Changing of the Guard

Restructure iStock 000008002627XSmall 146x219Graham Richardson looks at recent developments in relation to the complex issue of TUPE and service provision changes.

One of the main changes made by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) was to widen its scope so that it is more likely that an outsourcing (or a “service provision change”) may be a “relevant transfer”. A service provision change can occur in three situations: the contracting out of services, second generation out-sourcing and bringing services back in-house.

The increased certainty from the definition of “service provision change” that TUPE aimed to introduce led many employers to assume that, wherever there was an outsourcing situation, TUPE would usually apply. However, there has been a wave of recent cases in which the courts have held that no service provision change has occurred, suggesting that matters might not be so clear cut.

For TUPE to apply to a service provision change, there must be “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 and the activities concerned do not consist wholly or mainly of the supply of goods for the client’s use”.

“Organised Grouping of Employees”

The Employment Appeal Tribunal (“EAT”) considered the meaning of “organised grouping of employees” in Eddie Stobart v Moreman. It took a relatively narrow approach, finding that even though the employees in question carried out the majority of their work for the client, they were not an “organised grouping” because they were not organised by reference to the requirements of the client in question – there was no deliberate planning or intent that they mostly worked on tasks for that particular client. So, it appears that it is not enough for a service provision change to apply that a group of employees spend the majority of their time working for a specific client: it must also be shown that they are deliberately organised into an identifiable client grouping. The classic example of this will be when a group of employees are organised as the “Client X team”, although this need not necessarily be the case.

“Activities”

The post-transfer activities will need to be identifiable as the pre-transfer activities for a service provision change to occur, although the activities need not be identical and may be carried out in a different way. In the following recent cases the difference between the activities pre and post-transfer was enough for the tribunal to hold that there was no service provision change:

  • Johnson Controls v (1) Campbell (2) UK Atomic Energy Agency: the Claimant was a taxi administrator providing a centralised taxi administration service. UKAEA then decided to take the service in house and to ask its secretaries to book taxis directly with taxi firms rather than using a centralised taxi administrator. The EAT decided that the fact that booking taxis no longer existed as a centralised service meant that the services post-transfer were essentially different from those provided pre-transfer and therefore there had been no service provision change.
  • Enterprise Management Services v Connect-Up: IT support services provided to schools in the Leeds City Council Area by the original contractor transferred to a new provider. There were a number of differences between the services provided pre and post-transfer. In particular the new tender omitted any curriculum work, which represented 15% of the work done by the original contractor and there was also some fragmentation of the services between different providers post transfer (with some 40% of the schools formerly signed up by the original contractor distributed amongst five other suppliers). The ET found that the differences between the services pre and post-transfer were sufficiently different for there to be no service provision change, and on appeal the EAT confirmed this decision.
  • Nottinghamshire Healthcare NHS Trust v Hamshaw: A residential care home operated by the NHS Trust was closed and the residents were re-housed into their own homes, with their care transferred to private sector care providers. Although the objective of the tasks performed pre and post-transfer was essentially the same (i.e. the provision of care and support for vulnerable adults) the EAT decided that there was a fundamental shift in the ethos of the service so that no service provision change was found to have occurred.

Whilst the above cases should not be seen as a green light for employers to conclude that there will be no service provision change in situations where there are apparent differences in duties or activities before and after an alleged transfer, they do suggest a change in direction of travel, with courts apparently being less likely to find a TUPE transfer where there are significant differences in services pre and post-transfer.

“The Client”

Hunter v McCarrick considered for the first time the meaning of “the client” under the service provision definition, holding that it was the specific client on whose behalf the contractor carried out the services, so the activities carried out by the different contractors before and after the transfer must be carried out for the same client. The claimant was employed by a property services company. The company which owned the properties became the subject of a winding up petition. Receivers assumed control of the properties and appointed a new property services company. The EAT held that there could be no service provision change where the client (the property owner) changed and the contractors changed at the same time.

This decision provides clarity on what was potentially a grey area of the service provision change definition, with the Employment Appeal Tribunal adopting a literal interpretation of the TUPE.

An uncertain future?

Service provision changes were a wholly new statutory concept introduced under the 2006 TUPE Regulations, intended to reduce the uncertainty under the previous law as to when a change of contractor might amount to a relevant transfer. The intention was that this would create a more level playing field for business when a contract is let, as TUPE obligations would need to be taken into account in the tendering process. Inevitably, litigation has still arisen over the interpretation of the definition of service provision change and with the recent case law suggesting a move away from a wider interpretation of the provisions, employers would be forgiven for thinking that the increased certainty that was hoped for has been thrown up in the air.

The case of Argyll Coastal Services v Stirling has nevertheless provided some general guidance on the meaning of “service provision change”. Again, the EAT held that no service provision change had occurred, but the value in its judgement lies less with the facts of the case and more from the obiter observations of Lady Smith, who made a number of helpful comments on the interpretation of the different elements that constitute a “service provision change”, including the following:

  • The phrase "organised grouping of employees" implies fewer employees than the whole of the transferor's entire workforce, and who are deliberately organised as a team to carry out the activities required by the particular client contract;
  • The reference to "situated in Great Britain" clearly requires the organised grouping of employees to be based in Great Britain, although individuals who work outside the UK may not be prevented from being included in that organised grouping;
  • The term "principal purpose" should bear its ordinary meaning and not be interpreted to mean "sole" purpose.

Employers should bear these guidelines in mind when considering whether TUPE might apply to an outsourcing agreement.

The Government published a ‘Call for Evidence’ on the effectiveness of the TUPE provisions late last year. With the consultation period now closed and under review, it will be interesting to find out whether any significant reform of TUPE is proposed, especially in light of the recent tightening of its definition by the courts.

Public sector implications

A final word of caution for local authorities and other public sector organisations.

There are a number of documents applicable in the public sector which go beyond the normal requirements of TUPE. While the Government has revoked some of the suite of documents which formally comprised what was known as “TUPE plus” it has not revoked all of them. The Cabinet Office Statement of Practice: Staff Transfers in the Public Sector remains in place, and although it does not have statutory force, the effect of this document (and, to a lesser extent, the Cabinet Office Principles of Good Employment Practice) is that public sector bodies may come under pressure from staff and trade unions to ensure that staff are protected as if TUPE applies to transfer their employment even if there is not a service provision change as a matter of law. For further discussion of what remains of the original “TUPE plus” regime, see my earlier article on Local Government Lawyer.

In many cases the legal enforceability of such statements of practice is likely to be questionable, but public sector organisations should be aware that they may well be referred to by employees and unions when any process of outsourcing or taking a service in house is considered. In some cases where a contractual arrangements with a contractor are already in place, depending on the terms of the contract there may be a contractual obligation to comply with some or all of “TUPE plus”, and this may continue to have contractual force even though much of “TUPE plus” has now been revoked by the Government.

The application of TUPE, especially in the public sector, is a particularly complex area, and local authorities should take specialist legal advice when dealing with staffing issues in this context.        

Graham Richardson is a Director in employment law at national law firm Dickinson Dees. He can be contacted on 0191 279 9456 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..