Government Response to TUPE Consultation - Service Provision Changes Retained

Service Provision Changes

In what is likely to be viewed as a positive development by many businesses and employers, the Government has decided not to repeal the service provision change (SPC) legislation. SPCs arise particularly in so-called 'labour intensive' activities, which are often contracted-out to specialist third parties to provide services such as cleaning, catering or IT support.

As part of its Employment Law Review, the Government has been consulting on its plans to reform the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). This is in line with its goal of generally removing 'gold plating' from UK law, i.e. ensuring that the implementation of mandatory EU law in the UK goes no further than is strictly required by EU law. The consultation closed in April and the Government published its response last week.

67% of respondents to the consultation were against repealing the SPC legislation, on the basis that it brings greater clarity and reduces the number of TUPE claims before Employment Tribunals than would otherwise be the case. The Government has been persuaded by these responses and acknowledges that repealing the SPC legislation might damage the labour market and the wider economy through increased uncertainty and costs for business. As such, the SPC legislation will be retained, but modified slightly to make it clear that transferring activities must remain "fundamentally or essentially the same" for a SPC to occur. This is in line with the approach taken in recent case law.

This is good news. It is certainly easier (and preferable) to address the question of whether the requirements of a SPC have been satisfied, rather than the more complicated question of whether the loss of a particular services contract resulted in a traditional 'economic entity' transfer, particularly as this was often influenced as much by the size and scale of the incumbent service provider and the perceived significance of the individual contract to its overall business, as by the actual activities being carried out.

Had the Government proceeded with the repeal, it would have created considerable uncertainty over whether TUPE applied in outsourcing situations, whether a first- or second- generation contracting or taking a service back in-house. If, for example, TUPE did not apply on termination of a contract, service providers might be faced with the possibility of incurring unexpected redundancy costs without having originally priced for such a risk because of the perceived likelihood that the SPC legislation would apply. This in turn could have led to more frequent disputes between outgoing and incoming service providers, which customers would no doubt have been drawn into, increasing costs all round. Thankfully, this has been avoided.

Other Issues

There will be some other modest changes to TUPE. These are likely to come into effect in the early part of next year and are largely of a technical nature but which are intended to improve the effectiveness of TUPE from the perspective of both transferors and transferees. The main points are: