TUPE and re-tendering outsourcing service contracts

An important recent case heard by the Employment Appeal Tribunal (EAT), McTear Contracts Limited v Bennett,  has looked at whether the principles set out by the European Court of Justice in the case of Govaerts can be applied to a ‘service provision change’  under TUPE. This heralds a change in approach to re-tendering or outsourcing exercises, where there are multiple incoming contractors.

Background

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply in two scenarios:

1. business transfers and

2. service provision changes.  

N.B. In Northern Ireland the service provision change legislation is contained within separate legislation, the Service Provision Change (Protection of Employment) Regulations (Northern Ireland) 2006.

A ‘service provision change’ takes place when activities cease to be carried out by a contractor on a client's behalf and are carried out instead by another person (a subsequent contractor) on the client's behalf.

The ‘activities’ in question must be fundamentally the same pre and post transfer, and there must be an ‘organised grouping’ of employees carrying out the relevant activities.

Where a service provision change takes place, the employment contracts of those employed by the outgoing employer (‘the transferor’) automatically transfer to the incoming employer (‘the transferee’).

Complexities often arise where there are multiple incoming contractors. An EAT case called Kimberley Group Housing Limited v Hambley said that, in this scenario, the correct approach was for liability for all the transferor's employees to pass to the contractor which takes on the majority of the activities carried out pre-transfer – and it is not correct to ‘split’ employees between multiple incoming contractors.

However, this approach was thrown into doubt last Summer, in a European Court of Justice (ECJ) case called ISS Facility Services v Govaerts.

In that case, the ECJ said that where there are multiple transferees, transferring employees could be split between each of the transferees, in proportion to the tasks performed - as long as the

• division was possible; and
• did not adversely affect the employee in question.

If it did have an adverse effect, then the contract could be treated as terminated and liability for that termination would pass to the transferee. Please see our August 2020 Briefing for more information.

The Govaerts case concerned business transfers under TUPE, rather than service provision changes. And it was unclear how the UK Courts and tribunals would treat the decision: it conflicted with the Kimberley Housing approach and created several practical difficulties.

In McTear Contracts Limited v Bennett, the EAT has, this month, applied the controversial Govaerts case in the context of a service provision change.

Facts

Between 2012 and 2017, Amey Services Limited (Amey) had a contract with North Lancashire Council (NLC) replacing kitchens within its social housing properties. Amey divided the work between two ‘teams’ of employees (the Claimants) who generally worked independently of each other.

In February 2017, NLC re-tendered the work and split the contract into two ‘Lots’ based on a geographical split of NLC’s authority area into north and south.

NLC awarded the contract for Lot 1 to McTear Contracts Limited (McTear) and the contract for Lot 2 to Mitie Property Services UK Limited (Mitie).

To identify which employees should transfer to which transferee, Amey undertook a geographical analysis of where its employees had worked in the last 12 months. It took the general approach that team 1 corresponded to Lot 1, the north, and team 2 to Lot 2, the south. Two employees, Mr Daly, operations manager, and Mr Lennon, project surveyor, had never been allocated to individual teams at Amey and so a pragmatic approach was taken in allocating Mr Daly to one Lot and Mr Lennon the other. 

McTear and Mitie refused to take on any of the employees (Claimants) whilst Amey maintained that the contracts of the Claimants had transferred to either McTear or Mitie under TUPE.

Mr Lennon, Mr Daly and other claimants lodged claims in an employment tribunal, alleging (amongst other things) that TUPE applied to the award of contracts to Mitie and McTear.

An employment tribunal applied the principle of Kimberley Group Housing v Hambley (see above). It found that sole liability for each affected employee could only transfer to one of the transferees. The tribunal allocated liability for each of the Claimants to McTear and Mitie according to the amount of time each Claimant had spent in the relevant geographical area awarded to McTear and Mitie.

McTear and Mitie both appealed the decision, arguing that the Govaerts case meant that where a transfer of undertaking involves more than one transferee, the rights and obligations arising from a contract of employment will transfer to each of the transferees, in proportion to the tasks performed by the worker.

Employment Appeal Tribunal decision

The EAT allowed the appeal.

It held that there was no reason why an employee could not simultaneously hold two or more contracts with different employers, so long as the work under each contract was separate and clearly identifiable from the others.

The EAT commented that ‘”the division along geographical lines, of work previously carried out under a single contract into two new contracts is, in principle, a situation where there could properly be found to be different employees on different jobs”.

The case will now return to the Employment Tribunal where the Govaerts principles will be applied to each of the claimants individually.

Comment

This is the first time that the EAT has applied the ECJ decision in Govaerts to a domestic case related to the transfer of employees under regulation 3(1)(b) of TUPE. Prior to this, UK case law did not support the splitting of an individual’s employment.

Whilst the Govaerts principle may seem the most reasonable principle to apply, in practise there could be issues with the ‘splitting’ of a contract of employment. Questions may be raised as to when it will practically be possible to divide an employment contract, by how many transferees the employment can be split and at what point the splitting of an employment contract would detrimentally affect the individual. It could also lead to a multitude of administrative challenges for both employees and employers with regards, for example, annual leave, dismissal procedures and the employment contract being split between competitors.

In addition, the EAT did not deal with the question of what happens if the proposed split between incoming employers is detrimental to the employee. Any resulting termination of employment is likely to be automatically unfair, unless for an ‘ETO’ reason. We would, therefore, expect to see incoming transferees seeking strong indemnities to cover off potential liability where there are multiple incoming contractors.

Contributors: Joanna Grover and Sarah Maddock

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This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.