Bringing it all back home: TUPE reform after Brexit – by Charles Wynn-Evans

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1. Introduction

Despite the concerns expressed by many commentators ahead of Brexit about the possibility of significant deregulatory reform of employment protection legislation once the United Kingdom left the EU, precious little has been heard subsequently in this regard in terms of specific proposals other than a brief flurry of speculation earlier this year about potential reform of working time, rest break and holiday entitlement provisions. This culminated in the Government’s confirmation that a review of workers’ rights would not be proceeding and its statement, in explaining the failure to include the promised Employment Bill in the most recent Queen’s Speech, that it is “unequivocal in its commitment to protect and enhance workers’ rights as we build back better from the pandemic….”

That said, Lord Frost’s statement to the House of Lords on 16 September 2021 sent a somewhat different message. He announced not only the Government’s intention to “remove the special status of retained EU law, so that it is no longer a distinct category of UK domestic law” and to “ensure that all courts have the full ability to depart from EU case law according to the normal rules.” As Catherine Barnard has noted, EU retained law is already a distinct category of domestic law. One can only assume that the principal target of such reform is the ongoing supremacy of pre-Brexit EU derived law save where expressly amended by statute or departed from by a decision of the Supreme Court (as provided by European Union Withdrawal Act 2018, s 5).

Lord Frost also indicated the Government’s intention “to review comprehensively the substantive content of Retained EU law.” Notwithstanding this, a potentially crucial ongoing constraint on Government action may well be that the scope for deregulation is now limited to a material extent by the UK-EU Trade and Cooperation Agreement (TCA).

The TCA’s non-regression obligation (Article 387, para 2) obliges the United Kingdom not to ‘weaken or reduce, in a manner affecting trade or investment between the Parties, its labour and social levels of protection below the levels in place at the end of the transition period, including by failing to effectively enforce its law and standards.’ “Rebalancing measures” can be taken ‘[i]f material impacts on trade or investment between the Parties are arising as a result of significant divergences between the Parties’ in relation, inter alia, to labour and social standards falling within the scope of the TCA (Article 411, para 2).

It remains to be seen how the issue of material impact on trade or investment between the United Kingdom and the EU would be resolved and to what extent in practice the TCA restricts the scope for domestic deregulation. That said, the obligation not to reduce respective levels of employment protection is further buttressed by the commitment of the parties to the TCA (at Article 387, para 4) to ‘continue to strive to increase their respective labour and social levels of protection’.

TUPE – the Transfer of Undertakings (Protection of Employment) Regulations 2006 as amended in 2014 – was considered by many commentators to be high on the list as a likely target for deregulatory reform once it was possible following Brexit to depart from the minimum standards mandated by the Acquired Rights Directive (the Directive). The more drastic reform options for TUPE about which concern was expressed ahead of Brexit – such as the wholesale repeal of the legislation, the watering down of its information and consultation obligations, or an extension of the exclusion of its application in insolvency contexts – would appear potentially to be precluded by the TCA and do not appear to be a current political priority. Nonetheless, this (unapologetically niche and eclectic) note argues that various other aspects of TUPE could be improved without infringing the limitations imposed by the TCA.

2. Interpretation of TUPE

By virtue of its status as retained EU law, the requirement established in Litster and Ors v Forth Dry Dock and Engineering Limited (in receivership) to apply a purposive approach to the interpretation of TUPE where necessary in order to ensure compliance with the Directive is preserved. European Union Withdrawal Act 2018, s 5 specifically preserves the supremacy of EU law unless and until otherwise provided by subsequent legislation as confirmed by the relevant Explanatory Notes (at para 104).

Domestic law can also require a purposive approach to the interpretation of legislation more generally as reinforced by the already much-cited reminder from Lord Leggatt JSC in Uber BV v Aslam that ‘[t]he modern approach to statutory interpretation is to have regard to the purpose of a particular provision and to interpret its language, so far as possible, in the way which gives best effect to its purpose.’ Consistent with this, HHJ Serota QC took the view, in the earlier decision of Inex Home Improvements Limited v Hodgkins, ‘that it is essential to have regard to the purpose of the Regulations. We must have regard to the fact that the Regulations are ‘Transfer of Undertakings (Protection of Employment) Regulations 2006’ (our underlining).’

Despite this, interpretation of TUPE to ensure that it achieves its employee protective goals faces an obstacle which would merit reconsideration in any post Brexit reform of the legislation – namely, the principle, introduced by the CJEU into the interpretation of the Directive in Alemo-Herron and Ors v Parkwood Leisure Ltd, of the balancing of the interests of the transferee employer and the transferring employees. In Alemo-Herron the CJEU took the view – by reference to the EU’s Charter of Fundamental Rights and, in particular, the freedom to conduct a business under its Article 16 – that the aim of the Directive is not solely to safeguard the interests of employees but also to ensure a fair balance between the interests of the employees and the transferee, taking the view that the transferee ‘must be in a position to make the adjustments and changes necessary to carry out its operations.’

This approach not only potentially renders the transfer legislation less predictable and certain – which is in the interests of none of the parties involved in a transfer situation. It also potentially runs counter to the expressly stated purpose of the transfer legislation of the protection of employees. As Jeremias Prassl-Adams has argued, the terms of Directive (already) represent the view taken by the (EU) legislator of the “fair balance’” to be struck between the interests of employees and the transferee employer with which the courts and tribunals should not interfere by applying their own view of what constitutes such a fair balance. These are not idle theoretical concerns as demonstrated by the decisions (discussed below) in Alemo-Herron and Astrea, which diminished employee protection, and Govaerts, which reset the respective potential liabilities of transferors and transferees where an undertaking or service is split.

For the courts and tribunals to be entitled, and indeed required, to balance employer and employee interests when interpreting TUPE entails their making decisions with potential economic, commercial, and social implications for the adjudication of which it can be argued that they are neither well equipped nor suitable as a matter of democratic legitimacy. A resetting of the basis of the interpretation of TUPE post Brexit would disapply the approach adopted in Alemo-Herron on the basis that the balancing of employer and employee interests should be confined to the process of the design of the legislation. Domestic canons of interpretation should be adequate to ensure the proper application of the legislation.

3. Workers

Whether TUPE applies to workers as opposed to “traditional” employees is an issue of considerable importance for both employers and the individuals affected by TUPE transfers. The personal scope of TUPE has only to date been addressed at employment tribunal (ET) level and it would be of assistance for the parties affected by TUPE transfers for the position to be confirmed more authoritatively, whatever one’s policy preferences. This would most straightforwardly be done by reference to the existing categorisation of worker/employee status established by ERA 1996 s 230.

Even though workers will not have unfair dismissal rights, for them to fall within the scope of TUPE provides, by way of the automatic transfer of their engagement to the transferee, some level of protection, especially in an insolvency situation, as well as the opportunity, through the collective information and consultation process required by regulations 13-15, to seek to influence the transfer process and its implementation.

By contrast, from the employer’s perspective, the administrative and organisational burdens of having to take workers into account in complying with TUPE’s collective information and consultation obligations under its regulations 13-15 could be very significant, quite apart from the very material financial penalties potentially arising in cases of non-compliance. Likewise, for workers to fall within the scope of the “employee liability information” obligations of reg 11 increases the transferor’s burdens – but also concomitantly the transferee’s knowledge and understanding of the wider workforce engaged in relation to the transferring undertaking or activities.

Regulation 2(1) defines an employee for the purposes of TUPE, and therefore identifies its personal scope, as extending to ‘any individual who works for another person whether under a contract of service or apprenticeship or otherwise but does not include anyone who provides services under a contract for services and references to a person’s employer shall be construed accordingly.’ The use in regulation 2(1) of the words “or otherwise” indicates potentially that the TUPE definition of an employee goes beyond the concept of the “traditional” employee. However, the exclusion of those providing services under a contract for services would appear potentially to exclude workers, whether or not in business on their own account.

Regulation 2(1) was described as “unhelpfully drawn” by an ET in McCririck v Channel 4 Television Corporation (1) and IMG Media Limited (2) which concluded that the words ‘or otherwise’ in regulation 2(1) took the scope of the definition beyond “traditional” employees and therefore indicated that TUPE is intended to apply to “limb (b)” workers for the purposes of ERA 1996 s 230(3). Another ET reached the same conclusion in Dewhurst & Ors v Revisecatch Limited (t/a Ecourier) & Anor, not least by reference to the EU law context of TUPE and the Acquired Rights Directive’s reference to its application not just to a contract of employment but also an “employment relationship”.

The justification for the application of TUPE to workers as a matter of policy is that noted by the ET in McCririck. Workers are equally vulnerable as traditional employees to adverse treatment in situations to which TUPE applies – if not more so – and therefore they should fall within its scope. Interpreting the TUPE definition of an employee to include workers is certainly consistent with the ongoing narrowing of the differences between, if not the conflation of, the categories of employee and worker on a purposive basis exemplified by the Uber decision and, in the wider EU law context, Yodel.

The argument against the application of TUPE to workers, as opposed to traditional employees, goes beyond the textual point that regulation 2(1) on its face expressly excludes those engaged under contracts for services. It is the more restrictive position that, in order to reduce employer costs and avoid inhibiting their freedom of action in respect of workers, the protection of TUPE should be confined to “traditional” employees on the basis of the integration into the relevant operation inherent in their status.

The question also arises as to whether TUPE should apply to members of a Limited Liability Partnership (LLP). The argument in favour of this interpretation is in essence that, if LLP members can be workers by virtue of the decision in Bates van Winkelhof v Clyde & Co, then TUPE should likewise apply to LLP members if its personal scope extends to workers. It may nonetheless appear counterintuitive, not least given the prevalence of LLP structures in professional service and financial services contexts, for LLP members to fall within the scope of TUPE. Again, this is a policy debate – and clarification of the legal position – which could be addressed in future reform of TUPE.

4. Harmonisation of terms

Although closer to the kind of deregulatory reform which might engage the non-regression provisions of the TCA than the other issues addressed in this note, an ongoing area of concern for employers – and which could be a target for reform of TUPE – is the regularly debated mandatory and non-derogable protection of the terms and conditions of employment of the transferring employees following transfer established by Daddy’s Dance Hall and its associated case law. In essence, changes by reason a transfer are void even if agreed.

Amendments made to TUPE in 2014 sought to clarify the ability of an employer to implement valid contract changes with transferring in various respects including where the change was made pursuant to a pre-existing contractual power or where the reason for the change constituted an economic, technical or organisational reason entailing changes in the workforce. The validity of this latter amendment was open to question in the absence of any support for such a principle in the Directive.

TUPE’s prohibition on transfer related contract changes was also amended such that no longer would contractual amendments, even if agreed, be void if they were either by reason of or connected with the transfer as was the case prior to the 2014 Regulations – the voiding provisions of regulation 4(4) only apply where the sole or principal reason for the purported variation in question is a relevant transfer. Connection with the transfer is no longer sufficient for the voiding provision to engage.

Whether the 2014 amendment did actually increase the scope for employers validly to change employees’ terms and conditions for reasons connected with a transfer remains open to question. The Government guidance on the revised 2014 TUPE regulations suggests that it all depends on the circumstances. Moreover, regardless of the drafting of TUPE, the ECJ’s indication in Martin and Ors v South Bank University still stands to the effect that contract changes by way of harmonisation can be void under the Directive. As the ECJ put it, ‘[t]he fact, too, that the conditions of employment are brought into line with those applicable to existing staff of the new owner, is a sign that the transfer is a reason for the change.’

There therefore remains a policy debate to be had as to whether, subject to the constraints of the TCA, a further clarification of the ability to agree transfer related contract changes would be appropriate to facilitate harmonisation of terms and other post transfer changes. To do so would restore party autonomy and reduce the constraints on employers in managing and restructuring their businesses whilst retaining the usual protections of domestic employment law. Employees’ position as at transfer would be preserved. No longer would those affected by TUPE transfers have enhanced protection compared with those whose employers are the subject of a share sale. As employment protection would remain in place for all employees in any event it could be argued that the provisions of the TCA would not engage. A more employee protective approach would resist any further relaxation of employers’ ability to make post transfer contract changes consonant with the ongoing debate about “fire and rehire” practices.

5. Beneficial variations

Regent Security Services Ltd v Power held, in relation to the original 1981 iteration of TUPE, that a transferee could not disavow as void favourable contractual changes that it had agreed with employees who had transferred to it under TUPE in the same way that employees can argue, under the principle established in Daddy’s Dance Hall and its associated case law, that detrimental changes to their employment terms made by reason of the transfer are void, even if agreed.

In Ferguson and others v Astrea Asset Management and others the EAT held that the approach adopted in Power could not be maintained in the light of the wording of the subsequently enacted regulation 4(4) which provides that ‘any purported variation of a contract of employment that is, or will be, transferred…, is void if the sole or principal reason for the variation is the transfer.’ Applying what he described as ‘the “broad purposive” approach adopted to the interpretation of EU legislation,’ as well as relying on the balancing of interests approach adopted in Alemo-Herron discussed above, HHJ Shanks held that the words “any purported variation” in reg 4(4) should be interpreted to cover all types of variation, and not just those which are adverse to the employee.

As argued in more detail elsewhere, the approach adopted in Astrea, confirming a blanket prohibition on contract changes which are favourable to an employee, not only runs directly counter to employee protection contrary to the apparent intentions of the Government – which, as indicated by its guidance on the amended legislation, had not anticipated that the revised regulation 4(4) would prohibit favourable contract changes. The Astrea approach also risks adversely affecting the interests of the transferee if, for example, the efficacy of transfer related retention arrangements is undermined by the ability of the transferee to disavow them as favourable contract changes entered into by reason of the transfer. Restoring the principle that favourable transfer related changes should, all other things being equal, be valid should be a priority for the reform of TUPE.

6. Splitting contracts

For those who disagree with the approach that they adopt and the potential uncertainty they create, the decisions of the CJEU in ISS Facility Services NV v Sonia Govaerts, Atalian NV in relation to transfer of undertakings and of the EAT in McTear Contracts Ltd v Bennett & Ors in relation to service provision changes are prime targets for derogation from retained EU law. The principle that these decisions establish is (to paraphrase) that, on division of an undertaking or activities as a consequence of a relevant transfer, the contracts of employment of the relevant employees are to be divided proportionately between the (multiple) transferees. If such a division is not possible or would worsen an employee’s working conditions or employment protection, the associated liabilities which arise on the termination of the employee’s employment are likewise allocated proportionately.

Again, the balance of interests approach adopted in Alemo-Herron was deployed in support of a resetting of the established application of the Directive and TUPE. In deciding that its proportionate allocation approach on the division of an undertaking was appropriate, the CJEU took the view that ‘the interests of the transferee should not be disregarded’ and it was not appropriate for the transferee to inherit ‘a full-time employment contract although the worker concerned is to perform his or her tasks with that transferee only part time.’

This approach runs counter to the approach adopted in domestic case law in respect of transfers of undertakings as well as SPCs pursuant to which an employment contract could not be split on transfer, even where the undertaking or activities in questions were divided. Accordingly, an employee “assigned” to a transferring undertaking (or activities) would transfer, even if not wholly engaged on the relevant activities full time, whereas an individual who is not so assigned would not transfer – and liability for their employment and/or termination would remain with the transferor.

The approach adopted in Govaerts and McTear is potentially problematic in a number of respects, coming at a considerable cost in terms of uncertainty for all the parties affected by a situation regulated by TUPE. It is not clear by reference to what factors, in addition to the time spent respectively on the divided activities, the required division of contracts is to be determined, and how conflicts between the requirements and interests of multiple transferee employers are to be managed, especially if the transferees are competitors and required hours of work conflict. This approach may also disrupt, and cause considerable practical and commercial difficulties for the operation of, extant commercial contracts dealing with the consequences of the application of TUPE on termination of the arrangement in question – for example, of an outsourcing contract – which may have been agreed by reference to the traditional domestic approach and therefore not cater for a division of contracts of employment or liabilities on termination.

The approach of dividing employment contracts or associated termination liabilities may be understandable in terms of allocating liability proportionately and is therefore superficially attractive in terms of fairness as between transferors and transferees. The prior approach – based on a binary test of whether an employee was assigned or not to the transferring undertaking or activities or part thereof – was a blunt but relatively clear instrument. Whether the prior position should be restored would be a valid issue for debate in any future reform of TUPE.

7. Collective Agreements

In Alemo-Herron, the CJEUpreferred the “static” approach to the application of the Directive adopted by the ECJ in Werhof v Freeway Traffic Systems Gmbh to the “dynamic” approach adopted in domestic cases such as Whent v T Cartledge Ltd. Consequently, pay determination decisions reached through bargaining arrangements applying prior to transfer but to which the transferee is not a party post transfer are not binding on the transferee and the relevant employees’ collectively agreed terms remain as applicable as at the point of transfer. Moreover, the CJEU considered that Member States’ domestic law could not apply the dynamic interpretation, thereby (rather controversially) overriding the subsidiarity inherent in the ability of Member States, pursuant to Article 8 of the Directive, to apply more favourable standards than the Directive’s minimum requirements.

Whilst of clear value to a transferee, Alemo Herron undermines the ongoing efficacy of collective agreements involving external bargaining mechanisms and therefore to that extent constrains and thereby prejudices the continuation of such collective bargaining arrangements. From a common law influenced perspective, Alemo-Herron is also problematic as it overrides otherwise contractually valid pay determination arrangements which, from first principles, one would have expected the Directive to protect as terms of the transferring employment contract in a transfer situation. Again, this is a policy issue which would merit revisiting. In this context reform would require the repeal of regulation 4A which was introduced into TUPE in 2014 codifying the Alemo-Herron decision.

8. Conclusion

Whether the argument for a review of TUPE to address the issues considered in this note should be viewed as trying to revisit old battles that should be consigned to legal history or as a valid contribution to the clarification and improvement of the operation of domestic transfer of undertakings law now that (to an extent) control has been taken back post Brexit will no doubt depend on one’s assessment of legal and political priorities. The aspects of TUPE considered for reform in this note might be seen as entailing technical tinkering meriting lesser priority than other higher profile issues in domestic employment law. Conversely, it can be argued that the issues identified in this note warrant consideration in any future employment law reform programme as areas of the operation of TUPE which need to be improved.

The challenges inherent in the interpretation of TUPE in light of its European law parentage were recognised at an early stage in the development of the domestic case law in the observation of Waite J in McGrath v Rank Leisure Ltd that ‘[f]airness to the draftsman requires us, however, to bear in mind the almost insuperable difficulties which faced him when he was required to patch new Flemish broadcloth upon the fine weave of our domestic employment law—with instructions to do the minimum damage to either fabric.’ The Government’s failure to include the promised Employment Bill in the most recent Queen’s Speech – justified on the basis that legislation would be introduced when the time is right and not “while the pandemic is ongoing and continuing to affect the economy and the labour market in some unpredictable ways” – was a disappointment to many. It is to be hoped – at least from the perspective of the TUPE obsessed – that, if and when legislation is forthcoming addressing regulation of the labour market, the reform of TUPE will be given proper consideration with a view to improving the stitching of its fabric which has, in the respects identified in this note, become a little frayed.

Suggested citation: C Wynn-Evans, ‘Bringing it all back home: TUPE reform after Brexit’ UK Labour Law Blog, 22 September 2021, available at https://uklabourlawblog.com