The ownership of a business may change either as a result of the assets of a business being acquired by a new owner, or by the purchaser acquiring the shares in the company which runs the business. Under English law, the rights of the employees of the business and the obligations of the seller and purchaser are different in each case.
SHARE ACQUISITION
When there is a change in ownership of the underlying shares of an employing company there is no change in the identity of the employer. The acquired company retains ownership of the business itself and the employees remain employed by that company.
As a result of there being no change in employer, any share acquisition will have no direct effect on employment contracts, or the relationship between the target company and its employees. There is no statutory obligation to consult with employees, or their representatives, in the context of a share acquisition; however, some employers may be subject to collective agreements with unions or works councils which do impose a positive obligation on the employer to consult about an impending share acquisition.
The purchaser of shares in a company indirectly acquires all employment liabilities associated with that company and therefore due diligence on the general employment situation is very important at the very early stages of a deal in order to flush out any particularly costly or difficult matters.
ASSET ACQUISITION
In contrast, the purchase of a business by means of an asset acquisition will trigger a change of employer for all employees who are engaged in the business. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) are the UK version of the European Acquired Rights Directive, which sets out minimum standards for all EU countries. TUPE applies in a very broad range of circumstances, as well as asset acquisitions, it applies to a large proportion of outsourcing contracts and any other transaction where the ownership of an undertaking passes from one party to another.
The principal effect of TUPE is to transfer the contracts of employment of all employees who are engaged in the business at the date of the transfer to the new owner. Employees transfer on their pre-existing terms and conditions of employment and all pre-existing liabilities associated with that contract will pass to the new employer. For example, if there has been an act of sexual discrimination six weeks before the transfer, it will be the purchaser who will be responsible for dealing with any claim that the discriminated employee may bring, notwithstanding the fact that the act of discrimination took place before the acquisition.
The interaction of TUPE and pensions is a complex area. Where transferring employees are members of a final salary, or defined benefits scheme, the new employer must either provide transferring employees with an equivalent scheme, or provide access to a defined contribution/money purchase pension scheme and match employee contributions up to a maximum of 6% of salary.
WHEN DOES TUPE APPLY?
The Courts have looked at a number of factual scenarios which can assist the buyer and the seller to get to grips with the concept of a "business transfer".
The case of Spijkers decided by the European Court in 1986 put forward the test which has since become firmly established in determining whether there has been a transfer under TUPE:
"whether the entity retains its identity" through the transfer. To decide this question the courts look at a variety of factors including:
- the type of business or undertaking
- the transfer or otherwise of tangible assets such as buildings or stock
- the value of intangible assets at the time of transfer
- whether the majority of staff were taken over by the new employer
- the transfer or otherwise of customers
- the degree of similarity of activities before and after transfer
- the duration of any interruption in those activities
MANAGING THE RISK: Warranties & Indemnities
Given the complexities of TUPE and conflicting case law, it is important for parties to agree their respective responsibilities and liabilities as early as possible.
Parties cannot contract out of TUPE, but there is nothing to stop the seller and buyer agreeing between themselves how to share liability for potential claims. This is usually done by including appropriate warranties and indemnities in the sale and purchase agreement.
In contracting out situations, it is prudent for provision to be made at this stage to deal with obligations on termination of the contract.
OTHER EMPLOYMENT CONSIDERATIONS
Right to object
An automatic transfer under TUPE is subject to an employee's right to object to transferring, provided in Regulation 4(7). If an employee does exercise this right, then he will not transfer and his employment will terminate, but he will have no claim against either seller or buyer either under contract or statute.
An employee does, however, have the right to terminate his contract and claim constructive dismissal if he can show that a substantial and detrimental change has been or will be made to his working conditions. The change in the identity of his employer will not itself be such a reason unless he can show that the change is significant and to his detriment.
Unfair dismissal
Regulation 7 provides that employees of the seller or the buyer may not be dismissed in connection with the transfer unless there are "economic, technical or organisational reasons entailing a change in the workforce" (an "ETO reason"). If they are dismissed without an ETO reason, the dismissals will be automatically unfair. Liability for those unfair dismissals will itself transfer to the buyer under TUPE.
INFORMATION AND CONSULTATION
Who has to inform and consult?
Both the seller and the buyer are subject to obligations to inform and consult with their affected employees about the proposed transfer and any "measures" that will flow from the transfer.
Who must be consulted?
They must consult with "appropriate representatives" of the affected employees who may be:
- elected representatives of the employees; or
- representatives of an independent trade union if recognised by the employer.
If a trade union is recognised, then the employer cannot choose and must consult with the trade union’s representatives.
When should consultation begin?
No specific timetable is provided. The employer is required to provide information "long enough before a relevant transfer to enable the employer to consult" the appropriate representatives about any "measures" which the employer envisages it will take in relation to the employees. There is therefore a direct link between the extent of any measures proposed and the required duration of consultation.
TUPE does not provide any definition of a "measure". However, it does seem clear that it will cover any significant change in employees' working practices or conditions, as well as dismissals.
What information should be supplied?
As well as details of measures, the employer of any affected employees has to provide the employees' representatives with the following information:
- the fact that a transfer is to take place;
- when, approximately, it will take place;
- the reasons for it;
- the legal, social and economic implications for affected employees;
- any measures which the employer envisages it will take in connection with the transfer in relation to the affected employees (or if there are none, then the employer must say so);
- if the employer is the buyer, it must also give information about the measures which the seller envisages that it will take in relation to transferring employees once it becomes their employer. If no such measures are envisaged, then it must say so.
What are the penalties for failing to inform and consult?
Compensation can be awarded up to a maximum of 13 weeks’ pay for each affected employee and the liability rests jointly and severally with the buyer and seller.
MANAGING AFTER THE TRANSFER
Two particular issues are likely to give rise to problems:
Dismissals
Any dismissal connected with the transfer will be deemed automatically unfair unless it can be justified on ETO grounds (as mentioned above). A genuine redundancy will generally qualify. However, it is important to appreciate that whilst a dismissal on these grounds is not automatically unfair, it does not mean that it is automatically fair. The usual unfair dismissal principles will still apply;
Changing terms of employment
As English law stands, there are significant difficulties for a buyer wishing to harmonise the terms and conditions of transferring employees with those of its existing employees. In short, any change made in connection with the transfer will be open to challenge.