TUPE: Service provision changes and splitting liability between multiple transferees

The recent case of McTear Contracts Ltd v Bennett and others UKEATS/0023/19; Mitie Property Services UK Ltd v Bennett and others UKEATS/0030/19 (“McTear”) confirmed that in situations where there is a transfer to multiple transferees by way of a service provision change under regulation 3(1)(b) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE), the contracts of employment of the transferring employees may be split between the transferees in proportion to the work undertaken by the employees. This is a significant departure from the case law interpreting TUPE and will require employers to adopt a new mindset as, in short, employees can now transfer from working full time for one employer to working part time for multiple employers.

Facts of the case

Amey Services Limited (“Amey”) undertook a kitchen installation contract for North Lanarkshire Council. A group of Amey employees spent most of their time working on the North Lanarkshire contract. The employees were split into two teams that worked independently of each other and were not split geographically. In 2017, the Council retendered the kitchen installation work and split it into two discrete lots defined by geographical location (North and South). The re-tendered contracts were won by McTear (the South lot) and Mitie (the North lot). Amey’s view was that TUPE would apply to transfer their employees to either McTear or Mitie. Amey’s HR department produced a spreadsheet identifying which employees would be transferred where (one of the teams spent slightly more of its time working on the North lot and the other team spent slightly more of its time working on the South lot). At first instance, the Employment Tribunal found, applying the principles in Kimberley Group Housing Ltd v Hambley and others UKEAT/0488/07 (which excluded the possibility of multiple transferees), that there had been two service provision changes - one between Amey and Mitie and the other between Amey and McTear. All of the employees in each team should therefore transfer to the applicable transferee in line with the spreadsheet prepared by Amey’s HR department. Both Mitie and McTear appealed this decision.

The Employment Appeal Tribunal (“EAT”) held that the Employment Tribunal’s decision was incorrect and that the employment of each employee should be transferred to each of the transferees in proportion to the tasks performed by that employee, ie their employment was to be split in two. As we mentioned above, this is a significant departure from the previous case law interpreting TUPE. The reason for this departure is that the EAT in McTear had to consider the intervening decision in the European Court of Justice (“ECJ”) case, ISS Facility Services v Govaerts (Case C-344/18) (“Govaerts”).

The application of Govaerts

In Govaerts, the ECJ held that, in a transfer to multiple transferees under the Acquired Rights Directive, the contracts of employment of transferring employees could be apportioned between each of the transferees in proportion to the tasks undertaken by those employees – essentially, Kimberley must now be read subject to the principles in Govaerts.

In order for this split transfer to happen, it must be possible at a practical level and it must not have an adverse or negative impact on the employee’s rights and working conditions. In McTear, the EAT said that although it was not required to apply Govaerts to the purely domestic provisions of TUPE (ie those relating to service provision changes), TUPE would “lose coherence” if there were different rules relating to a transfer of an undertaking (under Regulation 3(1)(a)) and a service provision change (under Regulation 3(1)(b)). The EAT held that:

“There is no reason in principle why an employee may not, following such a transfer, hold two or more contracts of employment with different employers at the same time, provided the work attributable to each contract is clearly separate from the work on the other(s) and is identifiable as such. The division, on 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 employers on different jobs”.

The EAT remitted the case to the same Employment Tribunal for it to consider whether the employees had transferred to McTear or Mitie. The facts identified in the spreadsheet would have to be revisited to consider the application of Govaerts to each of the employees.

Issues for employers to consider

The case of McTear confirms that in circumstances where a service is transferred from a single contractor to multiple contractors, employers should consider the following questions.

• Is it possible to identify the activities and tasks that are transferring to each transferee, and do they remain fundamentally the same? If not, employers will likely be hard pushed to argue TUPE applies.
• Is it possible to identify a distinct organised grouping of employees in respect of each potential transfer (and are any employees clearly “assigned” to that grouping)?

Following the EAT’s decision, there is now the potential for difficulties in circumstances where contracts are to be divided between multiple transferees. There is no clear mechanism or process for calculating how employment contracts should be split between different employers.

When faced with a situation concerning the application of TUPE in a service provision change where there is a transfer to multiple transferees, some practical steps employers could take are:

Transferors

• Pre-determining a structure at the tender stage in order to clarify which employees will transfer to which transferees. This may help to avoid the complex situation whereby the contracts of employment are required to be split between multiple transferees.
• Identifying any employees where the applicable transferee(s) are not easily identifiable (for example if they work for multiple business streams).
• Have a conversation with the other employers involved about how the practicalities will be dealt with and attempt to understand which employees will remain with the transferor and which employees will be transferred.

Transferees

• Be mindful of the fact that fragmentation has previously been used as a strategy by transferees seeking to avoid a TUPE transfer - the decision in McTear means that this argument is now less likely to succeed.
• In some situations transferees will find that they have liability for only part of an employee's contract. What happens when it is not possible to split a contract or the transfer results in detrimental changes to an employee's rights and working conditions? In Govaerts the ECJ held that, in these circumstances, the contract may be terminated and that the termination must be regarded as the responsibility of the transferee(s), even if it was initiated by the employee. This point was not dealt with by the EAT in McTear, but it is likely that splitting a contract will adversely affect an employee's rights or working conditions. As such, if the contract is terminated this may be automatically unfair under TUPE unless it's possible for the transferee to argue that there was an economic, technical or organisational reason for the dismissal entailing changes to the workforce (an ETO reason). Likewise, the transferee is also likely to be responsible for statutory redundancy costs for those employees who have more than two years’ service. Transferees should be alive to this when negotiating allocation of liabilities in contracts.
• The Govaerts principle is likely to be particularly problematic in second generation outsourcing situations where transferees do not have a direct contractual relationship with the transferor and may have insufficient access to employee information.

In short, there is a great deal of uncertainty and we will have to wait and see how these issues play out.

Article co-authored by Katie Fleming.