A service provision change does not occur under TUPE where there is a change in the client on whose behalf the services are being carried out. This is the conclusion of the Employment Appeal Tribunal (EAT) in the case of Hunter v McCarrick, the first EAT decision to rule on this issue. The decision does not come as a great surprise but it provides welcome clarification on a point which occasionally arises in outsourcing situations.

What happened in this case

The Claimant (Mr McCarrick) brought an unfair dismissal claim against the Respondent (Mr Hunter) when he was dismissed on 8 March 2010 after having allegedly been employed by Mr Hunter for 7 months since August 2009. Since 2005, Mr McCarrick’s job was to manage a property portfolio owned by Waterbridge Group (WG)(of which Mr Hunter was Managing Director). In order to succeed in his claim against Mr Hunter, Mr McCarrick needed to show that he had at least one year’s continuous employment and that his employment had transferred to Mr Hunter under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) from his previous employers.

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.