Cast your mind back to before 2006 and consider this question: when does TUPE apply upon a change of contractor in relation to outsourcing contracts, in other words before the service provision change (SPC) elements of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) were introduced?
Pre-2006, the answer was often far from clear by virtue of a number of European and domestic UK cases. One of the main reasons for the introduction of the SPC concept was to seek to achieve greater certainty. However, in January this year the Government launched a consultation on certain reforms to TUPE which included a proposal to abolish the SPC provisions.
TUPE derives from the European Acquired Rights Directive (ARD) and the ARD does not explicitly provide for or require there to be a SPC concept. The Government has characterised the SPC as "gold-plating" the ARD and hence is considering its removal.
As with any proposal there will be pros and cons – the aim of this article is to assess what these might be.
What is a SPC?
TUPE provides that a SPC can occur when: services are outsourced for the first time; a new contractor takes on services that have already been outsourced (second generation contracting); or outsourced services are brought back in-house.
Paraphrasing slightly, the SPC concept requires there to be an organised grouping of employees whose principal purpose is the provision of the services in question.
To understand the impact of the proposal to remove SPC from the scope of TUPE, we need to remind ourselves of TUPE pre-2006.
What was so different pre-2006?
Since its introduction, TUPE has sought to protect employees when there is a 'relevant transfer' i.e. the transfer of a stable economic entity which retains its identity following the transfer. The prime example having always been the traditional sale of a business as a going concern through an asset disposal. However, that has never been the only scenario and the ECJ developed a "multi-factorial" test to determine whether a transfer occurs. The essence being that no single factor is the clincher – rather the situation has to be assessed in the round.
The ECJ accepted in 1994 that the transfer of a single cleaner without any (or many) associated assets could attract the protection of the ARD when a German bank outsourced its cleaning operations.
This was the high-water mark of the case law and there then followed almost a decade's worth of conflicting views from the European Court on the application of the ARD and hence TUPE to labour intensive activities such as cleaning and security services – namely non-core activities that are often outsourced – especially in a second generation context when contractors were changing.
This led to litigation as to the application of TUPE commonly to determine which entity might have to bear the responsibility for redundancy costs if some or all employees who may be viewed as assigned to the services might be dismissed. Often, that uncertainty led to references to the European Court, increasing the indirect business costs.
Impact
It was that uncertainty that the SPC concept was intended to address.
Therefore, various service providers and customers have expressed concern that if the SPC provisions are abolished we will simply be left having to revert to the uncertainty in the case law that led to the 2006 change in the first place which will ultimately increase rather than decrease costs.
One of the reasons for the abolition of the SPC is the "gold plating" point mentioned above. For example, the German interpretation of the ARD is much narrower than it is in the UK and affords less protection for employees of an outgoing provider of outsourced services.
Perhaps therefore it is not unsurprising that in the UK TUPE has been viewed as inhibiting business growth and development because of the liabilities and employees that new suppliers can be required to inherit. It is also recognised that economic times have changed since 2006 and removing TUPE could help stimulate business growth once again.
The Government is certainly hoping that removing the liabilities that TUPE carries will encourage more businesses (particularly SMEs) to bid for outsourcing contracts and will help create a more level playing field. Indeed the Government suggests that the removal of SPC will create more freedom for businesses "to out-source work and change service providers giving service providers more freedom to bid for contracts."
However, the proposals will not necessarily benefit all suppliers. Given that contracts will have been priced on the basis that TUPE would be expected to apply on exit - outgoing suppliers could now face unforeseen (and expensive) redundancy costs on termination. Consequently, the Government has recognised the impact of this proposal will greatly depend on when the changes are introduced and a lead in time of between 1 and 5 years has been suggested. Without doubt, the longer the delay, the fewer contracts will be affected.
Final thoughts
Clearly if the SPC provisions are abolished this will change the way that businesses approach outsourcing contracts in the future. It should however, be remembered that removing SPC will not mean that all outsourcing contracts will fall outside the scope of TUPE. Unless clarification of the pre-2006 case law is provided, the abolition of the SPC provisions may simply mean that parties dust off the same arguments on whether or not there is a 'relevant transfer' once again.
That said, we are still only at the consultation stage of the proposals and only time will tell if we have seen the end of the SPC provisions. In the meantime when entering into outsourcing contracts, it would be prudent for businesses to make provision on termination to deal with the situation both if TUPE would and would not apply.
NOA HRO roundtable