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Employment Issues
Responsibilities to employees if you buy or sell a business

Employee rights are generally protected when all or part of a business is bought or sold to another employer.

Employee rights are also protected when a contract to provide goods or services is transferred, but only where the circumstances of the contract transfer are equivalent to the transfer of a business or undertaking to a new employer.

Under the European Transfer of Undertakings (Protection of Employment) Regulations commonly referred to as TUPE, employees usually transfer to the new employer on the same terms and conditions.

The UK Government Department of Business, Innovation and Skills has issued a guide to TUPE - "Employment Rights on the Transfer of an Undertaking" which is available on-line as a PDF document.

This guide explains which transfers are covered by TUPE and which are not, the responsibilities of the old and new employers, the rights of employees, and the requirements to inform and consult employees affected by the transfer.


What is meant by a transfer and who is affected
When an organised group of people, eg employees, and assets - known as a stable economic entity - is transferred from one business to another and retains its identity after the transfer, the transfer falls under the scope of TUPE..

In other words, if the people and assets that form the transferred stable economic entity continue to perform their role under the new owner, then the TUPE regulations must be adhered to.

TUPE applies equally to relevant transfers of large and small businesses, and to public and private undertakings. This means there would be a relevant transfer if you sold your business or partnership or if your business bought and operated another business.

Not all transfers are relevant transfers. TUPE does not apply in the following instances:

  • Transfer by share takeover. When a company's shares are sold to new shareholders, there is no transfer of the business - the same company continues to be the employer.
  • When a business transfers assets only, eg if equipment is sold.
  • When a business transfers a contract to provide goods or services that doesn't involve the transfer of a business or part of a business.
  • Transfers of undertakings situated outside the UK - although similar provisions apply in the EU.
  • Change of business identity, eg if the work or organisational structure changes radically.

Whether TUPE applies in any particular case depends on all relevant circumstances. In the event of a dispute, only an employment tribunal or, on appeal - a higher court, can decide this.

Where TUPE applies, existing employees of the undertaking transferred automatically become employees of the person who takes it over.

If you intend to buy or sell a business - or part of one - you should consider obtaining legal advice to help you comply with these regulations, which can be complex.


Selling your business - your responsibilities to employees

You have important responsibilities to your employees when selling your business.

Information and consultation
You must inform and, where necessary, consult either representatives of a recognised trade union or elected representatives of the employees about the transfer and also about any measures you or the new employer plan to take concerning affected employees.

If you don't consult your employees, you may be ordered by an employment tribunal to compensate them.

If an employee refuses to transfer with a business, they are not regarded as dismissed but, rather, as having effectively resigned. This means they are not entitled to a redundancy payment.

Dismissals
If you dismiss employees who have been employed for one year or more, because of the transfer or a reason connected with it, they will automatically be held to have been unfairly dismissed.

However, if there is an economic, technical or organisational (ETO) reason entailing changes in the workforce, then you may be able to dismiss fairly, providing you follow a fair procedure. ETO reasons are narrow in practice and effectively amount to a genuine redundancy situation, eg insolvency of the transferred undertaking.

Subsequent transfers
You may sell a business or part of a business that you previously bought, or relinquish a contract that you previously took over. The Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) generally apply to second and subsequent transfers of the same undertaking. The effect of this is that the employees you took over will now transfer to a new employer. Use our interactive tool to get a checklist of how to handle potential redundancies.
Buying a business - your responsibilities to employees

Employees who transfer to your employment when you buy a business or part of a business - or acquire it by taking over a contract - do so on exactly the same terms and conditions they had previously, and with their continuous employment preserved. Their employment with you does not count as a new employment. This also applies to employees who have already transferred on a previous transfer.

You take over the contracts of employment of all employees in the undertaking immediately before the transfer, unless employees inform either you or the previous employer that they object to being transferred. In this case, the transfer of undertaking terminates their contract with the previous employer, but they aren't considered to have been dismissed.

You also take over responsibility/liability for:

  • employment rights of employees - including most potential employment tribunal claims, except some occupational pension rights
  • collective agreements - including those in force at time of transfer and recognition of the recognised trade union of staff transferring

Occupational pension rights earned up to the sale are protected by social security law and pension trust arrangements. The right to an ongoing pension provision isn't transferred. See our guide on how to know your legal obligations on pensions.

If you don't take control over the previous business' shares, you won't be able to provide such shares to your staff. If the previous employer had share or share option schemes, you must provide schemes of substantial equivalence.

Changes to terms and conditions
Don't try to change transferred employees' terms and conditions if the reason for the change is the transfer, eg to match those of your existing staff. Any such change would be a constructive dismissal entitling the employee to claim automatically unfair dismissal.

Information and consultation
You are required to inform and consult officials of a recognised trade union, if there is one, or other employee representatives.

You must also provide information to the old employer on any action you intend to carry out that will affect their employees - this must be long enough before the transfer to give adequate time for consultation.

 

Buying a business - dismissals and privatised business

If you buy a business or part of a business, or acquire it through a change of contractor, you must honour continuity of employment for all those employed in the undertaking immediately before the transfer.

Any employee who would have been employed if they had not been unfairly dismissed for a reason connected with the transfer is not treated as having transferred, but will be able to make a claim for unfair dismissal against the new employer.

This includes employees who were employed by the employer when negotiations for the sale of the business began with the eventual purchaser, but not those made redundant before that date.

If you dismiss employees who have one year's employment or more because of the transfer or a reason connected with it, they will automatically be held to have been unfairly dismissed.

However, if there is an economic, technical or organisational (ETO) reason entailing changes in the workforce, then you may be able to dismiss fairly, provided you follow a fair procedure. ETO reasons are narrow in practice and effectively amount to a genuine redundancy situation, eg insolvency of the transferred undertaking. Use our interactive tool to get a checklist of how to handle potential redundancies.

If you change employees' terms and conditions for the worse simply because of the transfer, employees can resign and claim constructive dismissal, which would be deemed automatically unfair, before an employment tribunal. However, if the proposed change was unconnected with the transfer, you would be able to handle it in the same way as any other change. See our guide on how to change an employee's terms of employment.

Privatised businesses
If you are buying a privatised (previously public sector) business, the government expects you to provide pension provision that is broadly comparable with that enjoyed by the previously public sector employees who you are taking on board. Download guidance on staff transfers in the public sector from the Cabinet Office website (PDF).

 

Informing and consulting employees

The old and new employers of a transferred business must inform and consult about the transfer with:

the recognised trade union - if there is one employee representatives appointed by the affected employees specifically for the purpose of being informed and consulted on the transfer or who have already been appointed for a different purpose and are suitable for this purpose too
Affected employees are any employees, whether transferring or not, employed in either employer's business.

What to tell representatives
The union or employee representatives must be informed of:

  • the fact that the transfer will take place, when and why it will happen
  • legal, economic and social implications for affected employees
  • measures the transferring employer envisages taking, in relation to affecting employees, eg redundancies, relocation or changes to terms and conditions, or that no measures will be taken
  • measures the new employer envisages taking in relation to employees who will transfer under the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE), or that no measures will be taken

You must consider and respond to any representations made by the employee representatives, stating your reason if you reject any of them.

When to tell representatives
Information must be provided to representatives long enough before the transfer deal is closed to give reasonable time for consultation, and the consultation must be undertaken with a view to seeking agreement.

Rights of representatives
Representatives have the right to:

  • have access to the affected employees facilities to enable them to carry out their duties, eg a phone line or office
  • time off with pay to carry out representative duties
  • Representatives may be eligible for reinstatement or compensation if unfairly dismissed or treated detrimentally because of their status or actions as representatives.

Transfers and employee relations

Transferring employees from one business to another affects morale. The result is often discontentment, not just in those transferred but also in staff left behind in the old business and workmates they join in the new business.

If the process is not handled sensitively the effects can include:

  • feelings of displacement in the employees transferred
  • anxiety amongst their ex-workmates who feel they might be next
  • resentment amongst new workmates who distrust the reason the new employees have been introduced and may resent the fact that they have different terms and conditions
    a feeling of insecurity that may be common to all

But if both employers know and meet their responsibilities fully and communicate openly throughout the process then good relations can be maintained with all employees concerned.

Research shows that effective consultation can lead to better decision making and a smoother implementation of decisions and proposals, boosting productivity. This is because if employees feel they have an input into decision making, they will be more satisfied and motivated at work.

You should be especially careful to emphasise the positive benefits of the sale or purchase and try to show how the prospects for all will be improved by the changes.