provided with a list of all the employees who will transfer and detailed information in relation to those employees (problems can arise in respect of second-generation outsourcing if the outgoing contractor is not contractually obliged to provide such information). It will seek to be protected from claims that others should have transferred pursuant to the obligations of Tupe. To prevent unsuitable employees being ‘dumped’ on the contractor, the list should be agreed and the public
sector body/existing contractor restricted from changing the list, or the terms and conditions of the employees on that list, before the transfer date.
Those employees transferring will transfer on their existing terms and conditions of employment. Any attempt to change the terms to the employees’ detriment could amount to constructive dismissal, which is likely to be an unfair dismissal (awards capped in most cases at £63,100). Changes are invalid, even if the employees concerned expressly consent to them. This can be a significant problem where there is a desire to harmonise terms and conditions of transferring employees with those of an existing workforce, or a general wish to cut costs by changing working practices.
The position is a little different in respect of pensions because Tupe does not currently protect occupational pension rights, although this is something that is likely to change in the future. For the public sector employees, pensions are often a material benefit. The award of many PFI projects is conditional, however, on the contractor agreeing to provide protection over and above that given under Tupe. Some of the protection is outlined in a statement of practice issued by the Cabinet Office or in public sector bodies’ codes of practice. Often, contractors will be required to provide ‘broadly comparable’ pensions for transferring employees. Details of the pension arrangements proposed must be provided in the contractor’s tender documents.
In respect of the allocation of risks, liabilities and costs, the normal starting point for negotiation is that the public sector body will indemnify the contractor for all employee-related liabilities arising before the transfer date, and the contractor will provide a reciprocal indemnity for liabilities arising after the transfer date. If the pre-transfer indemnity is not provided by the public sector body, the contractor will inherit all pre-transfer liabilities for the employees who transfer under Tupe.
Irrespective of the number of employees involved, Tupe imposes a duty on both the public sector body/existing contractor and the contractor to inform the “appropriate” representatives of their respective affected employees of the fact of the transfer, as well as any measures they envisage being taken in connection with the transfer “long enough before the transfer” to enable consultation to take place. They should be advised of the fact that the transfer is to take place; the approximate timing for the transfer and the reasons for it; the legal, economic and social implications of the transfer for affected employees; and the measures (if any) that are envisaged in respect of affected employees. If there is no recognised trade union, information should be given to appropriate employee representatives, who may be either elected specifically for the proposed transfer or have been appointed or elected for some other purpose, and with whom it is appropriate to inform and consult. Where measures are envisaged, the employer must consult with the appropriate representatives with a view to seeking their agreement.
Where there has been a failure to inform and consult, compensation of up to 13 weeks’ actual pay per employee may be awarded. Recent case law indicates that this liability passes to the contractor, even if the failure to consult is that of the public sector body/ outgoing contractor. This emphasises the importance of warranties and indemnities in the project agreement if the contractor is not willing to bear this risk.
At the end of the project, Tupe might transfer all employees who are, at that stage, engaged in the provision of the services either back to the authority or onto the next incoming contractor. If it does not apply, the contractor risks being liable for the redundancy costs of all employees engaged in the project upon expiry/termination. Whether Tupe will apply at the end of the term of the project depends on how the services are to be performed at the end of the term and on how Tupe develops during the term of the project. Given the unpredictability, it is usual for the project agreement to specify how the employees will be treated on expiry/termination and who is to pay for any resultant redundancy and dismissal costs. The provisions should deal not just with the employees who originally transferred, but also all others engaged in the undertaking at termination/expiry.
Until very recently, the contractor has been able to hire new staff on whatever terms and conditions it chooses to work alongside the former public sector staff who have transferred to it by virtue of Tupe. New joiners’ employment terms have sometimes been less favourable than those of the transferred employees, leading to a phenomenon referred to by the unions as the “two-tier workforce”.
Earlier this year, the Government published a new circular, ‘Best Value and Performance Improvements’. A code of practice on workforce matters in local government service contracts was annexed to this circular. The circular applies to local authorities in England. Under the code, new staff taken on to work alongside transferred staff must be offered terms and conditions which are, overall, “no less favourable” than those of the transferred employees. (While the overall package must be no less favourable, this does not mean that its individual elements cannot be changed.)
Attempts have been made in NHS PFI/PPP projects to avoid Tupe for the private sector provision of certain ‘soft’ ancillary services (for example cleaning, maintenance, portering and catering), using a mechanism known as the ‘Retention of Employment Model’ (REM). Under the REM, NHS staff engaged in such services are treated as if they do not transfer but remain in NHS employment and are seconded to the contractor.
While the aim is to give staff the perceived comfort of remaining in the public sector, it is questionable as to whether the model prevents the contractor becoming the employer as a matter of law. To date, no test cases have been brought.
Caroline Carter is a partner and head of employment, and Logan Mair is an energy, transport and infrastructure partner, both at Ashurst Morris Crisp