APPENDIX 9
Memorandum from Pinsent Curtis (RPS 19)
Thank you for your letter of 26 January. I set
out my views against the questions in your letter:
1. The DfEE told us that it was "overwhelmingly
likely" that TUPE will apply to any large scale contract
to outsource LEA functions, Under what circumstances might it
be possible that TUPE would not apply when outsourcing LEA functions?
I agree that it is highly likely that TUPE will
apply to such an exercise. Of course it cannot be presumed in
all cases that TUPE will apply (see below): but I imagine it would
be unusual for it not to in these circumstances. Rights under
or in connection with an occupational pension scheme are excluded
from transfer under TUPE. However, in transfers from the public
sector to the private it is commonplace for the public sector
body to require the contractor to offer comparable pension rights
for the future, such comparability to be certified by the Government
Actuaries Department. In local authority outsourcing, the logistics
of this have now been improved by the Local Government Pension
Scheme (Amendment, etc) Regulations 1999 (SI 1999 No 3438) Regulations
allowing admission of third parties to membership of the local
government pension scheme and I understand this approach was taken
in the Islington case in respect of outsourcing from the LEA.
In more detail, whether TUPE actually applies
to this sort of case depends on the facts of each case and the
test in the European Court judgment in Spijkers v Gebroeders
Benedik Abattoir CV (1986) ECR 199 which involves a number
of factors, including consideration of the type of undertaking
or business concerned; whether assets, tangible or intangible
are transferred; whether employees are taken over; whether customers
are transferred; and the degree of similarity between the activities
carried on before and after the transfer and the period, if any,
for which those activities are suspended. This is meant to be
a broad holistic test and no single factor is decisive in isolation.
There must also be a transfer of an economic entity, namely of
an organised grouping of assets/persons pursuing a defined economic
activity. I have no detailed information to hand as to whether
in respect of the service being outsourced in this case there
is an organised grouping of persons and assets performing such
an economic activity but I strongly suspect that there would be.
Secondly, I would imagine that there is sufficient transfer of
personnel (the contractor has been required to take the employees
over) and transfer of use of premises and suchlike to make the
Spijkers test satisfied.
Therefore I agree that it is likely that TUPE
would apply.
The circumstances in which TUPE would not apply
would be if there were no prior organised grouping of persons/assets
performing the function being outsourced (probably unlikely) or
if no assets or persons were taken on by the contractor (again
probably unlikely) or, finally, if the entity lost its identity
over the transfer process (virtually impossible I would have thought).
2. Are there weaknesses in TUPE arrangements
as far as transferring employee rights from local authorities
to private companies?
When you say weaknesses, I presume that the
Committee is looking at the question from the standpoint of the
individual employee. Please correct me if I am wrong. The major
exclusion from TUPE, at present, is rights under or in connection
with an occupational pension scheme, of which the local government
pension scheme would be such a scheme. However, this is countered
in practice in local authority outsourcing by requiring, in the
past, the contractor to put forward a comparable scheme of which
the transferring employee could become a member and now, by allowing
the third party contractor to become a member of LGPS. Directive
98/50 of the EC which amends the original Acquired Rights Directive
97/187 due to be implemented by Member States by 7 July 2001 allows
Member States to provide for pension transfer if they wish. As
I understand it, this is a serious proposal in the DTI's thinking
concerning the amendment of the present TUPE Regulations. It is
unlikely however that such provision would be in force even if
carried through, before the end of this year.
3. Is it generally considered that TUPE provides
sufficient protection to local authority employees when services
are contracted out?
TUPE will transfer all employment rights from
transferor to transferee (save, strictly, rights under an occupational
pension scheme as above described). Subsequent to transfer, employees
have the right not to be dismissed in connection with the transfer
save where there is an economic, technical or organisational reason
entailing changes in the workforce. This does not allow dismissal
to effect contract changes (for such would not be an economic,
technical or organisational reason entailing a change in the workforce).
This is because a change in the workforce means a change in the
numbers or composition of the workforce. It follows therefore
that only a genuine redundancy would be covered by the "eto"
defence but it also therefore follows that transferred employees
are at risk to redundancy in the same way as any other employee.
However, as I have said, Regulation 8 would
make dismissals to effect contract changes automatically unfair
and the case law of the European Court (as in the Daddy's Dance
Hall case) has evolved a rule that an employee is not allowed
to waive rights under this Directive (and therefore TUPE) and
any amendment to the employment contract if to the detriment of
the employee is invalid. Theoretically, then, employees do have
significant rights on outsourcing under TUPE.
Much of the research thus far however paints
a more pessimistic picture of employees' rights in connection
with TUPE transfers particularly in relation to local government
CCT. However, it is fair to say that those reports were written
some years ago at a time when first, for example, there was a
legal doubt about whether TUPE applied to public sector contracting
(because of the unlawful exclusion in TUPE at that stage (until
1993) of non-commercial ventures) and because the case law in
the UK was not so well developed. The reports were also written
before the significance of the Daddy's Dance Hall case
was realised, in the UK, in the Wilson case and it was
generally assumed until 1996 that employees could be asked to
agree changes in employment terms which through economic pressure
they may have had to agree to. Theoretically, there is a way of
disputing this after the Daddy's Dance Hall case as interpreted
by Wilson. Of course, in some cases of outsourcing, particularly
of skilled white collar workers, terms and conditions in the private
sector may be more favourable than in the public.
4. Are there differences in transferring employees
rights under TUPE when outsourcing different types of local authority
services?
If TUPE applies, all employment rights transfer
from transferor to transferee together with collective agreements
and recognition of unions, and information and consultation obligations
apply. This applies whichever type of local authority service
is caught by TUPE. Of course, assuming TUPE applies to the contracting
out of a variety of local authority services, terms and conditions
of employment will differ, depending on the service concerned.
So the rights will not obviously be the same in that regard but
the effect of the TUPE transfer will be the same in each service
assuming TUPE applies.
Applying the test of the European Court in the
Süzen case, it might be possible to identify a particular
service that is labour intensive compared with others that are
asset reliant and as a result, whether there were a TUPE transfer
would depend upon the taking over by a contractor of a major part
of the workforce in terms of numbers and skills. Thus if a contractor
declined to do so, a TUPE transfer could be avoided in a labour
intensive operation but perhaps not where other indicia of a transfer
were available. However, the effect of Süzen has been
moderated in the UK by the Court of Appeal decision in ECM
v Cox which states that an employer cannot make the choice
not to take employees on if the reason for that choice is to avoid
TUPE obligations. Furthermore, it is widely expected that amendments
to be made to TUPE at the end of this year in compliance with
Directive 98/50 will go further than the Directive and will apply
TUPE in the vast majority of contracting situations in so far
as TUPE does not already apply to those situations.
5. In your opinion, would TUPE be applicable
to staff employed by an individual school if responsibility for
that school passed from the local authority to a private company?
As you state, TUPE applies to a transfer of
an economic entity from one legal person to another. This would
seem to be the case if responsibility for the school and management
of its employees passed from the local authority to a private
company and the school is highly likely to be an economic entity
for the reasons above outlined.[2]
6. The DfEE told us that the contract between
Islington Borough Council and Cambridge Education Associates would
include transfer of pension rights for Islington employees who
are members of the local government or teachers pension schemes,
despite the fact that pensions are not covered by TUPE legislation.
Is this situation standard practice when other local authority
services have been transferred?
Almost invariably.
I trust that this has been helpful and I am
happy to answer any further supplementary queries.
John McMullen
Partner and National Head of Employment Law
Pinsent Curtis
March 2000
2 I would of course differentiate this from the situation
where management of a school passes between the governing bodies.
In such a case, if a teacher were employed by the local authority
he would not be employed by the transferor, the outgoing governing
body, and hence not be covered by TUPE. Back
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