John McMullen gives the results of one of the most thorough studies into the impact of Tupe

The Transfer of Undertakings (Protection of Employment) Regulations 1981 (Tupe) is one of the most controversial areas of employment law. Confusing and constantly changing, it exasperates all concerned, including employees, employers, HR practitioners and lawyers. Reform of Tupe, promised this year, is urgently needed.

In the meantime, Pinsents has completed a major research survey on the effect of Tupe, including its proneness to litigation, its transactional effect and the legal resourcing of advice for businesses. The results are illuminating. They indicate where the true practical problems exist and where reform is needed. The following is an abbreviated abstract of some of the chief findings of the survey.

Difficulty in deciding whether Tupe applies

Of the sample group, 77.1 per cent had some experience of difficulty in the application of Tupe; 5 per cent always had difficulty, although a surprising 16.8 per cent concluded that they never did.

Difficulties when Tupe applies

Responses here were instructive, with 77.9 per cent of respondents highlighting the inheritance of unsuitable terms and conditions of employment as a major problem in the application of Tupe. Complaints about the difficulty in changing terms and conditions came from 81.7 per cent of the sample group.

A related issue, feared by 20.2 per cent of respondents, was that a takeover of groups of employees on Tupe-protected terms and conditions might trigger equal pay claims if comparisons were made between transferring employees and existing workforce members. This remains a concern, as it is unlikely these issues will be dealt with satisfactorily in forthcoming new Tupe regulations.

The equal-pay time bomb has yet to explode in the Tupe context. Employers currently rely on the practice of 'red circling' – transferring employees' terms and conditions as a material factor defence to equal pay claims. That defence is undoubtedly liable to a rigorous examination in the courts at some stage.

Fear of the implementation of redundancies accounted for 14.1 per cent of concerns, notwithstanding that this would ordinarily be a permissible dismissal for an economic, technical or organisational reason.

Of the respondents, 31.3 per cent expressed concern about the inheritance of collective agreements and 29.4 per cent expressed concern about information to, and consultation with, employee representatives. It seems likely these concerns may be higher than expected because of the compulsory trade union recognition procedure introduced in the Employment Relations Act 1999 and the improved information and consultation provisions the Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 1999.

Lastly, 55.7 per cent of respondents recounted difficulties in the pensions field.

The transactional effects of Tupe

Respondents were asked to indicate the transactional effects of Tupe and 59.2 per cent considered that the regulations had increased the expenditure of a transaction. Of the respondents, 34.7 per cent indicated that the existence of Tupe made them think of alternative ways to structure their transactions and 59.2 per cent considered that Tupe slowed down the process of sale, purchase and outsourcing. It was considered that Tupe actually stopped a transaction from going through by 12.7 per cent of respondents.

The figure of 13.7 per cent of failed transactions is significant and disturbing as it is clearly not de minimis. Some service companies have been frightened away by the high cost of public sector pension provisions. This is especially so in the case of smaller companies. Conversely, 11.5 per cent of respondents considered that Tupe made it easier for a transaction to go through.

The legal resourcing of Tupe advice

It is here that some of the most interesting aspects of the survey arise. Of the respondents, 85.1 per cent always took advice on whether Tupe applied.

Source: PinsentsThe nature of this advice mirrors the inherent complexity of the regulations. Legal advice was obtained by 83.5 per cent of respondents. Private practice solicitors were used by 58.4 per cent, 5 per cent turned to barristers and 20.2 per cent obtained the advice from an in-house lawyer. The remaining advice was obtained from consultants (8.4 per cent), in-house HR (14.1 per cent) and 5.7 per cent fell into the 'other' catagory.

These results fuel the debate about the continuing juridification of UK labour law. Tupe, it seems, is not a matter that can be applied often without detailed legal advice.

The need for reform

It was as long ago as 2001 when the last major consultation document on the reform of Tupe was issued by the Department of Trade and Industry (DTI). Until February this year, there was no indication of what conclusions were drawn from the consultation exercise and when Tupe would be reformed. But on 14 February, the Secretary of State for Trade and Industry announced that new Tupe regulations would be published in draft during the first half of 2003, with a view to placing them before Parliament in the autumn, for commencement in spring 2004.

The coverage of occupational pension rights under Tupe will be considered separately and to a longer timescale, as part of the pensions review being taken forward by the Government's green paper 'Pensions in the Workplace' (published 17 December 2002).

The revisions, it is promised, will include the following:

• Giving more comprehensive coverage to service contracting operations (not including those involving high-level professional services), with the aim of improving the operation of the market and promoting business flexibility.
• Introducing a requirement on the old employer (transferor) to notify the new employer (transferee) of the employment liabilities that will be transferring, increasing the transparency of the transfer process and combating 'sharp practice'.
• Clarifying the circumstances in which employers can lawfully make transfer-related dismissals and negotiate transfer-related changes to terms and conditions of employment for economic, technical or organisational reasons.
• Introducing new flexibility into the regulations application in relation to the transfer of insolvent businesses, promoting the 'rescue culture'.

Respondents' views on reform

The survey shows that reform cannot come too soon. One manufacturing company commented that Tupe was “scaring the living daylights out of everybody”. Numerous respondents criticised the format of the 1981 regulations, in particular the 'bolt-on' approach to reform adopted in the past 20 years. Another manufacturing company was dismayed at the delay involved in the reform process and was fearful of a lack of positive decision-making on the part of the DTI. Others were cynical as to whether the February 2003 proposals go far enough or are easy enough to implement.

That is not to say that respondents considered Tupe a bad thing. A number of respondents considered that, managed properly and strictly adhered to, it was a benefit. They considered that it added a degree of certainty to the process of transfer.

What niggled most employers, however, was the current lack of a level playing field, ignorance of the law on the part of bad employers and delays in streamlining a provision that is now more than 20 years old.

John McMullen is national head of employment law at Pinsents