TUPE and commercial agents

Written by Steve Sidkin
18 October 04

TUPE is shorthand for the Transfer of Undertakings (Protection of Employment) Regulations 1981.

When will TUPE apply?

TUPE applies to the transfer of a business, or a part of a business, situated in the United Kingdom. It does not apply when shares are bought, nor when only assets are transferred. Whether there is a business transfer requires an assessment of all the factual circumstances surrounding the transaction, including:

• The type of undertaking or business concerned.
• Whether the tangible assets of the business (such as buildings and moveable property) are transferred.
• The value of the intangible assets of the business at the time of the transfer. 
• Whether or not the majority of its employees are taken over.
• Whether or not its customers are transferred.
• The degree of similarity between activities carried on before and after the transfer.
• The period, if any, for which those activities are suspended.

It is the overall picture that must be considered, not simply isolated factors. Whether there is or is not a “relevant transfer” subject to TUPE is always a question of fact and degree for the court or tribunal. If substantially all of the transferor’s assets, and the major part of its workforce, transfer to the transferee and substantially the same business is to be carried out by the transferee after the transfer, it is probable that the undertaking will retain its identity and that TUPE will apply.

Some cases suggest that whether or not a transferee took on a major part, in terms of numbers and skills, of the employees engaged in the transferor’s business, could determine whether or not there was a “relevant transfer” subject to TUPE. Such a situation may arise in the case of a labour-intensive business, where few, if any, assets transfer. It is, perhaps, more likely to apply in the case of a change of contractor or service provider. The motive of a transferee in deciding not to take on employees will be looked at carefully by the court or tribunal.

When might TUPE affect agents or principals?

There are three situations where TUPE might be relevant: the appointment of an agent by the principal; the replacement of an agent with another agent; and the termination of an agency, with the principal thereafter carrying out the former agent’s activities.

TUPE is unlikely to apply when an overseas principal appoints a new UK agent. However, if a UK principal appoints an agent to carry out sales activities previously carried out by the principal, that could constitute the transfer of part of the principal’s business.

When a principal replaces a UK agent with a new UK agent, or takes a former agent’s UK activities back in-house, both could constitute a transfer of the agent’s business. In the first case that would be a transfer to the new agent, in the second it would be a transfer to the principal.

TUPE will not apply in every case where a new agent is appointed or an agent changed.

Who and what transfers?

Under TUPE, the transfer of a business does not terminate the contract of employment of any person employed in the transferring business. Any such contract has effect after the transfer as if originally made between the person so employed and the transferee (unless the employee objects to transfer, in which case his employment comes to an end on the transfer).

All the transferor’s rights, powers, duties and liabilities under or in connection with any contract of employment of any transferring employee are transferred to the transferee. Anything done before the transfer by the transferor is deemed to have been done by the transferee. One effect of this is that after the transfer takes place (save for some exceptions), a transferee will assume responsibility for claims by employees which have arisen through the action of the transferor prior to the transfer. This can include liability for any failure by the transferor to comply with its obligation to inform, and where appropriate consult, with employees about the transfer. TUPE contains detailed provisions setting out an employer’s obligations in this regard. Pensions are a particularly difficult, and potentially expensive, area.

For example, a principal or a new agent could find that they are responsible for statutory redundancy and contractual payments to the employees of an agent with only one agency, whose employees work wholly in the agency, on termination of the agency, as the employees might transfer automatically to the new agent or to the principal.

The employees who transfer are those who, immediately before the transfer, are employed by the transferor and assigned to (but not necessarily working exclusively in) the business transferred and/or working in the business transferred. Courts and tribunals will look carefully at the genuineness of the assignment of employees to the transferring business, and can refuse to apply TUPE to employees where their assignment to the transferring business was an attempt to offload them onto the transferee. Multi-agency agents, whose employees are not dedicated to any single agency, are unlikely to have any employees who fall within TUPE, even if the change of agent is a relevant transfer for the purposes of TUPE.

How can I protect myself?

It is common to see terms in the commercial documentation which offer protection against the consequences of TUPE. These will usually include indemnities against employment liabilities. Principals and agents should seek to include suitable indemnities in agency agreements.

What are the other consequences of TUPE?

In broad terms, the dismissal of any employee will be automatically unfair if the reason or principal reason is the transfer or a reason connected with the transfer. There is an exception for economic, technical or organizational reasons entailing changes in the workforce (the best example is a genuine redundancy) and the dismissal follows a fair procedure.

Changes to contractual terms due to a transfer to which TUPE applies are not effective. This will be the case whether or not the changes enhance the employees’ terms and conditions of employment and/or benefits package, and even if the employees have agreed to the changes. In practice, however, claims are less likely to arise where there has been an enhancement.

Restrictive covenants in transferred employees’ contracts can be enforced by the transferee of a business, but only in respect of the transferred business and not the transferee’s other businesses. An agent or principal who takes on employees as a result of TUPE should exercise caution in how those employees are used within the business after the transfer.

This briefing note is for general information. For advice in applying this general information to specific circumstances, please contact Mark Watson or any member of the Fox Williams’ agentlaw team (www.agentlaw.co.uk).