Transferee inherits TUPE liabilities on transfer of business

In the recent case of Tucker v Alamo Group (Europe) Limited (EAT) 24/2/2003 the EAT has ruled that liability for the transferor's failure to inform and consult its employees under TUPE will pass to the transferee on a TUPE transfer.

Regulation 10 of TUPE imposes obligations on the employer of employees affected by a transfer to inform and consult with their employees, through employee representatives. Employees who are not properly informed or consulted may present a complaint to any employment tribunal, which can award compensation of up to 13 weeks' pay to all affected employees (Regulation 11).

While the transferor has a primary obligation to consult with its staff, it has been unclear whether liability to pay compensation for failure to consult remains with the transferor, or transfers to the transferee under TUPE.

In Kerry Foods v Creber [2000] the EAT held that liability for a protective award for breach of the requirement to consult with the workforce did transfer. However, in TGWU v McKinnon [2001] the Scottish EAT declined to follow Kerry and held that liability does not transfer.

In Tucker, the second respondent (Twose), had failed to inform and consult its employees under TUPE in connection with the sale of the business to the Alamo Group. The EAT held that the liability for failure to consult did transfer. The case illustrates that rights which transfer under TUPE can be derived from statute or regulations as well as under the contract of employment. The EAT considered that it was a liability arising out of or under a contract of employment, and therefore transferred with other employee rights in accordance with Regulation 5 of TUPE. As TUPE did not expressly exclude it from transferring, liability for failure to consult transferred to the Alamo Group.

The EAT highlighted their belief that the primary purpose of TUPE was to protect employee's rights, and that employees will be better protected if Purchasers have the primary responsibility to pay any compensation.

In light of this judgment, transferees should take steps to ensure that there are sufficient warranties and indemnities within the purchase agreement, to protect themselves against any default by the transferor.

Transferees might also consider a provision in the purchase agreement placing in escrow the value of the potential liability under Regulations 10 and 11 for a defined period. This would provide security for the purchaser in the event of the transferor's insolvency (rendering worthless any warranties or indemnities given by the transferor).

If you require any further information about this please contact Martin Brown at [email protected] or on +44 (0)20 7367 2590 or David Manson at [email protected] or on +44 (0)20 7367 2750.