Informing and consulting on a TUPE transfer – where does liability lie? (Health & Social Care)

Merger and acquisition activity in the health and social care sector is busier than ever, and it is an exciting time for care providers looking to grow and expand their portfolios. There are also good opportunities for those seeking to exit the sector.

Whether you are buying or selling you must be aware of your legal obligations in relation to staff.

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) are far-reaching and protect employees when their employment is transferred to a new business. Both the outgoing employer (the seller) and the incoming employer (the buyer) owe several obligations to each other, as well as the employees affected by the transaction.

Inform and consult

Prior to the completion of any business sale or acquisition, the seller must provide their employees with the following information:

1. The fact of the transaction, i.e. confirmation there is to be a sale of the business, together with the proposed date and the reasons for the transaction;
2. The legal, economic and social implications of the transaction i.e. any immediate impacts to the business such as working hours and place of work;
3. The measures envisaged by the sellere. actions which the seller will take in connection with the transaction such as redundancies.
4. The measures envisaged by the buyere. changes which the buyer envisages post-completion such as changing pay and benefits within contracts of employment.

Unless there are fewer than 10 employees who are affected by the transaction, employee representatives will need to be nominated and elected by the affected employees, following which the representatives will represent the employees during the information, and any consultation, process.

Whilst there is no timeframe specified in law by which the seller must provide the above information, it must be provided long enough before the transaction has completed.

Measures envisaged

Whilst the seller must provide information to affected employees regarding any measures it envisages making in connection with the transfer, it must also do the same for those measures the buyer envisages making. This obligation imposes a duty on both the seller and buyer to communicate and share information with each other, so that accurate information is passed onto the affected employees. ‘Measures’ is interpreted widely and covers any action, step or arrangement.

It is standard practice for the buyer to provide the seller with a TUPE measures letter, usually once the buyer has completed their employment due diligence. The measures letter must include any action, step or arrangement which the buyer is proposing to make post-completion, no matter how minor or trivial.

Special circumstances

In some circumstances, it is not feasible to inform and consult with staff. A defence is available in these circumstances, but only if the parties can show that there were special circumstances. This would include it not being reasonably practicable for information to be given or consultation to take place, and that the parties had done the best they could to comply in the circumstances.

Non-compliance

If the parties fail to comply with the above requirements, they may be ordered by an Employment Tribunal to pay compensation to each affected employee, up to 13 weeks’ gross pay. It is worth noting that there is no statutory cap on the calculation of a weeks’ pay for these purposes.

Both the seller and buyer may be held jointly and severally liable for a failure to inform and consult, as well as being liable for any compensation. Depending on the number of employees involved, this could be an expensive liability for the parties.

To avoid this, it is common for an indemnity to be provided in the asset purchase agreement, namely for the party at fault to compensate the other for failure to comply with their TUPE obligations. However, the indemnity itself can often be a hotly contested issue in corporate negotiations, as well as the practicalities of enforcing the indemnity itself.

The Case in Dispute

The Employment Appeals Tribunal (EAT) have recently delivered their judgment in Clark v Middleton and another. The Claimant worked for Ms Middleton, a sole trader who ran Black Dog Hydrotherapy, a business providing hydrotherapy treatment for injured dogs. When Ms Middleton retired, she transferred the business to a company called Black Dog Hydrotherapy Ltd (BDH Ltd). BDH Ltd had been set up by one of Ms Middleton’s employees. TUPE applied to the transfer and the Claimant’s employment transferred to BDH Ltd.

Following the transfer, the Claimant resigned claiming BDH Ltd intended to make changes to employees’ contracts and she was not informed of this prior to the transfer. The Claimant brought two claims, the first against Ms Middleton for failure to inform or consult and the second against BDH Ltd for unfair dismissal and unpaid wages and holiday pay.

Prior to the tribunal hearing, the Claimant and BDH Ltd reached a COT3 settlement through ACAS. The Claimant’s claim against BDH Ltd was consequently withdrawn and dismissed. The Claimant’s remaining claim against Ms Middleton proceeded to Tribunal and focused on two issues:

1. The fact Ms Middleton had failed to inform the Claimant the new employer was BDH Ltd (Ms Middleton had allegedly told the Claimant the employer was to be Mrs Slade Andrews in the capacity of a sole trader); and
2. The fact Ms Middleton had failed to inform the Claimant as to BDH Ltd.’s envisaged measures to change employee’s contracts of employment, post-transfer.

At the Tribunal hearing, Ms Middleton claimed that she was unable to give the necessary information to the Claimant because BDH Ltd had failed to comply with its duty to provide such information and therefore liability should fall to BDH Ltd. The Tribunal held that Ms Middleton’s defence succeeded and whereas ordinarily BDH Ltd would be joined as a party to proceedings and held jointly and severally liable for any compensation award, the effect of the COT3 settlement was to preclude the Tribunal from making an award against BDH Ltd.

The Tribunal were left to consider whether Ms Middleton had failed to tell the Claimant her new employer would be BDH Ltd, rather than Mrs Slade Andrews personally. On that basis, the Tribunal exercised its discretion and awarded no compensation. On appeal the EAT overturned the Tribunal’s decision to make an award of zero compensation and sent the case back to the Tribunal for reconsideration.

Takeaway Points

1. Liability

Both the buyer and seller may be held jointly and severally liable for a failure to inform and consult with affected employees; however, as noted by the EAT in this case, it is not for the Claimant to name the buyer as a party to proceedings, but rather the onus is on the seller to raise the buyer’s failings as its defence. Buyers therefore should be aware of the liability that may be imposed on them if they fail to provide adequate information as to the measures they envisage taking.

2. Obligation to Inform

Both the buyer and seller owe a duty to affected employers to provide all information required by TUPE. Information must be provided long enough before the relevant transfer and therefore parties are encouraged to ensure information is released as and when it is available, rather than waiting to release all information at one time.

3. Settlement

Claims for failure to inform and consult under TUPE can only be settled under a COT3 agreement reached via ACAS (and not a normal settlement agreement). The Tribunal’s finding in this case that reference to “all claims” being settled was wide enough to encompass the transferee’s failure to inform and consult suggests similar drafting is enough to preclude any compensation being awarded against the buyer.

For further information about TUPE please contact an employment solicitor in our health and social care team.