How Does TUPE Work During Insolvency?
November 22, 2023
Looking to understand the TUPE meaning, transfer rules and implications during a company insolvency? We’ll run through what you need to know in this article.
Transfer of Undertakings Protection of Employment regulations came into force in 2006, replacing the 1981 regulations of the same name. Amendments were made to these regulations again in 2014.
In this guide, we will cover TUPE regulations. We will explore what they are, responsibilities of employers, what happens if an employer fails to abide by them and how they work for an insolvent company.
What is TUPE?
TUPE meaning
TUPE stands for Transfer of Undertakings (Protection of Employment).
What is the aim of TUPE regulations?
TUPE regulations protect UK employees' rights when they transfer to a new employer as part of a business transfer or service provision change.
TUPE ensures that for relevant transfers, employees have the right to transfer to a new employer on the same terms of employment and with all their existing employment rights.
When do TUPE regulations apply and for how long?
A TUPE transfer can occur in two forms:
- When an organisation, or part of it, is transferred from one employer to another. This is known as a business transfer.
- When another business takes over a contract. This is known as a service provision change.
In both instances, TUPE does not apply if only goods or equipment are transferred.
TUPE will also not apply for a service provision change if the contract is for a single event or short-term task.
TUPE protection remains in place indefinitely for employees after a transfer.
How does TUPE protect employees?
Automatic transfer principle
Employee contracts are not terminated when a TUPE transfer occurs, whether a business transfer or service provision change. Instead, there is simply a transfer of undertakings from an outgoing employer to an incoming employer.
The rights, powers, duties and liabilities of the outgoing employer are taken up by the incoming employer. Any act or omission made by the transferer before the transfer is treated as having been done by the transferee. This ensures continuity for transferring employees when a relevant transfer occurs.
The right to information and consultation
In a TUPE transfer, both the incoming employer and the outgoing employer must inform and consult all transferring employees before a transfer occurs.
According to the London Gazette, the following information must be given to appropriate employee representatives long enough for effective consultation. These representatives should be recognised trade union or elected employee representatives:
- The facts of the transfer, the date (or proposed date} when it will happen and the reasons for it.
- The legal, economic, and social implications of the transfer for the affected employees.
- Any measures which the transferer envisages it will take in connection with the transfer.
- Any specific information regarding agency workers engaged by the employer.
If an employer fails to inform and consult the relevant employee representatives before employees transfer, they could be taken to an employment tribunal by the transferred employees.
The outgoing employer must also provide employee liability information to the incoming employer at least 28 days before the transfer date.
Employee liability information includes the names of transferring employees and the details of their employment contracts. This also consists of disciplinary or grievance records and relevant collective agreements with transferring employees.
The right to object
Under the TUPE regulations, an affected employee can object to their transfer. If they do so, their employment contract will be terminated on the date of the transfer- there will be no dismissal.
An affected employee who chooses to object to transfer will have no right to any compensation or redundancy pay. They will only receive payment if their resignation is in response to a breach of their employment contract or detrimental change to their working conditions.
Changes to contractual terms and conditions
Contractual changes (made before or after a transfer) are void if the principal reason is the transfer itself and there is no economic, technical, or organisational (ETO) reason for them. The exception to this is if it is stipulated in employees’ contracts that such changes can be made.
This means an incoming employer must be prepared to prove changes to any employment contract are unrelated to a business transfer or service provision change or that there is an ETO reason.
Protection from unfair dismissal
TUPE regulations also give affected employees more protection from unfair dismissal. Employees cannot be dismissed if the sole or principal reason for their dismissal is the transfer. Employees can only be dismissed if there is an economic, technical, or organisational reason for their dismissal.
Employees dismissed for the sole or principal reason of the transfer are protected under TUPE and can lodge a complaint with an employment tribunal. Employers may be forced to reinstate or compensate dismissed employees if the employment tribunal upholds the complaint.
How does TUPE work during insolvency?
During the transfer or takeover of an insolvent business, the protection employees receive under TUPE regulations differs from in a standard transfer.
When does TUPE apply in insolvency?
Whether or not TUPE applies during insolvency depends upon the type of insolvency process the company is currently undertaking and whether or not it is terminal or non-terminal.
Terminal processes are ones where the aim is to liquidate and close down the business. Non-terminal processes are ones in which business rescue and recovery are the aim.
Terminal insolvency
If a company is closing down or being liquidated when it is bought, employees to whom the buyer offers a job are unlikely to be covered by TUPE regulations. This includes when a company enters compulsory liquidation or a Creditors Voluntary Liquidation (CVL).
Under these circumstances, there is no automatic transfer of employment contracts, broader changes can be made to employment contracts, and employees cannot claim unfair dismissal on grounds of their TUPE rights. Once liquidation proceedings have begun, an incoming employer takes on very little under TUPE regulations.
These rules are in place to encourage a new employer's rescue of struggling companies.
Non-terminal insolvency
However, TUPE applies if a business is going through a non-terminal insolvency process, such as a pre-pack administration, where a company may be bought or taken over. Other non-terminal insolvency processes include Company Voluntary Arrangements (CVAs) and administrative receiverships.
Please note TUPE regulations will apply to an insolvent company if it is bought before terminal insolvency proceedings have formally begun.
In the case of non-terminal insolvency, TUPE regulations apply but in a limited form. This gives incoming employers more options for rescuing a struggling business.
Affected employees do not receive the same level of protection as when a business is solvent and taken over or transferred. This gives incoming employers more options for rescuing a struggling company.
TUPE regulations in cases of non-terminal insolvency
Company administration is the predominant case where TUPE applies to the transfer of an insolvent company. When a company enters administration and appoints an insolvency practitioner, the insolvency practitioner is considered the new employer.
The same TUPE regulations will apply to the insolvency practitioner as to a new employer buying the company out of administration.
TUPE regulations are relaxed during insolvency. For example, the liability for redundancy, notice, and other outstanding payments does not wholly transfer to the new employer.
Changes to contract
The new employer can change the contracts of affected employees without an ETO. These changes to employee contracts must be made with the aim of ensuring the business survives and must be agreed upon by any relevant trade unions or employee representatives.
The indefinite period of TUPE protection means that a new employer must prove a contract change is primarily for the business's survival after a transfer.
Employee pension rights are only protected up until the dates of the transfer. After the transfer, the new employer is not obligated to offer the same workplace pension arrangement as the old employer.
The right to information and consultation
As in a regular TUPE transfer, the incoming and outgoing employers must still inform and consult staff.
The old employer must still provide the incoming employer with relevant employee liability information about transferring employees. This includes details of employment, personal injury claims, disciplinary records, and collective agreements with employees.
The right to object
As with a regular TUPE transfer, employees may resign if they do not wish to be transferred to the new employer. The same rules apply here as in a standard TUPE transfer.
Who is liable for outstanding payments to affected employees?
If a company is insolvent, employees are likely owed unpaid wages. If there are insufficient funds to pay these, they can be sought from the National Insurance Fund.
The National Insurance Fund will pay:
- Wages of up to eight weeks
- Up to six weeks of holiday pay
- If an employee has worked their notice term but has not been paid, they are entitled to statutory notice pay.
- Contributions to an employment pension that have not been made.
Payment for sick pay and maternity/paternity/adoption pay is offered by the Department of Work and Pensions and HMRC.
Liability for any outstanding payments not covered by the fund is transferred from the old employer to the new employer.
Summary: How does TUPE work during insolvency?
Whether you’re an incoming employer or an outgoing employer, TUPE regulations are a tricky part of employment law.
This is doubly true when these regulations must be applied in the context of insolvency proceedings.
We hope you found this article helpful and informative. For other similar guides, take a look at our blog.
If you have questions about whether TUPE applies or how TUPE regulations might affect your company in insolvency, please don’t hesitate to get in touch.
