Outsourcing and TUPE

May 20, 2012

What Happened?

In 2009 Eddie Stobart Limited closed its operation at Manton Wood in Nottinghamshire. It had been servicing two contracts from that site at that time. One of those contracts related to the supply of meat to ASDA. ASDA’s ordering pattern meant that its stock was picked overnight while the stock picked for the other contract was picked during the day. The other contract was known as the ‘Vion’ contract and the dayshift spent most of its time working on that contract.

When the Manton Wood site closed, Eddie Stobart argued that the employment contracts of the staff on its dayshift transferred to the company that it thought would take over the Vion contract, FJG Logistics Limited. Eddie Stobart argued that the staff concerned were either working wholly or mainly on the dayshift (and therefore for the Vion contract) or that over 50% of the tasks the individuals had undertaken in the previous 90 days had been for the Vion contract.

There were arguments about both whether there was a transfer and, if there was, who transferred under the Transfer of Undertakings (Protection of Employment) Regulations 2006”. Full details can be found in the decision (Eddie Stobart v Moreman and Others [2012] UKEAT 0223_11_1702).

Relevant Law

TUPE provides that where there is a ‘service provision change’ the affected employees may transfer from the old contractor (Eddie Stobart) to the new contractor (FJG). However, for that to happen, various conditions must be met. The conditions are found in reg 3. They are (with our emphasis added) that ‘immediately before the service provision change –

(i) there is an organised grouping of employees situated in Great Britain which has as its principal purpose the carrying out of the activities concerned on behalf of the client;

(ii) the client intends that the activities will, following the service provision change, be carried out by the transferee other than in connection with a single specific event or task of short term duration; and

(iii) the activities concerned do not consist wholly or mainly of the supply of goods for the client’s use.’

Argument and Decision

FJG argued that no one had been assigned to any particular client at the site, and so claims brought against it by staff, who Eddie Stobart argued were transferred to FJG, should be struck out. At a pre-hearing review, the tribunal agreed with FJG, though it reached this decision on the basis that, just because the dayshift employees happened to spend most of their time working on the Vion contract (which required to be picked during the day), this did not mean that they were an ‘organised grouping of employees’. Eddie Stobart appealed on the ground that this decision had been made on different grounds than those that had been originally argued by FJG, and that it was enough to show that the individuals involved had worked mainly for Vion.

The appeal to the Employment Appeal Tribunal was unsuccessful. The key factor in the decision was, again, the need to establish the existence of an ‘organised grouping of employees’. The fact that circumstance dictated that some people generally spent most of their time fulfilling the needs of the Vion contract did not give rise to an ‘organised grouping of employees’, because there was no deliberate planning or intent to structure a group of people to serve a particular client. Of importance to the EAT was the fact that the dayshift workers could not have identified themselves as being on a ‘Vion Team’ and most likely didn’t even know they were picking for Vion. Rather, they were simply dayshift workers who happened to pick mainly for Vion.

Implications in Practice

Increasingly businesses, including those in IT or with an ICT focus, are arguing that TUPE does, or does not, apply to service provision changes involving them, on the basis of their commercial convenience. This decision seems to give outgoing suppliers some flexibility to manipulate whether or not their employees will transfer under TUPE when a contract terminates. However, it also means that, unless they carefully organise their workforce, suppliers may retain employees whom, under a wider interpretation of TUPE, they would have anticipated would transfer on to a new supplier.

Before this decision, if those employees happened, in practice, to spend most of their time working for one client, that might well have been viewed as sufficient to trigger TUPE at the end of the contract. This decision makes clear that something extra – ie a specific decision to organise employees to work for a specific client – will be needed.

Subject to the overriding need to run a profitable business, if a supplier wants to try to keep staff, it should ensure that it has not organised its employees by reference to its client, but rather the need to serve its clients generally. If it wants to be sure to be able to transfer staff across to a new supplier on termination of its deal, it needs to ensure that the employees are part of that client’s ‘team’, and organised to serve that client in particular. If the supplier’s view changes over time, it can reorganise the way its business is structured accordingly.

Companies that buy services on an outsourced basis and their replacement providers will face a less predictable and more opaque situation. That will matter whether the customer wants to return to self-supply using staff from the service provider, or to appoint a replacement. If either of them anticipated say 200 people transferring and none do, they will struggle to recruit staff quickly enough, particularly if they have no right to early information on likely transferees. Equally, if they expect no staff to transfer and 200 do actually transfer, there are likely to be significant redundancy costs.

Practical Consequences

Two important aims of most outsourcings are reduction in cost and increase in efficiency. Both often require the supplier’s staff to serve multiple clients in order to obtain the greater efficiencies that come with increased volumes and to justify having real specialists in areas where individual clients had the occasional need for support, but not enough of a need to justify a recruit.

Both of these drivers, particularly on smaller deals, tend to encourage suppliers to set up their staffing structures to serve their customers generally. This always presented the risk that employees would not transfer on termination if they did not, as a broad rule of thumb, spend the majority of their time working for the client in question. However, as a result of this case, there is the additional risk that, even if the employees are wholly or mainly assigned to one customer contract, they will still not transfer unless the supplier’s business model was designed so that there was a specific team for that customer.  

Drafting Consequences

This decision makes it more important than ever for suppliers and customers to ensure that the commercial documentation adequately protects their positions, particularly at the outset and on exit. Potential provisions might include terms which:

·        seek to control how the supplier structures its work force

·        entitle the customer/a new service provider to greater employee information than TUPE provides for, and at an earlier stage, so that the customer can see the likely transfer situation long enough before the end of the contract to be able to plan appropriately

·        specifically anticipate where staff will end up on transfer and assign the risk of that not being the case to one party or another via an indemnity.

Concluding Thoughts

At present, there is no indication that this decision will be appealed, and EAT decisions are binding on Employment Tribunals. This decision may well lead to suppliers having to change the way they operate (possibly reducing supplier efficiency, and the attractiveness of an onshore solution as a result) or a significant reduction in the number of instances where staff transfers occur, which will again tend to increase costs for suppliers and therefore customers.

In addition, whereas the principal aim of TUPE is to protect employees’ rights in the event of a transfer, this decision seems sure to increase the number of occasions where employees unexpectedly do not transfer, quite possibly leading to redundancies as a result.

Is this really a sensible result?

 Rex Parry is a Director of Rumbo Limited, a consultancy which focuses on helping businesses construct and implement IT and outsourcing deals.

Philip Davies is a Partner in Eversheds LLP’s employment team, based in London.