When a new outsourcing contract is put in place and the relevant part of the business is either moved from an internal department of the customer to a new provider, or an outsourcing contract is removed from an existing provider and given to a new provider, then employees dedicated to that part of the business will be affected and the provisions of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (commonly known as TUPE) will often apply, automatically transferring the employment contracts of those employees from the customer or the existing provider to the new provider. The workings of TUPE are complex, and the financial impact of TUPE can be significant, with the result that considerable time can be spent negotiating the relevant provisions of the outsourcing agreement. However a recent decision has highlighted a little-known area governing circumstances in which TUPE will not apply to an outsourcing, despite “dedicated” employees being involved.
The Regulations apply to a “relevant transfer”, which covers two types of event:
- a transfer of a business, undertaking or part of a business or undertaking where there is a transfer of an economic entity that retains its identity (essentially the sale and purchase of an identifiable part of a business).
- a customer engaging a contractor to do work on its behalf, reassigning such a contract or bringing the work “in-house”. There must be an organised grouping of employees whose principal purpose is carrying on the relevant activities on behalf of the customer and the activities must not consist wholly or mainly of the supply of goods for the customer’s use.
It is the second type of event which is, in effect, an outsourcing. However, it is to be noted that the Regulations will not apply to the second type of event if the activities concerned “consist wholly or mainly of the supply of goods” for the customer’s use. Such a state of affairs arose in the recent case of Pannu and others v Geo W King (in liquidation) before the Employment Appeals Tribunal.
The claimants were all employed by Geo W King Ltd (In Liquidation) (GWK) on an assembly line producing van parts for IBC Vehicles Ltd (IBC). GWK went into liquidation and the claimants were dismissed. IBC then entered into a contract with another company, Premier, to produce the relevant parts. Premier employed one of GWK’s workers, a supervisor, but none of the others.
The Employment Tribunal held that the employment contracts of the claimants did not transfer to either Premier or IBC as the activities involved consisted wholly or mainly of the supply of goods. On appeal the claimants argued that the facts pointed clearly to the conclusion that the activities were in truth the supply of services, rather than goods. The Employment Appeals Tribunal disagreed, holding that whilst the employees were providing a service to their employer, its activities did indeed amount to the supply of goods – specifically the supply of finished goods to IBC.
In addition, any change in the arrangements when Premier took over was irrelevant: either the nature of the activities changed, in which case the requirements of the Regulations were not met, or they remained the same, in which case a finding that GWK was providing goods meant that the Regulations did not apply.
It is clear that there are some advantages to characterising an outsourcing as principally a supply of goods if this is possible in the circumstances. Often this will not be the case, but it might be unwise on some occasions to wrap in unnecessary services to an outsourcing where the principal undertaking is to provide goods, since doing so might bring in the complexities of TUPE when, with some forethought, they might properly be avoided.
© Taveners 2012