Employees in asset sales – do they stay or do they go?

employment law business transfers

Buyers often assume that by buying the assets of a business, they can take the best bits and leave the rest behind.  Thanks to the Transfer of Undertakings (Protection of Employment) Regulations 2006 that isn’t necessarily the case when it comes to employees.  Ignoring TUPE can prove extremely costly but, managed properly, it need not be a show-stopper.  Here are some key points all Buyers should consider.

1. Does TUPE apply and if so to what extent?

Janette Lucas, Squire Patton Boggs.
Janette Lucas, Squire Patton Boggs.

TUPE can potentially apply to the whole of a business or only part of it, depending on what it is you are proposing to buy. Consider also whether any part of the target business is sub-contracted to a third party; if it is and you plan to bring that service or function back in-house, that could trigger TUPE too.

2. Be clear about who will transfer (and don’t be afraid to challenge).

Sellers can sometimes push their luck when it comes to saying which employees will transfer, particularly where only part of the business is being sold.  Only those who are genuinely “assigned” to (essentially, meaning that they are primarily employed to work in) the part of the business transferring should transfer to you. This depends on a range of factors, all of which should be tested to ensure you aren’t being foisted with employees Seller simply doesn’t want.

3. What liabilities transfer with them?

In short, everything. Buyer steps into Seller’s shoes – you are treated as if you had always employed the transferring staff. Whatever the Seller may have done for or to those staff – whether you know about it or not and whether good (future bonus commitments), bad (salary underpayments, miscalculated holiday pay), or downright ugly (serial harassment or unequal pay) – you inherit, unless the commercial agreement says otherwise.  Contractual employment terms and some collective agreements also transfer; terms/benefits which cannot be transferred (e.g. membership of Seller’s bonus or share scheme) will need to be replicated as far as practicable.  Particular care is needed where pensions are concerned, especially if Seller has a Defined Benefit scheme. This is the legal equivalent of buying a used car from a not very reputable dealer, so look under the bonnet, check the tyres.  Once it’s yours, it will be too late to complain!

4. Changing terms and conditions.

Strictly, if the transfer is the only reason for the changes, they will be void. This can have unwelcome results, particularly where the Buyer seeks to protect its investment through new restrictive covenants, in which case termination and re-engagement is usually the best option.  The risk of employees later arguing that the change(s) were not effective is generally low if overall the old and new packages are broadly comparable.

5. Automatic unfair dismissal.

A TUPE-related dismissal will be automatically unfair except in limited circumstances such as genuine redundancy. Where redundancy arises, failure to include your existing staff in the selection process (where appropriate) may also make those redundancies unfair.

6. Information and consultation.

TUPE requires both the Seller and Buyer to talk to affected staff about what the transfer means for them. There are two separate obligations here. Duty to inform – whilst so much of TUPE is as opaque as a June sky over London, it is very prescriptive about the information that has to be provided to staff on a TUPE transfer. Tick off everything on that list!

Duty to consult – this applies only where “measures” are proposed. TUPE does not define what “measures” are so you would be well advised to disclose any intended change affecting the incoming employees to Seller (so it can consult with transferring staff); if those measures also affect your existing staff, consult with them too.

Who do you inform/consult with?

“Appropriate representatives” of the “affected” employees.

Affected employees includes not just transferring employees, but other staff employed by you or Seller who may still be affected in same way by the transfer.

Affected representatives will include trade unions, existing employee representatives or staff representatives elected by the employees specifically for the TUPE information/consultation process.  Whilst not strictly compliant, you could inform and consult with all affected employees direct – especially where they are small enough in number that you can get them all in one room and give them the necessary information and a chance to ask questions on it.  If the process is otherwise done properly, the risk of a penalty for not electing representatives should then be small.  This approach is expressly permitted by TUPE where the relevant employer has less than 10 employees whom it is required to inform and/or consult.

8. Ignore at your peril!

Failure to inform/consult properly, even if it would have made no difference to the end result, could mean a protective award of up to 13 weeks’ pay per affected employee. Three months’ payroll.  Enough said.

9. Immigration/right to work checks.

Buyer should undertake a right to work check for all staff who transfer under TUPE within 60 days of transfer.  Additional steps apply if any Tier 2 migrants transfer.

10. So what should the commercial contract say?

Much will depend on your negotiating position but as an absolute minimum you should be asking for “on your watch” indemnities, i.e. protection against any liabilities which result from something the Seller did or did not do whilst it employed the transferring staff, including any failure to comply with its obligations under TUPE. The parties cannot use the commercial agreement to prevent TUPE applying but they can and should (especially as the Buyer!) use it to ensure clarity as to who will bear what the costs and liabilities arising as a result.

 Janette Lucas is a Partner at Squire Patton Boggs. 

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