Responsibilities to employees if you buy or sell a business

Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), when all or part of a business is bought or sold or there is a service provision change, the terms and conditions of the employees who transfer in the sale are preserved. In other words, in almost all cases, the new employer cannot change the transferred employees’ terms and conditions to match those of its existing employees.

This guide explains which transfers are covered by TUPE, the responsibilities of the old and new employers, the rights of employees, changing terms and conditions of employment, the requirements to inform and consult employees affected by the transfer and the transfer of insolvent businesses.

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What is meant by a transfer

A ‘relevant transfer’ – ie a transfer to which the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply – occurs when:

• an economic entity is transferred from one business to another, ie the entity is sold as a going concern and retains its identity after the transfer – this is known as a business transfer
• a client engages a contractor to do work on its behalf or reassigns such a contract, including bringing the work in house – this is known as a service provision change

An economic entity is defined as an organised grouping of resources, eg a grouping of employees and assets, such as premises and computer equipment, that pursues an economic activity. Some transfers will qualify as both a business transfer and as a service provision change, eg outsourcing a service will often meet both definitions.

Examples of service provision changes are where:

• a business contracts its security arrangements to an outside security business (outsourcing)
• a business decides to hire its own staff to provide catering to replace an outside catering business (in-sourcing)
• the contract to clean a client’s premises is transferred from one cleaning contractor to another

TUPE applies equally to relevant transfers of large and small businesses, and to public and private undertakings. This means there would be a relevant transfer if you sold your business or if your business bought and operated another business.

Note that TUPE generally applies to second and subsequent transfers of the same undertaking. This means that, if you sell a business or part of a business that you previously bought or relinquish a contract that you previously took over, the employees you took over will now transfer to the new employer.

Not all transfers are relevant transfers. TUPE does not apply when:

• A client buys in services from a contractor on a one-off basis – rather than the two parties entering into an ongoing relationship for the provision of the service.
• There is a transfer by share takeover. When a company’s shares are sold to new shareholders, there is no transfer of the business – the same company continues to be the employer.
• A business transfers assets only, eg if equipment is sold.
• There is a transfer of an undertaking situated outside the UK – although similar provisions apply in the European Union.
• There is a change of business identity, eg if the work or organisational structure changes radically.

Whether TUPE applies in any particular case depends on all relevant circumstances. In the event of a dispute, only an employment tribunal or a higher court can decide this.

Where TUPE applies, existing employees of the undertaking transferred automatically become employees of the business that takes the undertaking over.

If you think you may become involved in a transfer situation to which TUPE applies, you should consider obtaining legal advice, as the legislation in this area can be complex.

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Your responsibilities to employees transferred out of your business

You have important responsibilities to your employees if they are transferred out of your business.

Who transfers?

Those who transfer are employees assigned to the organised grouping of resources that is going to be transferred.

Therefore those who cannot transfer are:

• those only temporarily assigned to the organised grouping
• the self-employed
• independent contractors

However, an employee can still transfer even if they don’t spend all their time working for the grouping to be transferred.

Information and consultation

Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), you are required to inform and consult the representatives of those employees affected by the transfer.

Affected employees are not just those who are going to transfer – other employees in the business may be affected by the transfer and have a right to be informed and consulted too.

See the page in this guide on informing and consulting employees about business transfers.

Refusal to transfer

If an employee refuses to transfer with a business, they have not been dismissed but have effectively resigned. This means that they lose the right to claim certain employment rights.

See the page on resignations connected with a business transfer in our guide on what happens when an employee resigns.

Employee liability information

When employees transfer out of your business, you must give the new employer certain information about those employees. See the page in this guide on the transfer of employee liability information.

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The transfer of employee liability information

When you transfer employees out of your business, you must provide certain information about the employees who are transferring to the new employer. This is known as employee liability information.

The aim of this information is to give the new employer time to understand their obligations towards the transferred employees.

You must provide all information in writing. This can be as electronic files as long as the new employer can access the information.

If there is not much information to pass on, eg because only a few employees are transferring, you can provide the information by telephone. Consider asking the new employer which method they would prefer.

You can provide the information in stages. However, you must have given all the information before – ideally at least two weeks before – the completion of the transfer. You can also provide the information via a third party if you wish.

You can’t agree with the new employer not to supply this information.

If you don’t provide employee liability information, the new employer can make a complaint to an employment tribunal. This could lead to a compensatory award for any loss the new employer incurs due to not having the information. Compensation is usually at least £500 per employee affected.

The information you must provide

You must provide:

• the names and ages of the employees who will transfer
• their statements of employment particulars
• details of any collective agreements that apply
• details of any formal disciplinary action taken or employee grievances raised in the past two years to which either the 2004 or 2009 Acas code of practice on discipline and grievance procedures applies
• instances of any legal actions against you in the past two years by the transferring employees and any potential legal actions

If any of this information changes before the transfer is complete, you must provide the changes in writing to the new employer.

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Your responsibilities to employees transferred into your business

Employees who transfer to your employment do so on their pre-existing terms and conditions and with their continuous employment preserved. This also applies to employees who have already transferred on a previous transfer.

You also take over responsibility/liability for any:

• outstanding disciplinary and grievance situations
• ongoing employment tribunal claims
• collective agreements in force at the time of the transfer, which means that you must continue to recognise the recognised trade union(s) that the staff transferring are members of

Occupational pension and share-option schemes

You do not have to offer transferred employees who are members of – or eligible to join – an occupational pension scheme (OPS) exactly the same pension rights.

However, you must still offer those employees a minimum level of occupational pension provision.

You can opt to provide access to an OPS or make employer contributions to a stakeholder pension scheme. If you choose a stakeholder or a defined contribution scheme, you will have to match the employee’s contributions up to 6 per cent. This can be increased if both parties agree.

If you don’t take over the previous business’ shares, you won’t be able to provide such shares to your staff. If the previous employer had share or share-option schemes, you must provide equivalent schemes.

Note that if you buy a privatised (previously public sector) undertaking, or win a contract to provide a service to a central or local government organisation, the government expects you to have pension arrangements that are broadly comparable with that enjoyed by the previously public-sector employees.

Changes to terms and conditions

Don’t change transferred employees’ terms and conditions if the reason for the change is either the transfer itself, eg to match those of your existing staff, or related to the transfer.

If you change an employee’s terms and conditions in this way, this could amount to a breach of contract. The employee may then be able to resign and claim constructive dismissal.

If, however, the change is unconnected with the transfer, you should handle it like any other change of contract. For more information, see the page in this guide on changing terms and conditions after a transfer and see our guide on how to change an employee’s terms of employment.

Information and consultation

Even if you are taking on transferred employees, you must still inform and consult representatives of your existing employees who may be affected by the transfer.

In addition, you must give details to the previous employer of any action you intend to take that will affect the transferring employees. You must do this before the transfer takes place with adequate time for consultation.

See the page in this guide on informing and consulting employees about business transfers.

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Changing terms and conditions after a transfer

In a transfer situation, employees’ existing terms and conditions are transferred to the new employer from the start of the new employment.

Employees should therefore not be disadvantaged by a transfer, ie by having less favourable terms and conditions in their new roles.

If you are the new employer, you can only vary a contract for a reason related to the transfer if it’s an economic, technical or organisational (ETO) reason entailing changes in the workforce.

There is no legal definition of an ETO reason. However, it might relate to, for example:

• the profitability or market performance of your business – an economic reason
• the nature of the equipment or production processes which you operate – a technical reason
• the management or organisational structure of your business – an organisational reason

Note that you can’t vary the contracts of the transferred employees in order to harmonise their terms and conditions with those of your existing employees in equivalent roles or grades. However, you could change terms and conditions – by agreement – if the changes are positive, eg fewer working hours or additional holiday entitlement.

Changing terms and conditions over time

After a certain period, eg six months, you might be tempted to consider it ‘safe’ to vary the contracts of the transferred employees as the reason for the change can’t have been by reason of the transfer.

However, there is no set period for this and it’s still possible that a change could relate to the transfer a year or more after it took place.

Changing terms and conditions after the transfer of an insolvent business

Note that there is greater flexibility to change terms and conditions if the business being transferred is insolvent – see the page in this guide on transfers of insolvent businesses.

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Dismissal before or after a transfer

Employees who transfer have their continuity of employment preserved. This means that those who had, for example, 18 months’ service with their previous employer have – at the time of the transfer – 18 months’ service with the new employer.

This is important as it means that employees with enough continuous employment maintain their right to claim certain employment protection rights, eg the right to claim unfair dismissal. If in employment before 6 April 2012 the qualifying period is one year’s continuous employment. If employed on or after 6 April 2012 the qualifying period is two years. Employees also have the right to claim a statutory redundancy payment (two years).

Dismissals before the transfer

An employee still transfers if they would have been employed in the undertaking immediately before the transfer had they not been unfairly dismissed – either because of the transfer or for a reason connected with the transfer.

The employee will be able to bring an employment tribunal claim for unfair dismissal against either the previous or the new employer – as long as they have at least one year’s continuous employment – if in employment before 6 April 2012. If employed on or after 6 April 2012 the qualifying period is two years.

Employers do, however, have the ‘ETO defence’ – see below.

Dismissals after the transfer

If you dismiss a transferred employee either because of the transfer or a reason connected with it, their dismissal is automatically unfair.

They will, however, need at least one year’s continuous employment if in employment before 6 April 2012. For employment on or after 6 April 2012 they will need to be in employment for two continuous years to bring their unfair dismissal claim to an employment tribunal.

Employers do, however, have the ‘ETO defence’ – see below.

The ETO defence

If there is an economic, technical or organisational (ETO) reason entailing changes in the workforce, a Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE)-related dismissal may be fair.

However, even with this defence, the dismissing employer must still follow a fair dismissal procedure. See our guide on dismissal.

ETO reasons are narrow in practice and effectively amount to a genuine redundancy situation, eg insolvency of the transferred undertaking.

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Informing and consulting employees about business transfers

Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), you are required to inform and consult the appropriate workplace representatives of those employees affected by the transfer.

Affected employees are not just those who are going to transfer – other employees in either business may be affected by the transfer and have a right to be informed and consulted too.

The appropriate representatives who you must inform and consult are either:

• representatives of a trade union you have recognised for the purposes of collective bargaining – if there is one
• employee representatives appointed by the affected employees specifically for the purpose of being informed and consulted on the transfer or who have already been appointed for a different purpose and are suitable for this purpose too – for information on arranging the election of employee representatives, see the page on employee representatives during business transfers in our guide on working with non-union representatives 

If you have a pre-existing information and consultation (I&C) agreement in place, you have a duty to inform and consult employees or their representatives on – among other things – changes to the workforce. This means that you may have to inform and consult when planning to buy or sell a business.

However, you do not have to inform and consult at the same time under both TUPE and the I&C legislation – you can choose instead to ‘opt out’ of your I&C agreement and consult under the transfer legislation only.

What to tell TUPE representatives

The appropriate representatives must be informed of:

• the fact that the transfer is taking place, and when and why it will happen
• the legal, economic and social implications for affected employees
• any measures the employer envisages taking in relation to affected employees, eg redundancies, relocation or changes to terms and conditions, or the fact that no measures will be taken
• any measures the new employer envisages taking in relation to employees who will transfer – if the employer is the selling employer

You must consider and respond to any representations made by the appropriate representatives, stating your reasons if you reject any of them.

When to give information to TUPE representatives

You must provide information to representatives long enough before the transfer date to give reasonable time for consultation. The consultation must be undertaken with a view to seeking agreement.

Rights of TUPE representatives

Representatives have the right to have:

• access to the affected employees
• access to facilities to enable them to carry out their duties, eg a phone line or office
• time off with pay to carry out representative duties

Representatives may be eligible for reinstatement or compensation if unfairly dismissed or treated detrimentally because of their status or actions as representatives.

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Transfers of insolvent businesses

If you are transferring a business that is subject to insolvency proceedings and you owe money to the employees to be transferred, the responsibility to pay the full amount of the money owed does not transfer to the new employer.

The new employer is only responsible for the amount left after the employees have been paid from the National Insurance Fund (NIF).

They should be able to make a claim through the NIF for:

• salary
• holiday pay – for days taken but not paid

They will not be able to claim statutory redundancy pay or pay in lieu of notice as – post-transfer – their job will not have ended.

Permitted variations

You or the new employer – or the insolvency practitioner – can reduce pay and establish other less favourable terms and conditions after the transfer. These are known as permitted variations.

However, certain conditions must be met when doing this:

• the permitted variation must be agreed with you or the new employer – or the insolvency practitioner – and the appropriate representatives, ie trade union representatives if an independent trade union is recognised for collective bargaining purposes or, if not, elected employee representatives
• the agreement must be in writing and signed by each of the representatives or other authorised persons
• before the agreement is signed, the employer must provide all the affected employees with a copy of the agreement and any guidance the employees may need to understand it

You should also consider the following:

• any new terms and conditions agreed in a permitted variation must not breach other statutory entitlements, eg agreed pay rates must not be set below the national minimum wage
• any permitted variation must be made with the intention of safeguarding employment opportunities by ensuring the survival of the business – or part of it

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Transfers and employee relations

Transferring employees between businesses can affect staff morale. The result is often discontentment, not just in those transferred but also in staff left behind in the old business and existing employees in the new business.

If the process is not handled sensitively, the effects can include:

• feelings of displacement in the employees transferred
• anxiety among their ex-workmates who feel they might be next
• resentment among new workmates who distrust the reason the new employees have been introduced and may resent the fact that they have different terms and conditions
• a feeling of insecurity that may be common to all

However, if both employers know and meet their responsibilities fully and communicate openly throughout the process, then good relations can be maintained with all employees concerned.

Research shows that effective consultation can lead to better decision making and a smoother implementation of decisions and proposals, boosting productivity. This is because if employees feel they have an input into decision making, they will be more satisfied and motivated at work.

You should be especially careful to emphasise the positive benefits of the sale or purchase and try to show how the prospects for all will be improved by the changes.

See our guide on how to inform and consult your employees.