Employment Law Watch : Employment & Labor Lawyer & Attorney : Reed Smith Law Firm

The circumstances relating to this issue are complex, suffice to say there were two relevant alleged transfers which had occurred prior to Mr McCarrick’s dismissal:

1. In February 2009, WG (which as stated above, owned a property portfolio and employed Mr McCarrick to help manage it) ceased providing property management services in relation to its property portfolio. Instead, another company, WCP, took over the provision of property management services for the benefit of WG. In other words, WG outsourced the provision of property management services to WCP. 
2. In August 2009, receivers were appointed by Aviva, the lenders on WG’s property portfolio. Consequently, the receivers took control of the properties and appointed King Sturge (KS) to manage the properties. At this point, Mr Hunter (the Respondent) who was Managing Director of WG paid Mr McCarrick and two other employees to assist him in various matters including the provision of some property management services for the benefit of Aviva and the receivership.

The Employment Tribunal found that both these transactions amounted to service provision changes under TUPE 2006 so Mr McCarrick’s employment transferred from WG to WCP (in February 2009) and to Mr Hunter (in August 2009). This was so, despite there being a change in the client to whom the property management services were provided (the client being WG from February 2009 to August 2009 and Aviva from August 2009). 

Mr Hunter appealed to the EAT, arguing that the second “transfer” involving Aviva was not a service provision change because there had been a change in client to whom the property management services were provided. Therefore TUPE did not apply and Mr McCarrick had no right to bring an unfair dismissal claim.

The EAT considered Regulation 3(1)(b)(ii) of TUPE which provides as follows:

“These Regulations apply to:

(b) a service provision change, that is a situation in which -

…

(ii)        activities cease to be carried out by a contractor on a client’s behalf (whether or not those activities had previously been carried out by the client on his own behalf) and are carried out instead by another person (“a subsequent contractor”) on the client’s behalf; …”   (our emphasis)

The EAT considered whether in Regulation 3(1)(b)(ii) (see above), it mattered if the identity of the client to whom the services are provided had changed after the transfer. It said that there was no case law on whether the terms “a client” and “the client” in Regulation 3(1)(b) must be the same. It was therefore a matter of legislative interpretation as to what “client” meant. Mr McCarrick argued that the Employment Tribunal should apply a “purposive construction” to the Regulation - he said that to interpret the Regulation as applying even when there is a change in client before and after the change of contract would reflect the broad purpose of TUPE (and the EU Acquired Rights Directive under which TUPE is implemented) to protect the acquired rights of the employees. However, the EAT disagreed and said that there was no need for the Employment Tribunal to adopt such a purposive approach – it was sufficient to adopt a straightforward and common sense application of the relevant statutory words because service provision changes were a wholly new statutory concept introduced in TUPE 2006 and were not derived from the Directive.

The EAT concluded that the terms “a client” and “the client” in Regulation 3(1)(b) referred to the same person. Accordingly, the second “transfer” involving Aviva did not amount to a TUPE transfer by way of service provision change as Aviva was a different client to the original client (WG) to whom the property management services were first provided. Mr McCarrick’s employment was therefore not transferred by TUPE from WCP to Mr Hunter and his continuity was not preserved, meaning he was not entitled to bring an unfair dismissal claim.

What this means for employers

TUPE 2006 introduced a definition of “service provision change”(Regulation 3(1)(b)) due to the difficulties experienced in applying TUPE 1981 in circumstances where there was a change of service provider or a contracting in or out of services. There was no requirement to do this under the Acquired Rights Directive (under which TUPE 1981 was implemented) and the introduction of Regulations 3(1)(b) was seen by some as “gold-plating” by the UK Government. Prior to 2006 the UK and European courts used the “multi-factorial approach” to decide whether there was a “transfer of an undertaking” within the meaning of TUPE 1981 (which is now a “business transfer” under Regulation 3(1)(a)). This involves considering whether there is a transfer of an economic entity, including whether there was a transfer of plant and machinery, computer lists and other matters, in addition to other activities and an organised grouping of workers. Having now introduced Regulation 3(1)(b) (service provision change), there is no need to use a multi-factorial approach in determining whether there is a service provision change since Regulation 3(1)(b) makes clear that TUPE will apply on a change of service provider or a contracting in or out of services. This decision makes it clear that the test set out in Regulation 3(1)(b)(ii) will only be met if the activities carried out by different contractors before and after the change in service provision are on behalf of the same client. That said, it will always be important to take advice on whether Regulation 3(1)(a) (business transfers) applies where the services of an economic entity were provided to different clients before and after the transfer, since this decision does not rule out the possibility that such a change might be caught by Regulation 3(1)(a). Although there may be no service provision change, there may be a transfer of an undertaking.

The Government has now issued a call for evidence on TUPE 2006 and one of the questions to be considered is whether the increased certainty about the application of TUPE to service provision changes has resulted in benefits or burdens for businesses. In particular, the Government asks whether the 2006 amendments have led to less need to take legal advice prior to tendering or bidding for contracts, and whether they have led to fewer tribunal claims. Whilst TUPE implements the European Acquired Rights Directive and provides some important protection for both employers and employees, the Government’s main concern is that some businesses apparently believe that they are “gold-plated” and overly bureaucratic. Whilst it may be true that transferees may prefer to have the option of arguing TUPE does not apply so they can choose for themselves whether to take on employees when taking over a contract for the provision of a service, it is probably in the interests of all concerned that there is clarity in the tendering process so that both incoming and outgoing contractors can make commercial decisions, confident that that law on whether TUPE will apply is clear.

What did the Court decide?

Leena Homes Ltd (Leena) was contracted by the Home Office to provide accommodation and related services for asylum seekers. In 2006, Leena lost the contract and Kimberley Group Housing Ltd (Kimberley) and Angel Services (UK) Ltd (Angel) were awarded the right to succeed Leena under a new contract. The six claimants - employees of Leena engaged in providing these services – lost their jobs as a result and claimed they had been subject to a TUPE transfer.

The Tribunal examined regulation 3(1)(b) of TUPE which provides that a relevant transfer under TUPE can be a ‘service provision change’. The Tribunal found that there had been a service provision change because, as described by regulation 3(1)(b)(ii), activities ceased to be carried out by a contractor on a client’s behalf and were now carried out instead by another person (“a subsequent contractor”) on the client’s behalf. The Tribunal asked itself, “to whom did the contract of employment or liability of each claimant under or in connection with the service provision transfer?” In response, it concluded that “although the people and their contracts cannot be “split”, the liabilities under these contracts can.” Applying this reasoning, the Tribunal held that liability for the transferring employees should be apportioned between the two subsequent contractors, Kimberly and Angel, depending on how much of each claimant’s work each successor adopted. The two companies appealed against the decision.

The EAT allowed the appeal, holding that although the Tribunal was correct in finding that there had been a service provision change, its conclusion regarding the effect of that service provision change was “fatally flawed”. There is no precedent in statute or in common law for the division of liabilities under a contract between two transferees on a percentage basis. Whilst the Tribunal correctly recognised that an employee could not be the servant of two masters, it considered that the liabilities under the contract of employment could be separated out. The Tribunal reasoned that this was possible because the employees concerned had been dismissed. However, the EAT pointed out that the Tribunal’s reasoning would require the same apportionment to be applied even where the employees are still employed. This would cause obvious difficulties which demonstrated that this approach could not be right.

The overall principle, said the EAT, is essentially the link between the employee and the work or activities to be performed. The EAT considered that the Tribunal should have established which company had, after the service provision change, taken on the activities which each employee claimant had previously performed. In order to establish this, the Tribunal should have been guided by the principles set out in the European Court case of Botzen v Rotterdamsche Droogdok Maatschappij (1985) ECJ as applied by the UK Court in Duncan Webb Offset (Maidstone) Ltd v Cooper (1995 ). 

Had they taken this approach, the EAT were convinced that the Tribunal would have had to find that all six claimants transferred to Kimberley because Kimberley had taken on the majority of the activities previously carried out by Leena. The EAT therefore found that the employees had transferred to Kimberley and Kimberly alone was liable for them.

What this decision means for employers

This is the first piece of guidance on how a Tribunal should approach the situation in which a service, once provided by a single contractor, is later to be provided by two or more contractors. It is clear from this case that the contractors cannot be jointly liable for any particular employee. The question, therefore, is which of those two contractors, if any, should take responsibility for any employee who had been engaged in performing the service previously and on what basis?

In this particular case, the EAT considered which of the contractors had adopted the majority of the activities performed by the previous contractor in order to determine who took on responsibility for the transferred employees. This, it seems, was done in part for economic and practical reasons as requested by counsel for each of the parties, rather than having another Tribunal reconsider the facts and come to a decision. 

In practice, a Tribunal faced with this sort of case would have to apply the test as laid down in Botzen and Duncan Webb which decided that it is a question of fact as to which employees were “assigned to” the business, or part of business transferred. It will not always necessarily be simply a question of which contractor took on the majority of the activities of the previous contractor, as in this case. Although, in Duncan Webb, no definitive rules were provided, a number of helpful factors were suggested – the amount of time spent on one part of the business or the other; the amount of value given to each part by the employee; the terms of the contract of employment showing what the employee could be required to do and how the costs to the employer of the employee’s services had been allocated between the different parts of the business. There is not an exhaustive list of factors but the focus should be on the link between the employee and the work or activities which are performed and whether the employer is “assigned” to the work transferred.