Further clarification on the correct interpretation of TUPE

The recent Employment Appeal Tribunal ("EAT") judgment in Cheesman & Others v R Brewer Contracts Limited, delivered on 30th November 2000, provides a welcome summary of current TUPE principles and offers a clear statement of the judicial approach to establishing whether TUPE applies.

The facts of the Cheesman case centre on a maintenance contract of certain properties. In 1995 Onyx won the contract from the local District Council under a compulsory competitive tendering process. In 1998 the contract went to re-tender and was awarded to Brewer. Brewer took on none of the employees ("the Onyx 14"). In addition no assets, tangible or intangible passed from Onyx to Brewer either directly or indirectly by way of the Council. The Onyx 14 (who had been dismissed) claimed that TUPE applied and they were entitled to regard themselves as transferred on their existing terms and conditions by Brewer. An Employment Tribunal concluded that TUPE did not apply.

The EAT Judgment confirms the approach taken by the EAT in the earlier case of Whitewater (which was the subject of an earlier Employment LawNow). This is that a Tribunal should consider two questions separately, and in turn, to determine whether TUPE applies. The first is whether or not there is an identifiable business entity constituting an entity within the meaning of TUPE. The second (assuming such an entity can be determined) is whether or not there was a relevant transfer. This Judgment makes it clear that a Tribunal which fails to raise these two questions as separate and distinct questions runs a real risk of error. The EAT concluded that there was an error of law in the original Tribunal decision as it had failed to ask each of the questions. The matter has been remitted to the Employment Tribunal.

The Judgment confirms that the failure to ask two fundamental questions can result in an error of law. In addition the Judgment provides helpful guidance, taken from recent decisions, to answering those questions.

In determining whether there is an identifiable business entity:

1. There needs to be a stable economic entity whose activity is not limited to performing one specific works contract, an organised grouping of persons and of assets enabling (or facilitating) the exercise of an economic activity which pursues a specific objective.

2. In order to be such an undertaking, it must be sufficiently structured and autonomous but will not necessarily have significant assets, tangible or intangible.

3. In certain sectors, such as cleaning and surveillance, the assets are often reduced to their most basic and the activity is essentially based on manpower.

4. An organised grouping of wage- earners who are specifically and permanently assigned to a common task may, in the absence of other factors of production, amount to an economic entity.

5. An activity of itself is not an entity: the identity of an entity emerges from other factors such as its workforce, management staff, the way in which its work is organised, its operating methods and, where appropriate, the operational resources available to it.

As for whether there has been a transfer:

1. The decisive criterion for establishing the existence of a transfer is whether the entity in question retains its identity. This may be shown, among other things, by the fact that its operation is actually continued or resumed.

2. In a labour intensive sector a special rule applies. An entity is capable of maintaining its identity after transfer where the new employer does not merely pursue the activity in question but also takes over a major part, in terms of their numbers and skills, of the employees previously assigned to that task. That follows from the fact that in certain labour intensive sectors a group of workers engaged in the joint activity on a permanent basis may constitute an economic entity.

3. In considering whether there has been or is going to be a transfer it is necessary to consider all the factors characterising the transaction in question. But each is a single factor and none is to be considered in isolation.

4. Amongst the matters falling for consideration are: the type of undertaking, whether or not its tangible assets are transferred, the value of its intangible assets at the time of transfer, whether or not the majority of its employees are taken over by the new company, whether or not its customers are transferred, the degree of similarity between the activities carried on before and after the transfer, and the period, if any, in which they are suspended.

5. In determining whether or not there has been a transfer, account has to be taken, among other things, of the type of undertaking or business in issue. The degree of importance to be attached to the several criteria will necessarily vary according to the activity carried on.

6. Where an economic entity is able to function without any significant tangible or intangible assets, the maintenance of its identity following the transaction being examined cannot logically depend on the transfer of such assets.

7. Even where assets are owned and are not required to run the undertaking, the fact that they do not pass does not preclude a transfer.

8. Where maintenance work is carried out by a cleaning firm and then next by the owner of the premises concerned, that in itself does not justify the conclusion that there has been a transfer.

9. The fact that the service provided by the old and new undertaking providing a contracted-out service or the old and new contract-holder are similar does not, in itself, justify the conclusion that there has been a transfer of an economic entity between predecessor and successor.

10. The absence of any contractual link between transferor and transferee may be evidence that there has been no relevant transfer but it is certainly not conclusive as there is no need for any such direct contractual relationship.

11. When no employees are transferred, the reasons why that is the case can be relevant as to whether or not there was a transfer.

12. The fact that the work is performed continuously with no interruption or change in the manner or performance is a normal feature of transfers of undertakings but there is no particular importance to be attached to a gap between the end of the work by one sub-contractor and the start by the successor.

Until further clarification is available under the much heralded amended TUPE Regulations (the long awaited consultation paper has still not emerged from the DTI) this Judgment will be the best guide to employers and employees grappling with the complexity of TUPE issues.

If you require any advice on business transfers or TUPE, please contact Simon Jeffreys by telephone on +44 (0)20 7367 3421 or by e-mail at [email protected]