TUPE: Good news for property transactions?

Publication | July 2012

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) can have significant implications for property transactions. It has become well established that there are TUPE implications where property management services or third party service contracts (such as the provision of security or caretaking facilities) are terminated and a new managing agent or service provider is engaged. The recent case of Taurus Group Ltd v Crofts and another (UKEAT/0024/12) has cast doubt on the extent of the application of TUPE to the provision of facilities services where there is not only a change in the contractor, but a simultaneous change in the client to whom the services are provided.

TUPE protects the rights of employees on a “relevant transfer” by transferring their terms and conditions of employment to a new employer. There are two concepts of a relevant transfer. First, the traditional concept of a “business transfer” under regulation 3(1) (a) of TUPE and secondly where there is a “service provision change” (regulation 3(1) (b) of TUPE). Such a service provision change occurs where there is an outsourcing of a service, a change in service provider or where the service is contracted back in house. In property transactions this can occur where a property facilities agreement is terminated with one provider and the contract is awarded to a new provider.

The recent case of Hunter v. McCarrick indicated that there will not be a service provision change where there is a change both in the identity of the contractor and the client for whom the services are carried out, such as the managing agent or landlord. It held that the wording in regulation 3(1)(b)(ii) of TUPE should be interpreted as meaning that activities carried out by different contractors before and after the transfer have to be for the same client for a TUPE transfer to occur. If TUPE was intended to transfer the contractual terms of employees employed on an activity when it was undertaken for a different client then it could have been expressly provided.

In the Taurus Group case the Employment Appeal Tribunal (EAT) considered the Hunter decision in a second generation outsourcing at the time of the sale of the property. It held that it should follow the earlier decision in Hunter and therefore there was no service provision change where there was a change in the underlying client as well as the contractor. In this case the employee was employed by the original service provider (Reliance) to provide security services at student accommodation. The ownership of the building was subsequently acquired by a new company, the agreement with Reliance was terminated and Taurus Group Ltd was engaged as the new service provider. The parties disagreed as to whether the claimant’s employment had transferred to Taurus. The Employment Tribunal judge held that TUPE did apply, since if there was no service provision change then facilities staff would lose the protection of TUPE when there is a change in contractor as a result of a change in ownership of a building. The judge was of the view that to interpret TUPE in this way would undermine its purpose. The EAT overturned the decision of the Tribunal, relying on the decision in Hunter which had been heard after the Tribunal’s decision.

This means that where the ownership or management of a commercial property changes at the same time as the facilities services are changed, the employment contracts of the facilities staff (such as security guards) will not automatically transfer to the incoming facilities provider. Liability for terminating the employment by means of redundancy and other employment costs will remain with the outgoing service provider. This could apply equally to situations where a tenant employs staff to manage its building but the landlord takes over such management on the termination of the lease.

Although these decisions may appear significant for property transactions, there is cause for some hesitation. Even if such a transaction does not fall within a “service provision change”, parties may still have to consider whether it amounts to a business transfer within the meaning set out above. In addition, the Hunter case has been appealed to the Court of Appeal and is due to be heard in October this year. Whatever the outcome of that appeal, the Government intends to consult on the effectiveness of TUPE, in particular the “service provision change” concept. If the Government decides to remove service provision change from TUPE, the parties will be left with the more complicated consideration of whether there is a “business transfer”.

We will monitor the appeal of the Hunter case and follow the progress of the Government consultation and continue to keep you updated on any changes to the law.